The announcement by OnMobile Global Ltd on Monday to buyback its shares at a price nearly 25 per cent higher than the prevailing market price failed to lift the stock price in the exchanges.

But the action of the company once again raises the question as to whether companies should use their cash surplus for share buyback, if they do not have any immediate use for their cash chest, to prop up their share prices. Apart from the question of whether it is the job of the companies to do so, it also makes the investors wonder whether this could not be used to reward the investors in a better way like paying a hefty dividend to lighten the companies' cash balance in banks/MFs and whether the tactic is always successful.

Currently, there are 7 companies whose buyback offers are live on the exchanges (the buyback offer of Deccan Chronicle, the 8{+t}{+h} company, has been closed). In fact, all the eight buybacks have closing time up to the first quarter of next year.

Buyback plans

Companies generally resort to this for reasons such as reducing the equity size which would lead to higher EPS and lower PE ratio and thus pushing up the share prices in the long run, to prevent themselves from being a takeover target because of their huge cash chest, to reaffirm their own faith in the companies and to express their view that the stocks are under valued, etc.

The on going buyback programme, as listed on the BSE web site, shows that the eight companies together have announced that they would be spending close to Rs 2,230 crore for the buyback. Of this, the highest outlay is that of Reliance Infra which has a buyback budget of Rs 1,000 crore, followed by Zee Entertainment with Rs 700 crore and Deccan Chronicle with a budget of Rs 270 crore.

All of them have chosen to take the open market purchase route in that they would buy the shares from the stock markets subject to the maximum price fixed.

With the stock markets in an upheaval for most of 2011, all of them have failed in their efforts to contain the fall of the share price through share buyback and at present, the shares are trading at prices much below the price fixed by the companies. This could lead to possibly the companies completing the buyback at a lesser cost than originally estimated due to price erosion (unless the values move up during the remainder of the buy back period, which looks less likely in the current market scenario).

(Deccan Chronicle has announced that the Maximum Offer Shares for the buyback was 3,45,00,000 equity shares and the company has bought back 3,45,00,000 (maximum offer shares) as on August 24, 2011).

Decline in the share prices after companies announce buyback prices – at a premium to market prices – shows mere buyback cannot prevent a slide. Apart from companies' performance, market mood also counts.

While some may argue that the present low prices of these scrips compared to the buyback price offer the investors the chance of acquiring them at attractive valuations, only a brave heart would dare to gamble.

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