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Buyback of shares essentially means repurchase of its own share by a company having substantial cash reserves particularly when the prevailing rate of its shares in the market is much lower than the book value or what the company perceives to be its true value. In effect, share buyback or share repurchase is investment by a company in its own stocks.

It is a process of buying back its floating shares from existing shareholders. It enables companies to go back to its shareholders and offer to purchase from the shares they hold. It is viewed as a strong signal to the market that it wants to reward the shareholders and is serious about delivering shareholder value so that it is able to achieve firm’s basic objective of maximising the market value of its outstanding securities.

Share buyback a very popular strategy in the developed markets but its origin in Indian corporate environment is quire recent. Before October 1998, share buyback was prohibited in Indian equity market in order to prevent improper use of company’s assets by speculators in management of a company who may seek to take control of the firm for their own advantage. Another thought was that it could increase possibilities of insider trading and might act as anti competitive. This was considered necessary to protect interests of the creditors and depositors who had parked their funds on the basis of certain capital structure.

These thoughts were challenged in late 80s and early 90s by declining trend in share markets. It was widely felt necessary to adopt measures to restore the confidence of shareholders and make the corporate happy. In Oct 1998, the union government promulgated the companies ordinance, 1998 approving buyback of shares for the first time in India. Major reasons behind this were:

  • Reviving the sagging capital market by creating and sustaining investors’ interest in capital market.
  • Improving the standards of corporate governance and hence performance of corporate enterprises.
  • Better potential use of cash reserves.
  • Providing opportunity for restructuring debt equity ratio with minimum hassle.
  • Help in increasing promoters’ holding which will help in avoiding takeover bids.

 

The use of share buybacks has grown in intensity in India since its inception because buybacks strategy has long been advocated as one of the great hopes for economic revival. It contracts the capital base and decreases the floating stock. Hence it is expected to result in an enhancement of shareholders’ value and share prices provided that there is no erosion in the profitability of the company and market behaves rationally. But this is not only important for share prices and shareholders’ value but it is also important for the purpose of capital restructuring. It helps companies to tackle market inefficiencies by correcting perceived market share valuation.

This method is widely used all across the world for these purposes. Share repurchases have increased in the U.S. in the past twenty years, from $5 B in 1980 to $349b in 2005.

In 2008, India Inc was combating a slowing economy and liquidity crunch; the year saw many corporate entities spending money on buying back their shares. Many companies, including blue chips like Reliance Infrastructure and DLF, bought back shares worth more than Rs 1,100 crore between March and December 2008. With share prices having fallen sharply during the year, promoters of many companies were able to raise their stakes cheaply.

Name

Board meeting
Date

Price in Rs

Change
%

Date*

Mar 18 ‘09

DLF

10/07/08

458.35

159.10

-65.29

Gujarat Fluro

23/03/08

179.45

63.00

-64.89

HEG

19/08/08

264.64

100.40

-62.06

R System

04/09/2008

93.05

48.90

-47.45

SRF

25/04/08

139.05

74.20

-46.64

Ipca Labs

11/11/2008

427.95

306.45

-28.39

Bosch

02/09/2008

4048.35

2983.40

-26.31

Austin Eng

08/01/2009

59.15

44.05

-25.53

HOV Services

13/01/09

32.75

26.95

-17.71

Alembic

14/11/08

36.4

30.25

-16.90

* Board meeting date
Source: www.business-standard.com; Buybacks fail to enthuse investors; 19th Mar

 

Though as discussed earlier and with the data in table, it is evident that buybacks were not successful in cushioning the price of their shares but were able to increase promoters share holding quite cheaply.

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