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Banks told not to fund share buybacks - Views on News from Equitymaster
 
 
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  • Aug 27, 1999

    Banks told not to fund share buybacks

    According to newspaper reports, the Reserve Bank of India (RBI) has barred commercial banks from funding share buybacks. The stated rationale for this move is that such financing amounts to 'misutilisation' of bank funds as no new assets are created.

    Just when everything seemed to be headed in the right direction for India's stock markets, the RBI has taken a stand which is more likely to dampen market sentiment than not. Share buybacks may not as yet have taken off in India, but they hold tremendous potential in terms of affecting market sentiment.

    Why buyback shares?

    The benefits of a share buyback program, fundamentally speaking, could be looked at from two angles. The company initiating the exercise could be faced with a situation in which it has excess capital that cannot be efficiently employed. A buyback program thus enables the company to return capital to its owners, and in turn improves its overall efficiency ratios. The investors and stock markets benefit from the support the company lends to the market price of its equity shares by buying them within a stated price band. Post buyback, the higher earnings per share (post equity reduction) increase the value of existing shares, thus benefiting the existing shareholders.

    The RBI's move also closes a profitable avenue of lending for Indian banks, which are currently saddled with large amounts of unutilised funds. As most companies lack the kind of resources needed to initiate and fund a share buyback, the concept is all but relevant only to a few select companies.

     

     

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