Reverse IPO, have you missed this opportunity?5 min read
The IPO market in India is ‘red hot’, but do you know the ‘reverse IPO’ market too is buzzing? Confused? Is something like a Reverse IPO even for real?
An IPO dilutes the promoter’s stake in the company by selling a significant portion of shares to a large number of investors, whereas a Reverse IPO or Buyback of shares is the opposite, where the promoter/ company buys back those shares from the open market.
Sounds cool, doesn’t it?
How this is done, how can an investor take advantage of these opportunities, how can you find such opportunities and most importantly have these buybacks created any wealth for investors?
Let’s try to understand this in more detail and how an Investor can benefit from this and effectively play a risk-free price arbitrage game even in large-cap stocks.
Let’s understand with the example of the L&T buyback in July 2023, where they announced they would buy back shares worth 10,000 Crores. The market price then was ₹2565/ share. Now, there could be 2 conditions. One, an investor who has held shares of L&T for very long time and the second being an investor who wants to earn a risk-free arbitrage (advantage of price mismatch for the same asset/ share in 2 different markets).
Case 1: An investor bought 60 L&T shares in Covid times with a long-term view at around 800/share. He has an opportunity to tender shares in buyback at ₹3200/share and pay zero tax on capital gain of ₹1,44,000.
Case 2: Retail investors had an acceptance ratio of 100%, which means all shares tendered below 2 lakh per PAN card of an individual will be fully accepted and paid ₹3200/share. Now as a trader, I would have bought 60 shares in all my family member’s accounts on 25th July ‘23 for around ₹2565 and tendered in the buyback at ₹3200/share making a Tax free gain of ₹38,100, a risk-free return of 24% in 3 months!
The securities are quoted as an example and not as a recommendation, Source: www.nseindia.com
Do note that L&T has not yet touched ₹3200 level since the buyback.
Isn’t this super interesting?
Yes, it is. But opportunities like this come less frequently. This is the risk-free return an investor could make, and should make, once such an opportunity arises.
Similar to investing, buybacks are not always positive for participating investors.
BSE Ltd announced its buyback worth ₹374 Crore on 3rd July 2023 at a price of ₹816/ share, when the market price of that stock was quoting at around ₹668. Due to poor response to the buyback, the offer price was later increased to ₹1080/ share but still BSE was able to acquire only 2.49% of the proposed buyback shares.
The securities are quoted as an example and not as a recommendation, Source: www.nseindia.com
On 29th November 2023 BSE Ltd share was quoting ₹2410, more than 2X from the proposed buyback price.
Does this make it seem more complex?
Actually, buyback is a bit of a difficult strategy to execute, but the bottom line is that the higher the difference between the buyback price and market price or all-time high levels, the more chances that wealth will be created in that share
Why do companies do a Buyback?
Let’s see what encourages them to trigger this corporate action :
1. Invest in yourself
Don’t get me wrong, I’m not giving any ‘motivational quotes’ here. When companies have huge cash in the books, and they find no better place than their own company shares as the best investment opportunity, they open the cash coffers and announce a buyback.
2. Problem of plenty
Sometimes too much is really ‘too much’. Let me explain. When promoters think of reducing the number of investors/ outstanding shares in the open market, they offer a buyback, thereby consolidating their holdings in the company and thereby reducing the outstanding shares.
3. Value-wise
Promoters of good companies love market corrections. No, no, they are not pessimistic, but they get an opportunity to buy back shares of their own company which are available at relatively attractive prices, sometimes even below their fair value
4. Tax-free
Yes, you heard this right, Buyback is tax-free for investors as no capital gain is levied on the investors, whereas companies pay a tax of 20% + cess and surcharge
Notable Buybacks
Although many companies keep on announcing their buyback, let’s see a few more examples:
Take for instance the ongoing TCS buyback whose record date was 25th November ‘23, and the offer opens on 1st to 7th of Dec ’23. TCS is spending ₹17000 Crore and aims to buy 4.09 Crore shares from investors. Now, this buyback is happening at a price of ₹4150/ share and an entitlement ratio for retail investors being 17%.
Assuming one bought 48 shares of TCS on 13th October at around ₹3550/share, an acceptance ratio comes to around 40%, which makes a profit of 11,400 on 19 shares. Even if the price of TCS is around ₹3300 post offer closes he loses ₹7250 on these shares but still makes a 2.5% return on the total transaction.
The securities are quoted as an example and not as a recommendation, Source: www.nseindia.com
Reverse IPO is no longer an untold story for India now.
Happy Investing!
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