m"Micro finance has tremendous potential as an instrument for

poverty reduction."

-Shahid Khandker, Senior Economist, World Bank, in

1999.3
Grameen Bank- A Role Model in
Microfinance
Yet another monsoon season was approaching; but Joshuna
Begum (Begum) unlike her neighbours was not worried about her
house getting damaged during the monsoon. Her house now had
a tin roof, mud walls and wooden windows, a luxury in rural
Bangladesh. Earlier, Begum’s house had a straw roof and
bamboo walls, which used to get damaged in the monsoon
season, forcing the whole family to live in the kitchen. She got
her hut repaired with a loan from the Bangladesh Grameen4 Bank
(Grameen Bank).
Begum wasn’t the only one; there were thousands of people in
rural Bangladesh who had improved their living conditions with
the help of the microfinance programs of Grameen Bank, a
pioneer in microfinance (Refer Exhibit I for more about
microfinance). Grameen Bank helped thousands of poor
Bangladeshi women to improve their lives by extending loans to
them to start. their own enterprises. By 2003, it was reported
that between 33-48% of Grameen Bank borrowers had moved
above the poverty line5. By 2003, with 1,170 branches across
Bangladesh, Grameen Bank was seen as a role model for
microfinance all over the world.
The Grameen Bank model was replicated across the world -- not
only in developing countries like India, Pakistan, and Vietnam,
but even in developed countries such as Australia and the USA,
where similar schemes were set up to improve the lives of the
urban poor (Refer Exhibit II).
However, the Grameen Bank also attracted criticism from the
media and economists all over world. Analysts pointed out that
there was no proper monitoring of how the loans were utilized; it
was reported that the loans availed of by women were used
largely for consumption rather than for investment purposes.
Analysts also pointed out that the accounting methods used by
Grameen Bank were not in accordance with industry standards,
and that the bank did not provide full details about its financial
position and loan repayments position.

The Buyback Act

The buyback ordinance was introduced by the Government of
India (GOI) on October 31, 1998. The major objective of the
buyback ordinance was to revive the capital markets and protect
companies from hostile takeover bids.4 The buy back of shares
was governed by the Securities and Exchange Board of India's
(SEBI)5 Buy Back of Securities Regulation, 1998, and Securities
and Exchange Board of India's (SEBI) Substantial Acquisition of
Shares and Takeover Regulations, 1997.
The ordinance was issued along with a set of conditions6 intended
to prevent its misuse by companies and protect the interests of
investors. According to guidelines issued under SEBI's Buy Back
of Securities Regulation, 1998, a company could buyback its
shares from existing shareholders on a proportionate basis7 :
Through tender offer.
From the open market, through the book building process8 or the
stock exchange.

• From odd lot holders.

The ordinance allowed companies to buy back shares to the
extent of 25 per cent of their paid up capital and free reserves in
a financial year. The buyback had to be financed only out of the
company's free reserves, securities premium account, or
proceeds of any earlier issue specifically made with the purpose
of buying back shares. The ordinance also prevented a company
that had defaulted in the repayment of deposits, redemption of
debentures or preference shares, and repayment to financial
institutions from buying back its shares. Moreover, a company
was not allowed to buy back its shares from any person through
a negotiated deal, whether through a stock exchange, spot
transactions,10 or any private arrangement
It also allowed the promoters of a company to make an open
offer11 (similar to an acquisition of shares) to purchase the shares
of its subsidiary. This allowed foreign promoters to utilize their
surplus funds and make an open offer to acquire a 100% stake in
their Indian subsidiaries.

The Buyback Act Contd...

