Kaminey Buy back
See how Kaminey are this Buy-Back
Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors. For me Buyback are more effective than Bonus if there is Growth visibility in the company.
Buy back doesn’t mean Investor buys shares from market & participates in Market by surrendering it back to Company at Maximum Price.
Recently Provogue India & Jindal Poly films announced Buy back of shares.
In case of Provogue,Corporate Announcement clearly states Max price will be 100, that doesn’t mean Investor can buy from Market at Current Market price of Rs.55 & sell it back to company for Rs.100. In case of Provogue,Corporate Announcement clearly states Max price will be 100, that doesn’t mean Investor can buy from Market at Current Market price of Rs.55 & sell it back to company for Rs.100.
Company appoints an Investment Banker/Broker who will buy on behalf of company at Market Price over period of time at best available BID which is usually lower than 100.
Buy back reasons
Tax Gains; Since dividends are taxed at higher rate than capital gains companies prefer buyback to reward their investors instead of distributing cash dividends, as capital gains tax is generally lower. At present, short-term capital gains are taxed at 10% and long-term capital gains are not taxed.
* Unused Cash: This is one of the prime reasons for buy back. Company having huge cash reserves with no significant projects to invest in and if the company thinks the market price of its share is undervalued. India is an emerging country with ample growth opportunities. Therefore applying this argument to these companies is not logical for Small & Mid cap firms. In Midcaps & Small Caps buy back is boon to shareholders similar to Bonus. As the profit sharing is reduced, well set company brings benefits to shareholders who don’t participate in Buy back. E.g. Nava Bharat Ventures is good example in mid cap, as restless investors moved out, faithful Investors enjoy the fruits after buy back is over.
* Valuation Game By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher.
* Exit option If a company wants to exit a particular country or wants to turn company in to pvt ltd they go for buy back after which company announces delisting.(Jindal Photo in India is in progress with Exit process). If a company wants to avoid the regulations of the market regulator by delisting. They avoid any public scrutiny of its books of accounts.
* Improve Financials ratios Companies try to use buyback method to display better financial ratios. For eg. When a company uses its cash to buy stock, it reduces outstanding shares and also the assets on the balance sheet (because cash is an asset). Thus, return on assets (ROA) actually increases with reduction in assets, and return on equity (ROE) increases as there is less outstanding equity. If the company earnings are identical before and after the buyback earnings per share (EPS) and the P/E ratio would look better even though earnings did not improve. Since investors carefully scrutinize only EPS and P/E figures, an improvement could jump-start the stock. For this strategy to work in the long term, the stock should truly be undervalued.
* Increase promoter's stake Some companies buyback stock to contain the dilution in promoter holding, EPS and reduction in prices arising out of the exercise of ESOPs issued to employees. Any such exercising leads to increase in outstanding shares and to drop in prices. This also gives scope to takeover bids as the share of promoters is diluted.
Logic of buying back stock to protect from hostile takeovers is not logical. It may be noted that one of the risks of public listing is welcoming hostile takeovers. This is one method of market disciplining the management.
* Sometimes Govt nationalize the companies by taking over it and then compensates the shareholders by buying back their shares at a predetermined price.
Methods by which Investor/existing Shareholder can participate in buyback
Share buyback can take place in 3 ways:
1. Shareholders are presented with a tender offer where they have the option to submit a portion of or all of their shares within a certain time period and at usually a price higher than the current market value. Alternative type is of Dutch auction, in which companies state a range of prices at which it's willing to buy and accepts the bids. It buys at the lowest price at which it can buy the desired number of shares.
2. Through book-building process.
3. Companies can buy shares on the open market over a long-term period subject to various regulator guidelines like SEBI
In both 1 & 2 promoters can participate in buyback and not in 3.
Restrictions on buyback by Indian companies:
Some of the features in government regulation for buyback of shares are:
A. Special resolution has to be passed in general meeting of the shareholders.
B. Buyback should not exceed 25% of the total paid-up capital and free reserves.
C. A declaration of solvency has to be filed with SEBI and Registrar Of Companies
4. The shares bought back should be extinguished and physically destroyed;
5. The company should not make any further issue of securities within 2 years, except bonus, conversion of warrants, etc.
These restrictions were imposed to restrict the companies from using the stock markets as short term money provider apart from protecting interests of small investors.
Checklist for investors before accepting the company's buyback offer:
* Take a look at the share price movement immediately before the buyback. If there was a significant rise this means Insider trading is evident.
* Debt-equity ratio: The companies with Huge Debt should pay their debt first than going for buy back, especially if debt-equity ratio is more than .20.
* Recently listed IPO’s when announce about Buy back, one should avoid such companies as it reflects poor management of Finance by the Companies.
* When the management has passed special resolutions, with a lot of publicity, empowering the Board to buy back whenever allowed, there is enough scope for suspicion. Anybody with the genuine intention of buying back to enhance shareholders' wealth would try to do so with minimum publicity so that the share price does not flare up due to speculators.
Conclusion
Buyback has no immediate impact on the fundamentals of the economy or the company.
So Analyze the facts & future projects before jumping into well.
Hum bhi Thode Kaminey hai yaaro….Yeh Zindagi jo Kaminey Tehri
Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors. For me Buyback are more effective than Bonus if there is Growth visibility in the company.
