The board of One 97 Communications, the parent company of Paytm, will meet today to decide on a proposal to buyback its shares. Several reports have stated that it will use the proceeds from previous fundraising rounds to fund the buyback.
“…we wish to inform you that a meeting of the Board of Directors of the Company is scheduled to be held on Tuesday, December 13, 2022, to consider a proposal for buyback of the fully paid-up equity shares of the Company, in accordance with the applicable provision under the Companies Act, 2013 (including the rules and regulations framed thereunder), the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018 (as amended), and other applicable laws,” the company said last week.
A buyback is often undertaken when a company feels its share is undervalued. The share price of One97 (Paytm) has fallen 75 per cent from its IPO price. On Tuesday, the Paytm shares were trading at Rs 536 per share, and its IPO price was Rs 2,150 apiece. The company launched the Rs 18,300 crore IPO in November 2021. It was then the largest IPO in India.
The buyback reduces the number of shares in the market, increasing their value. It is also done to safeguard the company from a hostile takeover by increasing the promoter’s shareholding. The maximum limit for any buyback in India is 25 per cent of the aggregate paid-up capital and free reserves.
However, Indian companies cannot use the money raised from the IPO to fund the buyback.
According to the company’s liquidity report, Paytm has liquidity of Rs 9,182 crore. In November, the company stated that it would become cash flow positive in the next 12-18 months.
Expressing concerns, Institutional Investor Advisory Services (IiAS), in a recent report, said, “Why is the board considering a buyback at this stage? The company is yet to generate positive cash from operations. It is also yet to report profits – by traditional measures and not based on the company’s proposed profitability measures that exclude ESOP charges.”
“We expect that the board raised Rs 8,113 crore in net IPO proceeds after factoring in its existing cash. Therefore, its growth strategy a year ago required funding support that was in excess of the IPO proceeds. What has changed for the board to believe that its current liquidity is sufficiently in excess that it can be returned to shareholders?” it added.
On the other hand, some experts are optimistic about the buyback.
Rahul Jain, an analyst at Dolat Capital Market Ltd, told Mint, “Buyback at current valuation makes a lot of sense given the declining need for organic capital allocation and very compelling valuation.”