What to interpret of a buyback if promoters are participating

Navneet Education has just announced it will be buying back shares. Also the statement says “Members of the Promoter and Promoter Group of the Company have indicated their intention to participate in the proposed buyback.”

So what I understand is that promoters and management of the company considers the stock cheap and so has taken the decision to buyback. But then why would a promoter participate in a buyback. If stock is cheap, it it not better for the promoter to hold onto his shares and allow the company to buyback from others so that his stake increases?
Is announcing in a buyback and then participating in it a sign of confidence or lack of it?
Can a buyback be a route for a promoter to get good price for his shares in a cash rich business under adverse stock market conditions?

I am not asking this question specific to Navneet Education. I have held it for for several years and will continue to do so.
This is just a general question regarding a doubt I had.

Normally, buyback would mean that management thinks shares are cheap. However, in india companies pay 15% dividend distribution tax and promoters pay 10% more on dividends over Rs. 10 lakhs. So buybacks are a way around this tax for the promoters, since their capital gains are tax-free. Also, they set the buyback price at 25-30% above current price. This is detrimental to minority shareholders who do not participate in buyback.


totally agreee with Linga…the size of buyback is very very small these days and many companies are going for buyback instead of dividends …the minuscule buyback size clearly suggests promoters wants to save on the taxes on the dividends…not a good thing for minority shareholders…


Thanks, so well explained

sometimes dividend payout is seen as a shareholder friendly management but not always because if the promoters can see that surplus cash can be invested back in business instead of paying dividends then in the long term that cash invested back in business will lead to shareholder value… so to answer question of Pankaj, is this buyback seen a good thing or really a shareholder unfriendly sign? … what is it?

In buy back of shares by the promoters, the stock will give good returns very slowly. Those who have patience for minimum 1-3 years, they can invest in these companies.

The tax implications on buyback is that promoters pay long term capital gains(since buyback is an offmarket transaction) instead of being tax exempt. (Edit: Thanks to @hemantbhatia for pointing out that on market buyback also allowed. As I see from SEBI website, nearly all companies have adopted this route. However, as per the SEBI circular, it is optional. So do see if your company is executing on market http://www.sebi.gov.in/cms/sebi_data/attachdocs/1428927142167.pdf)
So for them to forgo an open market transfer and sell back to the company, implies that they expect the share price to dip. Also do not forget that they can always buy back on dips or do a preferential allotment to themselves by paying just 25% upfront money(something like a long term call option)

So overall, I would see it as a negative

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Nowadays buy back are done at stock exchanges ,hence STT applies on them,so it is not done off market.


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.


Infosys replied to this query:

Dear Sir,

Please be informed that as part of the Capital Allocation Policy of the company announced earlier this year, the company had allocated upto Rs. 13,000 crores to be returned to shareholders. This which works out to 20.51% of paid up capital and free reserves. As per the SEBI Buyback Regulations, an open market buyback can be done only upto 15% of paid up capital and free reserves. Since the company’s proposal was for over 20%, the company chose the Tender offer route.

In addition, the tender offer route has certain other advantages when compared with the open market route.

In the tender offer route, small shareholders have the benefit of reservation of 15% in the buyback of the securities proposed to be bought back. The Company has more than 500,000 small shareholders and therefore the Company believes that this reservation for small shareholders would benefit a large number of the Company’s public shareholders, who would be classified as “Small Shareholders”

For these reasons some of the recent buyback offers by our peers have also been through the tender offer route.

Best regards
Corporate Secretarial Group

My apologies, and yes, now my concerns are pretty clear. Actually its the retail investor who is benefitting the most.

From BloombergQuint, ‘According to the company’s filings, 2.87 crore Infosys shares were with investors holding 200 shares or less as of March 31. If we assume a price of Rs 1,000 on the record date for Infosys, the value of the shares held by these investors will be Rs 2 lakh or less, qualifying them as retail investors.
Since Infosys will have to buy back Rs 1,950 crore(15% of 13k crore) worth of shares from retail investors, at the buyback price of Rs 1,150 apiece this works out to 1.69 crore shares. So, the ratio of the shares Infosys will buy back from retail investors to the total number of shares held by the category stands at 59 percent. And that’s the derived entitlement ratio.’

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  1. If company is buying and promoters are participating - be skeptical about the stock
  2. If company is buying and promoters are not participating - stock is under valued
  3. If promoter is issuing shares to himself - be skeptical as equity dilution is benefiting promoter
  4. If promoter is buying from open market - be bullish about the stock if fundamentals are ok.

Others can add if to this logic.


Say Buy to buybacks