SHARE BUYBACK
Share buyback means a company buying back its shares from shareholders other than promoters. Company does it to increase the shares’ prices or delist, and this is done by either buying in the stock market directly, or asking shareholders to tender their shares.

A buyback offer is when a company buys some of its shares from its shareholders and extinguishes them. This is usually done from shareholders other than the promoters themselves, and is most often a testament from the management and promoters on the strength of the company, and their commitment to increase the returns for the shareholders. Market experts say it usually shows the confidence of promoters in the future of the company.

THE RATIONALE BEHIND SHARE BUYBACK
There are a number of reasons companies go for buybacks. The intentions could be to reward investors, improve financial ratios (such as price to earnings, return on assets and return on equity), increase promoter holding, reduce public float and check the falling stock price, reduce volatility and build investor confidence.

The following are the 6 main reasons why company offers share buyback:

1. To stop the fall in stock price.
2. In some situation company may want to bring down the public holding and increase promoters holding.
3. If the company sees there is no better opportunity to deploy its cash reserves then it may decide to buy back its shares.
4. The buyback may improve companies return ratios. If they reduce the total number of outstanding shares then the EPS (Earnings per Share) increases because EPS is PAT (Profit after Tax) divided by total outstanding shares. If the EPS increases then the P/E multiple decreases, and when P/E decreases, the share price increases to bring the P/E back to the higher levels. Other ratios like Return on Equity and Return on Networth also improve due to this.
5. When a company thinks its share price is undervalued.
6. In case of eventual delisting, some companies, especially foreign owned companies get into buybacks because they want to eventually delist from the Indian stock exchange. Usually, they don’t buy their entire outstanding shares at one go, but conduct these buybacks over a period of time and buy in tranches of 5% or 10%.

MODES OF BUYBACK
First of all a buyback is proposed in general meeting of the company which is then voted on and approved by the board of directors. Then they announce the buyback in a newspaper with all the details. There are two types of common buyback routes companies take, open market purchase and tender offer, i.e. one is done through open market purchase from the stock exchanges, and the second is done through a tender form.

•  When a company carries out buy back from the open market through stock exchange, there is nothing that you have to do except hope for a probable gain in stock’s market price. Company decides to acquire the certaisn number of shares to be bought back and fixes a price cap and can buy for any price up to that.
• When company makes an offer to buy shares through the tender route, it has to declare the number of shares and the specific price, at which shares have to be bought back directly from shareholders. Company sends a tender form to all its shareholders with instructions on how to fill the form and where they can mail or drop the form. This route ensures all shareholders are treated equally, however small they are.

Most companies prefer the open market route. Out of 19 buybacks offers received in 2011, 14 were made through open market mode and 5 were made through tender offer mode. The biggest difference between the two is that the price in the tender route is fixed.

CAN INVESTORS GET SOMETHING BENEFICIAL OUT OF IT?
A buyback usually improves the confidence of investors in the company because it sends signal to the market that the company believes the stock is trading below its intrinsic value and therefore its stock price rises.

However, past data reveal the stock can move in either direction after the buyback announcement, though it helps stocks in most cases.
Below mentioned are the few points, in what ways an investor can be benefitted from the buyback of shares:

1. Buy back at good premium may increase the stock price in share market.
2. As buy back of shares reduces outstanding shares, the EPS (EPS is calculated by dividing net profit by outstanding shares) may look good.
3. The ROA (Return on Asset) and ROE (Return on Equity) may improve by fall in outstanding shares and assets (in this scenario, excess cash).

Generally shares react positively to such announcements because buyback reduces the number of shares outstanding, which increases investors’ claims on dividends and earnings of the company and as these claims increases, so do stock prices.

Hereunder are a few instances of buyback announcement and its impact on the market prices:

• When this year in January, SEBI approved changes in rules to allow public sector units (PSUs) to buyback shares, as a result, shares of few PSUs soared 30-50% in the first 5 trading sessions.
• On January 20th, Reliance Industries Limited approved buyback of up to 120 million shares at a price not exceeding Rs. 870 per share from open market. The stock has risen 4% since despite the fact that company had reported poor numbers for the 3rd quarter. It was at Rs. 830 at the commencement of the buyback on February 1st.
• But the case is always not the same, Indiabulls Real Estate started moving southwards after the buyback announcement. The company announced a buyback on December 15th 2011, after which the stock fell 3% to Rs. 48.25 till 7 January 2012.

