CHAPTER-6 CONCLUSION AND SUGGESTIONS

Transcription

1 CHAPTER-6 CONCLUSION AND SUGGESTIONS 6.1 Conclusion With the present competitive environment in India arising due to globalization and multi-nationals entering into the Indian market; it was felt that Indian companies need flexibility. Though the response to buy-back option was lukewarm in the beginning, the situation is changing and the provisions for buy-back have received laudable response from the corporate world. Since the approval of buy-back of shares by companies, there has been commendable shoot up in the instances of buy-back. However, the present regulations leave wide scope for misuse. More specifically, it is found that the present regulations do not ensure the much desired transparency in the case of open market method of buybacks. In such buybacks, a company in public announcement declares the date of opening of the offer and the end date, the maximum total amount to be bought back and the maximum offer price per share during the process of buy-back. However, indicating the maximum price alone does not bring about the needed transparency in the system and leaves much room for price manipulation by the company promoters. It is found in Table 12 that there is an unduly large gap between the maximum announced price and the actual buyback price paid by the company in a large proportion in case of open market buybacks. The time gap between the announcement date and the opening of the offer date of buy-back of shares varied from day one to 110 days. The time gap between the announcement date and the opening of the offer date was three days in case of 11 companies in the study. However, irrespective of difference between the announcement date and the opening of the offer date it is noted that the difference in price between announcement date and opening of the offer date, ranged between (-25%) to ( +25%). Hence, from the shareholders viewpoint, 162

2 the disclosure of maximum price alone does not bring about the needed transparency in the system. Besides, at what price, on which days and in what quantity will the company repurchase its shares are all at the discretion of the company management. The companies are at liberty to end the buy-back programme or discontinue it before the end date and even before the total aggregate amount are reached. According to Section 77A (9), such particulars are required to be entered in the register of buy-back of securities within 7 days of the date of completion of buy-back. This system lacks transparency and could benefit the insiders rather than investing shareholders at large. The results of share price movements has shown that announcement effect resulted in a rise in price from announcement date to opening of the offer date in case of 64.63% of buy-back cases thereby, supporting management s contention of undervaluation of shares. Besides, an analysis of the mean share prices shows that in case of 55 companies (67%) there was an increase in the mean share prices after buy-back as compared to the mean share prices for pre buy-back period. Thus, the shareholders who did not participate in the buy-back programme gained in these companies. However, the overall effect of buy-back on the share prices is the algebraic sum of the announcement effect and the post buy-back effect and no assurance can be given regarding the price movements. A share will command premium only when the market is more confident. Phase-wise analysis showed that the dampening of the share markets due to technology meltdown; revival of the market due of private foreign capital flows to emerging market economies in an environment of liberalization, flexible exchange rates and strong economic growth, commonly known as bull-run period; the bear-phase due to global subprime crisis and the revival stage due to economic policies of the government played an important role in the valuation of shares in the market and companies to a large extent were affected by these 163

3 global events. Also share prices also depend on various fundamentals, capital markets and global factors affecting the companies. It is believed that share buybacks cause the EPS to rise after the completion of buyback. Yet, the study shows that the EPS does not rise in every case after buy-back. Though the performance efficiency of majority cases was positive and conveyed good news about future performance of companies after buy-back, the EPS had declined due to various internal and external factors over one year after buyback in about 23 companies (28%) which completed buy-back as shown in Tables 7, 8, 9, 10, and 11. There are companies which brought in financial changes as double buy-back, issue of bonus shares, rights issue etc after buy-back which affected the performance of the companies. It should be noted that the profits or fortunes of companies may improve or deteriorate from time to time due to a great variety of factors, both internal (such as company specific factors workers strike, break-down etc) and external factors (like cyclical factors, competition, government policies, etc.). Nevertheless, corporate actions usually create value to shareholders. Share buyback is no exception to this rule. The effect of buy-back on the shareholders wealth is evident from Table 12 and Table 13. The shareholders who tendered their shares in case of 32 companies (39%) gained as the prices of the shares after closing date declined and were better off than the shareholders who did not participate in the process of buy-back of those companies. At the same time, the shareholders who did not tender their shares in the buy-back process, as in case of 41 companies (50%) stood to gain as the mean share prices after buy-back were positive and the earnings per share a year after buy-back was also positive, but the shareholders of 10 companies (12.20%) suffered loss as the mean share prices after buy-back and even the earnings per share after one year of buy-back declined. The shareholders of 14 companies gained in the short run following the buy-back in terms of share prices but there was a fall in the earnings per share after one year. The shareholders of 17 companies did not gain in the short run but measured in terms of earnings post one year the results were positive. 164

