Thanks to the newly-introduced 15 per cent quota in buybacks, small shareholders could have a play in disinvestments done through the buyback route.
Market experts say shares of retail investors are most likely to be accepted in public sector undertaking (PSU) share buybacks in their ‘small shareholder’ category. Further, its likely investors will get to exit at a price much higher than the price prevailing in the market, they add.
In February, capital markets regulator Securities and Exchange Board of India (Sebi) amended the buyback regulations to create a category for small shareholders. Under the new regulations, any listed company proposing to buy back its shares through the ‘tender route’ is required to reserve 15 per cent of the securities, which it proposes to buy back for small shareholders.
The government is considering buyback of shares in some of the cash-rich PSUs like Coal India, NTPC, SAIL, NMDC, Oil India, BHEL and MMTC to achieve the Rs 30,000-crore disinvestment target set for 2012-13.
Market experts say share buyback through the disinvestment route poses an opportunity for small investors.
“In most likelihood the centre will set the buyback price much higher than the current market price, as most PSUs are trading below their intrinsic value. Small shareholders can benefit by buying now and tending the shares in buyback,” said an investment banker who didn’t want to be identified. “Acceptance of shares of small shareholders is mostly certain due to the 15 per cent reservation,” he added.
The disinvestment manual of the Department of Disinvestment (DoD) also states the buyback route for disinvestment will be taken for “companies with good intrinsic value, which is not reflected in accretion to shareholder value and market price”.
Small shareholders are the ones whose market value of securities is less than Rs 2 lakh in a particular company, according to the Sebi definition. Most companies conduct buyback through the ‘open market route’ where no reservations are required to be made for retail investors. However, as promoters are not allowed to tender their shares under the open market route, the government will have to take the tender route for buybacks.
“Retail investors who tender their shares in buyback will be at an advantage compared to the ones who stay back,” said Jagannadham Thunuguntla, equity head, SMC Global Securities. “Under buyback the company will be depleting its cash reserves to provide exit to shareholders.”
Sebi has made several modifications to the tender route buyback. It has created two categories — one for smaller shareholders and the other for the ‘general category’ of other shareholders, including promoters. Shares tendered in buyback will now get accepted based on entitlement ratio, which will be in proportion of shares held in the company as on the record date set for the buyback. Sebi has also significantly brought down the timeline for completion of buybacks from 63-114 days to just four days.
Investment bankers say the likelihood of the government taking the buyback route for disinvestment will be high if primary market conditions continue to remain weak.
Last week, Coal India said it would seek shareholder nod to amend its Articles of Association to facilitate share buyback.