Mumbai: Investors looking to make a quick buck through share buybacks will have to watch for a few telltale signs. Since April 2018, Indian companies have bought back shares worth ₹47,696 crore. Besides, last week, Wipro Ltd announced a ₹10,500 crore buyback.
Share buyback prices are typically higher than market prices when announcements are made. This arbitrage opportunity is driving investors to purchase these stocks in the market and tender them in buyback offers. More so because the market regulator has prescribed a minimal allocation in buybacks to small shareholders.
But shareholders looking to gain from the arbitrage opportunity may not be making money in all buybacks. An analysis by HDFC Securities Ltd shows that nine of the 33 share buybacks where returns were calculated likely lost money for participating shareholders. The losses ranged from -0.2% to -38.5% on an absolute basis.
So what can go wrong with a share buyback? Two important factors influence shareholder returns in share buybacks. Typically, the first and most important is the acceptance ratio. The acceptance ratio is the number of shares that are finally accepted as a percentage of the total that are tendered back to the company.
HDFC Securities research shows that since April 2018, just about 12 in 36 companies accepted 100% of the shares tendered back in an open offer. This is for the companies where the acceptance ratio is available. About 14 companies accepted up to 50% (see chart).
If the acceptance ratio is not 100%, investors looking for quick gains in the market may have to sell the remaining shares in the market at a lower price. This hits investor returns. Typically, shares fall post the completion of a buyback.
Hence, more often investor returns depends on the acceptance ratio. “Once a company announces a buyback, investors buy shares in anticipation of tendering in the offer and making money on the arbitrage available. If a large number of people participate, this tends to reduce the acceptance ratio and the expected returns," says Deepak Jasani, head of retail research at HDFC Securities.
Besides, in larger buybacks, the acceptance ratio can be higher. Tata Consultancy Services Ltd’s ₹16,000 crore buyback last year saw a 100% acceptance ratio.
“If the buyback size is large and where the number of shareholders are low, there is a possibility of a better acceptance ratio and decent returns," adds Jasani.
Of course, the final acceptance ratio cannot be known in advance, only after the buyback exercise is over.
But one thing is for certain: if the acceptance ratio is less than 100%, investors who bought in the market may have to sell at a lower rate in the market. And that could lower returns or even result in losses.