A

STUDY ON

BUYBACK SHARES IN IT SECTOR

AT

KARVY STOCK BROKING

Synopsis for project to be submitted for the award of the Degree of

MASTERS OF BUSINESS ADMINISTRATION

By

B V SHARATH CHANDRA

(H.T.NO: 1302-19-672-088)

Aurora’s PG College (MBA), Ramanthapur

(2019-21)
Aurora’s PG College (MBA), Ramanthapur

Department of Management

SYNOPSIS

Title of the Project: BUYBACK SHARES IN IT SECTOR

Student Name: B V SHARATH CHANDRA

Hall Ticket Number: 1302-19-672-088

Signature of the Student:

Signature of the
INTRODUCTION

Competitive forces with the unleashing of the liberalization policies have made corporate
restructuring as a necessity for survival and growth. Operational, financial and managerial
strategies are employed to maintain competitive edge and turnaround a sickened
performance. Financial restructuring involves either internal or external restructuring
(i.e. Mergers and Acquisitions). In the internal restructuring an existing firm undergoes
through a series of changes in terms of composition of assets and liabilities. Section 77A,
77B and 77AA now allow companies to buy back their shares following the
recommendations of committee on corporate restructuring, which was set up by the
government to propose various strategies to strengthen the competitiveness of the banking
and finance sector, companies are now allowed to repurchase their own shares. This will
enable the companies to catch up with other developed markets as part of the government's
moves to liberalize the local market and hence emerged the concept of SHARE BUY BACK
in the Indian corporate scenario.
Share Buyback is a financial tool for financial re-engineering. It is described as a procedure
that enables a company to purchase shares from the shareholders. The rationale behind
buyback of shares is to boost demand by reducing the supply, which in theory should push
the price up. The repurchase of shares reduces the number of shareholders, which in turn
enhances the earnings per share (EPS), and thus improves investors sentiments. The market
generally interprets share buy-backs as positive signal. Shareholders have a choice of
deciding whether or not to receive the payout by selling or holding their shares, unlike a
dividend payout. Returning excess cash by way of a share buy-back gives a company greater
flexibility with regard to its dividend policy Share buy-backs could enable a company to
achieve its desired capital structure more quickly or facilitate a major restructuring A share
buy-back could avert a hostile takeover bid by reducing the number of shares in circulation.
The repurchase of its own shares may conversely have a negative signaling effect as the
market place may think that the company has fewer growth opportunities after a share buy-
back, due to erosion of cash resources. Management may not seek to utilize any existing
excess cash effectively by acquiring new investments or developing profitable markets.
Possible mismanagement may arise if too high a price is paid for the re-purchased shares, to
the detriment of remaining shareholders, or if cash resources are eroded to the level that could
give rise to a risk of insolvency at the expense of its creditors. If buy-back is undertaken by
replacing shares with debt in cases where companies do not have adequate funds for buy-
back of shares, the proposal may misfire on the company. A return of funds by way of a share
buy-back is less certain than an annual dividend stream.
A company with some of the following characteristics may find a share buy-back
scheme feasible:
A company that has a high net surplus cash position may consider a share buyback. A
company that has a low debt/equity ratio may go in for a share buyback for the purpose of
increasing the ratio. A company, which does not, has a high capital expenditure requirements
in future may go in for a share buyback. A company with a High dividend yield may also
consider for a share buyback. The company, which is of view, that the intrinsic value of the
shares of the company is substantially higher than the market price of the shares of the
company may consider for a share buyback.
NEED FOR THE STUDY
‘Risk-based Anomaly’ is a relatively new phenomenon in the context of equity
anomalies. As mentioned above, it was noted very early in 1967 by Robert Haugen, but there
was no significant development on it until the mid-2000s. Now it has been extensively
verified in the developed markets like the US markets and with the global stock indices; but
remains to be tested in emerging markets like India.
In the US markets, low-volatility investing for the long term has become the latest
investment philosophy after the ‘Value’, ‘Size’ and “Momentum’ investing philosophies that
have been fully explored. In fact the index provider MSCI offers several MV indices as
benchmarks for financial institutions. S&P has just announced the next launch of S&P500 LV
index. Many big investment houses such as the Deutsche IT SECTOR in Europe and Canada,
Martingale Asset management, Morgan Stanley, Analytic Investors LLC8 for US and Global
markets, etc. have already launched funds to benefit from this strategy. Russell and IShare
and have already launched low volatility exchange traded funds (ETFs).
The sole motivation behind this research paper is to empirically test this phenomenon
in the Indian market and thereby, explore the usefulness of such a long-term investment
strategy in the Indian context.
OBJECTIVES
 A company may decide to buy back its shares for one of the following
 reasons:
 To return surplus cash to shareholders as an alternative to a
 higher dividend payment or investing the surplus cash in existing
 or new operations.
 Adjust or change the company’s capital structure quickly, say for
 those companies seeking to increase its debt/equity ratio.
 To increase earnings per share and net asset value per share as a
 possible signal to the market place that management is of the view
SCOPE OF THE STUDY

