28 firms opt for ~213-bn buybacks in sixmonths
The first six months of 2018 saw 28 companies announce share buyback plans aggregating ~213 billion, compared to ~291 billion by the same number of firms during the same period in 2017.
Tata Consultancy Services (TCS), Kaveri Seed Company and Jagran Prakashan have taken this route for a consecutive year. Besides, 11 others, including Aarti Drugs, Balrampur Chini Mills, Bharat Electronics, eClerx Services, Indiabulls Real Estate, KPR Mill and MOIL, have approved share buybacks in two of the past three years.
While Mcleod Russel, ADF Foods, Indiabulls Real Estate, DCM Shriram and the BSE have announced buyback through the open market route, the remaining 23 companies plan via the tender offer route.
Except TCS that has decided to go ahead with a buyback programme to return excess cash to shareholders, some companies have taken the route to restrict a fall in their share prices since the beginning of 2018, analysts say.
“Information technology (IT) 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 smallcap segments that have been beaten down badly. A buyback gives them a tax-efficient route to help arrest the fall in their stock price,” says G Chokkalingam, founder and managing director at Equinomics Research.
Buyback, experts say, is a better way to reward shareholders, rather than paying a hefty dividend, as the latter is subject to tax. According to the law, income by way of dividend above ~1 million is be chargeable at the rate of 10 per cent for individuals, a Hindu Undivided Family or partnership firms, and private trusts.
PC Jeweller and Weizmann Forex have seen their market value more than halve so far in 2018. 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 so far this year, compared to a five per cent rise in the benchmark BSE Sensex.
“There are two primary reasons why 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 shareholders in a tax-efficient manner. However, corporates should think this through well. Given the Securities and Exchange Board of India’s 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 a 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.