Micro Finance Has Tremendous Potential as an Instrument for Poverty Reduction
14
m"Micro finance has tremendous potential as an instrument for poverty reduction." -Shahid Khandker, Senior Economist, World Bank, in 1999. 3 Grameen Bank- A Role Model in Microfinance Yet another monsoon season was approaching; but Joshuna Begum (Begum) unlike her neighbours was not worried about her house getting damaged during the monsoon. Her house now had a tin roof, mud walls and wooden windows, a luxury in rural Bangladesh. Earlier, Begum’s house had a straw roof and bamboo walls, which used to get damaged in the monsoon season, forcing the whole family to live in the kitchen. She got her hut repaired with a loan from the Bangladesh Grameen 4 Bank (Grameen Bank). Begum wasn’t the only one; there were thousands of people in rural Bangladesh who had improved their living conditions with the help of the microfinance programs of Grameen Bank, a pioneer in microfinance (Refer Exhibit I for more about microfinance). Grameen Bank helped thousands of poor Bangladeshi women to improve their lives by extending loans to them to start. their own enterprises. By 2003, it was reported that between 33-48% of Grameen Bank borrowers had moved above the poverty line 5 . By 2003, with 1,170 branches across Bangladesh, Grameen Bank was seen as a role model for microfinance all over the world. The Grameen Bank model was replicated across the world -- not only in developing countries like India, Pakistan, and Vietnam, but even in developed countries such as Australia and the USA, where similar schemes were set up to improve the lives of the urban poor (Refer Exhibit II).
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Transcript of Micro Finance Has Tremendous Potential as an Instrument for Poverty Reduction
mMicro finance has tremendous potential as an instrument for
poverty reduction
-Shahid Khandker Senior Economist World Bank in 19993
Grameen Bank- A Role Model in MicrofinanceYet another monsoon season was approaching but Joshuna Begum (Begum) unlike her neighbours was not worried about her house getting damaged during the monsoon Her house now had a tin roof mud walls and wooden windows a luxury in rural Bangladesh Earlier Begumrsquos house had a straw roof and bamboo walls which used to get damaged in the monsoon season forcing the whole family to live in the kitchen She got her hut repaired with a loan from the Bangladesh Grameen4 Bank (Grameen Bank)Begum wasnrsquot the only one there were thousands of people in rural Bangladesh who had improved their living conditions with the help of the microfinance programs of Grameen Bank a pioneer in microfinance (Refer Exhibit I for more about microfinance) Grameen Bank helped thousands of poor Bangladeshi women to improve their lives by extending loans to them to start their own enterprises By 2003 it was reported that between 33-48 of Grameen Bank borrowers had moved above the poverty line5 By 2003 with 1170 branches across Bangladesh Grameen Bank was seen as a role model for microfinance all over the worldThe Grameen Bank model was replicated across the world -- not only in developing countries like India Pakistan and Vietnam but even in developed countries such as Australia and the USA where similar schemes were set up to improve the lives of the urban poor (Refer Exhibit II) However the Grameen Bank also attracted criticism from the media and economists all over world Analysts pointed out that there was no proper monitoring of how the loans were utilized it was reported that the loans availed of by women were used largely for consumption rather than for investment purposes Analysts also pointed out that the accounting methods used by Grameen Bank were not in accordance with industry standards
and that the bank did not provide full details about its financial position and loan repayments position
The Buyback ActThe buyback ordinance was introduced by the Government of India (GOI) on October 31 1998 The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids4 The buy back of shares was governed by the Securities and Exchange Board of Indias (SEBI)5 Buy Back of Securities Regulation 1998 and Securities and Exchange Board of Indias (SEBI) Substantial Acquisition of Shares and Takeover Regulations 1997The ordinance was issued along with a set of conditions6 intended to prevent its misuse by companies and protect the interests of investors According to guidelines issued under SEBIs Buy Back of Securities Regulation 1998 a company could buyback its shares from existing shareholders on a proportionate basis7 Through tender offerFrom the open market through the book building process8 or the stock exchange
bull From odd lot holdersThe ordinance allowed companies to buy back shares to the extent of 25 per cent of their paid up capital and free reserves in a financial year The buyback had to be financed only out of the companys free reserves securities premium account or proceeds of any earlier issue specifically made with the purpose of buying back shares The ordinance also prevented a company that had defaulted in the repayment of deposits redemption of debentures or preference shares and repayment to financial institutions from buying back its shares Moreover a company was not allowed to buy back its shares from any person through a negotiated deal whether through a stock exchange spot transactions10 or any private arrangementIt also allowed the promoters of a company to make an open offer11 (similar to an acquisition of shares) to purchase the shares of its subsidiary This allowed foreign promoters to utilize their surplus funds and make an open offer to acquire a 100 stake in their Indian subsidiaries
The Buyback Act ContdThe buyback of shares was allowed only if the Articles of Association12 of the company permitted it to do so The ordinance also required the company to pass a special resolution at a general meeting and obtain the shareholders approval for the buyback In addition companies were not allowed to make a public or rights issue of equity shares within a period of 24 months from the day of completing the buyback except by way of bonus issues and conversion of warrants preference shares or debenturesThe ordinance did not lead to increased buyback activity by multinational companies In the financial year 1999-2000 only six MNCs came out with buyback offers and in the year 2000-2001 only eight more companies offered to buyback shares According to the analysts the low level of buyback activity in 1999 and 2000 could be attributed to the fact that buyback regulations were very elaborate and discouraged companies from making use of buyback option (Refer Exhibit I for the buyback process and Exhibit II for methods of buyback) The lack of interest in the buyback option could also be the result of SEBIs restrictive regulationsSome companies complained that the process of buyback was delayed because the law required them to obtain shareholder approval for offering a buyback SEBI guidelines prevented companies from raising fresh equity to finance their projects It also prohibited any subsequent buyback offer by the same company once it had made one for a period of two years These complaints and the need to revive the stock markets after the September 11 2001 terrorists attacks in the US forced the government to make amendments to the buyback ordinance
