Proxy advisory firm Institutional Investor Advisory Services (IiAS) said on Monday the board of One97 Communications Pvt Ltd, the parent of Paytm, must respond to three areas of concern including the timing as well its future growth strategy and liquidity status, before it undertakes a buyback of shares.
Paytm announced on Thursday that its board will consider a share buyback proposal on Tuesday, 13 December. Investors initially cheered the move – stock surged 7% on Friday morning. On Monday, shares closed at ₹529.6 apiece, down 2.75% despite the company reporting robust loan growth of 150% for November.
Broadly, shares are down 75% since its November 2021 IPO issue price of ₹2,150 per share.
Paytm had reserve cash of ₹9,182 crore as on 30 September, 2022, however, it cannot use its IPO proceeds for the buyback according to the regulations.
“Why is the board considering a buyback at this stage? The company is yet to generate positive cash from operations. It is also yet to report profits –by traditional measures and not based on the companies proposed profitability measures that exclude ESOP ( Employee Stock Option Plan) charges,” IiAS said in its note .
Secondly, the IiAS note says that a year ago, Paytm had required funding that was in excess of its net IPO proceeds of ₹8,113 crore. At the time its growth strategy required funding support in excess of IPO proceeds, the firm said. “What has changed for the board to believe that its current liquidity is sufficiently in excess that it can be returned to shareholders?,” IiAS said.
Further, unless the buyback price is over ₹2,150 apiece, this buyback is also likely to benefit its pre-IPO and employees more than investors who came in during and after the IPO, the advisory firm said.
IiAS also said that Paytm board must articulate how it intends to roll out new initiatives announced at the time of the IPO and if the post-buyback liquidity will be sufficient for those initiatives.
“At the time of its IPO, the company had 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,” the note said.
Paytm board will meet today to vote on the buyback proposal. The exact contours of the buyback deal are not yet public.
When contacted a Paytm spokesperson said, "We strongly disagree with the approach of speculating on the drivers and outline of a buyback without waiting for the outcome of a Board decision. While tabling a proposal for a buyback, the company has ensured that there is surplus liquidity, which means that all cash requirements are adequately budgeted. 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."