The buyback of shares was allowed only if the Articles of
Association12 of the company permitted it to do so. The ordinance
also required the company to pass a special resolution at a
general meeting and obtain the shareholders' approval for the
buyback. In addition, companies were not allowed to make a
public or rights issue of equity shares within a period of 24
months from the day of completing the buyback, except by way
of bonus issues and conversion of warrants, preference shares or
debentures.
The ordinance did not lead to increased buyback activity by
multinational companies. In the financial year 1999-2000, only
six MNCs came out with buyback offers, and in the year 2000-
2001, only eight more companies offered to buyback shares.
According to the analysts, the low level of buyback activity in
1999 and 2000 could be attributed to the fact that buyback
regulations were very elaborate and discouraged companies from
making use of buyback option (Refer Exhibit I for the buyback
process and Exhibit II for methods of buyback). The lack of
interest in the buyback option could also be the result of SEBI's
restrictive regulations.
Some companies complained that the process of buyback was
delayed because the law required them to obtain shareholder
approval for offering a buyback. SEBI guidelines prevented
companies from raising fresh equity to finance their projects. It
also prohibited any subsequent buyback offer by the same
company once it had made one for a period of two years. These
complaints and the need to revive the stock markets after the
September 11, 2001 terrorists' attacks in the US forced the
government to make amendments to the buyback ordinance.

The government made amendments to the buyback ordinance in

October 2001, relaxing the buyback norms. The new
amendments allowed the promoters of a multinational company
to make an open offer to purchase up to 10% of its equity
without making a public announcement. This purchase just
required a mere approval from the board of directors. However, a
public announcement and shareholder approval were necessary
for any offer above 10%. The amendments also reduced the time
limit for issuing fresh shares from 24 months to 6 months.
These two changes were incorporated into the buyback
ordinance, which was passed by the government in December
2001 (and subsequently became the Buyback Act). The
amendments in the buyback ordinance coupled with depressed
stock market conditions saw an increase in buyback activity.
MNCs (through the open offer route) regarded the buyback
option as an opportunity to raise their equity stake in their Indian
ventures.

Buyback Offer by MNCs

In the financial year 2001-2002, twenty MNCs made buyback
offers. Some of the well-known MNCs which offered to buy back
their shares were Philips India Limited (Philips), Cadbury India
Limited (Cadbury), Britannia Industries Limited (Britannia),
Carrier Aircon (Carrier) and Otis Elevators (Otis). All these
companies made open offers for the non-promoter shareholding
in their Indian subsidiaries. To buy back shares, Cadbury paid Rs
9 billion, Philips Rs 2 billion, and Carrier, Otis and Reckitt
Benkiser all paid over Rs 1 billion (Refer Table I for MNC
buybacks).
According to analysts, the increased buyback activity by MNCs
was due to three reasons. They felt that the share prices of most
MNCs were under priced and did not reflect the true value of the
company. Moreover, the buyback of shares allowed MNCs to
convert their Indian ventures into wholly owned subsidiaries
(WOS).13 It also allowed them to delist the shares of these
ventures from the stock markets and thus protect them from the
volatility of the stock markets (caused by scams and other
market manipulations).14
Table I
MNC Buyback Offer Details
% of
Shares
Opening Closing
Issuer Method Price offered
Date Date
for
Buyback
 Philips
Open 13-Nov- 12-Dec- Rs.
India 49.00%
Offer 00 00 105
Limited*
Philips
Open 21-Nov- --------- Rs.
India 17.34%
Offer 01 -- 105
Limited@
Cadbury
Open 13-Dec- Rs.
India Mar-02 49.00%
Offer 01 500
Limited
Carrier Open 31-Jul- Rs.
2-Jul-01 49.00%
Aircon Offer 01 100
Otis Open 18-May- Rs.
9-Jul-01 31.10%
Elevator* Offer 01 280
Otis Open 18-Oct- 16-Nov- Rs.
19.38%
Elevator@ Offer 02 02 320
Reckitt Open 14-May- 13-Jun- Rs.
49.00%
Benkiser Offer 02 02 250
Open ---------
Britannia Sep-01 Rs.750 49.00%
Offer -

