Certain experts say buybacks
and the process of promoters increasing their stake in companies are features of a typical bear market. In such times, companies believe cash could be put to better use through buybacks
rather than other activities. "It’s natural for companies to use the current situation to announce buybacks as it is the easiest way of improving their return profile," said U R Bhat, director and chief investment strategist, Dalton Capital Advisors.
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The equation, however, would be a bit different if promoters, too, proportionately participate in the buybacks, which may not necessarily be a positive signal. For now, as times remain tepid, many say there could be more buyback announcements. "However, much will depend on the government's willingness to relook the 20 per cent tax levied on buybacks" says Pankaj Bobade, head-Fundamental Research, Axis Securities. Looking at the higher expenses because of buyback tax, promoters may consider buying shares directly from the market, as has been the case in recent years.
From an investors' standpoint, while buyback indicates promoter’s confidence in their business and future prospects, it does not necessarily have to lure them in terms of buying stocks which have announced such buybacks. Also, for them, whether to participate in a buyback plan should depend on their requirement for cash. "Their equity exposure in overall portfolio and their own view on the company’s prospects will play an important role," explains Deepak Jasani, Head - Retail Research, HDFC Securities. Kartik Soral, senior fund manager-equity, YES Asset Management Company, says buybacks do provide investors money in the near term. "But, sometimes, they end up losing their shares in the company and chance on its future profits.”
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