Proposed buyback guidelines beneficial for investors

Companies wanting to resort to buyback merely to push up share prices will not be able to do so

The markets regulator has taken several steps to help investors, even if it has meant incurring the displeasure of other stakeholders. Investors who have felt cheated by buyback announcements so far, may have something to look forward to if the Securities and Exchange Board of India’s (Sebi) proposed overhaul of share buyback guidelines are anything to go by. While companies are not too enthused with Sebi’s proposals, these are in the best interest of investors, say experts.

Some of the reasons why a company usually undertakes a buyback are to return surplus cash to shareholders, support share price during periods of temporary weakness or increase the underlying share value. Sebi says that several companies take approval from their shareholders, but do not end up buying even a single share. A buyback announcement indicates the confidence of the management in its business and leads to an increase in the share price.

Market experts say, often, a company announces a buyback only to push up its share price, earnings per share or dividend but does not go ahead with the buyback at the announced price.

“Sometimes the company discloses the maximum price only and eventually purchases the shares near market price, which could be significantly lower than the announced price. This may convey a misleading message to the shareholders and to the market,” says Sebi.

The proposed guidelines will stop such unscrupulous buyback announcements, says Raghavendra Nath, managing director, Ladderup Wealth Management. By asking companies to put 25 per cent of the maximum buyback amount in an escrow account and not allowing them to raise additional capital for two years after the buyback, Sebi is ensuring good corporate governance. “Sebi is looking at a tactical point-of-view. While investors will actually only benefit if there is a restriction on the price, these restrictions will indirectly benefit investors. They will ensure that companies have surplus capital before they announce a buyback,” Nath says.

As another step to ensure that the companies do not launch buyback programs for stabilising the share price, Sebi has also proposed that companies that are unable to buy back 100 per cent of the proposed amount (or the proposed maximum number of shares), may not be allowed to come up with another buyback for a period of at least one year irrespective of the mode of approval for the buyback. Currently, it is allowed if it is approved by the shareholders.

The proposal that companies must complete the buyback in a three-month period (as against 12 months now) and buy back a minimum of 50 per cent of the proposed size (against no such restriction now) will help in better price realisation for shareholders, says G Chokkalingam, executive director and chief investment officer, Centrum Wealth Management.

“Currently, almost nine out of ten companies do a bargain buyback. In other words, companies get 12 months to execute the buyback, but many a times they keep executing this till the last minute. By this time, the share prices may see a dip and shareholders would have lost confidence in the company due to its delay in buying back shares. Hence, that would help the company as they would end up buying back shares at a price that is lower than the maximum offer price, which was earlier quoted,” he says.