India’s open-market buybacks will be judged by the price companies pay

SEBI’s decision to restore share buybacks through stock exchanges can improve how Indian companies return surplus cash. It can also make it easier for a company to spend shareholders’ money supporting its share price at a poor valuation. Which result dominates depends on the price paid, the uses the company gives up and the regulator’s ability to see how orders affect the market. The board’s 19 June approval is best understood as a change in how a capital-allocation decision can be executed. It gives investors a reason to examine the completed purchases and the alternatives available to the board at the time. SEBI’s 19 June board decision · Business Standard’s account of the approved framework

The exchange route changes who can sell and at what price

A tender offer asks shareholders to offer their stock on specified terms. When the offer is oversubscribed, rules determine how many of those shares the company accepts. In an exchange buyback, the company places orders and buys shares from sellers in the market at the prices its orders can obtain. Shareholders who trade before or after its purchases may face a different price. The ability to buy over a period can be valuable when sellers arrive gradually or the value of the shares is uncertain. It also means that access to the buyback does not carry the same economics as an opportunity to tender at a common stated price. SEBI’s consultation on the exchange buyback route · The announced timetable and execution rules

The approved framework is intended to restore the route from 1 August. As reported following the decision, the purchases would have to be completed within 66 working days from opening, with at least 40 per cent of the funds used in the first half of the period. Companies would disseminate information electronically as well as through newspaper advertisements. Their orders would go through normal trading, without a separate window or an on-screen label identifying the company as purchaser. These are details of the framework announced after the board meeting. On 26 June the exchange route has yet to reopen under that decision. SEBI’s 19 June board decision · The announced timetable and execution rules

A higher earnings-per-share figure can coexist with a loss of value

Consider an illustrative company with ten crore shares and an estimated equity value of ₹1,000 crore, including surplus cash. That is ₹100 per share. Suppose the company spends ₹80 crore to repurchase one crore shares at ₹80 each. If the only change in the value of the business is the cash distributed, the remaining equity is worth ₹920 crore across nine crore shares, or about ₹102.22 per share. A continuing shareholder gains because the company buys below the assumed value. Now suppose the company instead repurchases one crore shares for ₹120 each. On the same assumptions, the remaining equity is worth ₹880 crore, or about ₹97.78 per share.

Both transactions remove one crore shares. If net earnings were unchanged, both would raise earnings per share by roughly 11.1 per cent. The purchase price determines whether value moves towards the continuing shareholders or towards the investors who sold. The example holds operating value fixed, ignores taxes and assumes the cash is surplus. In an actual company, lost interest, new debt, a different risk profile or a forgone investment can change earnings and equity value. An executive bonus linked to earnings per share can nevertheless reward the smaller share count before any of those costs are visible in the accounts.

The hardest input is the value per share. A board with a reliable estimate of spare cash and a defensible valuation range may rationally use the market route when shares trade below that range. A board forecasting a recovery in cyclical earnings may be particularly prone to mistaking optimism for a margin of safety. Investors should look for the assumptions behind the board’s willingness to pay and compare the actual purchase price with the value implied by plausible lower earnings. Where the business has a profitable investment available, the return forgone on that investment belongs in the same decision.

Execution rules shape the company’s incentives

The front-loaded spending requirement addresses the concern that an issuer might announce a large buyback and then buy very little while benefiting from the signal. On an illustrative ₹100 crore authorisation, the 40 per cent requirement would imply ₹40 crore of purchases in the first half of the window. The commitment makes an announcement more informative about intended demand. It can also put pressure on a company to buy during a rising market after an early price discount has disappeared. An issuer should therefore take account of both daily trading capacity and the risk of overpayment before it commits to a programme size. The announced timetable and execution rules

Removing the visible purchaser label can reduce opportunities to trade around known issuer orders. It also makes it harder for a seller to identify in real time how much of the demand comes from the issuer. Exchange surveillance and post-trade transparency become more valuable in that setting. The same ₹40 crore of purchases could be modest in a highly liquid stock and large relative to typical turnover in a smaller one. Market quality should be examined in relation to volume, spread and order-book depth. A price move in the days the company is active has a different interpretation if the share falls back as soon as the buying ends. SEBI’s consultation on the exchange buyback route · The announced timetable and execution rules

Why flexibility can still be worth having

The strongest argument for the route is that a company with genuinely excess cash can spread its orders over time and avoid fixing a tender price in advance. Existing shareholders who prefer to hold can continue to do so, and willing sellers trade through the existing market. When the stock is liquid and the purchases are modest relative to ordinary turnover, using that market can reduce execution costs. That flexibility is economically useful, especially when a company’s estimates of its capital requirements have changed. It does not establish that an individual buyback offers good value. SEBI’s consultation on the exchange buyback route

A repurchase also changes ownership weights. Investors who sell none of their holdings own a larger fraction of the company after shares are cancelled. The effect is arithmetically predictable and can matter when voting power is already concentrated. In the example above, a holder of one crore shares would go from 10 per cent to about 11.1 per cent without acquiring additional shares. Disclosure of the share count and any material shift in control helps separate the cash-return rationale from other effects of the transaction.

For a shareholder who needs liquidity, the exchange route can offer the ordinary market price and the chance of finding a buyer when the company is active. A tender can offer a more predictable quoted price, with uncertainty over the fraction accepted. For a shareholder who remains invested, the main exposure is to the value and risk of the company after the cash has gone. Comparing the two routes should therefore include both seller access and the financing position of the continuing company. The board’s case for a repurchase is weaker if the plan leaves little room to refinance obligations or sustain productive capital expenditure.

What evidence would make the reform look successful

SEBI should evaluate programmes by size and stock liquidity, comparing execution prices with observable trading benchmarks and checking activity for signs of concentrated buying. Issuer disclosures should make it possible to reconstruct actual spending, shares retired, average price and cash or debt remaining after the transaction. Investors should also compare those outcomes with what directors said before authorising the buyback. Announcement returns alone cannot tell whether a company bought cheaply or simply signalled stronger prospects. Trading patterns after the programme ends and subsequent financing decisions provide additional evidence. SEBI’s 19 June board decision · SEBI’s consultation on the exchange buyback route

The reform would earn confidence if companies use the route to return excess cash at defensible prices and if trading remains orderly in less liquid shares. Evidence of purchases concentrated near mandated spending deadlines, followed by price reversals or costly new financing, would support tighter execution safeguards. SEBI has widened the choice of route. The board of each company still has to show that the price and the use of cash served the shareholders who stayed. SEBI’s 19 June board decision