The government made amendments to the buyback ordinance in October 2001 relaxing the buyback norms The new amendments allowed the promoters of a multinational company to make an open offer to purchase up to 10 of its equity without making a public announcement This purchase just required a mere approval from the board of directors However a public announcement and shareholder approval were necessary for any offer above 10 The amendments also reduced the time limit for issuing fresh shares from 24 months to 6 months
These two changes were incorporated into the buyback ordinance which was passed by the government in December 2001 (and subsequently became the Buyback Act) The amendments in the buyback ordinance coupled with depressed stock market conditions saw an increase in buyback activity MNCs (through the open offer route) regarded the buyback option as an opportunity to raise their equity stake in their Indian ventures
Buyback Offer by MNCsIn the financial year 2001-2002 twenty MNCs made buyback offers Some of the well-known MNCs which offered to buy back their shares were Philips India Limited (Philips) Cadbury India Limited (Cadbury) Britannia Industries Limited (Britannia) Carrier Aircon (Carrier) and Otis Elevators (Otis) All these companies made open offers for the non-promoter shareholding in their Indian subsidiaries To buy back shares Cadbury paid Rs 9 billion Philips Rs 2 billion and Carrier Otis and Reckitt Benkiser all paid over Rs 1 billion (Refer Table I for MNC buybacks)According to analysts the increased buyback activity by MNCs was due to three reasons They felt that the share prices of most MNCs were under priced and did not reflect the true value of the company Moreover the buyback of shares allowed MNCs to convert their Indian ventures into wholly owned subsidiaries (WOS)13 It also allowed them to delist the shares of these ventures from the stock markets and thus protect them from the volatility of the stock markets (caused by scams and other market manipulations)14
Table IMNC Buyback Offer Details
Issuer Method
Opening Date
Closing Date
Price
of Shares offered for Buyback
Philips India Limited
Open Offer
13-Nov-00
12-Dec-00
Rs 105
4900
Philips Open 21- --------- Rs 1734
India Limited
Offer Nov-01 -- 105
Cadbury India Limited
Open Offer
13-Dec-01
Mar-02
Rs 500
4900
Carrier Aircon
Open Offer
2-Jul-01 31-Jul-01
Rs 100
4900
Otis Elevator
Open Offer
18-May-01
9-Jul-01
Rs 280
3110
Otis Elevator
Open Offer
18-Oct-02
16-Nov-02
Rs 320
1938
Reckitt Benkiser
Open Offer
14-May-02
13-Jun-02
Rs 250
4900
Britannia
Open Offer
Sep-01 ----------
Rs750
4900
Source Indiainfolinecom domain-bcom First open offer - Second open offer
Analysts also felt that MNCs had used the buyback of shares as a method for distributing surplus cash15 to their shareholders Buyback also acted as a tool for creating wealth for the shareholders The buyback of shares improved a companys return on equity (ROE)16 and this improvement would ultimately be reflected in a higher price earning ratio17 Buyback by the company usually indicated that the management felt that the stock was undervalued It resulted in an increase in stock price bringing it closer to the intrinsic value For example when Philips announced its first buyback offer at a maximum price of Rs105 in October 2000 its shares were trading at around Rs 60 The buyback announcement resulted in an increase in the share price to Rs 90 even before the buyback offer opened on November 13 2000 Hence the buyback offer gave shareholders an exit option that paid them a premium over the pre-buyback share price However in spite of the benefits of buyback a section of analysts and investors felt that it was being misused by MNCs
Investor GrievancesAnalysts felt that the buyback option may be misused by MNCs to increase their equity stakes in their Indian ventures escape public scrutiny and accountability and prevent them from the Indian regulatory environment Moreover the option to convert their Indian ventures into wholly owned subsidiaries and delist their shares from the stock markets provided MCs with complete control over their Indian ventures allowed them to repatriate profits and make more independent investment decisionsA section of investors felt that government regulations must have provided them with a choice However minority shareholders claimed that they had no option and were forced to sell their shares once MNCs bought back shares from the majority shareholders For example because Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC) who together held a 21 stake in Philips surrendered their shares when Philips made its first buyback offer the minority shareholders were forced to surrender the remaining shares when Philips made a second offer in November 2001 (Refer Table II)Reportedly investors feared losing an exit option in case the shares get delisted Moreover during the second offer the trading volume of shares fell to less than (on an average) 500 shares per day since December 2001
Table IIShare Holding Pattern in Philips India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9234 9147 8286
Institutional Investors
007 007 085
Private 014 018 149
Bodies General Public
74 822 1467
Source wwwindiainfolinecomSimilarly when Cadbury made a buyback offer public shareholding fell from 2667 to just 732 within six months after the majority shareholders surrendered their shares (Refer Table III)
Investor Grievances ContdMoreover in this case investors felt that the premium offered by Cadbury Schweppes the UK based parent company of Cadbury was low The offer was priced at Rs 500 which represented a premium of 24 on the average high and low prices over the past 26 weeks prior to the offer However Cadburys stock had been trading at prices in excess of Rs 500 in 1999 and 2000 (Refer Table IV) with an average PE multiple of 60 in 1999 and 54 in March 2000 Moreover Cadburys third quarter (October to December 2001) sales had increased by 112 compared to the same period in 2000 while its profits had increased by 52 Hence investors felt that the price offered for the buyback had not taken into consideration the future potential profits of the company and was not attractive to shareholders who had been holding their shares for a longer termAs a result of depressed stock market conditions investors (in most cases) received a low buyback price The price at which the open offers were made by MNCs caused great concern to both investors and regulators (Refer Exhibit III for details of pricing parameters of open offers)
Table IIIShare Holding Pattern in Cadbury India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9025 5100 5100
Institutional Investors
010 022 2036
Private Bodies
225 3318 171
General Public
732 1546 2667
Source wwwindiainfolinecomIn many cases minority shareholders had expressed their opposition to the use of discriminatory pricing by MNCs for buying back shares For example Otis Elevators bought back 239 of the equity stake from the Mahindra group at Rs375 per share in October 1999 but made a buyback open offer for only Rs 280 for the remaining 31 of the shares held by the Indian public in May 2001
Investor Grievances ContdTable IV
