The intention to buyback shares is certainly good and is aimed at improving the market valuations. The companies with good cash flow position and having a view that their stocks are largely under-valued at the market, go for the buyback route. The moot question however still remains regarding the effectiveness of this route in improving the shareholders' value.

Nearly all the buyback announcements have received a positive response from the market. And nearly in the all cases, the prices have come closer to the offer prices immediately after the announcement.

Bajaj Auto is a prime example. When the buyback scheme was announced, the stock was available at Rs 320, and after the announcement it touched a peak of Rs 393. However, it failed to cross the level of Rs 400 at which the offer was being made by the company.

In the case of Reliance, the market price moved in a 20 per cent range of the offer price.

Ashok Leyland also seen its stock price moving from Rs 36 to Rs 48 when the buyback was announced. The reaction to Sterlite Copper's buyback offer was also positive, and the stock gained more than 20 per cent.

While the initial reaction has been positive in nearly all the buyback cases, it does not change the valuations drastically. To tell the truth it cannot. For this reason, these offers are nothing but an opportunity to make an exit.

Why do market give a lower discounting to a particular stock? The answer lies in the performance of the company and the overall market perspective about the company. Either the performance failed excite the market or, when the performance was satisfactory, the market was not convinced of the future growth prospects of the company.

The stock price is nothing but the equilibrium point of demand and supply of the paper at any given time. And it is the market elements which determine the demand-supply scenario for a particular stock which results in a lower or higher valuation for a stock, at least in the medium-term.

The managements, in no way, can determine the valuations. Their job is to perform well, behave in a transparent manner, and have a long-term goal. In return, the market will have no option but to give a better valuation to the stock.

As such, the buyback scheme will no way change the medium-term discounting for the stock. At best, the short-term reaction will be positive, which it has been in almost all the cases. And, as said earlier, the investors should use it as a best exist opportunity.

Deepak Singh Tanwar