Market regulator SEBI is clamping down on the practice of ‘hollow’ buyback offers, which see companies make buyback announcements and lift share prices, but buy little or no shares. SEBI has issued informal guidelines to investment banks that manage buyback issues. These norms could soon be made part of the buyback rules, a person familiar with the matter said.

Companies will now have to mention the minimum number of shares that will be bought back while making announcements, said an official with an investment bank. The buyback offer cannot be closed before the minimum number of shares have been bought back. Companies will also have to buy back a certain number of shares every week when the market price is below the maximum buyback price.

Buybacks are meant to enhance shareholder value by reducing the equity base, which in turn boosts the earnings ratios (like return on equity, price earnings) and subsequently the share price. But SEBI has observed that some promoters have managed to bolster the stock price without spending a single rupee on buying back the shares.

In the past, several companies have announced large-sized buyback offers via open market purchases, apparently without intending to honour them. The mere announcement of a buyback offer is often good enough to bolster the company’s stock price.

This is because short-sellers back off, thinking company purchases will avert any steep slide in the stock price, and thus limit profits from short sales. Many undecided sellers will hold on to their shares, preferring to sell when prices rise later, and fresh investors too will step in to buy, expecting the stock to be re-rated because of the improvement in earning ratios.

Once the share price stabilises or firms up, promoters may choose not to buy any shares at all, or may just spend a fraction of the money mentioned in the original announcement.

In July last year, DLF announced a Rs 1,100-crore buyback for a maximum of 1.83-crore shares. Last week, it announced the closure of the issue, after buying back just 76.39-lakh shares for an aggregate amount of Rs 140.69 crore.

In another case, Bosch, which announced a buyback issue totalling Rs 639 crore in December last year, bought back a little over 4-lakh shares as against the maximum limit of over 14-lakh shares.
Similarly, Alembic has bought back 15-lakh shares after announcing a buyback for 60-lakh shares. “SEBI started this practice a few months ago with the intention of bringing in more seriousness to buyback offers,” says ICICI Securities’ head (capital market) Anil Ladha. “The trigger was obviously a slew of large buyback announcements, followed by insignificant actual buyback (of shares). Companies now also have to buy back shares every week, when the share price falls below the maximum buyback price,” adds Mr Ladha.

The regulator’s directive comes on the heels of a number of buyback announcements in recent times. Data collated by Prime Database reveal that around 30 buyback offers are currently on. In most instances, companies have not been buying back shares, despite the current market price being much below the maximum buyback price.

Some of the ongoing buyback offers with a clause regarding minimum quantum of buyback include Gitanjali Gems, Sandesh, Mangalam Cement, Apollo Tyres, Austin Engineering Company and Bosch. In most cases, the quantum of minimum buyback ranges from 15% to 25%.

For instance, if a company intends to buy back 10-lakh shares, and SEBI insists on a minimum of 20%, the issue cannot be closed before the company buys back at least 2-lakh shares.

Antique Stock Broking director Premal Doshi welcomed the SEBI directive. “Companies announce mega buyback issues, but the ground reality is different. The quantum of minimum buyback, however, differs, as it is only an informal guidance as of now,” says Mr Doshi.

source: Economictimes

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