Stock buybacks launched in the depths of the March-April stock market crash are in tatters as the stock market rose soon after, pushing prices beyond what companies were offering.
The prices of 7 out of 10 buyback shares are now trading above the offer price, rendering these programs ineffective, according to ESB data.
As Indian markets fell sharply with the spread of covid-19 in March, several cash-rich Indian companies have initiated buybacks, in an attempt to support their stock price decline.
Promoters and companies often use buybacks to signal to the market that stocks are undervalued at going prices.
Repurchases are offered at a significant premium to the market price to attract investors. However, now stock prices have even exceeded that premium that was offered when the buybacks started in March and April.
Considering the rising market price, most companies have seen no activity in their share buybacks in the past month. In fact, the ₹The 1,700 crore buyout by Sun Pharmaceuticals Ltd has not seen a single share sold to the company by shareholders since it opened. This is not surprising since the buyback offers a maximum price of ₹425 per share, while its shares are trading at ₹512.3.
Motilal Oswal Financial Services Ltd. ₹The 150 crore buyout has so far succeeded in buying shares worth only ₹9.55 crore, according to exchange documents.
Motilal launched its offer in April, offering to buy its own shares at a maximum of ₹650 per share. Motilal shares closed on Friday at ₹679.05 each.
Companies such as Dalmia Bharat, OnMobile Global and Delta Corp Ltd have also seen their share buybacks remain dormant.
The benchmark Sensex gained 47.63% from its March low, while Sun Pharma shares were up 58.12%, Motilal Oswal 39.69%, Delta Corp 79.75%, OnMobile 185.93% and Dalmia Bharat 81.96%.
“Given the recent rally in the markets, buybacks will be preferred by two groups of companies. One, who despite the rally has not seen a significant improvement in their perception of the market and two, those looking to return money to their shareholders in a tax-efficient way, ”said Ravi Dubey, partner, IndusLaw.
Recent trends suggest a bias in favor of buybacks through the takeover bid process, indicating cash payments to sponsor shareholders.