Paytm board of directors to decide on share buyback on 13th Dec 2022

No image 5paisa Research Team

Last Updated: 12th December 2022 - 03:49 pm

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With the stock price down more than 70% since the IPO, Paytm has been looking at ways and means of boost the stock price. During the week, One 97 Communications (which is the parent of Paytm), has announced that its board will meet on December 13th, 2022, to deliberate and decide on a proposal for buyback of shares. According to the company officials, the buyback is likely to be value accretive to the shareholders of a company. Unlike other corporate actions like bonuses and splits (which are value neutral), buybacks can add value to shareholders by reducing the outstanding shares of the company.

A buyback is typically undertaken by a company that is cash rich and has cash on its books. That is the case with Paytm, which is sitting on hard cash of over $1 billion. Most of the IT companies, that are extremely cash rich, have been using buyback route to prop prices. The only difference is that the IT companies are actually generating cash flows and profits and it is this profits that have translated into more cash. On the other hand, companies like Paytm are still loss making companies and the cash balance is nothing but the funds that they have raised as part of the mega IPO last year. The buyback reduces outstanding shares in the open market over a period of time and also boosts EPS in the process.

Typically, in any buyback program, the extant SEBI regulations permit a company to buy back up to 25% of the aggregate of paid-up capital and free reserves of the company. Paytm has Rs9,182 crore of cash in hand to fund the buyback and this is largely the amount that the company charged as premium on the IPO to its allottees. The argument given by Paytm is that it has a lot of cash on the books and this would be a good way of giving cash back to the shareholders. But it does sound ironic. You sell shares to investors at a steep premium and create a reserve. Then after an year when the stock prices is down 75%, you use the same shareholder money to buy back the stock at 25% of the IPO price.

How do shareholders benefit from this move? Normally, buybacks are done by companies that are sitting on mounds of cash, but do not have enough productive avenues. Paying dividends is not tax efficient. Hence, a better way is to buy back the shares. However, in the case of Paytm it cannot say it does not have avenues to spend since it is still a cash guzzling machine with heavy cash burn. One would wonder why a buyback now when the focus should be take on the competition from the likes of PhonePe, GPAY and Amazon Pay. That is going to cost a lot of money and the war chest would have been quite useful.

It would depend on the price set for the buyback and the subsequent price movement. If the price is around the current market price, then the buyback may not be too attractive. Similarly, if the price rallies sharply after the buyback announcement, then the demand for tendering shares will be limited. One logic is that it is more efficient in tax terms compared to dividends. Firstly, dividends are still some time away and secondly, most investors would be having capital losses than having capital gains. Shareholders (especially institutional shareholders and PE funds), who are not keen to stay invested can exit in the buyback.

For now we do not know the record date as that would get announced only once the board approval comes through. To be eligible to participate in the share repurchase process, a shareholder must be holding the shares of the company as on the buyback record date. That means they have to buy the stock at least 2 trading days prior to the record date. For now, on must wait for the board approval for the buyback, before other details start trickling in.

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