Share buyback fails to take off

MUMBAI, Jan 31: The share buyback facility, which was announced with much fanfare, has become a non-starter with leading companies turnin...

MUMBAI, Jan 31: The share buyback facility, which was announced with much fanfare, has become a non-starter with leading companies turning their back on the new facility. Hailed as the elixir for all the ills of the capital market and the industry when introduced last year, the buyback route has been found to be too restrictive by companies which expected a free-for-all regime.

Four months after the introduction of the facility, not a single major corporate has come forward to announce buyback of shares. Only a small finance company, Fortune Financial Services, has announced a firm plan to buy back its own shares. While public sector MTNL has announced its intention to buy back its shares and set aside a corpus of Rs 528 crore for the purpose, merchant bankers feel it will take several months for the company to execute the plan.

On the other hand, leading corporates like Reliance, Bajaj Auto, Ranbaxy and several others have decided not to consider buyback of shares due to the stringent restrictions.

8220;There is no queue of companies to buy back shares. Industry chambers which clamoured for the facility are now demanding for relaxation in the norms. Buyback has failed to excite the markets,8221; said the senior partner of a leading auditing firm.

The buyback rules in India and those prevailing abroad are different. As per Indian rules, no fresh equity issue is allowed for two years after the buyback. This is not the case in other countries. Besides, there are other grey areas like writing down of the equity capital and classification of income as capital gain or dividend. In India, the company needs to fix the price at which it plans to buy back the shares in consultation with the shareholders. This is not the case in several foreign markets. Reliance managing director Anil Ambani had recently criticised the stringent buyback guidelines. SEBI chairman D R Mehta has gone on record pointing out the need to fine-tune the regulations so as to make them workable.

Even the government found the buyback facilitya time-consuming process and opted for the share swap in the disinvestment process to cover the rising fiscal deficit. 8220;The government initially thought about the buyback route. That is, oil companies will buy back the stake held by the government at pre-determined prices. However, it was found too cumbersome and involved the appointment of a merchant banker and adherence to a host of rules and regulations,8221; said a merchant banker.

When the buyback plan was announced, the general perception was that it would set the markets on fire. The market was expecting Sensex to leap as companies come forward to buy dud stocks held by investors. But the markets have now totally ignored the buyback mantra.

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However, SEBI and Finance Ministry officials are worried about the possibility of misuse of the buyback facility. Indian markets are already known for rigging, price manipulation and insider trading. One reason for common investors to stay away from the capital market is that most of them have burnt their fingersin scams which hit the marketplace one after another in the last ten years. The fear among the regulators is that if norms are relaxed, promoters are likely to find loopholes and resort to price manipulation.

It is beyond doubt that for genuine promoters, buyback is an important facility to restructure the capital and increase the shareholders value. There is scope for further fine-tuning of the regulations in the larger interest of the capital market and corporate survival.