Regulations
Buy-back procedures: Protect the investor for subsequent delisting
During the buy-back period, the promoters will not be allowed to do any transaction on or off the market, as such a move may influence the price
 
Early this year, SEBI (the Securities and Exchange Board of India), brought out a discussion paper in order to ensure that the buy-back norms are not misused but, in fact, help investor to be rewarded when companies have adequate cash reserves.
 
The new rules announced by SEBI now restricts the time-frame of the buy-back period to six months (as against 12 months hitherto); the companies now cannot raise fresh capital for a period of one year and minimum buy-back should be at least 50% of the offer amount, and if they fail to achieve this, they would forfeit 2.5% of the offer.
 
At the same time, during this buy-back period, the promoters are not allowed to do any transaction on or off the market, as such a move may influence the price.
 
In the past, such buy-back announcements were used as a tool to manipulate the sagging market price of the shares when the same was kept open for one a year and yet the companies did not actually indulge in buying up the shares.  The new regulation will put an end to this.
 
Has the buy-back schemes really worked well? Hard to say and it is dependent on the corporate intentions of the management particularly when companies take this route before de-listing their shares from the market. Let’s take a look at this new angle, which is not covered in the regulation.
 
In the past, there have been a number of companies that went through the procedure of buy-back and got their shares delisted from the stock exchange. Shareholders who failed to take advantage of the scheme are still receiving dividends, but have no other right!  They have no means to know the fair market price for their shares as these are not traded and companies do not respond on such matters.
 
However, some brokers keep getting in touch the shareholders, who failed to encash during the buy-back period, and ask them to make a bid; they want you to make an offer on the phone, or offer at a price, with the attitude, “take it or leave it”!
 
There may be many such companies whose shares are no longer traded but yet can be ‘sold’ through some brokers. One can name such companies as Bharat Hotels, Syngenta, etc, for a start, and the shareholder is at the mercy of the management through such brokers.
 
The very idea of fixing the buy-out price, based on the market price as recorded for the past few months may be one means of establishing the “fair price”, but what about the book value, regularity of dividends, bonus given, profitability and so on?  The whole issue of fixing a “fair price” and the procedure set to reach this figure is debateable.
 
Anyway, take the case of Crompton Greaves, whose board plans to meet on 28th June to decide on the buy-back proposal. According to the statistical data available, after the news hit the market, the share price jumped by about 10% to reach Rs84.35 after having touched a year’s low of Rs71.70 against a peak of Rs 141.70 last year in October. The company has a wide range of products and its past record has been satisfactory.
 
In the case of Hindustan Unilever, shareholders have the option of selling their holdings in the open market at about Rs588, against the offer price of Rs600 given by Unilever Plc, which has a war-chest of Rs29,000 crore to be able to increase its holdings to 75% from the current 52.5%, and take the advantage of not paying capital gains tax, if they had held the shares for more than one year. But short-term holders, if they took the route to buy, when this bid began a couple of months ago, would have to pay the tax!
 
Also SEBI should now follow up this regulation with proposals relating to de-listing as a sequel to buy-back, and ensure that the investors are protected suitably.  
 
Readers of Moneylife who have cases involving buy-backs, delisting and their inability to dispose off their holdings may write full details so that some common means can be adopted to redress the grievance.
 
Finally, when buy-back proposals are approved by SEBI, why not they stipulate that ‘x’ percentage of the shares held by the promoters also be ‘bought’ back under the same scheme by the company, which is awash with funds?
 
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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COMMENTS

arun adalja

4 years ago

author is not sure what he want to say?buy back and delisting both are different issue.company buy back while listing and they announce some price limit for buyback and ask brokers to buy certain quantity everyday and with daily price limit.this is nothing but eyewash.they give higher price but they never buy that price,

CCEA approves hike in natural gas price to $8.4 per mmBtu
The Cabinet Committee for Economic Affairs on Thursday approved the proposal to hike the natural gas price to $8.4mmBtu from the current $4.2 per mmBtu with effect from April 2014
 
Biting the bullet, the government on Thursday approved near doubling of natural gas prices to $8.4 per million metric British thermal unit (mmBtu) from 1st April next year, a move which will result in rise in power tariff, urea cost and CNG prices.
 
