Buybacks fail to sizzle on Street

Open market buyback of shares is not attracting retail investors in a big way because of the 20 per cent short-term capital gains on such off-market deals.

The uncertainty over whether the company will accept all the shares tendered under a buyback scheme also acts as a deterrent, said experts.

No wonder, stocks, where buyback is on at the moment, are ruling at a discount to the buyback price.

In the past, no sooner were buybacks announced, the share prices shot up. But when buyback prices are fixed, the market price either stays unchanged or goes down.

Experts point out that since these are off-market deals and are not traded on screen, retail investors participating in the buyback have to bear a short term capital gains tax of 20 per cent, discouraging them to participate in such offers.

Moreover, a company does not buy all the shares tendered by investors. For example, if a shareholder possesses 100 shares, not all the shares will qualify for a buyback and that is the reason why there is a difference between the buyback price and the current market price.

Here, rules of arbitrage also come into play as financers try to cash in on the opportunity. R Ramaswami, chief financial officer, MRO-Tek, says, "We will buy back only up to 25,60,000 shares that will increase the promoters' stake by 5 per cent in the company."

MRO-Tek is one among the companies which have announced a buyback. Others are Natco Pharma, GTL Limited, Ace Soft Export, Gujarat Ambuja Export and ICI India. Ballarpur Industries announced a buyback scheme on Tuesday. Natco Pharma is buying 5 lakh shares increasing promoters' stake by 0.1 per cent.

Companies essentially resort to buybacks when they are sitting on a huge cash surplus and want to reduce public stake, thereby, gaining greater control over their business.

It also means that the stock of a particular company has been largely undervalued over a period of time and companies try to unleash greater shareholder value by making them exit at a premium.

For example, HUL shares had been lagging compared with other market indices. Since January 2005, the stock has grown only 30.29 per cent compared with Sensex increase of 131.29 per cent.

Sometimes companies eventually go for delisting by continuous buybacks. A clutch of multinationals have expressed their desire to exit capital markets by acquiring shares from minority shareholders. This includes MICO, Bayer Diagnostics, iFlex, Mphasis, BFL, ICI and Fulford India.