Proxy advisory firm IiAS on Tuesday said that Paytm parent One97 Communications' share buyback proposal is primarily a return of equity capital to its shareholders as the company continues to report cash losses annually.
Paytm has been making headlines ever since the company announced a buyback proposal. On Thursday, December 8, the company said that its Board of Directors will meet on December 13 to consider a proposal for share buyback, without specifying further details.
The company's buyback announcement surprised investors and analysts because it was unclear as to how the loss-making company would actually buy back its shares.
IiAS said buybacks are generally used as tax-efficient instruments to return excess cash to shareholders. They signal that the company has strong cash flow generation, which is more than required to maintain the company’s growth trajectory, it added.
"In Paytm's case, the company continues to report cash losses annually. Therefore, the buyback is essentially a return of equity capital to its shareholders," IiAS said.
According to IiAS, employees and IPO shareholders may not see the proposal positively unless the buyback price which is to be announced is higher than the price at which they entered the stock.
Shares of One 97 Communications Ltd closed at ₹539 per share on the BSE, over 70 percent lower than its IPO price of ₹2,150.
"Since inception Paytm has been burning cash. We believe that the pre-IPO cash on the books is also likely to be from an equity raise from its pre-IPO investors. It is possible that this is the pool from which the board will attempt to demarcate its buyback pool," the proxy advisory firm said.
Only Rs. 2,514 crore of the Rs. 8,113 crore in net proceeds generated during the IPO have been used by the company as of September 30, 2022, leaving Rs. 5,600 crore unused, while the company's cash and cash equivalents stood at ₹9,186 crore, as per IiAS estimates.
IiAS has highlighted three key questions that it says Paytm’s board should answer before the company decides to undertake the buyback.
Firstly, why is the board considering a buyback at this stage? The company has yet to generate positive cash flow 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, IiAS said.
Secondly, “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?” IiAS questioned.
Finally, at the time of its IPO, the company announced its plans to undertake new initiatives. It is only once these initiatives are rolled out that the board can satisfy itself that the war chest is sufficient. Therefore, the board must articulate how it has determined that the post-buyback liquidity will be sufficient to meet the unexpected investments in these new initiatives, IiAS pointed out.
Meanwhile, Paytm said that it strongly disagrees with comments and speculations from renowned advisory firms regarding the company’s financial performance and proposed share buyback plan.
The company reiterated that, with respect to the buyback proposal, it will fully comply with the statutory framework and regulations that govern the formulation of a share buyback plan. The decision on whether or not to approve it will be made by Paytm’s board after "due diligence," it said.
A Paytm spokesperson said, “The management is confident of strong operational performance and remains focused on building long-term value for its shareholders.”
“We would also like to take this opportunity to share that the company cannot use IPO funds for any proposed buyback, as it is not allowed as per regulations.”
