 "Chart : Why investors need to be wary of buybacks")
Buy backs seems to be the buzz these days as a large number of companies have come up with offers to buy back their shares from the open market. This interest was last seen in the stock of Alfa Laval, whose delisting offer evoked a huge response on day one with 1.68 lakh shares being tendered.
And this trend seems to have caught on with the government which is also planning to do its own sort of PSU buy back.
According to a report by SMC Securities, there are currently 16 buy backs in the market. Of these, only five companies, namely, Crisil, Rain Commodities, Onmobile Global,Borosil Glass and Bhagyanagar India are companies whose buy back have exceeded more than 50 percent of its total a value (see interactive graph below).
In terms of value, RIL has the largest buyback size of Rs10,044 crore. The company has already started this as it has already bought Rs 51.2 crore or 0.49 percent of buyback since its buyback commenced on 7 February, 2012.
But what really is a buy back and whom does it benefit ?
A buyback offer is when a company buys back some of its shares from its share holders and extinguishes them. Mostly, this is done through two routes - one is through the stock markets and the second is done through a tender form. And, it is done when companies feel they would like to delist the entity or that the share price is undervalued.
However, investors need to be alert when it comes to buy backs. “According to SEBI regulations, it is not mandatory for companies to buy back even after the announcement as companies can pick and choose”, said Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities, to Firstpost.
What happens in a buy back
• It leads to a reduction in outstanding number of shares and consequently increase in earnings per share.
• Improvement in return on net worth, etc.
•Allow shareholders (other than promoters) to exit the stock at a higher price as a buy back announcement generally leads to a rally in the stock
•Increases promoter shareholding.
To see the full report, click here .
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