For a very long period that spanned over four decades, legendary investor Warren Buffett neither paid dividends to his shareholders nor initiated any share buybacks. As long as there were opportunities to invest and to earn a good return on capital, he found such exercises futile. But in September 2011, he shocked the financial world when he announced his plans to buy back shares of Berkshire Hathaway. It was a clear indication that there was a dearth of investible opportunities for the Oracle of Omaha. Given the bleak current prospects for the US economy, his change of stance is quite understandable.
But what's happening in India? Today, the board of Mukesh Ambani-led Reliance Industries Limited (RIL) will consider the proposal for a share buyback program which is touted to be one of the biggest share buyback programs in the history of India. The stock markets have given a thumbs-up to the news and the stock price of Reliance Industries has gone soaring in the last couple of days. It must be noted that the stock had been quite an underperformer in 2011, shedding about one-third of its market capitalisation.
But does the proposed share buyback mean good news? Well, the answer is both yes and no. Yes, because stock buybacks are like indirect dividend payments. By reducing the number of equity shares, it boosts the earning per share of the company.
But there is another way of looking at it and that makes us a little uncomfortable. The money that will be utilised to exercise the buyback could have been invested in building productive capacities, developing infrastructure and other such assets which in turn would have generated income and employment. In other words, the money is being returned to shareholders for lack of investible opportunities. But how can there be a dearth of opportunities in an emerging economy like India? In reality, the problem is not lack of opportunities but a bad business environment. Is it any coincidence that India ranks as low as 134th out of 183 countries on World Bank's 'Ease of Doing Business' index? What is even more disappointing is the fact that the case of RIL is not an exception but a trend. Several other cash-rich companies are also finding it quite difficult to deploy their funds into productive assets. Just a few weeks back we had written about how the cash-rich Piramal Group was also struggling to find viable investment opportunities.
This does not bode well at all for the Indian economy. In a growth phase, an economy akin to a corporate needs investments to keep the growth momentum. If that is not happening, then the future prospects of the Indian economy are certainly under threat.
So what does India need to get past the roadblocks? In one word, it is 'reforms'. Reforms that will make it easy for entrepreneurs to conduct business in a smooth manner. But will the government do anything? Not until pushed onto the brink of a crisis we believe.
But what's happening in India? Today, the board of Mukesh Ambani-led Reliance Industries Limited (RIL) will consider the proposal for a share buyback program which is touted to be one of the biggest share buyback programs in the history of India. The stock markets have given a thumbs-up to the news and the stock price of Reliance Industries has gone soaring in the last couple of days. It must be noted that the stock had been quite an underperformer in 2011, shedding about one-third of its market capitalisation.
But does the proposed share buyback mean good news? Well, the answer is both yes and no. Yes, because stock buybacks are like indirect dividend payments. By reducing the number of equity shares, it boosts the earning per share of the company.
But there is another way of looking at it and that makes us a little uncomfortable. The money that will be utilised to exercise the buyback could have been invested in building productive capacities, developing infrastructure and other such assets which in turn would have generated income and employment. In other words, the money is being returned to shareholders for lack of investible opportunities. But how can there be a dearth of opportunities in an emerging economy like India? In reality, the problem is not lack of opportunities but a bad business environment. Is it any coincidence that India ranks as low as 134th out of 183 countries on World Bank's 'Ease of Doing Business' index? What is even more disappointing is the fact that the case of RIL is not an exception but a trend. Several other cash-rich companies are also finding it quite difficult to deploy their funds into productive assets. Just a few weeks back we had written about how the cash-rich Piramal Group was also struggling to find viable investment opportunities.
This does not bode well at all for the Indian economy. In a growth phase, an economy akin to a corporate needs investments to keep the growth momentum. If that is not happening, then the future prospects of the Indian economy are certainly under threat.
So what does India need to get past the roadblocks? In one word, it is 'reforms'. Reforms that will make it easy for entrepreneurs to conduct business in a smooth manner. But will the government do anything? Not until pushed onto the brink of a crisis we believe.
source:eqitymaster
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