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PRESS TRUST OF INDIA
Introduced to lift the sagging stock markets, buyback of shares could be used by unscrupulous companies to manipulate share prices to suit their needs and dupe investors, warn market experts. Citing previous experience, they fear fear that some of the rules can be misused by promoters to dupe investors. "Everybody is under the impression that buy-back is a magic potion which will infuse life into the lifeless stock markets, but this is far from true," says an official in a Delhi-based investor forum.
Votaries of the buyback system say the facility would allow a company to buy back its shares when they are trading at lower prices and, hence, reduce the liability of payment to shareholders through dividends. Although companies have to extinguish an equal amount of equity, the percentage of the promoters' holding in the overall capital would go up. This provision leaves room for manipulation as firms going for buyback to reduce bloated capital are allowed to float fresh issues and mobilise public funds aftertwo years.With the Securities & Exchange Board of India now proposing to cut the two year period for fresh issues after buyback to six months, market experts see more room for fraudulent activities..
"I see a major scam in the offing in the form of buyback during 1998 and 1999 with at least 2,500 companies announcing buyback," says Prithvi Haldea of Prime Database. Since 1994, promoters have raised huge amounts of money from gullible small investors exploiting a new rule which gave them a free-hand to fix the price at which shares were sold. And now, says G V Ramakrishna, chairman of Disinvestment Commission, "Promoters are going to fix prices of buyback."
Although the buyback rules provide that the decision for buyback and its price can only be decided at the shareholders meeting, Ramakrishna notes hardly 10 to 12 per cent of shareholders actually attend these meetings, which would leave the decision in the hands of the promoters. According to Ramakrishna, the market regulator should have made postalballot compulsory for the buyback decision. "That would allow shareholders a say in the pricing of buyback," he added.
Or else, Sebi could have disallowed promoters from casting a vote on this issue, he says. However, Haldea disagrees with this suggestion, arguing that "disallowing promoters to cast their vote on buyback would be an extreme step". He says the pricing should be done by taking the average of six months traded price of the company in the stock markets. This would leave little room for manipulation by promoters.
In a similar vein, Amit Swaroop, chief dealer with Vickers Ballas, a Singapore-based broking firm, has called for some check on promoters to safeguard the interest of small investors. "Buyback will help companies reduce their bloated share capital and give shareholders a good return for their investments. But in India, unless proper checks and balances are built into the system, some promoters will misuse the buyback provision," warns Swaroop.
Pricing of shares, he says, can becomputed by taking an average of three-months traded price of that company at the stock markets. Voting on share pricing by domestic financial institutions (FIs) and foreign institutions (FIIs,) who holds large stakes in companies, is another factor which should be watched closely. "Domestic financial institutions have all along been voting with promoters rather than favouring the interest of small investors," says the official with a Delhi-based investor forum.
According to Rajiv Gupta, financial director with RBC Financial, buyback can become an easy tool for promoters to hike their stakes in companies.
"Promoters should not be allowed to hike their stakes using the company's money," he says. Besides, with the introduction of buyback, stock markets would be rife with rumours about companies going for buyback. A small investor could get carried away with such rumours. But Rajiv Gupta says, "Buyback rumours are something investors have to live with. It will be a learning curve for them."
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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