Source: Indiainfoline.com, domain-b.com

* First open offer @- Second open offer.
Analysts also felt that MNCs had used the buyback of shares as a
method for distributing surplus cash15 to their shareholders.
Buyback also acted as a tool for creating wealth for the
shareholders. The buyback of shares improved a company's
return on equity (ROE),16 and this improvement would ultimately
be reflected in a higher price earning ratio.17 Buyback by the
company usually indicated that the management felt that the
stock was undervalued. It resulted in an increase in stock price,
bringing it closer to the intrinsic value. For example, when Philips
announced its first buyback offer at a maximum price of Rs.105
in October 2000, its shares were trading at around Rs 60. The
buyback announcement resulted in an increase in the share price
to Rs 90 even before the buyback offer opened on November 13,
2000. Hence, the buyback offer gave shareholders an exit option
that paid them a premium over the pre-buyback share price.
However, in spite of the benefits of buyback, a section of
analysts and investors felt that it was being misused by MNCs.
Investor Grievances
Analysts felt that the buyback option may be misused by MNCs to
increase their equity stakes in their Indian ventures, escape
public scrutiny and accountability and prevent them from the
Indian regulatory environment. Moreover, the option to convert
their Indian ventures into wholly owned subsidiaries and delist
their shares from the stock markets provided MCs with complete
control over their Indian ventures, allowed them to repatriate
profits and make more independent investment decisions.
A section of investors felt that government regulations must have
provided them with a choice. However, minority
shareholders claimed that they had no option and were forced
to sell their shares once MNCs bought back shares from the
majority shareholders. For example, because Life Insurance
Corporation (LIC) and the General Insurance Corporation (GIC),
who together held a 21% stake in Philips, surrendered their
shares when Philips made its first buyback offer, the minority
shareholders were forced to surrender the remaining shares
when Philips made a second offer in November 2001 (Refer Table
II).
Reportedly, investors feared losing an exit option in case the
shares get delisted. Moreover, during the second offer, the
trading volume of shares fell to less than (on an average) 500
shares per day since December 2001.

Table II
Share Holding Pattern in Philips India Limited
Share
Holding
30/06/2002 31/03/2002 31/12/2001
Pattern as
on (%)
Foreign
92.34 91.47 82.86
Promoters
Institutional
0.07 0.07 0.85
Investors
 Private
0.14 0.18 1.49
Bodies
General
7.4 8.22 14.67
Public
Source: www.indiainfoline.com
Similarly, when Cadbury made a buyback offer, public
shareholding fell from 26.67% to just 7.32% within six months
after the majority shareholders surrendered their shares (Refer
Table III).
Investor Grievances Contd...
Moreover, in this case, investors felt that the premium offered by
Cadbury Schweppes, the UK based parent company of Cadbury,
was low. The offer was priced at Rs 500, which represented a
premium of 24% on the average high and low prices over the
past 26 weeks prior to the offer. However, Cadbury's stock had
been trading at prices in excess of Rs 500 in 1999 and 2000
(Refer Table IV), with an average P/E multiple of 60 in 1999 and
54 in March 2000. Moreover, Cadbury's third quarter (October to
December 2001) sales had increased by 11.2% compared to the
same period in 2000, while its profits had increased by 5.2%.
Hence, investors felt that the price offered for the buyback had
not taken into consideration the future potential profits of the
company and was not attractive to shareholders who had been
holding their shares for a longer term.
As a result of depressed stock market conditions, investors (in
most cases) received a low buyback price. The price at which the
open offers were made by MNCs caused great concern to both
investors and regulators (Refer Exhibit III for details of pricing
parameters of open offers).
 Table III
Share Holding Pattern in Cadbury India Limited
Share
Holding
30/06/2002 31/03/2002 31/12/2001
Pattern as
on (%)
Foreign
90.25 51.00 51.00
Promoters
Institutional
0.10 0.22 20.36
Investors
Private
2.25 33.18 1.71
Bodies
General
7.32 15.46 26.67
Public
Source: www.indiainfoline.com
In many cases, minority shareholders had expressed their
opposition to the use of discriminatory pricing by MNCs for
buying back shares. For example, Otis Elevators bought back
23.9% of the equity stake from the Mahindra group at Rs.375
per share in October 1999, but made a buyback open offer for
only Rs. 280 for the remaining 31% of the shares held by the
Indian public in May 2001.

