The market euphoria resulting from the prime minister's recent outpourings will be short lived. Though it is evident that buyback will soon become a reality, it will be some time before the first company is able to buy its own shares from the market. Besides, the capex programme announced by the government is merely a statement of intent. The six-lane highway project was first announced by the Deve Gowda government and in case finances are successfully tied up, the absence of a clear policy and land acquisition will prove to be major problems.

Several companies have sought shareholders' approval to buy back their shares as and when it is allowed. But how many of these are in a position to buy back their shares? Most probably, less than a third. Even for those that are ideal candidates, the issue to be considered is that all the resolutions are enabling resolutions and Sebi is likely to insist on a specific resolution before allowing a company to share buyback. Hence, it is logical tobelieve that the first buyback is at least three months away (a highly optimistic time-frame).

In any case, let us examine the possible buyback candidates. Cash-rich companies are often believed to be good buyback candidates. However, not all cash-rich companies are likely to go in for a buyback. Consider the case of utilities like TEC and BSES - both cash-rich companies, but unlikely candidates for buyback. The reason being that the reasonable return (RR) is linked to the capital base (CB). For calculating the CB, equity is added, while long-term debt is deducted. If the capital base shrinks, so will the RR and hence, the clear profit (CP-the profit available to shareholders) will exceed the RR. This will result in a refund to customers, as special appropriations will be hard to justify every year.

Therefore, for utilities, a buyback may not be in the best interests of shareholders. The better option will be a high payout, as dividend is tax-free income for shareholders. On the other hand, a buyback islikely to attract capital-gains tax. There could also be other considerations for a cash-rich company not buying back their shares, the most important being the market price of its shares. Consider for instance, Bajaj Auto. Rahul Bajaj has gone on record saying that the company will not consider a buyback at the current price. The stock has been consistently giving good returns to its shareholders and a buyback at these prices may, in fact, be detrimental to their interests.

Bombay Dyeing is another cash-rich company that many expect will opt for buyback. However, as the company depends to a great extent on "other income" to generate profits, it is unlikely that it will sell its investments to fund a buyback. Arvind Mills has found many "buy" recommendations on the basis of a possible buyback. Though it is true that the company is cash rich, and that the stock is trading at sufficiently low prices, it is unlikely to go in for a buyback, as it needs funds for its various capital expenditure programmes andis, in fact, considering a preferential issue to raise additional resources.

Perhaps, the most likely candidates for a buyback are Reliance Industries, Essel Packaging, GNFC, ICICI, HDFC and GE Shipping. The management of Reliance Industries is committed to a buyback and this will be of immense benefit to the shareholders, as the company suffers from an inflated equity. The managements of Essel Packaging and GE Shipping have also gone on record committing themselves to a buyback. ICICI and HDFC are quoting at mouth- watering prices and these companies have the necessary resources to correct the situation through a buyback. So is the case with GNFC.

Some managements that may be less inclined to a buyback despite the fact that it may make good sense to do so are Grasim and Bharat Forge. Though KM Birla has stated that his stake in Grasim is comfortable, buyback should be a very tempting option. Buying back the equity which is created owing to the acquisition of Indian Rayon's cement division needs to beseriously considered. If this is done, the more profitable cement division will have to serve Grasim's pre-acquisition equity. Shareholders will, therefore, stand to benefit greatly. As far as the management of Bharat Forge is concerned, it should call back the interest-free loans extended to subsidiaries and use the proceeds to fund a buyback in the larger interests of shareholders.

Buyback may give some managements an alternative route to reduce their capital and to hike their stakes in their companies. Consider for instance, Escorts, which had recently tried to reduce its capital, but was not able to do so. A buyback should, therefore, be the logical way out. For the management of Asian Paints, buyback would be a god-sent opportunity to hike its stake in the company. Though the paints major needs funds for its capital-expenditure programmes, it is likely to buy back when allowed. On the other hand, companies like Thermax, most MNCs in the pharma and FMCG segments, and those engaged in software areunlikely to buy back, considering that their managements have a comfortable stake and more importantly, their high market prices.

Lastly, whether or not buybacks would take off even if allowed would be determined to a large extent by the pricing formula prescribed by the regulatory authority. The last offer price would not serve any purpose and will effectively delay the process. In all probability, a floor will be prescribed on the lines of the Sebi pricing formula for preferential allotment, at the same time giving the management sufficient maneuverability.