Companies blaze new route to buyback, skip narrower one

Opt for tender route, which allows promoter participation, over the open-market option

India Inc is increasingly opting for the 'tender route' buyback instead of the traditional 'open market' route. Between 2006 and 2014, nearly 80 per cent of the buybacks were done through the 'open market' route. Since 2015, 95 per cent of the buybacks have been through the 'tender route'. Even the recent mega-buyback of Tata Consultancy Services (TCS) has been proposed to be done through the 'tender route'.

Change in regulatory and taxation framework has been the key factor behind the shift.

The sharp rise in tender buybacks have coincided with the government's decision to levy 10 per cent additional taxes on dividend at the hands of individuals.

"Over the years, the primary motive of buybacks has changed. Earlier buybacks were used to send a signal to the market that the stock is undervalued. In the current context and with a change in the tax code, companies are using buyback as a tax efficient way of distribution to shareholders. The change in mechanism being used largely reflects the changed motives behind buyback," said Munish Aggarwal, director, Equirus Capital.

In 2016, buybacks saw a sharp spurt on the back of the government's decision to tax dividends. A total of 38 buybacks worth Rs 29,080 crore were done last year, out of which 29 or Rs 26,800 crore worth of buybacks were done through the tender route.

Companies scaling back on dividends and instead rewarding shareholders, including promoters, through buybacks to avail the tax-arbitrage, say market experts.

According to the Securities and Exchange Board of India (Sebi) Buyback regulations, through the tender route, both promoters and public shareholders can offer their shares. On the other hand, through open market route, only the public shareholders can offer their shares for buyback.

In 2012, the Sebi overhauled the buyback regulations to ensure only companies with serious intentions announce share repurchase programmes. The new regulations also encouraged companies to opt for 'tender' buybacks instead of 'open market' as the latter was prone to manipulations.

Interestingly, not just the private companies, but several public sector undertakings (PSUs) too have done tender route buybacks as the part of the disinvestment programme.

In 2016-17, the government has mopped up around Rs 16,000 crore through buybacks.

"In a lot of buybacks that have happened in last two years, promoters have been keen to participate. As promoter group cannot participate when a buyback is done through the open market, the tender mechanism is the only option," said Gaurang Mehta, executive director, investment banking, Axis Capital.

Market participants say tender route buybacks are more investor friendly as shares are purchased at the maximum buyback price. On the other hand, open market buybacks can be done at any price below the maximum buyback price.

Market players say the new regulations have tighter timelines for completion of buyback process, which has increased the appeal. Sebi has lowered the duration of a buyback to three months from one year previously. The regulator increased the disclosure requirements for buybacks. These steps were taken after the regulator found companies announcing buybacks just to shore up their share prices and in reality, some of them ended up buying not even a single share from the investors.