“In the post Covid-19 world, cash is emerging as the king for companies. Promoters with excess funds can utilise the money to raise their stake in the company. In case of companies with excess cash, promoters will resort to buying back shares in a depressed capital market rather than paying dividends,” says Amar Ambani, senior president at YES Securities.
In a tender offer, a company buys back its own shares through a letter of offer to the shareholders. The offer will state the number of shares the company wants to repurchase and a price range for the shares. In case of an open market purchase, however, shares are bought back directly from the stock exchanges at their prevailing market prices or at a marginal premium to market price, but not exceeding the maximum buyback price.
The companies buy back shares for a number of reasons, such as they may feel their shares are undervalued and do a buyback to provide investors with a return. A buyback also boosts the proportion of earnings that a share is allocated.
“The promoters are doing the smart thing by opting for the open market route. That way, the promoters can buy their own stock cheap if the overall market is depressed. In a tender route, the main idea is to help the shareholder with a higher return than the prevailng market price of the stock,” explains G Chokkalingam, founder and managing director at Equinomics Research.
Among individual companies, JK Paper, Delta Corp, Sterlite Technologies, Emami, Polyflex Corporation, Ramkrishna Forgings, Motilal Oswal
Financial Services, Dalmia Bharat and Supreme Petrochem are the notable companies that have approved a share buyback via the open market.
Meanwhile, market regulator Securities and Exchange Board of India (Sebi) has eased the 12-month cooling-off period that companies have to observe between buybacks
and equity fundraising. The move is seen as an incentive to corporates to announce share repurchase programmes to support their share prices battered by the Covid-19 pandemic.