Hindustan Unilever : Buy Back of Shares

Hindustan Unilever on 30th April 2013 announced that it would buy back shares @ Rs.600, to the extent of 75% of total shares issued. Though this news triggered huge single day rally in the stock (up 17% or Rs.86 to Rs. 583), we need to understand the background of such a move by a premium listed company. Though HUL had reiterated that they would not hike their stake beyond 75% of total shares issued, God only knows their action plan !

Four decades back, during Ms.Indira Gandhi's regime, an unintended government policy helped foster an equity culture in India with many owning multinational companies stocks for decades. This policy helped not just thousands of retail shareholders get richer, but also boosted the portfolio of India's state-owned financial & investment institutions.

 

Infact, the investment portfolios of India's top public investment institutions such as the Life Insuranceand General Insurance Corporation of India were burnished partly because many of these multinationals were forced to allot shares to them through preferential offerings.

In an era of controlled pricing of share sales, the public offerings of a host of such companies — Colgate, Wimco, Tata Findlay (now TATA Global), Hindustan Lever, Cadburys, Britannia, Castrol were lapped up by retail investors.

The Hindustan Lever initial public offering (IPO) in 1977 during the stewardship of T Thomas was priced at Rs 17, inclusive of a premium of Rs 7, based on a pricing formula approved by the Controller of Capital Issues which vetted such share sales and the premium. The issue was a big success — coming as it did at a time when another relatively smaller home grown company then — Reliance Industries hit the market to raise funds.

Given the under pricing of these shares, public financial institutions profited enormously over the decades. Over two decades starting from 1993, scores of listed multinational companies have generated huge returns for local investors — in many cases multibaggers including in Nestle, Glaxo and HUL, to name a few.

Worrying Trend:

Many wellrun, profitable MNC's have hiked their stake resulting in low floating stocks. The list of foreign companies who have raised the holdings of the parent firm to over 70% is growing — such as Astrazeneca Pharma, ABB, Whirlpool, Blue Dart, Novartis, BOC and Timken India.

Many companies such as Cadbury, Carrier Aircon and Alfa Laval have delisted. This is best reflected in the composition of the Sensex, which now has just two multinational firms — HUL and Maruti Suzuki !

Such a trend may worry India's public shareholders who will lose out in terms of sharing in the growth of the local arm of strong foreign firms in sectors which are growing at a fast clip even in a slowing economy.

 

A decade ago, the chairman of SEBI : DR Mehta did raise a red flag over the growing trend of multinationals delisting. But the ministry of finance did not lend support saying that in a mature market, as long as all approvals were in place and shareholders were " kosher", there was no need to step in.

What is worrying now is that at a time when the quality of governance of some of India's leading home-grown companies is a cause of concern, the universe of top quality companies is shrinking. This poses the risk of investment concentration in select stocks by foreign funds and local institutional investors besides a lower floating stock.

While the govenment has been hawking for higher retail participation in equity market, but with stocks of Hindustan Unilever, and GlaxoSmithkline dwindling, investors are left with the limited choice of quality companies. No doubt it is a cause of concern.

Source of Information: Many of the informations cited in this article, including the graph / chart has been published in The Economic Times.