Share Prices on First Open Offer by MNCs
Company Name
Maximum Offer Price
Price on Buyback Date (BD)
Premium offered18
Price 1 year prior to BD
Price 2 year prior to BD
Price on1-Jul-02
Philips 105 905 46 11 148 10
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
and that the bank did not provide full details about its financial position and loan repayments position
The Buyback ActThe buyback ordinance was introduced by the Government of India (GOI) on October 31 1998 The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids4 The buy back of shares was governed by the Securities and Exchange Board of Indias (SEBI)5 Buy Back of Securities Regulation 1998 and Securities and Exchange Board of Indias (SEBI) Substantial Acquisition of Shares and Takeover Regulations 1997The ordinance was issued along with a set of conditions6 intended to prevent its misuse by companies and protect the interests of investors According to guidelines issued under SEBIs Buy Back of Securities Regulation 1998 a company could buyback its shares from existing shareholders on a proportionate basis7 Through tender offerFrom the open market through the book building process8 or the stock exchange
bull From odd lot holdersThe ordinance allowed companies to buy back shares to the extent of 25 per cent of their paid up capital and free reserves in a financial year The buyback had to be financed only out of the companys free reserves securities premium account or proceeds of any earlier issue specifically made with the purpose of buying back shares The ordinance also prevented a company that had defaulted in the repayment of deposits redemption of debentures or preference shares and repayment to financial institutions from buying back its shares Moreover a company was not allowed to buy back its shares from any person through a negotiated deal whether through a stock exchange spot transactions10 or any private arrangementIt also allowed the promoters of a company to make an open offer11 (similar to an acquisition of shares) to purchase the shares of its subsidiary This allowed foreign promoters to utilize their surplus funds and make an open offer to acquire a 100 stake in their Indian subsidiaries
The Buyback Act ContdThe buyback of shares was allowed only if the Articles of Association12 of the company permitted it to do so The ordinance also required the company to pass a special resolution at a general meeting and obtain the shareholders approval for the buyback In addition companies were not allowed to make a public or rights issue of equity shares within a period of 24 months from the day of completing the buyback except by way of bonus issues and conversion of warrants preference shares or debenturesThe ordinance did not lead to increased buyback activity by multinational companies In the financial year 1999-2000 only six MNCs came out with buyback offers and in the year 2000-2001 only eight more companies offered to buyback shares According to the analysts the low level of buyback activity in 1999 and 2000 could be attributed to the fact that buyback regulations were very elaborate and discouraged companies from making use of buyback option (Refer Exhibit I for the buyback process and Exhibit II for methods of buyback) The lack of interest in the buyback option could also be the result of SEBIs restrictive regulationsSome companies complained that the process of buyback was delayed because the law required them to obtain shareholder approval for offering a buyback SEBI guidelines prevented companies from raising fresh equity to finance their projects It also prohibited any subsequent buyback offer by the same company once it had made one for a period of two years These complaints and the need to revive the stock markets after the September 11 2001 terrorists attacks in the US forced the government to make amendments to the buyback ordinance
The government made amendments to the buyback ordinance in October 2001 relaxing the buyback norms The new amendments allowed the promoters of a multinational company to make an open offer to purchase up to 10 of its equity without making a public announcement This purchase just required a mere approval from the board of directors However a public announcement and shareholder approval were necessary for any offer above 10 The amendments also reduced the time limit for issuing fresh shares from 24 months to 6 months
These two changes were incorporated into the buyback ordinance which was passed by the government in December 2001 (and subsequently became the Buyback Act) The amendments in the buyback ordinance coupled with depressed stock market conditions saw an increase in buyback activity MNCs (through the open offer route) regarded the buyback option as an opportunity to raise their equity stake in their Indian ventures
Buyback Offer by MNCsIn the financial year 2001-2002 twenty MNCs made buyback offers Some of the well-known MNCs which offered to buy back their shares were Philips India Limited (Philips) Cadbury India Limited (Cadbury) Britannia Industries Limited (Britannia) Carrier Aircon (Carrier) and Otis Elevators (Otis) All these companies made open offers for the non-promoter shareholding in their Indian subsidiaries To buy back shares Cadbury paid Rs 9 billion Philips Rs 2 billion and Carrier Otis and Reckitt Benkiser all paid over Rs 1 billion (Refer Table I for MNC buybacks)According to analysts the increased buyback activity by MNCs was due to three reasons They felt that the share prices of most MNCs were under priced and did not reflect the true value of the company Moreover the buyback of shares allowed MNCs to convert their Indian ventures into wholly owned subsidiaries (WOS)13 It also allowed them to delist the shares of these ventures from the stock markets and thus protect them from the volatility of the stock markets (caused by scams and other market manipulations)14
Table IMNC Buyback Offer Details
Issuer Method
Opening Date
Closing Date
Price
of Shares offered for Buyback
Philips India Limited
Open Offer
13-Nov-00
12-Dec-00
Rs 105
4900
Philips Open 21- --------- Rs 1734
India Limited
Offer Nov-01 -- 105
Cadbury India Limited
Open Offer
13-Dec-01
Mar-02
Rs 500
4900
Carrier Aircon
Open Offer
2-Jul-01 31-Jul-01
Rs 100
4900
Otis Elevator
Open Offer
18-May-01
9-Jul-01
Rs 280
3110
Otis Elevator
Open Offer
18-Oct-02
16-Nov-02
Rs 320
1938
Reckitt Benkiser
Open Offer
14-May-02
13-Jun-02
Rs 250
4900
Britannia
Open Offer
Sep-01 ----------
Rs750
4900
Source Indiainfolinecom domain-bcom First open offer - Second open offer
Analysts also felt that MNCs had used the buyback of shares as a method for distributing surplus cash15 to their shareholders Buyback also acted as a tool for creating wealth for the shareholders The buyback of shares improved a companys return on equity (ROE)16 and this improvement would ultimately be reflected in a higher price earning ratio17 Buyback by the company usually indicated that the management felt that the stock was undervalued It resulted in an increase in stock price bringing it closer to the intrinsic value For example when Philips announced its first buyback offer at a maximum price of Rs105 in October 2000 its shares were trading at around Rs 60 The buyback announcement resulted in an increase in the share price to Rs 90 even before the buyback offer opened on November 13 2000 Hence the buyback offer gave shareholders an exit option that paid them a premium over the pre-buyback share price However in spite of the benefits of buyback a section of analysts and investors felt that it was being misused by MNCs
