Investment banks are focusing on share buybacks to make up for the decline in fee from IPOs
Mumbai: Investment bankers are pitching for more share buybacks in 2018 as the primary market has dried up, said two people familiar with the matter. According to a Mint analysis based on company disclosures in initial public offer (IPO) prospectuses, while investment banks earned approximately ₹ 625 crore in fees from IPOs in 2017, in the first 10 months of 2018 they have earned just about ₹ 504 crore.
Last year saw 36 companies raising ₹ 67,147 crore through IPOs, while so far this year, 24 companies have raised ₹ 30,959 crore through the same route, shows data from primary market tracker Prime Database.
Meanwhile, the number of share buybacks has already crossed last year’s levels. In the first 10 months of 2018, 51 companies have repurchased their shares, against 50 companies in all of 2017. However, 2017’s buybacks added up to ₹ 55,273 crore, while so far in 2018, companies have bought back shares worth only ₹ 26,594 crore.
As of 12 November, five companies, including rating firm Icra Ltd and radio station operator Music Broadcast Ltd, have bought back shares.
Some companies, which have used the buyback route in 2018, include media companies Jagran Prakashan Ltd and DB Corp Ltd and pharma firm Akzo Nobel India Ltd. Besides these firms, information technology (IT) services majors Tata Consultancy Services Ltd and HCL Technologies Ltd too have gone for share buybacks.
According to investment bankers, buybacks are becoming an area of focus for many bankers as they look to compensate for the lacklustre IPO market.
“Buybacks have become a higher priority for almost all banks on the street. All banks have been going aggressive on buybacks," said one investment banker working with a domestic investment bank, on the condition of anonymity.
The banker added that market conditions in the recent past, which have been a major hindrance to IPOs, lend themselves well to share buybacks.
“Share prices, especially in midcaps, were depressed and so, in such an environment, the companies have been using cash on their books to improve the return ratios and also give a signal that they believe that the intrinsic valuation of the stock is better than what the price reflects. Also, when price is muted, companies use this to improve the promoter shareholding," he said.
The BSE MidCap index has shed 16.9% since the start of 2018, according to stock exchange data.
“Since the markets are difficult to launch IPOs, banks have been pitching buybacks, as it allows them to generate some fee, while also keeping the teams busy. A buyback offering can earn anywhere between ₹ 50 lakh to ₹ 1 crore in fee for the banker," said the person cited above.
According to Pranjal Srivastava, an independent capital markets professional, buybacks are being driven by multiple factors including taxation and falling stock prices.
“There are a few drivers for buybacks including tax. There is a differential between the tax that one pays for dividend distribution and that paid for share buyback. So, buybacks have become an attractive route for promoters as against dividends because of the relatively higher tax on the latter," Srivastava said.
Apart from tax benefit, buybacks are also a good route for promoters to support falling stock prices, he said. “For bankers, it is a much easier product to manage as compared to an IPO. They have been pitching these actively. There have been a lot of new buyback announcements in the recent days."