Even as the capital market regulator is looking at strengthening the buyback regulations, companies in the midst of buybacks are expected to take a breather. Market players say that the recent surge in stock prices and the bullish outlook would force many companies to hit the pause button on share buyback.
According to data available on stock exchange websites, 21 buyback offers are currently on. Of these, 17 companies have bought back shares in the previous one month at regular intervals. Companies such as Reliance Industries, Indiabulls Real Estate, JK Lakshmi Cement, United Phosphorous and Allcargo Logistics are currently buying back shares through open market.
Meanwhile, 11 companies, including RIL, have already bought back around 25% of the allocated amount ? the minimum commitment required under the rules specified by the Securities and Exchange Board of India (Sebi).
Reports suggest that Sebi is working on norms that would bar companies from closing their buyback offers until a definite quantity of shares has been bought back.
Share buyback is a tool to increase the value of shares when market conditions are bleak and the return on equity is estimated to be lower. It is also used to eliminate threats by shareholders looking for a controlling stake. The company announces a maximum buyback price and the period within which it will buy back shares from the open market.
?Average returns (absolute and relative) improve as the buyback progresses ? but marked outperformance comes only after 12 months have passed following the buyback notice (or open offer as the case may be),? said Morgan Stanley, in a note issued last month.
Market players say that while companies typically use buybacks as a tool to support the share price, the recent upsurge in the broader market has made buyback quite unnecessary. They, however, add that the companies would require to buy back a minimum number of shares as stipulated by the regulator.
?Companies engaged in share buybacks have to follow certain mandates. If the prices have risen significantly (and if these prices are close or above the maximum buyback price set at the time of announcement), the management may stop buying shares from the open market,? said an analyst at Edelweiss Securities.
Share prices of most companies currently engaged in a buyback are hovering quite close to the maximum buyback price fixed at the time of announcement.
This is also leading to a slowdown in the buyback activity. Experts also say that since a majority of the companies have already neared their minimum commitment, they may not be in a dire need of buying back shares at such steep levels.
