Kolkata: Coal India Ltd’s board on Monday approved a proposal to buy back 108.9 million shares for 335 each, spending a total of 3,650 crore.

This marks a deviation from the state-controlled miner’s earlier plan of raising cash from its seven wholly-owned coal-producing units by getting them to buy back their shares from Coal India. The boards of five of its subsidiaries had already agreed to release cash to Coal India.

“That plan has been put on hold for now," said a key Coal India official, asking not to be named. “We are going to pay for the buyback from our cash reserve." To be sure, it would have increased transaction costs at a time when Coal India didn’t immediately have to boost its cash reserve to buy back shares.

Also, if Coal India, the holding firm, needs a cash injection from its units, it can have its shares bought back by them separately—the two didn’t have to be combined, said the official cited above.

The price offered for the buyback represents a 4.5% premium over Monday’s closing price of Coal India’s shares. They closed on BSE at 320.50 each, gaining 2.84%, while the benchmark Sensex jumped 1.84%.

On Monday, a considerable amount of time was spent on the pricing of the buyback, officials said. The buyback will result in a contraction of Coal India’s paid up capital by 1.7%, but that might not have much impact on its free float—or the shares available for trading.

For Coal India, a buyback is a better way of rewarding its shareholders than paying a special dividend, according to former chairman and managing director Partha Bhattacharya. It will shore up the firm’s profit per share going forward, he said.

Also, for state-owned enterprises in India, a new instrument for rewarding shareholders is being tested, Bhattacharya said.

It is expected that it will take up to three months for Coal India to obtain all necessary clearances, officials said. By then, the price may not remain attractive for retail investors to tender their shares, according to analysts.

The buyback will primarily benefit the Union government, which owns 79.65% of Coal India’s shares. The Life Insurance Corp. of India Ltd is the second biggest shareholder with 5.86%; the rest is widely held.

In a regulatory filing, Coal India said its board “noted the intention of the promoter of the company to participate in the proposed buyback", acknowledging the fact that the Union government had asked it to loosen its purse strings.

It has been reported previously that Coal India was concerned that this cash drain could impair its capacity to expand. But Bhattacharya said CIL has “huge borrowing capacity" based on its balance sheet strength, so a 3,650 crore payout will not constrain its growth pursuits in any manner.

Close