Tuesday, June 21, 2016

SEBI Buyback Guidelines : Opportunity in National Aluminium

Business Schools taught us , Companies do Buyback of Shares to enhance shareholders value. But because of  Budget,2016 and New SEBI Buyback Guidelines , There are new reasons for buyback.

a) Do buyback instead of paying Dividend to avoid paying Taxes.
b) Do buyback to use company reserves for funding needs of Promoter / Government. (Instead of OFS)

I am writing this post on calculated risk  / Low risk Arb opportunity. Discussing on implication of Buyback with above rationale can be by another blog.

There are spate of Buyback happening in the Indian market by Private Sector companies and Public Sector companies. There is SEBI guidelines that Buyback from Small shareholders (Holding shares valued at not more than Rs 2 lacs) should be made as per there entitled share holding ratio or 15 % whichever is higher (Refer SEBI guideline linked above).

It is noticed that small shareholders may form more than 90 % to 95 % of the number of shareholders, but they may not hold more than 5% to 10% of the share capital. Also Higher the promoter holding, lesser will be holding of small shareholders in percentage terms.

It means the lesser the percentage of Retail shareholding, Higher will be the acceptance ratio in Buy back., Also there will be many long term investors, who would not want to tender the shares (Also sometime, they wont, if their cost of purchase is higher), which will further push up the acceptance ratio.

There will also be many big Investors, who would not participate in such arb trade, they may not be able to buy such quantity back from normal market without impacting prices. There will also be large investors, who would not participate in Buyback as Arb returns may be lesser than Tax impact on selling of shares.

Private sector companies like Wipro, Bharti Infratel, Novartis came out with Buyback, They are doing buyback of shares, but Promoters are also participating in buyback, clearly with an intention to get money from the company and in more Tax effective way.

Recently PSU like National Aluminum (Nalco) , MOIL and NMDC have declared Buyback, The Buyback seems done only to give reserves back to promoters (Government), participation by other shareholders in collateral.

But There is opportunity for small shareholders based on acceptance ratio. I will not calculate returns but try to calculate acceptance ratio.

I will discuss my rationale of Buyback opportunity in Nalco  below as they have already asked for Postal Ballot.

National Aluminum : Nalco is a profit making, dividend paying PSU, It has a dividend yield of almost 4 %, and trades at PE of 15. Its book value is around Rs 52/-. It has buyback of Shares at Rs 44/- (CMP 41.50).

We will look at share holding Data, to arrive at acceptance ratio.

No of issued Shares
% of Promoter holding (GOI)
No of small shareholders
Qty held by small shareholders
% of Qty by Small share holders
Total Buyback qty
% of Buyback
BB Qty for Small Share holders
in Buy back

Fund holdings
Fund holdings %
Other Major Shareholders
Other Major Shareholders %
BB Qty for Goi
BB Qty for Other Share holders
Total Floating Stock
Total share by large share holding,

more that 1 %

From the above table, we can see that, there is high probability of 100 % acceptance ratio for small share holders, If it is bought now also, because The offer is to buy more than 9.66 crore shares and there are only 5.28 in that bracket. 

Also as LIC, Bajaj and Hindalco hold chunk of 26.54 crore share, which I feel will mostly not be tendered in Buyback. Also if we remove all Institutional shareholder and Share holder, the remaining float would be 118406554. Whereas Buyback qty is much more.

There can be change in acceptance ratio if Price falls, but then fundamental will come into play and many value buyers will enter the market to support the price. Also to qualify GOI have put its intention to tender 100 % qty of Buyback, (That may happen if price of Nalco move above 44 /-)

I will calculate acceptance ratio of other companies as and when they finalize their buyback QTY and Price, and send it for approval of shareholders.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this company.

I welcome your critical comments and suggestions.

PS : I have some position in the stock, So I can be Biased