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Cairn buyback call next week

Mumbai, Nov. 22: Cairn India will consider a proposal to buy back its shares in a move that may see the exit of Cairn Energy Plc from the Vedanta group company.

The oil and gas exploration and production firm today told the bourses that its board would meet on November 26 to consider the proposal.

There are two methods in which a company can buy back its shares: through a tender offer or market purchases. In the case of a tender offer, an entity fixes a certain price and then writes to its shareholders to know whether they want to subscribe to the offer.

In an open market purchase, the company buys these shares from the market after it fixes a ceiling price for the buyback offer. In this case, the proceeds do not flow directly to the shareholders.

Companies have been using buybacks to boost their share valuations. Those going in for a share buyback will have to extinguish the equity capital to that extent. This leads to higher book value and earning per share even as it also results in increasing the promoter holding in the unit.

A share buyback is often seen as a reflection of the management’s confidence in the company’s growth ahead.

Stock market circles say the buyback programme may see the exit of Cairn Energy Plc from the company. For the period ended September, Cairn Energy, which has been looking to sell its shares for a long time, held 10.27 per cent (nearly 19.62 crore shares) in Cairn India. At current prices, the value of its entire holding stands at Rs 6,400 crore.

The London-listed Vedanta Resources had acquired a majority stake of 58.5 per cent in Cairn India for $8.67 billion in December 2011. The deal was delayed by about 16 months from the original announcement of August 2010.

Vedanta holds 58.76 per cent in Cairn India through subsidiary firms Sesa Goa, Sesa Resources and Twin Star Mauritius Holdings Ltd. Institutions hold 26.34 per cent in the company, while the rest is spread between corporate bodies, individuals and NRIs.

Cairn India is now sitting on a cash pile of $3 billion and it is estimated that if it buys back 10 per cent and extinguishes them subsequently, the promoters stake could jump to over 65 per cent. The company posted a net profit of Rs 2,236 crore during the period ended September on net sales of Rs 2,863 crore.

In August, the Securities and Exchange Board of India made some changes to the way a share buyback is done. Sebi made it mandatory for companies to repurchase at least 50 per cent of their offers. However, companies taking the tender offer route should buy back at least 15 per cent of the targeted amount.

The norms are aimed at safeguarding the interests of public shareholders. Sebi had said that the companies would have to complete their buyback offers within six months, lower than the previous requirement of 12 months. It has also warned that those companies that are not able to meet the target will be barred from launching another offer for a period of one year.

On the BSE, the Cairn India stock leapt 3 per cent to close at Rs 326.95.

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