4 Nevertheless, only buy-back cannot be the sole factor to consider the effect on EPS. Much depends on many other uncontrollable factors and the shareholders in the long run may or may not have retained the shares of the companies which have completed buy-back. It has been the practice of companies to make fresh issue of share or have employees stock option plan within a few months before or after buy-back. Allowing a company to make a fresh issue of shares just 6 months either before or after share buyback may encourage undesirable practices by promoters. For example, in the study undertaken, GSS America Infotech Ltd raised ` lakhs during the financial year i.e. before buy-back and bought back 5,63,157 equity shares during 25th February 2009 to 5th August 2009 at an average share price of ` per share amounting to `8.571 crores and reduced the share capital to `12.74 crores after buy-back. However, the company raised ` lakhs during the quarter ending 30 th June 2010 through qualified institutional placement by issuing 14,00,000 lakh shares at ` per share. This can lead to manipulation by the management which may go against the interest of the shareholders. The management may buyback at low prices, reduce the floating stock, push up the stock price and soon come out with a share issue at a higher price. It also raises the question whether companies which are unable to have a credible financial plan and capital budget for even one year ahead, should be allowed to go for share buyback. It would be very confusing if a company buys back its shares on the ground that it has surplus cash and then, within the same year decides to issue fresh equity for raising capital. There should be strict regulation disallowing companies to make fresh issue of shares at least one year after buy-back. 6.2 Suggestions From the shareholders viewpoint, the disclosure of maximum price alone does not bring about the needed transparency in the system. It is desirable that in the 165

5 case of open market buyback offers, SEBI regulations should be amended to make the company mandatorily announce a minimum support price at which the company will accept the buyback offers made by the shareholders. This will have several advantages: (a) It will assure the shareholders that the company management is genuinely interested in preventing an unjustified fall in share price. (b) It will help to reduce price volatility, which is much higher in India than in the developed countries. (c) It will prevent the misuse of open market offer method for manipulating the share price according to the whims and fancies of the promoting group. (d) Finally, the requirement of announcing both maximum and minimum buyback prices will ensure that buyback prices are realistic and not just conjectural. Irrespective of the time gap between announcement date and opening of the offer date, the investors can devise trading strategies to purchase shares of companies proposing share buy-backs as soon as the company informs the stock exchanges and media and sell the same on the opening date to gain a short- term profit. In order to maintain the much needed transparency, an early disclosure of the information regarding the total number of shares repurchased and the total cost incurred for the same at the end of the fortnight, the buyback offer price and the average price paid for such repurchases, the extent to which the announced buy-back programme has been implemented in terms of the total cost incurred and the extent of the remaining programme which may be implemented in the future is desirable. This would be equitable to both insiders (persons well informed within the company) as well as the shareholders and would guide them to design their future course of action. A share will command premium only when the market is more confident. Thus, merely signaling effect of announcement of buy-back is not sufficient to make 166

6 good the undervaluation of shares, but an additional boost from the market is also necessary. One of the motives of buy-back is to increase earnings per share. Companies should not resort to buy-back only to fulfill this purpose. Corporate actions should always create value to shareholders by efficient management by improving the overall results of the company. No fresh issue of shares should be allowed for at least one year after share buyback. This can prevent manipulation by the management and safeguard the interest of the shareholders. 167