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Rediff.com  » Business » Buyback should be avoided, say market participants

Buyback should be avoided, say market participants

September 29, 2011 09:39 IST

The government's move to buy back shares would affect public sector companies hungry for capital to fund their expansion plans, say marketmen.

Amit Tandon, former managing director of Fitch Ratings and co-founder of Institutional investors advisory services, said the move was not good for companies which have capital expenditure plans laid out.

"For companies like SAIL and ONGC, which have laid out huge expansion plans and are in need of capital, diverting of resources to buy back own shares is debilitating. This needs to be certainly revisited. Many Navratnas have enough plans laid out.

On the other hand, if companies are sitting on huge cash piles and do not know what to do with them, a buyback of shares may be useful," Tandon said.

SAIL would continue to place maximum thrust on capacity addition, for which capital expenditure would be made "with positive and upbeat sentiments", C S Verma had told shareholders in an AGM earlier this week.

"Cumulative orders worth about Rs 54,000 crore have already been placed under SAIL's ongoing modernisation & expansion plan to realise hot metal production capacity of 23.5 million tonnes by 2012-13," he said.

In such circumstances, the buyback move would not only deplete existing resources, it would also constrain the companies from raising capital in the future.

"It appears to be a desperate move,"said R Balakrishnan, Chennai-based independent adviser, " the move could restrict their ability to raise money for the next couple of years".

While the completion of the offer could take a few months, Sebi rules specify a moratorium of six months for any new fund raising after completion of the buyback offer.

Buyback is one of the many ways available for a company to deploy surplus cash. Paying out dividends is the other form. Most minority investors prefer the latter as it is more transparent and investor-friendly.

Last year, Piramal Healthcare chose the buyback route to pay surplus generated by sale of part if its pharma business, much to the discontent of investors.

Unlike in a dividend payout, an investor is not sure of what he is getting. A buyback offer is generally made for a particular number of shares or a particular corpus subject to a price ceiling. If more investors tender shares, the offer is done on a pro-rate basis.

Government being the largest shareholder is likely to get the lion's share as it holds over 70 per cent in many large PSUs.

Balakrishnan advises investors to stay back and not to tender in such offer. "If the offer is made at a reasonable price, investors should hold back. If they hold back, since the shares bought back will be extinguished, the stake of residual shareholders will go up," he said.

N Sundaresha Subramanian in Mumbai
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