This will be the first revision in gas prices in three years.
 
The Cabinet Committee on Economic Affairs (CCEA) headed by prime minister Manmohan Singh approved the oil ministry’s proposal to price all domestically produced natural gas as per a complex formula suggested by a panel headed by Prime Minister’s economic advisor C Rangarajan, a top source said.
 
When contacted, oil minister M Veerappa Moily said: “The CCEA has approved Rangarajan panel formula for pricing of gas. It will be applicable from 1 April 2014 and will be valid for five years.”
 
The new price will apply uniformly to all producers, be it state-owned firms like Oil and Natural Gas Corporation (ONGC) or private sector Reliance Industries (RIL). While it was previously said the new rates would apply to regulated or APM gas produced by firms like ONGC immediately, the pricing as per Rangarajan formula will come into effect from 1 April 2014, just when RIL’s KGD6 formula of $4.2 per mmBtu runs out.
 
The Rangarajan formula would be applicable for five years.
 
The Rangarajan formula uses long-term and spot liquid gas (LNG) import contracts as well as international trading benchmarks to arrive at a competitive price for India.
 
While the Rangarajan panel had recommended revising domestic gas prices every month based, the oil ministry changed it to a quarterly revision.
 
Though the average of the two currently comes to $6.775, the price of gas in April next year when these guidelines will come into effect would be around $8.42 and over $10 in the following year. This is because Petronet’s deal with Qatar’s RasGas (India’s only functional long-term LNG contract) has a price-cap which lifts in January 2014, linking gas prices fully with crude.
 
While RIL’s KG-D6 gas price was fixed in 2007 at $4.205 per mmBtu for first five years of production, APM gas rates were last revised in June 2010 when prices were raised to $4.2 from $1.79. RIL began production from its eastern offshore KG-D6 field in April 2009.
 

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COMMENTS

Dayananda Kamath k

4 years ago

this is how they want to control inflation. and benefit the reliance group during election year. all policy decisions are taken based on lobbying than public good.

Rupee likely to remain weak; financial stability will remain RBI’s focus

Nomura’s latest forex report on India says that the rupee is likely to remain weak, with very few tools available at the disposal of the RBI

Nomura estimates that despite net portfolio outflows of $6.7 bilion, largely from debt over the last month, foreign positioning in India in equity remains high. In fact, foreign equity ownership actually rose about 0.4% in June.
 

While it is commonly perceived that the recent depreciation of the rupee by about 9% against the dollar has brought it closer to its fair value, Nomura’s analysis shows that it is still overvalued by about 17.6%. Higher import prices from the rupee’s weakness are likely to keep the Reserve Bank of India (RBI) on hold for some time, lowering growth expectations and limiting foreign equity flows.
 

The fact that the rupee has breached the 60-mark could elicit a government response soon. Without solid reform, Nomura expects the rupee to remain weak. One suggestion it offers that can be implemented quickly and lead to a sharp halt in the rupee depreciation is an announcement of a large NRI bond issuance.
 

Nomura expects India's current account deficit to ease out to 4.3% of GDP in 2014 from 5% in 2013 due to lower gold imports, maintaining, however, that financing the deficit is going to be an immense challenge. The steadily worsening external vulnerability indicators suggest that the RBI has little agency to exercise. Aggressive intervention would only increase the vulnerability of further capital outflows.
 

The brokerage suggests real sector reforms such as clarity on gas pricing policy, raising FDI limits in certain sectors and relaxing external commercial borrowing limits further.
 

Nomura's expectations for the next few months are bleak, with a weak currency increasing imported cost inflation and hurting the corporate sector with un-hedged loans.
Domestic supply-side constraints, weak global demand and inelastic imports make it unlikely that even a weak currency could substantially help the trade deficit. Financial stability is likely to be of primary concern to the RBI, with a possible delay in rate cuts and tighter liquidity further hurting the prospects of domestic growth.

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