We beg to differ. India is a developing country where most industries (barring some like jute) are in a growth phase. The economy is also being opened up for compensation. In such a scenario, it is improbable that a company will return money to shareholders (especially when raising it again will be more difficult). This happens in developed economies where growth opportunities for many industries are limited, and companies return surpluses back to investors for want of investment opportunities. To say that buyback will improve the EPS would have to be viewed against whether that money is better employed to gain market share and, hence, improve the EPS in the long term. A cash-generating company in a low-growth business like cigarettes (ITC) would want to invest in new growth opportunities in a growing economy. ITC has shown interest in the hotel business.

In most countries, dividend would be taxed at the rate applicable to income, whereascapital gains on account of buybacks would be taxed as capital gains. In most countries, capital-gains tax is lower than income tax, and buybacks offer a tax-efficient way of rewarding shareholders. In India, however, dividends are taxed at rates lower than capital gains, and there is no incentive to announce buybacks. A company can simply announce a higher dividend. Shareholders can use the funds to increase exposure to the company if it is so attractive.

Buyback was sought to give a level-playing field against takeover tycoons. Domestic managements in the absence of buyback provisions could not defend their companies (by using their own cash) against a takeover threat, whereas the acquirer could (theoretically) leverage against the cash of the target company. This, we feel, is the best argument in favour of buyback. However, companies fulfilling this criterion would be few, especially when the management could always route surplus funds through group companies and maintain shareholding.

Most domesticpromoters have more than one company. How is buyback of shares by Telco different from buying of Telco shares by Tisco? Here again, the management is signalling that it believes the stock is undervalued. However, we admit that buyback is a more transparent way of doing things.

Having more than 51 per cent stake in a subsidiary permits a foreign parent to integrate the subsidiary's accounts into its own books. With many of the subsidiaries of multinationals doing better than their parent firms abroad, there is a definite desire to increase shareholding to 51 per cent. However, most foreign companies have already achieved this. Most would not like to pay the valuations commanded by their subsidiaries on the Indian bourses. For example, HLL wanted to increase Unilever's stake in itself at a significant discount to the market price citing long-term nature of investment. We have to find stocks where the parent's stake is less than 51 per cent, and the stock has good long-term prospects, but the share price isnot reflecting the fundamentals fully. Chicago Pneumatic is cited as one such company.

Bajaj Auto was supposed to be an ideal candidate to go in for buyback. The company is sitting on cash, and does not have investments lined up. However, the company has said that it would not go in for buyback. This is mainly because the scrip price reflects the cash-surplus position of Bajaj. Cash reserves generate at least 12 per cent pre-tax return, whereas buyback would save less than 2 per cent in dividend outgo for the company (Rs 10 share dividend on a share whose market price is Rs 550). Stocks like Reliance, and public-sector units (PSUs) like Nalco, MTNL, VSNL, Gail, and oil companies like BPCL, HPCL, IOC could be interested in buyback.

PSUs present an interesting case. Companies like VSNL and Gail could buy back a part of their equity from the government and assist it in meeting its disinvestment targets. This would prevent the stock being placed in difficult market conditions at a discount. This possibilitywould add to the list of possible routes the government is thinking of to meet its targets.

(The author works with SBI Caps, and the views expressed here are his own and not of the company)