Time to AMP up scrutiny on corporate buybacks
Buyback of shares by corporate India has picked up steam since 2022. Last year, 58 listed companies bought back shares worth almost Rs 50,000 cr. So far this year, 34 companies have announced share buybacks worth Rs 28,000 crore.
Recently, L&T announced a buyback of shares worth Rs 10,000 crore. Wipro completed a Rs 12,000 cr exercise in June, while the Infosys buyback in February was worth Rs 9,300 crore. Share buybacks in India do not attract the kind of scrutiny that buybacks in the US do. Perhaps it is time for more debate on the merits of buybacks.
There are many reasons why companies buy back shares—increasing promotors’ control, averting hostile takeovers, etc., but the most common reason is to boost the share price. Buybacks are considered suitable for investors as they are offered a premium for surrendering their shares. Those who do not surrender their shares gain due to increased prices. In buybacks, already-issued shares are bought back by the company and cancelled. Due to fewer shares remaining in the cart, the share price increases. Buybacks are often criticised because they unfairly boost share prices, benefiting promoters, large investors and key company officials who hold large chunks of shares.
Also, companies use cash from their reserves for buybacks instead of investing in more productive ventures like capital expenditure, R&D or upskilling employees. One of the reasons why buybacks escape scrutiny in the country is that Indian laws do not allow companies to buy back shares using borrowed money like in the US. But the timings of the buybacks can be suspect. Last December, when Paytm’s parent company, One 97 Communication, announced an Rs 850-cr buyback of shares, proxy advisory firms questioned the decision as Paytm was yet to register a profit. By announcing a buyback, the company dug into reserve cash to benefit its shareholders and large investors.
The Indian government slashed corporate tax rates from 30% to 22% in 2019, hoping the move would help increase private investments. But private investments remain lacklustre, and corporates have been accused of using the money to buy back shares and pay dividends to investors instead of investing in capacity-building. It is time to subject buybacks by large corporates to greater scrutiny in the country and raise ethical and moral questions about rewarding large shareholders through buybacks.