Buy back doesn’t mean Investor buys shares from market & participates in Market by surrendering it back to Company at Maximum Price.
Recently Provogue India & Jindal Poly films announced Buy back of shares.
In case of Provogue,Corporate Announcement clearly states Max price will be 100, that doesn’t mean Investor can buy from Market at Current Market price of Rs.55 & sell it back to company for Rs.100. In case of Provogue,Corporate Announcement clearly states Max price will be 100, that doesn’t mean Investor can buy from Market at Current Market price of Rs.55 & sell it back to company for Rs.100.
Company appoints an Investment Banker/Broker who will buy on behalf of company at Market Price over period of time at best available BID which is usually lower than 100.
Buy back reasons
Tax Gains; Since dividends are taxed at higher rate than capital gains companies prefer buyback to reward their investors instead of distributing cash dividends, as capital gains tax is generally lower. At present, short-term capital gains are taxed at 10% and long-term capital gains are not taxed.
* Unused Cash: This is one of the prime reasons for buy back. Company having huge cash reserves with no significant projects to invest in and if the company thinks the market price of its share is undervalued. India is an emerging country with ample growth opportunities. Therefore applying this argument to these companies is not logical for Small & Mid cap firms. In Midcaps & Small Caps buy back is boon to shareholders similar to Bonus. As the profit sharing is reduced, well set company brings benefits to shareholders who don’t participate in Buy back. E.g. Nava Bharat Ventures is good example in mid cap, as restless investors moved out, faithful Investors enjoy the fruits after buy back is over.
* Valuation Game By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher.
* Exit option If a company wants to exit a particular country or wants to turn company in to pvt ltd they go for buy back after which company announces delisting.(Jindal Photo in India is in progress with Exit process). If a company wants to avoid the regulations of the market regulator by delisting. They avoid any public scrutiny of its books of accounts.
* Improve Financials ratios Companies try to use buyback method to display better financial ratios. For eg. When a company uses its cash to buy stock, it reduces outstanding shares and also the assets on the balance sheet (because cash is an asset). Thus, return on assets (ROA) actually increases with reduction in assets, and return on equity (ROE) increases as there is less outstanding equity. If the company earnings are identical before and after the buyback earnings per share (EPS) and the P/E ratio would look better even though earnings did not improve. Since investors carefully scrutinize only EPS and P/E figures, an improvement could jump-start the stock. For this strategy to work in the long term, the stock should truly be undervalued.
* Increase promoter's stake Some companies buyback stock to contain the dilution in promoter holding, EPS and reduction in prices arising out of the exercise of ESOPs issued to employees. Any such exercising leads to increase in outstanding shares and to drop in prices. This also gives scope to takeover bids as the share of promoters is diluted.
Logic of buying back stock to protect from hostile takeovers is not logical. It may be noted that one of the risks of public listing is welcoming hostile takeovers. This is one method of market disciplining the management.
* Sometimes Govt nationalize the companies by taking over it and then compensates the shareholders by buying back their shares at a predetermined price.
Methods by which Investor/existing Shareholder can participate in buyback
Share buyback can take place in 3 ways:
1. Shareholders are presented with a tender offer where they have the option to submit a portion of or all of their shares within a certain time period and at usually a price higher than the current market value. Alternative type is of Dutch auction, in which companies state a range of prices at which it's willing to buy and accepts the bids. It buys at the lowest price at which it can buy the desired number of shares.
2. Through book-building process.
3. Companies can buy shares on the open market over a long-term period subject to various regulator guidelines like SEBI
In both 1 & 2 promoters can participate in buyback and not in 3.
Restrictions on buyback by Indian companies:
Some of the features in government regulation for buyback of shares are:
A. Special resolution has to be passed in general meeting of the shareholders.
B. Buyback should not exceed 25% of the total paid-up capital and free reserves.
C. A declaration of solvency has to be filed with SEBI and Registrar Of Companies
4. The shares bought back should be extinguished and physically destroyed;
5. The company should not make any further issue of securities within 2 years, except bonus, conversion of warrants, etc.
These restrictions were imposed to restrict the companies from using the stock markets as short term money provider apart from protecting interests of small investors.
Checklist for investors before accepting the company's buyback offer:
* Take a look at the share price movement immediately before the buyback. If there was a significant rise this means Insider trading is evident.
* Debt-equity ratio: The companies with Huge Debt should pay their debt first than going for buy back, especially if debt-equity ratio is more than .20.
* Recently listed IPO’s when announce about Buy back, one should avoid such companies as it reflects poor management of Finance by the Companies.
* When the management has passed special resolutions, with a lot of publicity, empowering the Board to buy back whenever allowed, there is enough scope for suspicion. Anybody with the genuine intention of buying back to enhance shareholders' wealth would try to do so with minimum publicity so that the share price does not flare up due to speculators.
Conclusion
Buyback has no immediate impact on the fundamentals of the economy or the company.
So Analyze the facts & future projects before jumping into well.
Hum bhi Thode Kaminey hai yaaro….Yeh Zindagi jo Kaminey Tehri
Prashantji,
ReplyDeleteNice article on shares buy back by the companies.
What do you think about Jindalpolyfilms a conservative co when it announced its buyback few months back, which is going to be completed soon. It wd hv been nice if you throw some light specifically on Jindal poly.
Kushhal