Share buybacks in tatters due to recovery

Prices of seven out of 10 buyback stocks now trade above the offer price, rendering these programmes ineffective, according to BSE data.

Share buybacks launched during the depths of the March-April market crash are lying in tatters as the stock markets roared ahead soon after, driving prices beyond what the companies offered.

Promoters and companies often use buybacks to signal to the market that the stocks are undervalued at prevailing prices. (Bloomberg file photo)

Prices of seven out of 10 buyback stocks now trade above the offer price, rendering these programmes ineffective, according to BSE data.

As the Indian markets fell sharply with the spread of covid-19 in March, several cash-rich Indian companies launched buybacks, aiming to provide support to their falling stock price.

Promoters and companies often use buybacks to signal to the market that the stocks are undervalued at prevailing prices.

Buybacks are offered at a significant premium to the market price to attract investors. However, now, share prices have crossed even this premium that was offered when the buybacks were launched in March and April.

Given the higher market price, most companies have seen zero activity in their share buybacks in the last one month. In fact, the ₹1,700-crore Sun Pharmaceuticals Ltd buyback has not seen a single share being sold back to the company by shareholders since it opened. This is not surprising as the buyback offers a maximum price of ₹425 per share, while its shares trade at ₹512.3.

Financial services firm Motilal Oswal Financial Services Ltd’s ₹150-crore buyback has so far managed to buy shares worth only ₹9.55 crore, according to exchange filings.

Motilal launched its offer in April, offering to buy its own shares at a maximum of ₹650 per share. On Friday, shares of Motilal closed at ₹679.05 apiece.

Companies such as Dalmia Bharat, OnMobile Global, and Delta Corp Ltd have also seen their share buybacks remain dormant.

The benchmark Sensex has gained 47.63% from their March lows, while the Sun Pharma stock is up 58.12%, Motilal Oswal 39.69%, Delta Corp 79.75%, OnMobile 185.93%, and Dalmia Bharat 81.96%.

“Given the recent rally in the markets, buybacks will be preferred by two sets of companies. One, who despite the rally have not seen significant improvement in their market perception and two, those who are looking at returning cash to their shareholders in a tax-efficient manner,” said Ravi Dubey, partner, IndusLaw.

Recent trends suggest a bias towards buybacks through the tender offer process, indicating cash pay-outs to promoter shareholders.