Shareholder value seen soaring on easier buyback norms

Our Markets Bureau

Mumbai, Oct 17: The markets reacted positively to the decision by the Union cabinet on Tuesday to allow companies to buyback up to 10 per cent of their own shares by taking approval from the board and not from the shareholders, as per the earlier norms.

Companies, which brought back their shares, can now issue fresh shares after six months of the buyback against the previous period of two years. Coupled with the eased norms for creeping acquisition cleared earlier this month, the overall atmosphere for share prices to go up seems positive, feel marketmen, who welcomed the Centre’s move.

Dealers and analysts expect the approval to enhance shareholder value in companies and unlock the reserves at appropriate time to take advantage during unforeseen circumstances.

Tata TD Waterhouse Securities head of research K Ramachandran said: "The move is very much market-friendly, giving companies better flexibility, helping the management sitting on cash to exercise this option whenever they see the valuation is on the lower side without wasting time and passing through the current rigid mode."

However, Mr Ramachandran added that only the old economy companies may come forth and take advantage of the eased norms, in comparison to the pharma or IT companies.

He said the values for pharma companies are reasonable, while the IT companies need money to enhance their business or fresh acquisition. But it is possible that some IT companies with excess cash and without any new projects might go for it, but it is not a common thing to happen.

JF Asset Management director UR Bhat said: "The easing of buyback procedure is a positive news for the market and we have already seen the reaction today."

"Simplifying the norms would help the companies who have cash on their balance sheet and who think the ongoing price is under valued compared to its underlining fundamentals they can use this opportunity. Whenever the price gets attractive, they can take the decision on a faster phase, without adhering to stringent procedure," Mr Bhat added.

He added that before coming to any conclusion, the hidden points and provisions have to be checked. But looking at the exterior, we can say that the new norms would be simpler compared to the existing ones.

However, any company wanting to buy back over 10 per cent of its paid-up capital would compulsorily have to go through the special resolution and seek permission of shareholders become essential.