Buyback issue: Minority shareholders’ interests should be safeguarded

By Arun Kejriwal

The week saw the budget fine print causing havoc in the markets on the first two days. These were the tax on buyback and the higher surcharge on income above Rs 2 crore. FPIs have got covered under this section and the same created heartburn and panic in the markets.

While the markets did recover on Thursday quite smartly and were doing reasonably well on Friday, a last hour sell-off on Friday put paid to hopes of a recovery. The BSESENSEX lost 777.16 points or 1.97 per cent to close at 38,736.23 points. NIFTY lost 258.65 points or 2.19 per cent to close at 11,552.50 points.

The broader markets like the BSE100, BSE200 and BSE500 lost 2.08 per cent, 2.09 per cent and 2.09 per cent respectively. BSEMIDCAP lost 1.17 per cent and BSESMALLCAP was down 2.58 per cent.

Dow Jones had a decent week and gained 409.91 points or 1.52 per cent to close at 27,332.03 points. The Indian Rupee surrendered some of its gains of the previous week and lost 26 paisa or 0.38 per cent to close at Rs 38.68 to the US Dollar.

Results for the quarter kicked off with TCS announcing them on Tuesday and Infosys announcing post market close on Friday. TCS saw a revenue growth of 11.4 per cent at Rs 38,172 crore and a net profit growth of 10.8 per cent at Rs 8,131 crore. Infosys reported a revenue growth of 13.98 per cent at Rs 21,803 crore with a net profit growth of 5.14 per cent at Rs 3,798 crore.

What is heartening to note from Infosys is that they have upped the guidance for the current year from 7.5 per cent-9.5 per cent growth to 8.5 per cent-10 per cent. This sends a strong signal to the IT industry even as Gartner has signalled a massive slowdown in IT spend.

Home grown retail chain D Mart has upped its performance significantly. It reported revenues of Rs 5,781 crore, an increase of 26.8 per cent. Its net profit grew to Rs 335.3 crore, an increase of 33.8 per cent.

What is indeed surprising is the sharp increase in margins in an otherwise highly competitive environment to 10.3 per cent at the EBITDA level and a PAT margin of 5.8 per cent. The company over the last four quarters had reported significantly lower levels of margins. This performance is certainly creditable considering the competition from online and offline players.

Issues have begun to emerge over the buyback tax levied in the budget with the first casualty being listed entity KPR Mill Limited. They have written to SEBI stating that they cannot proceed with the buyback as the amount passed by the board and the shareholders would be exceeded on account of the tax and that they would have to borrow the money.

Hence, they have decided to cancel the same. What SEBI decides and how the issue would be resolved, is anybody's guess. This is the beginning of the buyback mess. There has been a demand that the buyback issues which are in the pipeline be grandfathered and that minority shareholders interests be safeguarded. How the tax department, the regulator and the government approach this issue would be critical for the future of about a dozen buybacks in the system.

Markets have more or less reacted to the budget and the same is behind us with the roughly 2 per cent fall last week. Going forward with results season currently on, performance would be the key to decide market trends. If they have to move forward and gain ground, the key would be improved performance from corporate results. Nothing else currently can drive markets. We have enough headwinds on the global front which will act as deterrents for the rally, but if growth and performance is visible on the results front, then some gains could be expected.

Reliance Industries would declare results on Friday, July 19, and this would give an indication of a large conglomerate connected with oil, petrochemicals industry besides telecom and retail.

The week ahead would see results determining the direction markets take. While post budget there has been a sell-off on account of buyback tax and general disappointment to turn the economy on its head, the idea of shorting the market at this juncture looks a little dangerous. In case of confusion in one's mind it would be best to refrain from doing anything.

(Arun Kejriwal is founder of Kejriwal Research and Investment Services. The views expressed are personal)