Promoters Get Ready To Reap Buyback Bonanza

Promoters of some cash-rich business houses are gearing up to reap a windfall at the expense of their companies, following the budget announcement permitting corporates to buy back shares.

Market sources said that most of these promoters were planning to mop up shares from the secondary market using a complex network of shell companies. This would make the buyback cost prohibitive for minority shareholders in the companies in which the promoters wish to consolidate their holdings.

Most Indian companies already own a network of shell companies, often known as investment companies, through which they control their empires.

These investment companies have been incorporated as vehicles for protecting the promoter's interests in the flagship company. This has created the farcical situation of hundreds of companies being incorporated annually from the same office premises. Company law experts believe that these vehicles could easily be diverted to rig prices to the promoter's advantage in the event of a buyback. ``A vehicle is a vehicle. It can be put to any use,'' they pointed out.

 

Using a network of investment companies would enable promoters to artificially inflate the price of shares at every level on the purchase route. Ultimately, the cost to the company would be several times the original secondary market price.

The proposed amendments to the Companies Act, 1956, are expected to permit buybacks to be effected either by raising funds from the capital market after adequate disclosures, or from the free reserves of the company.

Hence, the whole exercise of buying back shares through shell companies would have the effect of rigging the share prices to the advantage of the last seller.

The last seller on the purchase route would invariably be an investment company in which the promoter has direct or indirect interests. Thus, the price advantage would accrue to the promoter at the cost of the shareholders of the company in which the equity reduction is being effected.

Market feedback over the last few months has indicated that some of the upswing on the stockmarket indices in recent weeks is attributable to promoter buying, which began when the introduction of a revamped takeover code became imminent following the Bhagwati Committee report.

Market watchers said that such promoter buying through investment companies would be legitimised by the legal provision for buyback. ``Promoters made windfall gains through preferential allotments two years ago. Now they will do the same through buyback,'' said the sources.