Investor GrievancesAnalysts felt that the buyback option may be misused by MNCs to increase their equity stakes in their Indian ventures escape public scrutiny and accountability and prevent them from the Indian regulatory environment Moreover the option to convert their Indian ventures into wholly owned subsidiaries and delist their shares from the stock markets provided MCs with complete control over their Indian ventures allowed them to repatriate profits and make more independent investment decisionsA section of investors felt that government regulations must have provided them with a choice However minority shareholders claimed that they had no option and were forced to sell their shares once MNCs bought back shares from the majority shareholders For example because Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC) who together held a 21 stake in Philips surrendered their shares when Philips made its first buyback offer the minority shareholders were forced to surrender the remaining shares when Philips made a second offer in November 2001 (Refer Table II)Reportedly investors feared losing an exit option in case the shares get delisted Moreover during the second offer the trading volume of shares fell to less than (on an average) 500 shares per day since December 2001
Table IIShare Holding Pattern in Philips India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9234 9147 8286
Institutional Investors
007 007 085
Private 014 018 149
Bodies General Public
74 822 1467
Source wwwindiainfolinecomSimilarly when Cadbury made a buyback offer public shareholding fell from 2667 to just 732 within six months after the majority shareholders surrendered their shares (Refer Table III)
Investor Grievances ContdMoreover in this case investors felt that the premium offered by Cadbury Schweppes the UK based parent company of Cadbury was low The offer was priced at Rs 500 which represented a premium of 24 on the average high and low prices over the past 26 weeks prior to the offer However Cadburys stock had been trading at prices in excess of Rs 500 in 1999 and 2000 (Refer Table IV) with an average PE multiple of 60 in 1999 and 54 in March 2000 Moreover Cadburys third quarter (October to December 2001) sales had increased by 112 compared to the same period in 2000 while its profits had increased by 52 Hence investors felt that the price offered for the buyback had not taken into consideration the future potential profits of the company and was not attractive to shareholders who had been holding their shares for a longer termAs a result of depressed stock market conditions investors (in most cases) received a low buyback price The price at which the open offers were made by MNCs caused great concern to both investors and regulators (Refer Exhibit III for details of pricing parameters of open offers)
Table IIIShare Holding Pattern in Cadbury India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9025 5100 5100
Institutional Investors
010 022 2036
Private Bodies
225 3318 171
General Public
732 1546 2667
Source wwwindiainfolinecomIn many cases minority shareholders had expressed their opposition to the use of discriminatory pricing by MNCs for buying back shares For example Otis Elevators bought back 239 of the equity stake from the Mahindra group at Rs375 per share in October 1999 but made a buyback open offer for only Rs 280 for the remaining 31 of the shares held by the Indian public in May 2001
Investor Grievances ContdTable IV
Share Prices on First Open Offer by MNCs
Company Name
Maximum Offer Price
Price on Buyback Date (BD)
Premium offered18
Price 1 year prior to BD
Price 2 year prior to BD
Price on1-Jul-02
Philips 105 905 46 11 148 10
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
The Buyback Act ContdThe buyback of shares was allowed only if the Articles of Association12 of the company permitted it to do so The ordinance also required the company to pass a special resolution at a general meeting and obtain the shareholders approval for the buyback In addition companies were not allowed to make a public or rights issue of equity shares within a period of 24 months from the day of completing the buyback except by way of bonus issues and conversion of warrants preference shares or debenturesThe ordinance did not lead to increased buyback activity by multinational companies In the financial year 1999-2000 only six MNCs came out with buyback offers and in the year 2000-2001 only eight more companies offered to buyback shares According to the analysts the low level of buyback activity in 1999 and 2000 could be attributed to the fact that buyback regulations were very elaborate and discouraged companies from making use of buyback option (Refer Exhibit I for the buyback process and Exhibit II for methods of buyback) The lack of interest in the buyback option could also be the result of SEBIs restrictive regulationsSome companies complained that the process of buyback was delayed because the law required them to obtain shareholder approval for offering a buyback SEBI guidelines prevented companies from raising fresh equity to finance their projects It also prohibited any subsequent buyback offer by the same company once it had made one for a period of two years These complaints and the need to revive the stock markets after the September 11 2001 terrorists attacks in the US forced the government to make amendments to the buyback ordinance
The government made amendments to the buyback ordinance in October 2001 relaxing the buyback norms The new amendments allowed the promoters of a multinational company to make an open offer to purchase up to 10 of its equity without making a public announcement This purchase just required a mere approval from the board of directors However a public announcement and shareholder approval were necessary for any offer above 10 The amendments also reduced the time limit for issuing fresh shares from 24 months to 6 months
These two changes were incorporated into the buyback ordinance which was passed by the government in December 2001 (and subsequently became the Buyback Act) The amendments in the buyback ordinance coupled with depressed stock market conditions saw an increase in buyback activity MNCs (through the open offer route) regarded the buyback option as an opportunity to raise their equity stake in their Indian ventures
Buyback Offer by MNCsIn the financial year 2001-2002 twenty MNCs made buyback offers Some of the well-known MNCs which offered to buy back their shares were Philips India Limited (Philips) Cadbury India Limited (Cadbury) Britannia Industries Limited (Britannia) Carrier Aircon (Carrier) and Otis Elevators (Otis) All these companies made open offers for the non-promoter shareholding in their Indian subsidiaries To buy back shares Cadbury paid Rs 9 billion Philips Rs 2 billion and Carrier Otis and Reckitt Benkiser all paid over Rs 1 billion (Refer Table I for MNC buybacks)According to analysts the increased buyback activity by MNCs was due to three reasons They felt that the share prices of most MNCs were under priced and did not reflect the true value of the company Moreover the buyback of shares allowed MNCs to convert their Indian ventures into wholly owned subsidiaries (WOS)13 It also allowed them to delist the shares of these ventures from the stock markets and thus protect them from the volatility of the stock markets (caused by scams and other market manipulations)14
