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It pays to participate in buybacks

Deepak Korgaonkar

To answer the perennially nagging question as to whether shareholders are better off in tendering their shares in a buyback offer or in the post buy-back phase, perhaps it will help to know that the 26 companies which routed Rs 14.80 billion of shareholders' money (from the company's reserves) into buy-backs actually ended up with an erosion of a whopping Rs 129.34 billion in market capitalisation after the buy-back.

This erosion in market capitalisation has been calculated as the difference between the offer price and price as on August 30, on the reduced equity capital.

This indicates that the shareholders who did not participate in the buy-backs have suffered a double loss. First, the remaining shareholders in the company were poorer off because the company expended their funds in the buyback, leading to a decline in the company's book value.

Secondly, the market price of their shares fell in the period following the buy-back. Indeed, most of the companies that went in for buy-backs are currently available at a 15 to 60 per cent discount to the buy-back price.

For example, the Bajaj Auto stock declined by 36.5 per cent over the buy-back price of Rs 400 to Rs 254.20 on the BSE on Thursday. Thus, the promoters utilised Rs 7.28 billion from the reserves and the end result is a Rs 22.04 billion decline in market capitalisation.

Similarly, the promoters of Raymond utilised Rs 1.86 billion from reserves to buy back 14 million shares at an average price of Rs 135.85.

After the buy-back, the stock declined by 36 per cent to Rs 87 on Thursday. Jay Shree Tea, which bought back 1.2 million equity shares is currently available (Rs 55.05) at a discount of 54 per cent over its offer price of Rs 120.

Robert Bosch GmbH, the promoters of Motor Industries, bought 200,000 shares in two tranches at prices of Rs 4,200 and Rs 3,800 per share. The promoters utilised Rs 1.58 billion from reserves but after the buy-back, the stock is available at Rs 1,925, down 50 per cent.

As per data available from the Security and Exchange Board of India, a total of 26 companies made buy-back offers since March 1999. Of this, six companies bought back shares in two tranches at differing prices. Bhagyanagar Metals made its first offer at Rs 27 and the second at Rs 80.

Jay Shree Tea (at Rs 120 and Rs 75), Motor Industries (at Rs 4,200 and Rs 3,800), Rajratna Metals (at Rs 40 and Rs 60), Selan Exploration (at Rs 10 and Rs 25) and Fortune Financial Services (at Rs 10 each time). All these scrips are currently traded below their offer price.

Five more companies are in the pipeline: Britannia Industries at Rs 750, Bombay Dyeing (Rs 60), Tata Chemicals (Rs 60) and Winsome Yarn (Rs 8). These companies propose to buy back their shares in open market operations. Madura Coats proposes to use the tender approach at Rs 27.

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