The year 2012 started with shopping news of a different kind-share buybacks .

First, the market regulator, the Securities and Exchange Board of India (Sebi), changed the process and mandated that companies buying back own shares should declare the buyback ratio, as they do in rights issues, and fix a record date. Buyback ratio is a market valuation measure used to gauge what percentage of market value is being reduced by the share buyback activity.

Four per cent is the return given by the RIL stock between the announcement and start of buyback
Second, Sebi approved changes in rules to allow public sector units (PSUs) to buy back shares. As a result, shares of PSUs such as MMTC, Hindustan Copper, State Trading Corporation of India and Dredging Corporation of India rose 30-50 per cent in the first five trading sessions of January. However, on January 6, the Union cabinet deferred the decision due to differences among ministries. Third, on January 20, Reliance Industries, or RIL, approved buyback of up to 120 million shares at a price not exceeding Rs 870 per share. The stock has risen 4 per cent since despite the company reporting poor numbers for the third quarter. It was at Rs 830 at the commencement of the buyback on February 1. Why did shares of RIL and PSUs rise on buyback news? Varun Goel, head, equity portfolio management services, Karvy Private Wealth, says, "A buyback is done to send a signal to the market that the company believes the stock is trading below its intrinsic value." PERSPECTIVE: Behind RIL's share buyback move"Shares react positively to such announcements because buyback reduces the number of shares outstanding, which increases investors' claims on dividends and earnings of the company. As these claims increase, so do stock prices," says Samir Gilani, head, derivatives, and co-head, equities, MAPE Securities. However, Goel says, "A buyback may create a short-term spike that may not last. Most of the times, it is perceived as a vote of confidence in the company. However, in some cases, a company may buy back shares to delist." WHAT IS BUYBACK? Share buyback means purchase of outstanding shares by a company to reduce the number of shares trading in the market. Market experts say it usually shows the confidence of promoters in the future of the company. Pavan Kumar Vijay, managing director, Corporate Professionals Group, says, "There are a number of reasons companies go for buybacks. The intention is to reward investors, improve financial ratios (such as price to earnings, return on assets and return on equity), increase promoter holding, reduce public float and check the falling stock price, reduce volatility and build investor confidence." MODES OF BUYBACK Some common buyback routes companies take are tender offer and open market purchase. In

Reliance Infrastructure. 16. These include Zee Enertainment Enterprises. out of 500 companies in the BSE 500 index.6 per cent.95 to Rs 103. Between then and 26 December 2011. However. The company announced a buyback on 15 December 2011. distribution. Indiabulls Real Estate started moving southwards after the buyback announcement. CRISIL made a similar announcement on 18 October 2011. Vijay says. the day the buyback started. Onmobile Global. tender or market purchase.25 till 7 January 2012. 6. respectively.2 per cent. the stock rose 1. head of research." On 27 May 2011. CRISIL. For instance. However. Onmobile Global. after which the stock tumbled 3 per cent to Rs 48.2 per cent. chief executive officer. WHAT'S IN IT FOR INVESTORS? A buyback usually improves the confidence of investors in the company and so its stock price rises. though it helps stocks in most cases (See Stock Moves). Amtek Auto and Praj Indusries. rose as much as 19.9 per cent to Rs 855.4 per per cent during the period. the company makes an offer to buy a certain number of shares at a specific price directly from shareholders. . Destimoney Enterprises. Four per cent is the return given by the RIL stock between the announcement and start of buyback On the downside." In open market purchase." says Pankaj Pandey.6 per cent. says.398 during the period. share prices of Deccan Chronicle Holdings (DCHL). "The obvious reason for the fall is the mismatch between the buyback price announced by the company and investor expectations. share prices of eight rose between the announcement date and the day the buyback started. its stock rose 3. the size of the offer. The benchmark BSE Realty index fell 6 per cent from 1. Monnet Ispat & Energy and Amtek Auto. "This route ensures all shareholders are treated equally. for instance. Rain Commodities. the mode of the offer. 7. Brijesh Parnami." says Parnami.447 to 1. From the date of announcement till the start of buyback on July 1. 14 bought back shares in 2011. It fixes a price cap and can buy for any price up to that.tender offer.15. however small they are. Balrampur Chini and FDC fell 32. 24. ICICIdirect. the difference between the offer price and the market price of the stock and the market's confidence in the management's intention to carry out the offer. "The price trend depends on various factors such as the market situation. However.1 per cent and 5. Of these. The biggest difference between the two is that the price in the tender route is fixed. past data reveal the stock can move in either direction after the buyback announcement.20 per cent from Rs 99. PVR announced an open market purchase of its shares on the Bombay Stock Exchange (BSE). Jindal Poly Films. the company decides to acquire a certain number of shares. "Most companies prefer the open market route. that is.

market experts have mixed views on RIL. For instance.75. Goel of Karvy Private Wealth says. This is because if the buyback size is too small compared with the overall market capitalisation of the company.Stock Moves: The shares of a company entering into a buyback can move in either directions after the announcement Click here to Enlarge "The movement of a stock after the buyback announcement depends on valuations. "It is important to look at the size of the buyback offer. "You should not buy shares just because the company is working out a buyback plan. On February 6. Goldman Sachs upgraded its target price from Rs 960 to Rs 970 on 7 February 2012. RIL was trading at Rs 832. 2012. founder and chief executive. The result can differ from company to company. the stock can touch a level of Rs 660 in the next 12 months." says Gilani of Mape Securities. the buyback price and the duration of the offer. according to a research report of Mansukh Securities and Finance issued on 4 February 2012." says Gajendra Nagpal. market experts have a word of caution for you. Unicon Investment Solutions. SHOULD YOU BUY? If you plan to invest in companies which are going to buy back their shares. Investors must study the company they wish to invest in and take a decision based on its ability to generate profits. Despite the commencement of buyback. However. buybacks are announced to trigger certain favourable movements (anticipation of an upward movement in stock price). the impact on the stock could be very small . In some rare cases.