The company has now revised its offer by a special resolution passed at the Annual General Body meeting on the 29th of July. The buyback is now to be effected through a tender offer to the equity shareholders at a maximum price of Rs.400/- per share aggregating Rs.720 crores in cash as compared to the earlier requirement of Rs.810 crores.

The earlier price for the buyback was arrived at taking into consideration the market prices ruling over the last two years, the current and future earnings per share, return on equity, networth and other similar factors. The price of Rs.450/- a share was at a premium of 29 percent to the average of the highest and the lowest price during the three months period ending March 2000 and at a premium of 20 percent to the average of the highest and the lowest price during the six months period ending March 2000. The current market conditions could have been one of the factors leading to a revision of the price.   

The company has surplus funds of over Rs.2400 crores, which it plans to utilize in this direction. According to SEBI guidelines, Bajaj Auto Limited can utilize up to 25 per cent of the paid-up capital and free reserves for share buy-back. For the nine months ended December 31, 1999, Bajaj had a net profit of Rs.397.95 crores and announced an interim dividend of Rs.10/- per share for 1999-2000, which will absorb Rs.132.52 crores. Post-buyback at Rs.400/- a share, the company's debt-equity ratio will be 0.21:1 as compared to the earlier case of 0.15:1.

Bajaj Auto has been a favorite on the Sensex but has witnessed steady battering in the recent months causing the stock to slide to touch a low of 259 on March 3rd. Improvements in product off take and the decision to effect a share buy-back, has infused some positive sentiment and brought about some price recovery over the last month. However the company’s fundamentals have not changed enough to warrant a higher valuation. The management is of the view that even conservatively the intrinsic value of Bajaj is substantially higher than the buyback price. Hence the buyback price of Rs.400 is likely to ensure a profitable exit route for floating investors and value addition for investors who decide to stay on.

In the context of the Indian markets, buybacks are unlikely to affect the value of a firm other than reasons connected with taxation laws. A company’s value is unaffected by its equity ownership pattern and its debt-equity ratio barring tax and liquidity issues. Buybacks are just another mechanism for speculative activity. In developing economies with ample investment opportunities, high returns, high risks and capital shortages, the optimal use of investible funds is in new investments, expansion and diversification of firms and not in share buybacks. The prerequisites for share buybacks are the existence of liquid and efficient stock markets, competitive financial institutions, effective regulation of insider trading and a cash-surplus macro-economy. The Indian economy has a long way to go on these fronts. Bajaj's buyback will indicate its inability to diversify and compete with the auto giants entering India.

On the investor’s front, the buyback is expected to return to the shareholders a part of the surplus funds by buying back shares at a price below the conservatively computed intrinsic value. The buyback is a reasonably fair exit option to shareholders wishing to do so without hurting the interest of the shareholders who wish to continue to hold their equity shares. Investors could use the present price uptrend to trim exposures.