Corporate Restructuring through Share buybacks: An Indian Experience

Abstract

The share buyback regulation was enacted by the Government of India (GOI) in 1998 with an objective to revive the fast declining Indian capital markets and protect the interest of the investors and companies from hostile takeover bids . Until 2004, the buyback process did not gain any momentum, but the year 2004 witnessed a series of share buyback announcements and this process has continued until the present day. There is much discussion in media and financial circles about this issue, but little effort was made to know the reasons behind such buyback decisions. The present study has analyzed the corporate actions such as the "free cash" policy, dividend distribution, change in capital structure and lower profitability while deciding interpreting the intent behind these ‘tender offer buyback' and ‘open market buyback' offers between January 2004 to December 2017.The study uses a sample of ninety open market repurchasing companies with a similar number of non-repurchasing companies and of fifty-four tender buyback companies with fifty-four non-repurchasing companies in the same industry having similar market capitalization and listed on Bombay stock exchange (BSE). To investigate the drivers of open market buyback and tender offer buyback in India, a Tobit regression analysis has been used. The study concludes that ‘Tender offer buyback' is used more predominantly for capital structure corrections, while in the case of open market repurchase in India, dividend substitution and capital structure correction act as the key drivers. Whether ‘size of the firms' make any significant difference or not, study revealed positive impact on the motive for buybacks.

Keywords

• Share buyback
• Open market repurchase
• Tender offer buyback
• Capital Correction.