Forbes India 15th Anniversary Special

Share buybacks - A way to stabilise Indian financial markets

It will protect companies from the threat of acquisitions and takeovers

Published: Mar 28, 2016 07:34:51 AM IST
Updated: Mar 28, 2016 08:22:24 AM IST
Share buybacks - A way to stabilise Indian financial markets
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Management of companies trading at very low prices, but having high corporate valuations should make an announcement of share buybacks, which ensures returns to shareholders

“Cash-rich Indian companies should invest in their own company to add value to stakeholders and to stabilise the financial markets”.

The big American global companies like Home Depot Inc., IBM Inc., and Apple Inc., had invested consistently in their own stocks in the form of share buybacks. The investment in share buybacks was consistent even during the period of sub-price crisis i.e. from 2008 to 2011. Also during the global turmoil due to the euro crisis, the big companies of America invested in their own stocks. The reason behind the announcement of share buybacks are many, but they had ensured the shareholders by creating wealth even during the existence of a crisis in markets. This kind of corporate actions will definitely boost the morale of investors and make them connect with financial markets. This will lead to efficiency in financial markets.

Financial markets will show an uptrend as along as they create value for the investors. Markets should not create an environment in which investors shy away from markets. The regulators, policymakers, government policies do create an impact on the performance of financial markets. Factors like GDP, inflation, savings rate, and interest rates will direct the trend of financial markets.

In a scenario of lower inflation, moderate growth and constant interest rates, there should not be turmoil in financial markets in India. This will create financial stress for investors and also on global market participants. It will also cause the diversion of investments from the financial markets which lead to the downfall in the marketplace. Under the current environment of financial markets, most of the blue-chip stocks were trading at very low prices. But their corporate valuations are on a high. Under such circumstances, the management of such companies should make an announcement of share buybacks, which ensures returns to shareholders.  

“Buyback is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price”. In India, Buyback of Securities Regulations Act, 1998, is introduced and the applicability of share buyback norms is commenced thereafter. The new Buyback of Securities Act (Amendment), 2013, is very stringent and also makes it complicated for companies to announce buyback programmes. As a result, many companies in India are not showing interest in buyback announcements. Hence, regulators should rethink on relaxing some of the buyback norms, so that it can be used as a vital tool for enhancing the stability of stock markets and also ensures that markets move in the positive direction.  

When companies expect investors to invest in their stocks, why can’t companies invest in the same, when the prices are low?  The recent buyback announcement of Dr Reddys Limited at a target price of share buyback for Rs 3,500 results in the value creation for the shareholders even though the current market price is moving in the range of Rs 2,900 to Rs 3,000.  

There could be many reasons behind this corporate action. But it will demonstrate a win-win situation for both parties and also positive momentum to the markets. Apart from Dr Reddys Limited, there are a good number of companies which are trading at a very low price, even when their valuations are high. As we are aware, the majority of the Indian investors believe in market sentiment rather than the company performance and also the valuation. In such a scenario, it is the responsibility of the company to establish the confidence among the investors by investing in their own companies.

The Government of India has asked public sector firms to buyback shares worth about Rs 25,000 crore.  As an alternative to selling stake through public offers, it has asked the cash-rich Coal India Ltd, National Aluminium Co Ltd (NALCO), NMDC Ltd and MOIL Ltd among half a dozen PSUs to buyback shares. The firms identified for the share buyback have a cumulative cash balance of over Rs 78,000 crore.

Even, Justdial Ltd is going to buyback 10,61,499 equity shares of Rs 10 each at a price of Rs 1,550. The company has received final observations from the Securities Exchange Board of India (Sebi) for the buyback.  Another private enterprise Onmobile global Ltd. has decided to buyback up to 56 lakh equity shares at a price not exceeding Rs 150 per share.

The value drivers include high growth rate, lower inflation which are positive signs for investments. The companies should the use these positive value drivers to create returns to the stakeholders. In the current scenario of Indian markets, the announcement of share buybacks is vital.  It will protect the company from the threat of acquisitions and takeovers since undervaluation.    

Even Warren Buffett alluded to the share buybacks in his 1984 letter to shareholders: “When companies with outstanding businesses and comfortable financial positions find their shares selling far below their intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.”  

Finally, remarkable Indian companies trading at low prices with an outstanding business and strong financials should result in the victory for shareholders in the form wealth creation using share buybacks. 

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  • Vijay

    Brilliantly written! However, the responsibility laise with SEBI/govt to relax the stringent norms and make companies to explore on Buyback system.

    on Mar 30, 2016
    • M.chandra Shekar

      Thanks Vijay for your comment on my article. Yes, the point you stressed is highly appreciated i.e. SEBI/Govt to relax buyback norms. Best Regards Chandra Shekar

      on Apr 12, 2016
  • Write Comments

    Can the authors explain what is the sub-price crisis mentioned in the first few lines of this article.

    on Mar 29, 2016
    • M.chandra Shekar

      Sorry, there was a typo please read it as Sub-Prime crisis. Best Regards Chandra Shekar

      on Apr 12, 2016