The recent successes in the IPO market also need to be seen in the context of companies increasingly opting for share buybacks
The success of yet another initial public offering—that of insurance company ICICI Lombard—should be seen as supply of fresh equity in a stock market where waves of buying have pushed up the prices of existing shares.
Such extra supply is welcome. However, it is also time to refocus on a strange development. Companies have been using their cash to buy back shares. The effect on the stock market is the exact opposite of what an issue of new shares does.
Ajay Tyagi, chairman of the Securities and Exchange Board of India, pointed this out earlier this month. He said that over the past two years, the amount of shares withdrawn from the market through buybacks has exceeded the supply of new shares.
These buybacks could be welcome in terms of corporate governance. Company managements should return cash to investors if there are no fresh investment plans to absorb it. But the macro effect is that there are fewer shares available for trading. The recent successes in the new issue market also need to be seen in this context.
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