Table IMNC Buyback Offer Details
Issuer Method
Opening Date
Closing Date
Price
of Shares offered for Buyback
Philips India Limited
Open Offer
13-Nov-00
12-Dec-00
Rs 105
4900
Philips Open 21- --------- Rs 1734
India Limited
Offer Nov-01 -- 105
Cadbury India Limited
Open Offer
13-Dec-01
Mar-02
Rs 500
4900
Carrier Aircon
Open Offer
2-Jul-01 31-Jul-01
Rs 100
4900
Otis Elevator
Open Offer
18-May-01
9-Jul-01
Rs 280
3110
Otis Elevator
Open Offer
18-Oct-02
16-Nov-02
Rs 320
1938
Reckitt Benkiser
Open Offer
14-May-02
13-Jun-02
Rs 250
4900
Britannia
Open Offer
Sep-01 ----------
Rs750
4900
Source Indiainfolinecom domain-bcom First open offer - Second open offer
Analysts also felt that MNCs had used the buyback of shares as a method for distributing surplus cash15 to their shareholders Buyback also acted as a tool for creating wealth for the shareholders The buyback of shares improved a companys return on equity (ROE)16 and this improvement would ultimately be reflected in a higher price earning ratio17 Buyback by the company usually indicated that the management felt that the stock was undervalued It resulted in an increase in stock price bringing it closer to the intrinsic value For example when Philips announced its first buyback offer at a maximum price of Rs105 in October 2000 its shares were trading at around Rs 60 The buyback announcement resulted in an increase in the share price to Rs 90 even before the buyback offer opened on November 13 2000 Hence the buyback offer gave shareholders an exit option that paid them a premium over the pre-buyback share price However in spite of the benefits of buyback a section of analysts and investors felt that it was being misused by MNCs
Investor GrievancesAnalysts felt that the buyback option may be misused by MNCs to increase their equity stakes in their Indian ventures escape public scrutiny and accountability and prevent them from the Indian regulatory environment Moreover the option to convert their Indian ventures into wholly owned subsidiaries and delist their shares from the stock markets provided MCs with complete control over their Indian ventures allowed them to repatriate profits and make more independent investment decisionsA section of investors felt that government regulations must have provided them with a choice However minority shareholders claimed that they had no option and were forced to sell their shares once MNCs bought back shares from the majority shareholders For example because Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC) who together held a 21 stake in Philips surrendered their shares when Philips made its first buyback offer the minority shareholders were forced to surrender the remaining shares when Philips made a second offer in November 2001 (Refer Table II)Reportedly investors feared losing an exit option in case the shares get delisted Moreover during the second offer the trading volume of shares fell to less than (on an average) 500 shares per day since December 2001
Table IIShare Holding Pattern in Philips India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9234 9147 8286
Institutional Investors
007 007 085
Private 014 018 149
Bodies General Public
74 822 1467
Source wwwindiainfolinecomSimilarly when Cadbury made a buyback offer public shareholding fell from 2667 to just 732 within six months after the majority shareholders surrendered their shares (Refer Table III)
Investor Grievances ContdMoreover in this case investors felt that the premium offered by Cadbury Schweppes the UK based parent company of Cadbury was low The offer was priced at Rs 500 which represented a premium of 24 on the average high and low prices over the past 26 weeks prior to the offer However Cadburys stock had been trading at prices in excess of Rs 500 in 1999 and 2000 (Refer Table IV) with an average PE multiple of 60 in 1999 and 54 in March 2000 Moreover Cadburys third quarter (October to December 2001) sales had increased by 112 compared to the same period in 2000 while its profits had increased by 52 Hence investors felt that the price offered for the buyback had not taken into consideration the future potential profits of the company and was not attractive to shareholders who had been holding their shares for a longer termAs a result of depressed stock market conditions investors (in most cases) received a low buyback price The price at which the open offers were made by MNCs caused great concern to both investors and regulators (Refer Exhibit III for details of pricing parameters of open offers)
Table IIIShare Holding Pattern in Cadbury India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9025 5100 5100
Institutional Investors
010 022 2036
Private Bodies
225 3318 171
General Public
732 1546 2667
Source wwwindiainfolinecomIn many cases minority shareholders had expressed their opposition to the use of discriminatory pricing by MNCs for buying back shares For example Otis Elevators bought back 239 of the equity stake from the Mahindra group at Rs375 per share in October 1999 but made a buyback open offer for only Rs 280 for the remaining 31 of the shares held by the Indian public in May 2001
Investor Grievances ContdTable IV
Share Prices on First Open Offer by MNCs
Company Name
Maximum Offer Price
Price on Buyback Date (BD)
Premium offered18
Price 1 year prior to BD
Price 2 year prior to BD
Price on1-Jul-02
Philips 105 905 46 11 148 10
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
These two changes were incorporated into the buyback ordinance which was passed by the government in December 2001 (and subsequently became the Buyback Act) The amendments in the buyback ordinance coupled with depressed stock market conditions saw an increase in buyback activity MNCs (through the open offer route) regarded the buyback option as an opportunity to raise their equity stake in their Indian ventures
Buyback Offer by MNCsIn the financial year 2001-2002 twenty MNCs made buyback offers Some of the well-known MNCs which offered to buy back their shares were Philips India Limited (Philips) Cadbury India Limited (Cadbury) Britannia Industries Limited (Britannia) Carrier Aircon (Carrier) and Otis Elevators (Otis) All these companies made open offers for the non-promoter shareholding in their Indian subsidiaries To buy back shares Cadbury paid Rs 9 billion Philips Rs 2 billion and Carrier Otis and Reckitt Benkiser all paid over Rs 1 billion (Refer Table I for MNC buybacks)According to analysts the increased buyback activity by MNCs was due to three reasons They felt that the share prices of most MNCs were under priced and did not reflect the true value of the company Moreover the buyback of shares allowed MNCs to convert their Indian ventures into wholly owned subsidiaries (WOS)13 It also allowed them to delist the shares of these ventures from the stock markets and thus protect them from the volatility of the stock markets (caused by scams and other market manipulations)14