The price trend depends on various factors such as the market situation, the mode of the offer, i.e. tender or market purchase, the size of the offer, the difference between the offer price and the market price of the stock and the market’s confidence in the management’s intention to carry out the offer. The movement of a stock after the buyback announcement depends on valuations and the result can differ from company to company.

THINKING OF PARTICIPATING IN BUYBACK?
If you plan to invest in any such company which is going to buyback its shares, there are some guidelines and the few words of caution to be followed:

• You should not buy shares just because the company is working out a buyback plan. In some scarce cases, buybacks are announced to trigger certain favourable movements in stock price.
• It is important to consider the size of the buyback, buyback price and the duration of the offer, because if the buyback size is too small compared with the overall market capitalization of the company, the impact on the stock could be very small.
• Equally important to know what buyback route the company will follow, because if they will buyback the shares from the stock market, then the share buyback price is irrelevant to you.
• If the company is buying back from the shareholders then you have to look at offer size of the buyback, how much time is left for the buyback to take place, and what is the difference between the current market price and the offer price.
• Generally, companies only buyback a certain percentage of outstanding shares from the public and to know this fact is really important; because a few people who are not familiar with the process end up buying shares with the hope of sure-shot profit and later stuck-up with the remaining shares as only a part of their holding has been bought back.

Whatever decision you take largely depends on these variables, and they can be entirely different with every single case. Generalization of these variables in context of buyback offers would certainly lead to a blunder; you will have to evaluate each offer on its merit only.

SOME CLARIFICATIONS WITH EXAMPLE
Consider the example of Monnet Ispat Limited; announced the buyback of equity shares on Dec. 22nd 2011 with the maximum offer price of Rs. 500, and the prevailing market price of the share was around Rs. 358.

What do you think of this offer? Is it an opportunity with entirely the win-win situation?

Monnet Ispat Limited will be buying the shares from the open market and not from the shareholders, and the price of Rs. 500 is only the maximum price at which they can buyback their shares. This is the upper limit beyond which the company can’t buy their shares from the share market.

So, when Monnet Ispat Limited has set up a maximum price of Rs. 500, it only means that they can’t buy shares at a price over Rs. 500, instead they can buy the shares at any price below Rs. 500, and can certainly buy it at the Rs. 358 or so at which it’s currently trading.

Had it been the offer where the company had opted to buy its shares back from the investors directly, the 500 number had more importance, but then they would not have even chosen such a high number.

Monnet Ispat Limited announced that buyback offer is for shares not exceeding Rs. 100 crores being maximum offer size representing 4.97% of the total paid-up equity capital and free reserves. At the time of announcement, maximum offer price was at 40% premium.

Now is it possible that someone buys the shares at lowest possible level and then sells them back at Rs. 500 in a few days, pocketing around 40% returns?

This simply won’t happen because usually there are more shares offered for a buyback than the company actually wants to buy. Therefore, in this case they buy back the shares in the proportion of the over subscription. So one will only get a part of his/her shares bought back, and if the price comes down below purchase price after buyback fiesta then for disposing of the remaining shares he/she might have to wait for long.

Global Scenario

Some of the busiest corners of the multitrillion-dollar-a-day foreign-exchange market are quieter these days.

The currency market is experiencing its first slowdown since the 2008 financial crisis. Banks, fearing a global credit crunch brought on by Europe’s sovereign-debt struggles, are lending less, reducing the flow of currency across borders. As currency funds suffered a miserable year, investors decamped to other markets or for the safety of cash.

After surging 55% from April 2009 to April 2011, foreign-exchange volumes flattened out. The main driver behind plateauing volumes was an 8% drop in foreign-exchange swaps, in which banks and other companies lend one currency to borrow another. Trading volume averaged $3.47 trillion a day in October 2011, roughly the same as April 2011,

Trading across many assets, such as stocks and commodities in addition to currencies; evaporated amid concerns that Greece’s debt woes would spread to other countries in Europe.

Some Positive Cues

Though it hasn’t been all downhill, there’s plenty to catch some breath. Some emerging-market currencies, like the Mexican peso and Russian ruble, saw higher trading volumes. The Dow Jones Industrial Average managed to briefly edge above 13,000 for the first time in nearly four years. Greece has secured a series of bailout packages that will sidestep a chaotic default, while the European Central Bank has bolstered Europe’s financial system by providing banks with cheap, unlimited loans. The U.S. economy is picking up steam and fears of a “hard landing” in China have disappeared.

