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Buyback of Shares by MNCs in India

            
 
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Case Details:

Case Code : FINC018
Case Length : 12 Pages
Period : 1997 - 2002
Pub. Date : 2002
Teaching Note : Available
Organization : SEBI
Industry : Financial Services
Countries : India

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"MNCs are taking advantage of the depressed market conditions to mop up the shares. There is nothing legally wrong in buying back shares, but it should be by paying a fair price to minority shareholders"

- Kirit Somaiya, President, Investor Grievance Forum.1

The Buyback Option

In October 2000, Royal Philips Electronics of Netherlands (Philips), the Dutch parent of Philips India Limited, announced its first offer to buyback the shares of its Indian subsidiary.

The open offer was initially made for 23% of the outstanding shares held by institutional investors, private bodies2 and the general public. The offer was made at Rs.105, a premium of 46% over the then prevailing stock market price. With this, Philips became one of the first multinational (MNCs) companies in India to offer buyback option to its shareholders. Soon after, the buyback option was offered by several multinational companies (MNCs) to increase their stake in their Indian ventures. Some of these companies were Cadbury India, Otis Elevators, Carrier Aircon, Reckitt Benkiser etc. Fund managers which held these companies' stocks felt that allowing buyback of shares was one of most favorable developments in the Indian stock markets.

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It provided a much needed exit option for shareholders in depressed market conditions. Buyback by the company usually indicated that the management felt that its stock was undervalued.

This resulted in an increase in the price, bringing it closer to the intrinsic value and providing investors with a higher price for their investment in the company. However, critics of the buyback option claimed that large multinationals had utilized the buyback option to repurchase the entire floating stock from the market with the objective of delisting3 from the stock exchange and eliminating an investment opportunity for investors. Moreover, most MNCs that offered buyback option reported a steep decline in the trading volumes of the shares of their Indian ventures. The declining liquidity of these shares prompted critics to say that the Government of India's attempt to revive capital markets by allowing buyback of shares had failed.

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1] 'Multinationals Leave Indian Investors Stranded,' Raju Bist, Asia Times, June 5, 2002. The Investor Grievance Forum is a Mumbai based investor protection body.

2] Private bodies refer to overseas corporate bodies as well as private companies investing in shares.

3] Delisting is a process by which a company's shares are removed from the stock exchange. According to the listing agreement, if the general public shareholding falls to less than 10%, the company has the option to delist.

 

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