On December 20, 2004, when reliance industries (RIL) Chairman and Managing Director Mukesh Ambani announced his company's intention to buy back shares from investors up to an amount not exceeding Rs 2,999 crore, it was not an entirely unexpected move. For a month at the time, the company had been embroiled in a controversy over ownership issues between Mukesh and his younger brother, RIL Vice Chairman and Managing Director Anil, which had beaten the RIL stock down, eroding 10 per cent of its market capitalisation. The announcement-which offered to buy back shares at a price not exceeding Rs 570, a premium of nearly 20 per cent over the then stock price of Rs 480, and was aimed at what the company called its "desire to maximise returns to investors and enhance overall shareholder value"-helped RIL's stock recover to Rs 530 over the next 10 days, restoring investor confidence to some extent.

It isn't just Reliance, though (see The Real Picture for more buyback examples), and it isn't just about propping up stock prices either. Companies the world over, not just in India, resort to stock buybacks for a variety of reasons, and through various avenues.

How Buybacks Work

According to regulations of the Securities and Exchange Board of India (SEBI), India's stock market regulator, companies can buy back their shares from existing shareholders on a proportionate basis either through tender offers or from the open market. Buyback schemes through stock exchanges are open for a year. As for tender offers, shareholders receive tender/ offer forms from the company. Intimation about acceptance of shares is sent within 15 days of closure of the offer, and share certifications or cash (whatever the case may be) is sent within 21 days from the closure date.

One situation when companies go for a buyback offer is when there is surplus cash flow and no immediate need for cash to fund expansion plans. A buyback makes better sense for such a cash-rich company than, say, investing the cash in unrelated diversifications that may result in losses in the long run. Then, once a company buys back a certain number of shares, the outstanding shares in the hands of investors come down, leading to a rise in its stock price. A buyback is also an opportunity for promoters of a company to strengthen their stake in the company, reducing the chance of a hostile takeover.

What You Get

In most cases, a buyback offer results in a win-win situation for investors. One exception is when a company wants to buy back its shares in order to delist from stock exchanges, leaving investors with no option but to sell their shares. Companies that have delisted in the past include Hoganas India, E-Serve, Wartsila, Reckitt Benckiser, Madura Coats and Cadbury.

In all other cases, however, buybacks offer benefits for both those who sell their shares as well as those who don't. Those who stay with the company benefit, as earnings get better. Says Rohit Srivastava, Market Strategist, Sharekhan: "The drop in the floating stock of a company and increase in its earnings can enhance valuations significantly." Then, if a company looks to have good growth prospects, there is no reason why shareholders shouldn't stay with the company. The only hitch? "Investors need to have a long-term approach as the holding period is longer," explains Jigar Shah, Vice President, KR Choksey Shares & Securities.

Also, excessive cash on the books is not seen as a healthy financial policy since it has a sluggish effect on the return ratios. Once cash reserves are diluted after a buyback, return ratios improve. And this augurs well for the company and its shareholders. Shareholders who stick to a company also benefit from a relative increase in their stake in the company. As for those who choose to exit, the obvious gain is the cash they receive (which is generally at a premium over prevailing stock prices). There is a catch, however. Whatever profit you make (the difference between the price you bought the share in and the value you get from the buyback) is subject to capital gains tax. So check first if the premium is more than the tax outflow; if not, it would be a better idea to sell the shares in the open market or, alternatively, hold on to your shares.

Among companies with buyback offers currently active are Reliance and Procter & Gamble. Investors should stay with Reliance since it is still undervalued and has good growth potential; as for P&G, after its proposed merger with Gillette goes through, its stock valuations are likely to get better. So, stick around. As a guiding principle for buyback offers, don't let just the premium lure you into selling shares. Assess the company's growth prospects, and your tax liabilities, first.

Credit Or Debit?
Debit cards and credit cards provide you similar functionality, albeit differently. How do you choose between the two?

By Shilpa Nayak

The last time you bought your monthly groceries, how did you pay? Chances are, through your debit card. And when you bought that high-end plasma TV? Credit card, most likely. For most of us, plastic money, as in debit and credit cards, bring a high degree of flexibility and convenience. Of course, it's anyday safer to carry these plastic thingamajigs than wads of notes in your pocket. And while credit cards need to be acquired, debit cards have become common thanks to banks' policy of providing every new savings account holder with the ubiquitous atm card that doubles up as a debit card.

While both provide a similar, basic function-enabling purchases without ready cash-they do it differently. Credit cards behave like a moneylender; when you make a purchase, you have to pay back the billed amount to the lender (which is a bank) within a specified period (normally 40 days), else interest mounts on the amount. That can be pretty telling, with banks charging up to 40 per cent interest per annum. Debit cards, on the other hand, behave like a mobile savings account, where the purchase amount is straightaway deducted from the savings account that the card links up to.

Now, picture this: as you stroll by a mobile phone showroom, the latest Nokia 7710 catches your fancy, and proves too lucrative for you to pass by. But with a price tag of around Rs 30,000, it isn't something you'd buy using your debit card, and have a hole drilled into your savings account. Such impulsive and high-ticket purchases are where credit cards really show their value; payment can be deferred till the due date, and if you have the ability to handle the interest rates, perhaps even rolled over for a longer duration. Debit cards, on the other hand, are useful for small-value buys such as groceries or gas refills. Explains V. Vaidyanathan, Senior General Manager and Country Head (Retail Business), ICICI Bank: "Typically, debit and credit cards together encompass the entire spectrum of customer spends."

This is, of course, assuming that you have both cards, and given their distinctly different spending patterns, there's no reason why you shouldn't. "Customers should have both cards and use them according to their cash flow and nature of transactions," says Amresh Acharya, Vice President and Head (Retail Liabilities), HDFC Bank. Having said that, however, cases can also be made out for having just one of the two:

• If you are the forgetful kind who is likely to have trouble keeping track of credit card bills, debit card is what you should be charging your expenses to.
• For the jet-setting executive type whose company foots the bill for expenses incurred, credit card is but a natural choice.
• Once your salary comes into your account, you stash it away into deposits and other investments, and maintain a minimal savings account balance. If that sounds like you, debit cards are not of much use; go for credit cards.
• If credit card companies refuse to give you a card due to your nature of job or low salary and so on, you don't have much choice but to go with debit cards.
• If you have a reasonable bank balance at most times, you can use the debit card more often, at least for recurring expenses.

Whichever suits your profile, you will do well to inculcate a safety-first approach. That is, maintain a reasonable savings account balance for debit cards, and pay back credit card dues in time. Otherwise, even plastic money has a propensity to explode in your face.