Firms seek to signal to the markets that the stocks are undervalued at these prices
I-banks have seen a sharp rise in the number of enquiries regarding share buybacks
As stock prices continue to tumble due to the Covid-19 pandemic, companies and promoters are rushing to offer investors some solace through share buybacks.
While drugmaker Sun Pharmaceuticals Ltd announced on Monday that it plans to buy back as much as ₹1,700 crore worth of its shares, consumer goods maker Emami Ltd said it plans to buy back its shares worth ₹194 crore on Thursday. In the last two days, several others, including Sterlite Technologies Ltd, Kalpataru Power Transmission Ltd and Motilal Oswal Financial Services Ltd, have also said that their boards will meet soon to consider share buybacks.
The sudden rush to buy back shares comes as the benchmark Sensex has shed 26.13% since the beginning of March.
Investment banks have seen a sharp rise in the number of enquiries regarding share buybacks, said several bankers that Mint spoke to.
“We have been getting several enquiries from promoters who want to look at buybacks. In some cases, promoters want to directly buy shares from the market, while in other cases cash-rich companies want to use some of their capital to buy shares," said an investment banker, who is advising a few clients on such transactions, requesting anonymity.
“Promoters and companies, through these buybacks, want to signal the market that the stocks are undervalued at these prices."
Buybacks can be executed through multiple routes, either through a tender offer or from the open market. Promoters can also buy shares in the open market for a similar result, but can buy up to only a certain limit as per Securities and Exchange Board of India (Sebi)’s takeover guidelines.
The maximum limit of any buyback is 25% or less of the aggregate of paid-up capital, and frees the reserves of a company, according to Sebi guidelines.
Buybacks generally offer a premium over the prevailing market price thus making them attractive for existing shareholders to sell their shares in such an offering.
Sun Pharma has offered to buy back its shares at a price of up to ₹425 apiece. On Thursday, the pharma company’s shares closed at ₹360.2.
Emami is planning to buy its shares at a maximum price of ₹300 per share. On Thursday, Emami’s shares closed at ₹172.65
While in the past share buybacks have usually come from companies in sectors such as pharmaceuticals and IT services, in the current market environment the companies that are eyeing this strategy are coming from across the spectrum.
“In the last couple of years we have seen large buyback offers from IT services and pharma, the enquiries that we are getting today are from companies across various other sectors such as industrials as well as financial services," said a second investment banker, who also spoke on the condition of anonymity.
However, he added that in the current market environment, where equities are seeing a global sell-off, it remains to be seen how effective this strategy will be in mitigating falling stock prices.
According to data from primary market tracker Prime Database, in the first two months on 2020, six companies have bought back shares worth ₹1,289.15 crore. In 2019, 69 companies bought back shares worth ₹43,506 crore worth of shares.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!