First of all, Thanks for all the insightful views.
This question has been there since last year’s budget on dividend (!0lacs) tax and the frenzy behind corporate buybacks.
I understand buybacks could be done through tender or open market purchases.
Why do companies of late in India go through tender route? For retail investors, isn’t It is a slight hassle to send them a duly filled form and also theres no guarantee of them getting purchased. Infy announced it would 5% of outstanding shares, and assuming all shares are tendered, which means roughly 1 in 20 would be actually bought. So what if an investor holds only 15 shares? He misses out on the premium, right? Also what if someone can’t tender? He misses out on the premium too.
In short, this method penalises continuing shareholders for the sake of exiting ones. (Read this in one of Warren Buffett’s letters.)
So why not just purchase them from the open market a company feels its shares are cheap? O/S shares are reduced, those who wanna exit just sell thru the routine way, and all those per-share metrics rise just as normally. Continuing shareholders don’t lose anything.
Also, when buyback price is above BV, BVPS after buyback is reduced.
I understand that the news of company buying its shares can really jack up the price. So, it can be done in a staggered manner over many months or years as some really awesome CEOs have done in the USA. (Rex Tillerson-ExxonMobil bought back around 25% of o/s shares during a period of 5 years, (read in The Outsiders)
So, why the inefficient tender route?
Any public company’s one of the bedrock principle should be that continuing shareholders should never be penalised through ‘deliberate actions’ of the company, which is clearly being violated here. Paying 1150 rupees to exiting investors clearly adversely affects continuing, loyal ones. As you will know Buybacks in the current world are usually done to prop up sagging share prices, so why not just indicate to the market that the company is open to purchase shares from the open market whenever it feels they are trading cheap.
This tender method seems to befitting the promoters, who get to sell a few hundred crores worth of shares, without their reducing any percentage ownership.
Just my opinion.
Thank your for your time.