L&T wanted to Buy Back Shares but Where Is the Cash?

Capital allocation decisions taken by the management of the company have far-reaching impact on the returns to the shareholders.

The management basically has two options of what to do with the cash generated out of profits every year:-

1. Reinvest profits in the business (R&D, add more plants, more spends on marketing/branding, expand markets etc.)

OR

1. Return money to shareholders through dividends or share buybacks.

Recently, in Aug-18, L&T announced a massive share buyback proposal worth Rs 9,000 Crs. The market regulator SEBI dis-approved the proposal citing Regulation 4(ii) of the SEBI (Buyback Regulations) 2018 and Companies Act 2013.

 My take on the whole L&T buyback fiasco for Moneylife Magazine.https://www.moneylife.in/article/lt-wanted-to-buy-back-shares-but-where-is-the-cash/56157.html

The article analyses the past 10 year financials of L&T at the consolidated level and find out that L&T has not generated any free cash flow over this period. This basically means L&T will have to borrow fund from financial institutions to fund this buyback.

Is it a good idea to raise more debt at a time when real interest rates (interest rate - inflation) is as high as +6%?