Table IMNC Buyback Offer Details
Issuer Method
Opening Date
Closing Date
Price
of Shares offered for Buyback
Philips India Limited
Open Offer
13-Nov-00
12-Dec-00
Rs 105
4900
Philips Open 21- --------- Rs 1734
India Limited
Offer Nov-01 -- 105
Cadbury India Limited
Open Offer
13-Dec-01
Mar-02
Rs 500
4900
Carrier Aircon
Open Offer
2-Jul-01 31-Jul-01
Rs 100
4900
Otis Elevator
Open Offer
18-May-01
9-Jul-01
Rs 280
3110
Otis Elevator
Open Offer
18-Oct-02
16-Nov-02
Rs 320
1938
Reckitt Benkiser
Open Offer
14-May-02
13-Jun-02
Rs 250
4900
Britannia
Open Offer
Sep-01 ----------
Rs750
4900
Source Indiainfolinecom domain-bcom First open offer - Second open offer
Analysts also felt that MNCs had used the buyback of shares as a method for distributing surplus cash15 to their shareholders Buyback also acted as a tool for creating wealth for the shareholders The buyback of shares improved a companys return on equity (ROE)16 and this improvement would ultimately be reflected in a higher price earning ratio17 Buyback by the company usually indicated that the management felt that the stock was undervalued It resulted in an increase in stock price bringing it closer to the intrinsic value For example when Philips announced its first buyback offer at a maximum price of Rs105 in October 2000 its shares were trading at around Rs 60 The buyback announcement resulted in an increase in the share price to Rs 90 even before the buyback offer opened on November 13 2000 Hence the buyback offer gave shareholders an exit option that paid them a premium over the pre-buyback share price However in spite of the benefits of buyback a section of analysts and investors felt that it was being misused by MNCs
Investor GrievancesAnalysts felt that the buyback option may be misused by MNCs to increase their equity stakes in their Indian ventures escape public scrutiny and accountability and prevent them from the Indian regulatory environment Moreover the option to convert their Indian ventures into wholly owned subsidiaries and delist their shares from the stock markets provided MCs with complete control over their Indian ventures allowed them to repatriate profits and make more independent investment decisionsA section of investors felt that government regulations must have provided them with a choice However minority shareholders claimed that they had no option and were forced to sell their shares once MNCs bought back shares from the majority shareholders For example because Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC) who together held a 21 stake in Philips surrendered their shares when Philips made its first buyback offer the minority shareholders were forced to surrender the remaining shares when Philips made a second offer in November 2001 (Refer Table II)Reportedly investors feared losing an exit option in case the shares get delisted Moreover during the second offer the trading volume of shares fell to less than (on an average) 500 shares per day since December 2001
Table IIShare Holding Pattern in Philips India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9234 9147 8286
Institutional Investors
007 007 085
Private 014 018 149
Bodies General Public
74 822 1467
Source wwwindiainfolinecomSimilarly when Cadbury made a buyback offer public shareholding fell from 2667 to just 732 within six months after the majority shareholders surrendered their shares (Refer Table III)
Investor Grievances ContdMoreover in this case investors felt that the premium offered by Cadbury Schweppes the UK based parent company of Cadbury was low The offer was priced at Rs 500 which represented a premium of 24 on the average high and low prices over the past 26 weeks prior to the offer However Cadburys stock had been trading at prices in excess of Rs 500 in 1999 and 2000 (Refer Table IV) with an average PE multiple of 60 in 1999 and 54 in March 2000 Moreover Cadburys third quarter (October to December 2001) sales had increased by 112 compared to the same period in 2000 while its profits had increased by 52 Hence investors felt that the price offered for the buyback had not taken into consideration the future potential profits of the company and was not attractive to shareholders who had been holding their shares for a longer termAs a result of depressed stock market conditions investors (in most cases) received a low buyback price The price at which the open offers were made by MNCs caused great concern to both investors and regulators (Refer Exhibit III for details of pricing parameters of open offers)
Table IIIShare Holding Pattern in Cadbury India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9025 5100 5100
Institutional Investors
010 022 2036
Private Bodies
225 3318 171
General Public
732 1546 2667
Source wwwindiainfolinecomIn many cases minority shareholders had expressed their opposition to the use of discriminatory pricing by MNCs for buying back shares For example Otis Elevators bought back 239 of the equity stake from the Mahindra group at Rs375 per share in October 1999 but made a buyback open offer for only Rs 280 for the remaining 31 of the shares held by the Indian public in May 2001
Investor Grievances ContdTable IV
Share Prices on First Open Offer by MNCs
Company Name
Maximum Offer Price
Price on Buyback Date (BD)
Premium offered18
Price 1 year prior to BD
Price 2 year prior to BD
Price on1-Jul-02
Philips 105 905 46 11 148 10
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
India Limited
Offer Nov-01 -- 105
Cadbury India Limited
Open Offer
13-Dec-01
Mar-02
Rs 500
4900
Carrier Aircon
Open Offer
2-Jul-01 31-Jul-01
Rs 100
4900
Otis Elevator
Open Offer
18-May-01
9-Jul-01
Rs 280
3110
Otis Elevator
Open Offer
18-Oct-02
16-Nov-02
Rs 320
1938
Reckitt Benkiser
Open Offer
14-May-02
13-Jun-02
Rs 250
4900
Britannia
Open Offer
Sep-01 ----------
Rs750
4900
Source Indiainfolinecom domain-bcom First open offer - Second open offer
Analysts also felt that MNCs had used the buyback of shares as a method for distributing surplus cash15 to their shareholders Buyback also acted as a tool for creating wealth for the shareholders The buyback of shares improved a companys return on equity (ROE)16 and this improvement would ultimately be reflected in a higher price earning ratio17 Buyback by the company usually indicated that the management felt that the stock was undervalued It resulted in an increase in stock price bringing it closer to the intrinsic value For example when Philips announced its first buyback offer at a maximum price of Rs105 in October 2000 its shares were trading at around Rs 60 The buyback announcement resulted in an increase in the share price to Rs 90 even before the buyback offer opened on November 13 2000 Hence the buyback offer gave shareholders an exit option that paid them a premium over the pre-buyback share price However in spite of the benefits of buyback a section of analysts and investors felt that it was being misused by MNCs
