A section of the shareholders feel that the company's financials are not sound enough for it spend at least Rs 350 crore for the buyback.

Tata Steel has a repayment obligation of close to Rs 400 crore next year to its foreign-currency convertible bond holders, which comes up for conversion next March. A buyback of shares, in the same fiscal, could lead to an outgo of about Rs 750 crore in non-steel operations.

The amount required could go up significantly if the Tata Steel scrip price moves up. The stock closed at a 8-year low of Rs 99.25 on the Bombay Stock Exchange on Monday and has been moving steadily southwards over the last 12 months.

A buyback of shares, when allowed, is likely to shore up the price as the floating stock will be reduced. The Tata group holding, which is at about 15 per cent, will alsoincrease as the company's Rs 367-crore equity base will get reduced. A 10 per cent buyback will shore up the group's holding by around 1.7 per cent.

"For Tata Steel, buyback would mean a huge drain on its free reserves. Such a huge liability will be against shareholders' interest, even as the promoter shareholder strengthens its grip on the company," said a minority shareholder of the company.

Shareholders are also aggrieved at way the enabling resolution for a buyback was drafted without stating material facts, especially relating to its purpose and the fund source.

"Sebi and the Registrar of Companies would act suo moto and stop companies from obtaining shareholders approval on enabling resolutions. We do not even know what the law will be for a buyback, and shareholders' approval at this juncture robs his right to call back consent, if the approved form of buyback works out to their disadvantage," said a minority shareholder Dinesh Lakhani.

Internationally, there are two models for buyback. Whileone school favours buyback through a share reduction mode and requires extinguishment of the shares bought back, the other model requires companies to buyback their own shares through treasury operations.

In India, the treasury-operation route is fraught with insider-trading risks. Although the regulators are yet to take a decision on the model to be adopted in the country, it is widely believed that buyback will be allowed through extinguishment of the shares, as was recommended in the Companies Bill, 1997.

Tata Steel's total reserves stood at Rs 3,697 crore as on March 31, 1998, of which the share-premium reserve accounts for about Rs 1,792 crore.

INSIGHT
Misplaced fear by shareholders

The shareholders' objection is rather strange, as they will be the ones to benefit by the higher share-price consequent to a buyback. How Tisco can propose a specific resolution for buyback is difficult to understand as buyback is yet to be allowed, and the mode of finance can hardly be specified bythe company at this stage. Further, the conversion/outgo on account of foreign-currency convertible bonds cannot also be treated as non-operational outgo as the funds were raised for deploying it in business. In any case, the company is now proposing only an enabling resolution and the requirements of buyback, in terms of the law, may well require a specific resolution.