Buybacks jump to a 2-year high in pandemic-hit FY21
Share buybacks by companies climbed to a two-year high in 2020-21, led by software services firms, indicating that these firms either did not have too many avenues to deploy the cash or lacked confidence in the business climate in a year hit by the pandemic. Notably, share repurchases offered by state-run firms in the last fiscal were also the highest since 2018-19.
In 2020-21, 61 companies offered to buy back shares worth ₹39,295 crore, according to data from Prime Database. This compares to 52 and 63 firms that made similar offers totaling ₹19,972 crore and ₹55,587 crore in 2019-20 and 2018-19, respectively. In 2020-21, eight buybacks worth ₹8,949.08 crore, or 23% of the total amount, were offered by public sector undertakings (PSUs). In comparison, there were two buybacks by PSUs worth ₹328.25 crore in 2019-20 and 11 worth ₹15,988.85 crore in 2018-19.
“Buyback is a fast route to raise money to meet divestment targets of the government. Hence, buyback is often used by PSUs whenever the government wants to raise money without undergoing the tedious process of initial public offering (IPOs), follow-on public offer (FPOs), offer for share (OFS). While deciding the mode of raising money, the government has also to consider the extent to which its stake in the company can go down. Buybacks are an efficient way to raise money as it involves reduction in the equity capital, increase in earnings per share (EPS), and increase in return ratios of the company, all of which can help in improving valuations of the company,” said Deepak Jasani, retail research head, HDFC Securities.
The biggest buyback offers in FY21 were Tata Consultancy Services ( ₹16,000 crore) and Wipro ( ₹9,500 crore).
Six out of 10 biggest buyback offers in FY21 were by PSUs. These are Hindustan Petroleum Corporation Ltd ( ₹2,500 crore), NTPC ( ₹2,275.75 crore), NMDC ( ₹1,378.06 crore), Gail India ( ₹1,046.35 crore), National Aluminium Company ( ₹749.10 crore) and Engineers India Ltd( ₹586.90 crore)
“The government announced stimulus packages to shore up economic activity and revive consumer demand, while dwindling tax revenue ( direct taxes) continue to affect the fiscal deficit. The government is thus looking at alternative, non-tax means to fill in the fiscal gap and raise revenue through disinvestment of stakes in profit making and cash-rich PSUs through buyback,” said Sandip Khetan, partner and national leader, financial accounting advisory services, and Jalpa Sonchhatra, partner, financial accounting advisory services, EY India.
Firms with ready-to-invest cash were suddenly facing challenges in finding optimal investment options (both organic and inorganic) amid the uncertainty caused by covid-19 while also grappling with a fall in their stock prices, according to experts.