Whenever there is a rumor about buyback, the stock markets
go up. According to market operators, this is an obvious
step to breathe life into a moribund market. They feel that
everyone's a winner. But if buyback is such a win-win situation,
what has been holding the government back for so many years
from introducing this proposal? In theory, buyback of its
shares by a company is guided by the principle that the
intrinsic worth of the share is substantially higher than
the market price. By buying back its shares, the company
will allow some desperate shareholders to exit and enhance
the value of the remaining shareholders.
The buyback ordinance was introduced by the Government
of India on October 31, 1998. The major objective of the
buyback ordinance was to revive the capital markets and
protect companies from hostile takeover bids. The buyback
of shares was governed by the Securities and Exchange Board
of India's (Sebi) Buy Back of Securities Regulation, 1998,
and Securities and Substantial Acquisition of Shares and
Takeover Regulations, 1997. However, even before 1998, buyback
was possible either as reduction of capital (Section 100)
or a scheme of arrangement (Section 391), both with the
court's approval.
A company can buyback shares if it has free cash and there
is no immediate requirement for funds. Issuing fresh capital
by way of debt will increase the degree of financial leverage
of a company, thereby increasing the financial risk and
by way of equity will defeat the very purpose of the buyback.
The companies making buyback offers can be divided in three
categories:
The companies wherein the promoters who sometimes wish
to manipulate the share prices of their companies, involve
in speculative activities behind the scenes. In many cases,
they speculate on their own account with a safety net of
the company's funds. In spite of availability of provisions
to prevent the misuse, it is difficult for regulators to
check the ingenuity of such promoters.Companies which have
promoters with low equity stake fear a takeover. These promoters,
in the absence of availability of resources to increase
their stake, will resort to buyback and reduce the number
of outstanding shares.
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