Investor GrievancesAnalysts felt that the buyback option may be misused by MNCs to increase their equity stakes in their Indian ventures escape public scrutiny and accountability and prevent them from the Indian regulatory environment Moreover the option to convert their Indian ventures into wholly owned subsidiaries and delist their shares from the stock markets provided MCs with complete control over their Indian ventures allowed them to repatriate profits and make more independent investment decisionsA section of investors felt that government regulations must have provided them with a choice However minority shareholders claimed that they had no option and were forced to sell their shares once MNCs bought back shares from the majority shareholders For example because Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC) who together held a 21 stake in Philips surrendered their shares when Philips made its first buyback offer the minority shareholders were forced to surrender the remaining shares when Philips made a second offer in November 2001 (Refer Table II)Reportedly investors feared losing an exit option in case the shares get delisted Moreover during the second offer the trading volume of shares fell to less than (on an average) 500 shares per day since December 2001
Table IIShare Holding Pattern in Philips India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9234 9147 8286
Institutional Investors
007 007 085
Private 014 018 149
Bodies General Public
74 822 1467
Source wwwindiainfolinecomSimilarly when Cadbury made a buyback offer public shareholding fell from 2667 to just 732 within six months after the majority shareholders surrendered their shares (Refer Table III)
Investor Grievances ContdMoreover in this case investors felt that the premium offered by Cadbury Schweppes the UK based parent company of Cadbury was low The offer was priced at Rs 500 which represented a premium of 24 on the average high and low prices over the past 26 weeks prior to the offer However Cadburys stock had been trading at prices in excess of Rs 500 in 1999 and 2000 (Refer Table IV) with an average PE multiple of 60 in 1999 and 54 in March 2000 Moreover Cadburys third quarter (October to December 2001) sales had increased by 112 compared to the same period in 2000 while its profits had increased by 52 Hence investors felt that the price offered for the buyback had not taken into consideration the future potential profits of the company and was not attractive to shareholders who had been holding their shares for a longer termAs a result of depressed stock market conditions investors (in most cases) received a low buyback price The price at which the open offers were made by MNCs caused great concern to both investors and regulators (Refer Exhibit III for details of pricing parameters of open offers)
Table IIIShare Holding Pattern in Cadbury India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9025 5100 5100
Institutional Investors
010 022 2036
Private Bodies
225 3318 171
General Public
732 1546 2667
Source wwwindiainfolinecomIn many cases minority shareholders had expressed their opposition to the use of discriminatory pricing by MNCs for buying back shares For example Otis Elevators bought back 239 of the equity stake from the Mahindra group at Rs375 per share in October 1999 but made a buyback open offer for only Rs 280 for the remaining 31 of the shares held by the Indian public in May 2001
Investor Grievances ContdTable IV
Share Prices on First Open Offer by MNCs
Company Name
Maximum Offer Price
Price on Buyback Date (BD)
Premium offered18
Price 1 year prior to BD
Price 2 year prior to BD
Price on1-Jul-02
Philips 105 905 46 11 148 10
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
Investor GrievancesAnalysts felt that the buyback option may be misused by MNCs to increase their equity stakes in their Indian ventures escape public scrutiny and accountability and prevent them from the Indian regulatory environment Moreover the option to convert their Indian ventures into wholly owned subsidiaries and delist their shares from the stock markets provided MCs with complete control over their Indian ventures allowed them to repatriate profits and make more independent investment decisionsA section of investors felt that government regulations must have provided them with a choice However minority shareholders claimed that they had no option and were forced to sell their shares once MNCs bought back shares from the majority shareholders For example because Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC) who together held a 21 stake in Philips surrendered their shares when Philips made its first buyback offer the minority shareholders were forced to surrender the remaining shares when Philips made a second offer in November 2001 (Refer Table II)Reportedly investors feared losing an exit option in case the shares get delisted Moreover during the second offer the trading volume of shares fell to less than (on an average) 500 shares per day since December 2001
Table IIShare Holding Pattern in Philips India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9234 9147 8286
Institutional Investors
007 007 085
Private 014 018 149
Bodies General Public
74 822 1467
Source wwwindiainfolinecomSimilarly when Cadbury made a buyback offer public shareholding fell from 2667 to just 732 within six months after the majority shareholders surrendered their shares (Refer Table III)
Investor Grievances ContdMoreover in this case investors felt that the premium offered by Cadbury Schweppes the UK based parent company of Cadbury was low The offer was priced at Rs 500 which represented a premium of 24 on the average high and low prices over the past 26 weeks prior to the offer However Cadburys stock had been trading at prices in excess of Rs 500 in 1999 and 2000 (Refer Table IV) with an average PE multiple of 60 in 1999 and 54 in March 2000 Moreover Cadburys third quarter (October to December 2001) sales had increased by 112 compared to the same period in 2000 while its profits had increased by 52 Hence investors felt that the price offered for the buyback had not taken into consideration the future potential profits of the company and was not attractive to shareholders who had been holding their shares for a longer termAs a result of depressed stock market conditions investors (in most cases) received a low buyback price The price at which the open offers were made by MNCs caused great concern to both investors and regulators (Refer Exhibit III for details of pricing parameters of open offers)
Table IIIShare Holding Pattern in Cadbury India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9025 5100 5100
Institutional Investors
010 022 2036
Private Bodies
225 3318 171
General Public
732 1546 2667
Source wwwindiainfolinecomIn many cases minority shareholders had expressed their opposition to the use of discriminatory pricing by MNCs for buying back shares For example Otis Elevators bought back 239 of the equity stake from the Mahindra group at Rs375 per share in October 1999 but made a buyback open offer for only Rs 280 for the remaining 31 of the shares held by the Indian public in May 2001
Investor Grievances ContdTable IV
Share Prices on First Open Offer by MNCs
Company Name
Maximum Offer Price
Price on Buyback Date (BD)
Premium offered18
Price 1 year prior to BD
Price 2 year prior to BD
Price on1-Jul-02
Philips 105 905 46 11 148 10
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
Bodies General Public
74 822 1467