A company shall not buy back its shares from any person through negotiated deals, whether
on or off the stock exchange or through spot transactions or through any private arrangement.
Any person or an insider shall not deal in securities of the company on the basis of
unpublished information relating to buyback of shares of the company. A company shall not:
Issue any shares including bonus issue till the date of closure of the offer for buy-back
Withdraw the buy-back offer when the draft letter of offer is filed with SEBI or public
announcement of the offer is made.
METHODOLOGY OF THE STUDY
The type of research adopted is descriptive in nature. For the preparation of this
report, relevant data has been collected from secondary source i.e., Daily prices of scripts
from Newspapers, Business Magazines, Internet and Text Books.
The project mainly focuses on analysis of stocks of three selected IT SECTORS.
Buyback shares in IT sector method was chosen for the purpose of study. The study includes
calculating the risk, return and beta (market risk) of the stocks for a period of one year.
Statistical techniques such as mean, standard deviation, variance, and co-variance have been
used for predicting future returns of the assets. This assists in better decision making. Using
CAPM model, the expected return of the individual security is calculated which helps to
know whether the security is fairly priced, over-priced or under-priced. Graphs representing
date wise returns are plotted for each IT SECTOR stock and conclusions are drawn from
these graphs.
1. Sampling:
The sample for the study consists of the constituent stocks from S&P CNX 500 index.
The S&P CNX 500 is the first broad-based benchmark of the Indian capital market. It
represents about 94.92% of the free-float market capitalization and about 91.68% of the total
turnover on the NSE. The S&P CNX 500 companies are disaggregated into 71 industry
indices viz. S&P CNX Industry Indices (Source: NSE website). The reason behind selecting
S&P CNX 500 constituents stocks as sample is that in addition to the index representing
almost the entire market; it also helps avoiding issues associated with small and illiquid
stocks dominating the results.
 2. Data Collection:
The analysis data has been collected from the period May 06 2017 – May 04 2019.
The beginning of 21st century brought number of significant changes in Indian stock market,
a significant example being the introduction of futures and options trading in major indices.
This period also covers both bullish and bearish phases: the bear phase following the major
secondary market scam in India in early 2011s, the strong ‘Bull Run’ between 2012 to
January 2013, the global financial meltdown of 2012-2013 and then the recovery period
which started thereafter.
Thus, this period signifies all the recent ups and downs in the Indian equity markets.
Out of the total available list of 500 companies of S&P CNX 500, following companies are
excluded from the final sample:
1. Companies for which data for 36 months historical data was not available and hence their
volatility could not be calculated.
2. Companies for which price and volume data for the test period is not available.
3. Stocks replaced during the study period and not part of S&P CNX 500 index now.
LIMITATION OF THE STUDY
 Maximum price at which the buyback shall be made and whether Board of Directors
is authorized at General Meeting to determine subsequently the specific price at which
buy back my be made at appropriate time.
 Number of shares/ securities that the company proposes to buy.

 If promoters are participating in the offer quantum of shares proposed to be tendered.

 Details of their transactions and their holdings for the last six months prior to the
passing of the special resolution for buy back including information of number of
shares acquired, the price and the date of acquisition.
REVIEW OF LITERATURE