Investor Grievances Contd

Table IV
Share Prices on First Open Offer by MNCs
Price
Price on Price Price
1
Maximum 2 on
Company Premium year
Offer Buyback year 1-
Name offered18 prior
Price Date prior Jul-
to
(BD) to BD 02
BD
Philips 105 90.5 46% 110 148 103
Cadbury 500 483 5.90% 589 566 493
 Carrier
100 98 53% 88 218 99
Aircon
Otis
280 175 41.40% 315 306 287
Elevator
Reckitt
250 245 5% 211 190.5 235
Benkiser
Source: www.myiris.com
Analysts also felt that the buyback option was not beneficial for
small investors. Allowing MNCs to delist their shares from the
stock market would deprive Indian shareholders of good
investment opportunities. For example, in few companies
including Philips, Carrier, Reckitt, Cadbury and Wartsila, the
promoter's stake had almost crossed 90% (Refer Table V).
Though these companies had not delisted their shares from the
stock markets, there was hardly any trading in these companies'
stocks.
Table V
Shareholding Pattern as on 30/6/2002 (In %)
Institutional
Foreign General
Name and Other
Promoter Public
Investors
Philips
India 92.34 0.26 7.4
Limited
Cadbury 90.25 2.43 7.32
Carrier
91.16 - 8.84
Aircon#
Otis
80.62 9.21 10.18
Elevator
Reckitt
82.84 1.23 15.93
Benkiser*
Wartsila 88.13 6.37 5.49
Source: Indiainfoline.com
# Carrier Aircon has also made its final offer to acquire the
remaining 8.84% of its stock. The offer opened on September 9,
2002 and would close on March 7, 2003.
* The foreign promoter Reckitt Benkiser had acquired 87.27% of
Reckitt Benkiser India Limited shares by September 2002. It had
already made an open offer for the remaining 12.73% in August
2002.
Analysts argued that like China and Indonesia, India must revert
back to a system that prevented multinationals from delisting
their shares from the stock exchange by prescribing a minimum
amount of floating stock. The buyback by MNCs not only affected
the small shareholders, it also had an impact on the stock
exchanges. The buyback of floating stock resulted in a decline in
the trading volumes. For example, the Delhi Stock Exchange was
badly affected as MNCs accounted for more than 90% of the
volume traded and 85% of the listing fees earned by the
exchange before the buyback act was introduced. Given the
negative impact of the Buyback Act, market observers felt that
the act had failed to revive the capital markets.

Buy or Not to Buyback?

The dilemma that faced small investors in India was whether the
buyback option, along with the SEBI guidelines, actually
protected their interests and offered them an exit option at a fair
price or was it a tool that provided them with no options allowing
large MNCs to gain complete control of their subsidiaries.
Investors felt that the regulations framed by SEBI did not have
provisions for preventing good stocks from delisting. Moreover,
the buyback price, which was determined using the parameters
specified in the SEBI Takeover Code, did not consider the future
potential of the stock (Refer Exhibit III for details of pricing
parameters of open offers). They felt that SEBI should have
looked at various financial parameters such as future cash flows,
value of brands and the value of fixed assets to determine a
pricing formula for open offers which ensured that investors who
had been holding the stock for several years received a fair price
for their investment.
Questions for Discussion
1. What were the objectives of the buyback ordinance issued by
the Government of India in 1998? Describe the salient features of
the buyback ordinance. Why did MNCs want to buy back the
shares of their Indian ventures? Explain.
2. The depressed stock markets in India are being utilized by
several large MNCs to increase their stake in their Indian
subsidiaries through the buyback of shares. Explain in detail the
different methods of buyback available to an organization.

3. According to minority shareholders, MNCs had misused the

buyback option. Explain the various grievances of minority
shareholders regarding the buyback of shares.

4. Do you think stringent measures should be introduced to

protect the interests of small investors? What should SEBI do to
safeguard small investors' interests and resolve their grievances?