Buyback offers: Options for traders

on selling shares remains at zero for equity shares which have been held for over 12 months.

A promoter can announce a buyback, extinguish some shares and cash in. At the same time, since the equity base shrinks in proportion, the ownership pattern remains unaffected. The government has been the biggest practitioner of the buyback concept, pulling money out of the accumulated reserves of PSUs rather than actually disinvesting. These two factors changes in dividend tax and the government's reluctance to actually disinvest - have led to a massive swell in buybacks in the recent past.

At the same time, the spate of buybacks indicate one distressing fact. Well-run corporates don't deplete reserves via buyback? Will it be profitable buybacks when they have to buy shares off the market more constructive things to do and offer those? First, obviously with their cash. Companies read the terms carefully. with expansion plans should Second, factor in the news, the try to finance plans those via market price of the share will reserves since go up. Third, that's the cheapest adjust expectations route, rather for the fact than borrow or that the shares raise fresh equity. you buy will not Ergo, corporates all be accepted don't have meaningful for the buyback. expansion You will therefore, plans, that also be left holding gels with the col- some shares lapse of credit off- after the transaction take, which has is complete. dropped to a 25-year low. Put it Fourth, if you've bought shares together and it becomes very from the market, rather than difficult to trust GDP numbers offering long-term holdings, asserting GDP growth at sev- you will be paying short-term en per cent. capital gains.

Anyhow, what should a Despite those caveats, buybacks trader do, if a company offers a are often worth it. But it can be a very complicated process. To take an example, HCL Technologies offered a buyback in early April with a record date of May 25, at a price of ~1,000 per share. The stock was trading at around ~865 when the offer was announced and it moved between ~800 and ~880 during the “live period”. Eventually in mid-June, when the deal was processed, about 67 per cent of the offered shares were accepted for buyback.

Assume that a trader managed to buy a stake at an average price of ~850, towards the upper end of that price range. Those shares were offered and two-thirds of the position was accepted at ~1,000. The price fell to about ~840 after the buyback and the trader sold at a loss. So, there was a loss of ~10 per share on the shares not accepted for tenders. Putting it together, the trader made a pretax profit of about 11 per cent (absolute) over a holding period of about three months. There will be both short-term capital gains tax payable and also STT or securities transaction tax. It was still a decent trade making about 8.5 per cent.

There have been several similar trades in the past year. Those experiences lead us to believe that there are fairly safe, if limited, profits to be had in most instances from going to the market and accepting a buyback. Note that the promoters' interests are completely allied to that of the minority shareholder in these cases. However, the profits will always be limited and subject to arbitrage as big players will get into the action.

Assume that a trader managed to buy a stake at an average price of ~850, towards the upper end of that price range. Those shares were offered and two-thirds of the position was accepted at ~1,000