Source wwwindiainfolinecomSimilarly when Cadbury made a buyback offer public shareholding fell from 2667 to just 732 within six months after the majority shareholders surrendered their shares (Refer Table III)
Investor Grievances ContdMoreover in this case investors felt that the premium offered by Cadbury Schweppes the UK based parent company of Cadbury was low The offer was priced at Rs 500 which represented a premium of 24 on the average high and low prices over the past 26 weeks prior to the offer However Cadburys stock had been trading at prices in excess of Rs 500 in 1999 and 2000 (Refer Table IV) with an average PE multiple of 60 in 1999 and 54 in March 2000 Moreover Cadburys third quarter (October to December 2001) sales had increased by 112 compared to the same period in 2000 while its profits had increased by 52 Hence investors felt that the price offered for the buyback had not taken into consideration the future potential profits of the company and was not attractive to shareholders who had been holding their shares for a longer termAs a result of depressed stock market conditions investors (in most cases) received a low buyback price The price at which the open offers were made by MNCs caused great concern to both investors and regulators (Refer Exhibit III for details of pricing parameters of open offers)
Table IIIShare Holding Pattern in Cadbury India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9025 5100 5100
Institutional Investors
010 022 2036
Private Bodies
225 3318 171
General Public
732 1546 2667
Source wwwindiainfolinecomIn many cases minority shareholders had expressed their opposition to the use of discriminatory pricing by MNCs for buying back shares For example Otis Elevators bought back 239 of the equity stake from the Mahindra group at Rs375 per share in October 1999 but made a buyback open offer for only Rs 280 for the remaining 31 of the shares held by the Indian public in May 2001
Investor Grievances ContdTable IV
Share Prices on First Open Offer by MNCs
Company Name
Maximum Offer Price
Price on Buyback Date (BD)
Premium offered18
Price 1 year prior to BD
Price 2 year prior to BD
Price on1-Jul-02
Philips 105 905 46 11 148 10
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
Table IIIShare Holding Pattern in Cadbury India Limited
Share Holding Pattern as on ()
30062002
31032002
31122001
Foreign Promoters
9025 5100 5100
Institutional Investors
010 022 2036
Private Bodies
225 3318 171
General Public
732 1546 2667
Source wwwindiainfolinecomIn many cases minority shareholders had expressed their opposition to the use of discriminatory pricing by MNCs for buying back shares For example Otis Elevators bought back 239 of the equity stake from the Mahindra group at Rs375 per share in October 1999 but made a buyback open offer for only Rs 280 for the remaining 31 of the shares held by the Indian public in May 2001
Investor Grievances ContdTable IV
Share Prices on First Open Offer by MNCs
Company Name
Maximum Offer Price
Price on Buyback Date (BD)
Premium offered18
Price 1 year prior to BD
Price 2 year prior to BD
Price on1-Jul-02
Philips 105 905 46 11 148 10
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
0 3Cadbury
500 483 590 589
566 493
Carrier Aircon
100 98 53 88 218 99
Otis Elevator
280 175 4140
315 306
287
Reckitt Benkiser
250 245 5 211
1905
235
Source wwwmyiriscomAnalysts also felt that the buyback option was not beneficial for small investors Allowing MNCs to delist their shares from the stock market would deprive Indian shareholders of good investment opportunities For example in few companies including Philips Carrier Reckitt Cadbury and Wartsila the promoters stake had almost crossed 90 (Refer Table V) Though these companies had not delisted their shares from the stock markets there was hardly any trading in these companies stocks
Table VShareholding Pattern as on 3062002 (In )
Name
Foreign Promoter
Institutional and Other Investors
General Public
Philips India Limited
9234 026 74
Cadbury
9025 243 732
Carrier Aircon
9116 - 884
Otis Elevator
8062 921 1018
Reckitt Benkis
8284 123 1593
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
er Wartsila
8813 637 549
Source Indiainfolinecom Carrier Aircon has also made its final offer to acquire the remaining 884 of its stock The offer opened on September 9 2002 and would close on March 7 2003 The foreign promoter Reckitt Benkiser had acquired 8727 of Reckitt Benkiser India Limited shares by September 2002 It had already made an open offer for the remaining 1273 in August 2002 Analysts argued that like China and Indonesia India must revert back to a system that prevented multinationals from delisting their shares from the stock exchange by prescribing a minimum amount of floating stock The buyback by MNCs not only affected the small shareholders it also had an impact on the stock exchanges The buyback of floating stock resulted in a decline in the trading volumes For example the Delhi Stock Exchange was badly affected as MNCs accounted for more than 90 of the volume traded and 85 of the listing fees earned by the exchange before the buyback act was introduced Given the negative impact of the Buyback Act market observers felt that the act had failed to revive the capital markets
Buy or Not to BuybackThe dilemma that faced small investors in India was whether the buyback option along with the SEBI guidelines actually protected their interests and offered them an exit option at a fair price or was it a tool that provided them with no options allowing large MNCs to gain complete control of their subsidiariesInvestors felt that the regulations framed by SEBI did not have provisions for preventing good stocks from delisting Moreover the buyback price which was determined using the parameters specified in the SEBI Takeover Code did not consider the future potential of the stock (Refer Exhibit III for details of pricing parameters of open offers) They felt that SEBI should have looked at various financial parameters such as future cash flows value of brands and the value of fixed assets to determine a pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
had been holding the stock for several years received a fair price for their investment
Questions for Discussion1 What were the objectives of the buyback ordinance issued by the Government of India in 1998 Describe the salient features of the buyback ordinance Why did MNCs want to buy back the shares of their Indian ventures Explain
2 The depressed stock markets in India are being utilized by several large MNCs to increase their stake in their Indian subsidiaries through the buyback of shares Explain in detail the different methods of buyback available to an organization 3 According to minority shareholders MNCs had misused the buyback option Explain the various grievances of minority shareholders regarding the buyback of shares
4 Do you think stringent measures should be introduced to protect the interests of small investors What should SEBI do to safeguard small investors interests and resolve their grievances
- mMicro finance has tremendous potential as an instrument for poverty reduction
- Grameen Bank- A Role Model in Microfinance
- The Buyback Act Contd
- Investor Grievances Contd
- Buy or Not to Buyback
- Questions for Discussion
-
