Sakshi Education
By Srirangam Sriram, Sriram's IAS, New Delhi.
When a cash-rich company buys its own shares back from shareholders it is called share repurchase or buyback?
It is done for a variety of reasons. When share prices are not rising due to the stock market under performance, the company may use a part of its cash reserves to buy its own shares to give adequate yields to the shareholder. It helps the shareholder because the price at which the share is repurchased is higher than the market price and so the shareholder is given an exit opportunity. There is one more way in which the shareholders profit. When a portion of the shares is bought and extinguished, it leads to shrinkage of total stock of shares. Demand being the same, supply having reduced, the share price gains to benefit the shareholders.
The cash rich company being concerned about the share valuation is another positive that helps in better valuation. It builds investor confidence. Stock market acquires greater credibility which is good for the capital markets in general.
Union government asked about eight public sector firms to go for share buybacks. The idea is to come closer to the ambitious disinvestment target of Rs.2.1 lakh crores. It is critical as tax resources suffered due to the deep recession in the economy. The PSUs that may go for buybacks include NTPC, Kudremukh Iron Ore, RITES, Coal India, NMDC, and Engineers India. All of them are sitting on thousands of crores of cash reserves and have limited avenues for investment.
Government will benefit if the PSUs go for a share buyback. Government is the majority shareholder in them and the government can choose to sell some of its holdings to monetise. It means additional fiscal receipts for the government for its budgetary expenditure. In short, it is a tool of disinvestment for resource mobilisation. It is particularly important presently as the economy is contracting and so are the finances for the government.
It is done for a variety of reasons. When share prices are not rising due to the stock market under performance, the company may use a part of its cash reserves to buy its own shares to give adequate yields to the shareholder. It helps the shareholder because the price at which the share is repurchased is higher than the market price and so the shareholder is given an exit opportunity. There is one more way in which the shareholders profit. When a portion of the shares is bought and extinguished, it leads to shrinkage of total stock of shares. Demand being the same, supply having reduced, the share price gains to benefit the shareholders.
The cash rich company being concerned about the share valuation is another positive that helps in better valuation. It builds investor confidence. Stock market acquires greater credibility which is good for the capital markets in general.
Union government asked about eight public sector firms to go for share buybacks. The idea is to come closer to the ambitious disinvestment target of Rs.2.1 lakh crores. It is critical as tax resources suffered due to the deep recession in the economy. The PSUs that may go for buybacks include NTPC, Kudremukh Iron Ore, RITES, Coal India, NMDC, and Engineers India. All of them are sitting on thousands of crores of cash reserves and have limited avenues for investment.
Government will benefit if the PSUs go for a share buyback. Government is the majority shareholder in them and the government can choose to sell some of its holdings to monetise. It means additional fiscal receipts for the government for its budgetary expenditure. In short, it is a tool of disinvestment for resource mobilisation. It is particularly important presently as the economy is contracting and so are the finances for the government.Published date : 12 Dec 2020 05:58PM
