At the outset, there is no “loss” to any shareholder if all shareholders apply for the buyback and get proportionate cash. This is just like dividend in that sense. Whether tender or market offer makes no difference. The only difference is whether the promoter wants to join in. And there is no reason why the promoter should not join in. Promoter is also a shareholder isnt it? The method chosen should be fair to all shareholders, not just to the minority shareholders. Also, a buy back should primarily be done to give back excess cash which cannot be used or if the intrinsic value of the share is more than the market price, not to “prop up sagging share price”. Market offer may be the right approach if intrinsic value is more than market price, but tender offer makes more sense to give back excess cash.
I for one always assume that promoters/management are always keen on maximising their revenue and any profits accruing to minority shareholder are only incidental (for them, not for us!) when making investment decisions. After choosing an industry that I believe has potential, my management analysis is restricted to making sure that the management is capable of doing this business well and is not absolutely unscrupulous. Examples - Ambani/Azim Premji/Anil Agarwal/NRN/Tatas/Gautam Singhania/Vijay Mallya/Dilip Sanghvi/Habil Khorakiwala - I will let the reader choose who is who as this is quite subjective. In addition, I practice diversification and margin of safety so that one or two mistakes do not significantly affect the portfolio.
In this present instance, based on the logic below, only continuing shareholders who hold more than 2 lakhs can have a reason to be aggrieved. Even in this case, I believe they will not lose much at the current offer price of 1150 even if they do not participate at all which indicates that the price of 1150 is fair.
a. A shareholder either believes the share price is undervalued, overvalued or rightly valued at 1150.
b. If shareholders believe the shareprice is undervalued or rightly valued at 1150, this will clearly be a benefit for the continuing shareholders in the long run. So there can be no grievances here.
c. A shareholder who bought shares to capitalise on the buyback opportunity is merely a speculator and has no right to complain about corporate governance.
d. If shareholders believe the shareprice is overvalued at 1150, this is where there could be a case made for the management not doing the right thing. But to circumvent this issue, the small shareholder has the option to tender all shares through the tender route (assuming the holdings are less than 2 lakh). They can then repurchase at the “right price” at a later point in time. Thus the law already provides for them.
Now the situation of the shareholder holding more that 2 lakhs is as follows. The price of 1150 was last reached on 14 Jul 2016. I am presuming this investor will sell overvalued stocks and buy rightly or undervalued stocks. The stock has reached a lowest price of 914 since 24 Jul 2016 (ignoring the latest fall). This gives that the shareholder believes the right shareprice falls anywhere between 914 and 1149. Even assuming that the right price as per the shareholder is 914, as a result of the buy back, the shareholder will lose a maximum of 1.34% - (914 * 100 - 1150 * 4.92) / (100-4.92) = 902. In my opinion, there will be enough opportunities for the shareholder to exit in the coming days. Thus my conclusion is that if there was indeed an over valuation in the buy back, it does not impact the continuing shareholders very badly.