Buyback of Shares by MNCs in India

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Themes: Financial Markets
Period : 1997 - 2002
Organization : SEBI
Pub Date : 2002
Countries : India
Industry : Financial Services

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Case Code : FINC018
Case Length : 12 Pages
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Buyback Offer by MNCs

In the financial year 2001-2002, twenty MNCs made buyback offers. Some of the well-known MNCs which offered to buy back their shares were Philips India Limited (Philips), Cadbury India Limited (Cadbury), Britannia Industries Limited (Britannia), Carrier Aircon (Carrier) and Otis Elevators (Otis). All these companies made open offers for the non-promoter shareholding in their Indian subsidiaries. To buy back shares, Cadbury paid Rs 9 billion, Philips Rs 2 billion, and Carrier, Otis and Reckitt Benkiser all paid over Rs 1 billion (Refer Table I for MNC buybacks).

According to analysts, the increased buyback activity by MNCs was due to three reasons. They felt that the share prices of most MNCs were under priced and did not reflect the true value of the company. Moreover, the buyback of shares allowed MNCs to convert their Indian ventures into wholly owned subsidiaries (WOS).¹³ It also allowed them to delist the shares of these ventures from the stock markets and thus protect them from the volatility of the stock markets (caused by scams and other market manipulations).¹⁴

Table I
MNC Buyback Offer Details

Issuer	Method	Opening Date	Closing Date	Price	% of Shares offered for Buyback
Philips India Limited*	Open Offer	13-Nov-00	12-Dec-00	Rs. 105	49.00%
Philips India Limited@	Open Offer	21-Nov-01	-----------	Rs. 105	17.34%
Cadbury India Limited	Open Offer	13-Dec-01	Mar-02	Rs. 500	49.00%
Carrier Aircon	Open Offer	2-Jul-01	31-Jul-01	Rs. 100	49.00%
Otis Elevator*	Open Offer	18-May-01	9-Jul-01	Rs. 280	31.10%
Otis Elevator@	Open Offer	18-Oct-02	16-Nov-02	Rs. 320	19.38%
Reckitt Benkiser	Open Offer	14-May-02	13-Jun-02	Rs. 250	49.00%
Britannia	Open Offer	Sep-01	----------	Rs.750	49.00%

Source: Indiainfoline.com, domain-b.com
* First open offer @- Second open offer.

Analysts also felt that MNCs had used the buyback of shares as a method for distributing surplus cash¹⁵ to their shareholders. Buyback also acted as a tool for creating wealth for the shareholders. The buyback of shares improved a company's return on equity (ROE),¹⁶ and this improvement would ultimately be reflected in a higher price earning ratio.¹⁷ Buyback by the company usually indicated that the management felt that the stock was undervalued. It resulted in an increase in stock price, bringing it closer to the intrinsic value. For example, when Philips announced its first buyback offer at a maximum price of Rs.105 in October 2000, its shares were trading at around Rs 60. The buyback announcement resulted in an increase in the share price to Rs 90 even before the buyback offer opened on November 13, 2000. Hence, the buyback offer gave shareholders an exit option that paid them a premium over the pre-buyback share price. However, in spite of the benefits of buyback, a section of analysts and investors felt that it was being misused by MNCs.

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13] A company in which 100% of the voting stock is owned by the holding company. In India, once the promoter holds more than 90% of the voting stock, he/she can delist the company from a stock exchange.
14] Manipulations include the artificial increase in the volume of shares traded through trading within the group companies or dumping of shares by Foreign Institutional Investors. Such manipulations made the share price volatile.
15] Financial theory states that if a company does not have any investment opportunities where the internal rate of return (IRR) of the investment is at least equal to the company's cost of capital, it is more prudent for the company to utilize the surplus cash to buy back its own shares.
16] Return on equity is the ratio between the Net Profit and Net worth of the company.
17] It is the ratio between the market price of the share and the earning per share.