Buy-back procedures: Protect the investor for subsequent delisting

AK Ramdas 28 June 2013

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.)

Comments

User

arun adalja

1 decade 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,