Investors may not believe the world economy is in a better place, but they’ve stopped worrying about it. Currency options-trading suggests money managers have turned unusually calm about future swings in global currency rates despite the economic problems afflicting the U.S., Europe and China–not to mention the threat of an oil-price shock. Analysts say volatility fears are low mostly because central banks in the U.S., Europe, Japan and China are again taking big steps to shore up the global markets.

In Indian context, something happened as we turned the calendar from 2011 to 2012. The fears of imminent collapse two months before Christmas have certainly waned. In Europe the LTRO (long term refinancing operations) performed better even than the ECB (European Central Bank) hoped. Then there is the fiscal compact. There is still concerns about short term funding and still concern about whether the banks will be able to raise the capital. There’s less of a concern about an event shock, but still concern about process shocks as we go along and Greece and other countries have to roll over their debt. That’s certainly had a positive impact on investor sentiment here in India, although Indian exposure to Europe is not dominant. To the extent that Europe seems to be less unstable today, it does help domestic investor sentiment here too and we’ve seen that on all the market indices.

All emerging economy currencies have depreciated in the pre-Christmas months, but Indian rupee depreciated more than other currencies and it was the worst performing currency in the world or whatever. What explains that is that India is a current account deficit economy. Those emerging economies that had a surplus or a small deficit were less hit than countries that have a sizeable deficit like India, and that deficit was growing. So the rupee depreciation was a result of external flows practically thinning out and driven by the dynamics of the current account deficit.

The Ideal Way Out

Eventually India needs to make the balance of payments more robust to inspire confidence. There is need to diversify the export destinations and product mix. As far as imports are concerned, dependence on oil imports should be reduced and one way to do that is to deregulate petroleum product prices in true sense.

Oil prices are a big factor and largely beyond one’s control and are very complex economic and geopolitical factors that drive oil prices. Just looking at the world economic situation, the U.S. growth situation is quite modest and Europe is probably in a recession and Japan is growing but… And then there are the political factors, which is Iran. If Iran is outside the world pool there could be price pressures. If Saudi Arabia because of fiscal concerns, its commitment to extend fiscal supports to other Arab countries, to meet that commitment they might want to keep oil prices at a certain level. There are economic factors, there are political factors and there are market factors, all of them that determine oil prices which are largely out of control. India imports as much as 80% of oil it needs and more than a third of total imports, so oil prices are a big factor for inflation management, for the fiscal deficit and for macroeconomic stability for the country.

Gold imports of course have added to the misery arising from BoP crisis. We need to provide other safe havens and need to attract more stable flows, FDI for example. And finally we must encourage, if not pressurize our corporates to hedge their foreign exchange exposures. They don’t do that adequately. They do cost benefit calculations, if the rupee is not moving rapidly, they calculate the cost of hedging is higher than the risk they take by not taking. But as happened in the pre-Christmas months, it can certainly overshoot, so corporates should hedge more.

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

Mutual funds are considered one of the best available investments being very cost efficient and also easy to invest in as compare to others. Thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.

Mutual funds are set up to buy many stocks as they automatically diversify in a predetermined category of investments, i.e. growth companies, emerging or mid size companies, low-grade corporate bonds, etc. The most basic level of diversification is to buy multiple stocks rather than just one stock.

Regulatory Authorities

To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations and issues guidelines from time to time. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.

The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry.

Types of returns

There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:

• Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
• If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
• If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Advantages of Investing Mutual Funds:

• Professional Management: The basic advantage of funds is that, they are professionally managed by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.
• Diversification: By purchasing units in a mutual fund instead of buying individual stocks or bonds, investors’ risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
• Economies of Scale: Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
• Liquidity: Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.
• Simplicity: Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMCs have automatic purchase plans popularly known as SIP where investor can reap the benefit of mutual fund by investing as little as Rs. 50 per month basis.

Disadvantages of Investing Mutual Funds:

• Costs: The biggest source of AMC income is generally from the entry & exit load which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
• Dilution: Because funds have small holdings across different companies, high returns from a few investments often don’t make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
• Taxes: When making decisions about your money, fund managers don’t consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.