The following article from The Asian Age Newspaper dtd 29/12/04 - Though i will share for the knowledge of the investors
- By Olga Tellis
With the mother of all buybacks announced by Reliance Industries Limited, buybacks have come under the scanner. And because of the raging battle between the Ambani brothers, Mukesh and Anil, corporate governance and the farce of independent directors have become issues of concern to shareholders and the media.
Lacking transparency
Buybacks are of two kinds. They can be done through the tender route or the market route. Through the market route, the company has no obligation to buy back the shares and that's why, for instance, Reliance Industries had two previous buybacks, but did not buy a single share. More recently, we had Reliance Energy saying that its buyback is on, but at the moment, it will not buyback its shares as the share prices are down because of the controversy surrounding the Reliance group.
This sounds strange. Because clause d) in Chapter 5 of Securities and Exchange Board of India (Buy Back of Securities) Regulations, 1998 is very clear that the company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the board (SEBI) or public announcement of the offer to buy-back is made. One understands by this is that it cannot be held in suspension.
Tender better
The second buyback method is through the tender process, which is more beneficial and transparent. Mr Prithvi Haldea of Prime Database, that tracks the capital market, says he's not a proponent of the market buyback. In the market buyback, they can put any price. They usually say not exceeding X figure. This may mean that they can give the shareholder even half of that figure and he can do nothing about it.
Self-serving gimmick
As Mr Haldea says the company sometimes announces a price to send a message that it is the true value of the share and uses it as a bench mark price for the market and shareholders. If the shareholders believe the company, the price of the shares can go up. So propping up prices by the promoters is meaningless, but cheaper than manipulating them.
Promoters gain
In India, most of the buybacks are done to increase the shares of the promoters at the cost of the company. They buyback the shares from the company's money and as they extinguish these shares, their own holding up. So buyback is a very self serving gimmick for promoters and a cheaper way of increasing their shareholding in the company. A smart director can make a killing by asking his friends and relations to tender their shares in the buyback scheme.
Decrease floating stock
Another ruse is to decrease the floating stock in the market so that it is easier to jack up the price of the share. Such companies announce buybacks four to five times. There are big operators in the market who look for such mid-cap companies where management owns 50 per cent of the shares and the floating stocks is very less. So when there is a lot of euphoria over mid-cap stocks rising and seeing new highs, it is only because operators find it easy to manipulate such stocks with or without help from the promoters.
Independent irrelevant
Following the struggle for the control at Reliance Industries Limited, said that the word independent should be removed and directors should be plain directors. There is not such thing as an independent directors. They are mostly friends and relations of the promoters. And so is corporate governance, which can not be implemented through the law, unless one has a regulator like New Yorks attorney general Eliot Spitzer.
- By Olga Tellis
With the mother of all buybacks announced by Reliance Industries Limited, buybacks have come under the scanner. And because of the raging battle between the Ambani brothers, Mukesh and Anil, corporate governance and the farce of independent directors have become issues of concern to shareholders and the media.
Lacking transparency
Buybacks are of two kinds. They can be done through the tender route or the market route. Through the market route, the company has no obligation to buy back the shares and that's why, for instance, Reliance Industries had two previous buybacks, but did not buy a single share. More recently, we had Reliance Energy saying that its buyback is on, but at the moment, it will not buyback its shares as the share prices are down because of the controversy surrounding the Reliance group.
This sounds strange. Because clause d) in Chapter 5 of Securities and Exchange Board of India (Buy Back of Securities) Regulations, 1998 is very clear that the company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the board (SEBI) or public announcement of the offer to buy-back is made. One understands by this is that it cannot be held in suspension.
Tender better
The second buyback method is through the tender process, which is more beneficial and transparent. Mr Prithvi Haldea of Prime Database, that tracks the capital market, says he's not a proponent of the market buyback. In the market buyback, they can put any price. They usually say not exceeding X figure. This may mean that they can give the shareholder even half of that figure and he can do nothing about it.
Self-serving gimmick
As Mr Haldea says the company sometimes announces a price to send a message that it is the true value of the share and uses it as a bench mark price for the market and shareholders. If the shareholders believe the company, the price of the shares can go up. So propping up prices by the promoters is meaningless, but cheaper than manipulating them.
Promoters gain
In India, most of the buybacks are done to increase the shares of the promoters at the cost of the company. They buyback the shares from the company's money and as they extinguish these shares, their own holding up. So buyback is a very self serving gimmick for promoters and a cheaper way of increasing their shareholding in the company. A smart director can make a killing by asking his friends and relations to tender their shares in the buyback scheme.
Decrease floating stock
Another ruse is to decrease the floating stock in the market so that it is easier to jack up the price of the share. Such companies announce buybacks four to five times. There are big operators in the market who look for such mid-cap companies where management owns 50 per cent of the shares and the floating stocks is very less. So when there is a lot of euphoria over mid-cap stocks rising and seeing new highs, it is only because operators find it easy to manipulate such stocks with or without help from the promoters.
Independent irrelevant
Following the struggle for the control at Reliance Industries Limited, said that the word independent should be removed and directors should be plain directors. There is not such thing as an independent directors. They are mostly friends and relations of the promoters. And so is corporate governance, which can not be implemented through the law, unless one has a regulator like New Yorks attorney general Eliot Spitzer.
I for one, am neither falling for any of the carrots on offer by the Rel group nor am I buying any of the melodrama on offer on the media channels. This planet will keep rotating & revolving irrespective of all the naatak going on. Am terribly glad with the way the markets are absorbing & digesting all the !! crap !! (pardon the language) being served up on the media channels almost on a daily basis. This re-inforces my view that the retail investor is no pigeon, instead he's wiser than one (Ambani siblings) thinks. 