The first six months of calendar year 2018 (CY18) has seen 28 companies announce buyback plans aggregating Rs 213 billion with Tata Consultancy Services (TCS), Kaveri Seed Company and Jagran Prakashan planning a buyback of their shares for the second consecutive year.
Besides these three, 11 companies – Aarti Drugs, Balrampur Chini Mills, Bharat Electronics, eClerx Services, Indiabulls Real Estate, KPR Mill and MOIL – have approved share buyback proposal in two out of the last three years.
While Mcleod Russel, ADF Foods, Indiabulls Real Estate, DCM Shriram and BSE have announced buyback through open market route, the remaining 23 companies plan to buy back their shares via the tender offer route.
Except TCS that has decided to go ahead with a share buyback programme in a move to return excess cash to its shareholders, some companies have taken the buyback route to restrict the fall in their stock prices since beginning of CY18, analysts say.
“Information technology companies are cash rich and it makes sense for them to reward shareholders via buybacks. A lot of the other companies announcing such plans are from the mid-and small-cap segments that have been beaten down badly. A buyback gives them a route to help arrest the fall in their stock price,” says G Chokkalingam, founder and managing director at Equinomics Research.
PC Jeweller and Weizmann Forex have seen their market value more than halve thus far in CY18. Bharat Electronics, Balrampur Chini Mills, Unichem Laboratories, Mcleod Russel and DB Corp are some of the other counters that have lost between 25 per cent and 44 per cent in CY18, as compared to 5 per cent rise in the S&P BSE Sensex during the period.
“There are two primary reasons why the companies are resorting to buybacks. One, is to help shore up the shareholding for the promoters because the valuations have dipped significantly. Second, companies are sitting on cash and it is a good way to reward the shareholders in a tax efficient manner. However corporates should think this through well as given Sebi regulations, this can become a real liability rather than just a mechanism to provide support to the stock price,” explains Munish Aggarwal, director (capital markets) at Equirus Capital.
Under tender offer, the company makes an offer to buy a certain number of shares at a specific price, directly from shareholders. This route ensures all shareholders are treated equally, no matter if they hold a majority or a minority stake. On the other hand, in an open market purchase, the company fixes a maximum price and can buy back the shares anywhere up to that particular price. The biggest difference between the two is that in a tender route, the price of the buyback is fixed.