DLF's announcement yesterday confirms a new flavour on Dalal Street: share buybacks are here to stay. With shares available at nearly half the price they were in January 2008, several companies are lapping up chunks of their own shares from the open market.
Share buyback or repurchase is the process in which a company (generally cash-rich) buys its shown shares back from the open market. The company usually cancels such bought back shares, thus reducing the number of shares and the equity capital in turn.
Besides pushing up the promoters' holding on a leaner equity base, a buyback also results in higher earnings per share (EPS) as profits are distributed over lesser number of shares. Securities and Exchange Board of India (Sebi) allows companies to buy back up to 10 per cent of their outstanding shares without shareholder approval.
"It is a way of rewarding shareholders and the company also establishes its belief that inherent valuation is more than what the market perceives," said Bharat Banka, head, corporate finance, Aditya Birla Group.
With the Sensex nearly 40 per cent lower from an all-time intra-day high of 21,207 points recorded on January 10, 2008, a number of shares are available at cheap prices.
For instance, shares of DLF that were trading at Rs 1,225 in January are currently about Rs 381. "The offers signal that these stocks are undervalued," said Apurva Shah, head of research at Mumbai-based brokerage firm, Prabhudas Leeladhar. "If the valuation continues to come down, more and more companies may come up with buyback offers."
Meanwhile, Reliance Infrastructure has already bought over 11 lakh shares from the open market in the last two working days.