The Hindu Business Line : When a buyback isn’t investor friendly

Is the company not contradicting itself by first expending cash to buy back shares and then setting out to dilute the value of the same shares through a massive private placement?

S. Murlidharan

DLF recently proposed a buyback offer for its shares, setting aside Rs 1,100 crore to buy back 2.2 crore equity shares from the market at a maximum price of Rs 600 per share. As with many open market buybacks, the company may or may not go through with its offer of buyback, given that it is to be routed through the open market. Buybacks through the tender route may offer more certainty, with an offering to buyback shares from each shareholder on a pro rata basis.

Be that as it may, the rationale for this buyback exercise is to prop up the flagging stock valuations in this case, which according to the company do not do justice to the intrinsic value of the business.

If imparting strength to the sagging market value is the reason for buyback, then it bears note that the company is almost simultaneously embarking on a massive qualified institutional placement (QIP) issue of a whopping Rs 10,000 crore (for which it will seek shareholders’ approval at its AGM), which incidentally roughly corresponds to the size of its IPO. A company buying back its own shares under section 77A is proscribed from making further issue of shares for six months following the completion of buyback. This could explain the timing of the QIP private placement. On this count, the proposed QIP issue may be well within the legal norms, but does it pass muster as a sound financial and fair practice?

Any further issue of shares — be it by way of rights, bonus or private placement — has the potential to dilute the value of the existing shares. Is the company not contradicting itself by first expending cash to buy back shares and then setting out to dilute the value of the same shares through a massive private placement? One could have empathised had it been a rights issue and not a QIP because in a rights issue existing shareholders could have been compensated for the resultant dilution, if the rights were offered on attractive terms.

Not in investor interest

The following facets of this buyback. therefore, are unfriendly to the small investor:

Buyback from the market instead of making a transparent and equitable offer to buy from each one of the shareholders pro rata

Proposing to make a further issue of shares in which they cannot partake; and

Leaving the interests of the small shareholders unguarded from the inevitable reduction or dilution in their holdings following increase in the share capital.

What DLF is doing may be perfectly legal but it would be certainly guilty of added insult to the injury of the small investors, who may not be able to cash out in the market on attractive terms in the buyback exercise. Remember there is no lock-in period on QIP issues. The idea of QIP incidentally was to enable large listed companies to find capital quickly within the country from knowledgeable qualified institutional investors, instead of meeting funds requirements from abroad through GDR or ADR issues.

(The author is a Delhi-based chartered accountant.)

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