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Photo: Mint
Photo: Mint

The good, the odd, and the big rule of buybacks

Companies are buying their shares back as a response to taxation tweaks. But Vedanta’s failure to delist itself this way reminds us that shareholder interests must clearly prevail

Share buybacks are back with a bang. On Tuesday, Wipro Ltd declared it had set 9,500 crore aside to buy its stock back from holders ready to turn their shares in. A week earlier, Tata Consultancy Services said it would snap up its own equity worth 16,000 crore. With smaller offers included, this fiscal year’s buyback count already looks 40% higher than last year’s, and might even top the action of 2017-18 and 2018-19, when equity valued at over half a trillion rupees each was mopped up by this device. It was laid low by a 20% tax imposed on buybacks last year, but this year’s recast of dividends as taxable income for shareholders has again turned it into a relatively tax-efficient way for thriving companies to reward shareholders. Those who take such an offer get to encash their holdings at a premium over market prices, while the rest look forward to juicier profits being shared among fewer scrips (and thus capital appreciation too). But fiscal fiddles are not the only motivation for buybacks. Sometimes, a company’s aim is to delist its stock from trading platforms and go private. This is a path strewn with pitfalls, though, as seen in a failed attempt by Vedanta Ltd.

Anil Agarwal’s Vedanta Resources, his London-based energy and minerals group, had raised a reported $2.5 billion in debt to buy shares worth over $3.1 billion from Indian investors in an effort to take its locally-listed firm off our stock exchanges. Vedanta Ltd’s price had dropped sharply in the post-covid phase, and the move was part of a big group re-organization with aims that do not seem to have impressed sufficient shareholders. An open offer was duly made to them, but under our rules, such a plan cannot go through if investors representing over a tenth of the equity pie do not tender their shares. While a large chunk of free-float equity had signed up by 9 October, it soon emerged that unconfirmed bids for a significant fraction of that figure were rejected. This meant the company had failed to get the minimum shares needed to delist itself. Suspicions have since arisen over the bids that were found to be invalid on closer inspection. Were they ghost bids made by shadowy agents trying to help the firm meet regulatory conditions? The case could be in for scrutiny. There was also a divergence between the price demanded by some mutual funds and the state-run Life Insurance Corp, which reportedly tried to turn in its stake of almost 6.4% at 320 apiece, about 3.7 times the offer’s floor price and more than five times its late-March low. By the reverse book-building method used in such cases, that is the money each share might have got from Vedanta had the exercise been a success. That it was not may reflect poor shareholder engagement, an offer that was simply not deemed worthy enough by all, or possibly even sabotage.

Whatever it was, the Vedanta fiasco serves us another reminder that minority shareholders cannot be taken for granted. There seems to be a sense that closely-held companies have taken their interests lightly for too long. It is possible that Vedanta owners who held out have lost a good chance to exit, but they do have a say in their company’s affairs, and seem to have made themselves heard. Even while the West turns to the fuzzy warmth of stakeholder capitalism, Indian companies must pay closer attention—as a rule—to what shareholders think and what’s good for them. All buybacks needn’t be

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