Loss-making One 97 Communications, the parent company of Paytm, on Thursday, said its board will meet on December 13, 2022, to decide on a proposal for buyback of its shares. While the company said the buyback may be beneficial for the shareholders, the company, in an unusual move, is using proceeds from previous rounds of fundraising to fund the buy-back. Does Paytm have the cash to fund buyback? Paytm said it has Rs 9,182 crore of cash in hand as of September 2022 to fund the buyback. Analysts and fund managers are, however, raising questions over the same. Many said that while companies such as Infosys, TCS and RIL have done buy-backs from cash generated from their profits, that is not the case with Paytm as the company is not generating profits. In the case of Paytm, money raised from other investors is used to fund the buyback. “This is a bit irregular. The buyback is being done through funds raised from investors as the company has not been making profits. This is uncommon,” said a fund manager who did not wish to be named. Paytm made huge losses of Rs 2,325 crore in 2021-22, Rs 628 crore loss in the June quarter of 2022-23 and Rs 588 crore loss in the September quarter. Why is Paytm going for share buyback? Disappointing investors, Paytm shares have fallen 75 per cent from the IPO price of Rs 2,150 to Rs 540 now. On Friday, it gained 6.5 per cent intra-day on the back of the buyback plan. Its market capitalisation has fallen by over Rs 70,000 crore in a year’s period. The company raised Rs 18,300 crore through the IPO in November last year. One of the reasons for a company to go for buyback of shares is when it feels that its stock is undervalued or fallen too much. By buying outstanding shares, a company reduces the number of shares in the market and this can increase the value of the remaining shares. Share buyback also helps in increasing the promoter shareholding, which can act as a safeguard against any threat of hostile corporate takeover. There were instances when promoters also participated in the buyback and surrendered their shares. What is a share buyback? When a listed company buys its own shares from the existing shareholders, it’s known as a share buyback, which is also called as share repurchase. The process reduces the number of outstanding shares in the open market over a period of time. A company can buy back its shares from shareholders on a proportionate basis through a tender offer, or from the open market via book-building process, stock exchanges, or from the odd-lot holders. The maximum limit of any buy-back is 25 per cent or less of the aggregate of paid-up capital and free reserves of a company. What is the benefit for shareholders? Through buyback, a company can reward its shareholders in a tax-effective manner. The dividend that a company pays is taxed at the company level and also at the shareholder level. In the case of share buyback, the company pays the tax and shareholders are exempted from paying tax on the income generated in the process. If the company offers a higher price than the market price, shareholders, who are not keen to stay invested in the company, can surrender their shares and exit. While a company can go for repurchase of its shares when it is sitting on a lot of cash but does not have many avenues to invest and prefers to return cash to shareholders, the case of Paytm is different – it’s sitting on huge losses and now using part of investors' proceeds for the buyback. Who is eligible to participate in buyback? To be eligible to participate in the share repurchase process, a shareholder needs to hold the shares of the company, which has announced the buyback, before the record date declared in the announcement. The share also needs to be held in the demat form. As many as 56 companies, including Infosys, TCS, Bajaj Auto and ACC, had opted for share buybacks in 2022.