Different researchers have given diverse and varied accounts of motivations behind share
buyback actions of organizations listed on bourses across the world. Such motivations are
predominantly evaluated and classified to be falling under any of the seven hypothesis
categories, namely, Free Cash Flow Hypothesis, Undervaluation Hypothesis, Dividend
Substitution Hypothesis, Takeover Deterrence Hypothesis, Earnings Management
Hypothesis, Leverage Hypothesis and Employee Stock Options Hypothesis. These
hypotheses imply the basic motivations and guide managers to take repurchase decision on
rational basis in line with the objectives to be achieved. However, empirical studies show
presence of multiple motivations at a point of time influencing buyback (or repurchase)
decision. Yet, one of the motivations is specifically dominant and shows presence of
environmental factors as determinant to influence managers’ decision for repurchases. It is
only through the study of these environmental factors as measured through relevant variables,
decisive inferences can be drawn regarding identification of most important determinant
affecting organization's decision to repurchase.
Article 1:
TITLE: carried out a study in UK market
Author: Padgett and Wang
Source: International Journal of Social Economics, Vol. 31 Issue: 1/2, pp.56-66
Abstract:
Padgett and Wang (2007) carried out a study in UK market, which explained the positive
association between repurchase announcements and cash ratios. The regression model so
developed established a close positive relation between cash ratios and negative relation with
Tobin’s q, an indicator for undervaluation. Thus, it rejected the “signaling hypothesis”,
thereby, giving judgement in favour of free cash flow hypothesis as the single most important
motivation for repurchases in UK market.
Article 2:
TITLE: “potentially dilutive
Author: Bens, Nagar, Skinner and Wong
SOURCE: Journal of financial research, volume 17,Issue 1, June 2014, Pages 137-159
Abstract:
Bens, Nagar, Skinner and Wong (2003) propounded this idea by focusing on diluted EPS due
to the effect of “potentially dilutive” securities such as warrants, convertible debt and
Employee Stock Options (ESOs). As managerial compensation is directly linked to higher
stock prices and higher reported earnings post repurchases, they have motivations to report
consistently growing earnings in form of EPS. Moreover, executives have the fear of being
fired due to underperformance and it additionally benefits by lowering down the cost of
capital due to a relatively high stock valuation. The study found conclusive evidence of firms
going for repurchases in order to counter the potentially dilutive securities. Moreover, the
repurchases happen more frequently in situations of EPS not being able to maintain the past
levels of earnings growth. The study also reported high repurchases for firms with larger
Price Earnings (P/E) ratios due to bigger disappointments flowing from low earnings in such
cases. Thus, it was the first ever study supporting earnings management as a possible
motivation behind repurchases as it focused on both numerator and denominator of EPS
being affected simultaneously by such decision. Obviously, such tactics can’t be adopted
without the support of top management
Article 3:
TITLE: compared to share issuance
Author: Nelson
Source: International Journal of Social Economics, Vol. 31 Issue: 1/2, pp.56-66
Abstract:

Nelson (1999) reported a 12 % higher annual return over a period of five years following
buyback as compared to share issuance. Inefficiency in the speed with which the market
corrects itself has been put forward as the root cause for excess returns in the long run
occurring to firms repurchasing shares. Thus, it increases the value of the firm as firms tend
to streamline or adopt the discipline of leverage through buyback.
 PURPOSED OUTCOMES

Share Buyback is a financial tool for financial re-engineering. It is described as a procedure

that enables a company to purchase shares from the shareholders. The rationale behind
buyback of shares is to boost demand by reducing the supply, which in theory should push
the price up. The repurchase of shares reduces the number of shareholders, which in turn
enhances the earnings per share (EPS), and thus improves investors sentiments.
 that the prospects of the company justify a market price higher
 than that currently accorded by the market.
 To improved the various performance parameters like EPS,DPS,
 operating cash flow per share, etc.
 To thwart the attempts of a hostile takeover.
 BIBLIOGRAPHY

BOOKS REFERED:

 Ramsay, Ian, and Asjeet Lamba, (2005) “Share Buybacks: An Empirical

Investigation”, Unpublished Report, Centre for Corporate Law and Securities
Regulation, The University of Melbourne.
 Rodriguez, Arturo and Yue Heng, (2008), “Open Market Share Repurchases and
Earnings Management”, Estudios de Administración, Vol. 15, No.1, pp. 31-64.
 Shoven, B. John, and Laurie B. Simon, (1987), “Share Repurchases and
Acquisitions: An Analysis of Which Firms Participate”, Working Paper No. 2243,
NBER Working Paper Series.
 Direct Tax Laws & Practice: By Dr. Vinod K. Singhania
 SEBI Guidelines

JOURNALS

 The journal of finance

 International journal of finance & policy analysis
 Journal of finance education.

NEWS PAPERS

 Financial Express(December 2017)

 Economic Times (December 2017)

WEB SITES

 www.sebi.gov.in
 www.pricewaterhouse.com
 www.capitalmarket.com
 www.google.com