Open market share buybacks have brought little cheer to investors in the last six months. Market values of 25 out of 34 companies have declined after they announced buybacks during this period. Only nine stocks managed to buck the trend by appreciating between 1 and 40 per cent.
Those on the buyback failure list include DLF, Godrej Industries, Rain Commodities, ANG Auto, HEG, R Systems International (over 40 per cent fall), Jindal Poly Films, Bosch, TV Today, TTK Healthcare and Surana Telecom (between 20 and 40 per cent decline).
The 34 companies had made a combined provision of Rs 2,730 crore to buy back 172 million shares through open market purchase. Of these, 15 companies that started buying have bought only 12 million shares from the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Real-estate heavyweight DLF has made a provision of Rs 1,100 crore for buying back 22 million shares and has fixed a floor price of Rs 600 per share. The stock was trading at Rs 458.35 when the buyback was announced on July 10, 2008. However, now the scrip has fallen to Rs 277.39 on BSE, registering a decline of over 40 per cent. So far, the company has bought back 2.1 million shares.
Now, Satyam Computer Services, the company that made a flip-flop by announcing two acquisitions and calling the same off within 12 hours under investor pressure, is going to consider a buyback at its board meeting on December 29. Going by the trend in the last six months, even Satyam’s move could prove to be a damp squib if the company goes in for open market buyback. The company has Rs 6,200 crore in its reserves and surplus kitty. If it offers open market buyback, it can use Rs 1,550 crore to buy 6.6 per cent shares at the current market value of Rs 169.35.
| LITTLE CHEER | ||||||
| Shares (in mn) | MOP | Price in Rs as on | ||||
| MOS | BB | Price* | 18-Dec | % chg | ||
| HEG | 1.39 | 0.63 | 350.00 | 264.84 | 113.15 | -57.28 |
| R Systems | 1.31 | 0.11 | 150.00 | 93.05 | 49.40 | -46.91 |
| ANG Auto | 0.75 | 0.64 | 215.00 | 82.10 | 45.00 | -45.19 |
| DLF | 22.00 | 2.12 | 600.00 | 458.35 | 277.39 | -39.48 |
| Bosch | 2.14 | 0.01 | 4500.00 | 4048.35 | 3045.65 | -24.77 |
| Surana Tele | 1.80 | 1.30 | 50.00 | 32.00 | 24.25 | -24.22 |
| Ipca Labs | 1.00 | 0.01 | 600.00 | 427.95 | 363.20 | -15.13 |
| Alembic | 1.20 | 0.05 | 55.00 | 36.40 | 32.29 | -11.29 |
| Monnet Ispat | 0.50 | 0.01 | 300.00 | 176.45 | 158.70 | -10.06 |
| FDC | 8.97 | 0.59 | 40.00 | 34.50 | 31.50 | -8.70 |
| MOS: Maximum offer shares, MOP: Maxmium offer price BB: Shares buyback till Dec 17, 08, *On date of buyback announced | ||||||
Buyback of shares through open market mechanism means a company purchasing its own shares at the prevailing market price, subject to the overall limit approved by its shareholders. In this case, there is no pre-determined ceiling price fixed by the company as in case of tender buyback. In a share buyback programme, the acquired stocks are liquidated, thereby reducing the company’s equity base.
Buyback of equity shares is a common practice in a bear market. The difference between the open market buyback and tender buyback is that, in the first mechanism, promoters are not allowed to participate, while in the second, they can be part of the process on a proportionate basis.