REPORT ON

BUYBACK OF SHARES
SUBMITTED TO PROFESSOR PARADKA
MUMBAI EDUCATION TRUST 2007-2008

Prepared by Dipock Mondal

ROHIT BANKA VIVEK BHIMRAJKA NEHA CHAWLA

6010 6020 6027
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SHUBHANKAR GUPTA VIJAY JAIN PALAK JERAJANI MOUSUMI MALLYA NIKITA SHAH RITU TANEJA

6057 6063 6066 6092 6161 6179

ACKNOWLEDGEMENT
We would like to express thanks to MET for giving students of PGeMBA an opportunity to make projects which truly checks their skills and management knowledge. Our gratitude also to Mr. Paradkar for helping us articulate and understand the entire research and documentation process involved in this project. There are others, whose views, work and expertise made this work possible. Sheer weight of numbers preludes our thanking them all. Those who did help know who they are and have our everlasting gratitude.

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TABLE OF CONTENTS Serial No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Particulars Meaning Of BuyBack History Of BuyBack Objective Of BuyBack Advantages & Disadvantages Of BuyBack Provisions & Conditions Of BuyBack Methods Of BuyBack BuyBack for Unlisted Companies BuyBack for Listed Companies Methods for BuyBack Under SEBI Merchant Banker Page No. 5 6–7 8 - 10 11 - 13 14 – 23 24 – 26 27 - 30 31 - 33 34 – 44 45
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11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Role of Merchant Banker in BuyBack Valuation of Shares in BuyBack Accounting for BuyBack Effects of BuyBack CASE : HINDUSTAN UNILEVER LTD CASE : GLAXO SMITH KLINE CASE : APPOLO Unsuccessful BuyBack CASE : Oracle & I-Flex Innovation

46-47 48-49 50-56 57-63 64-70 71-74 75-78 79-90 91-92 93-94

MEANING OF BUYBACK OF SHARES
Definition1 A corporation's repurchase of stock or bonds it has issued. In the case of stocks, this reduces the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company. This is usually considered a sign that the company's management is optimistic about the future and believes that the current share price is undervalued. Reasons for buybacks include putting unused cash to use, raising earnings per share, increasing internal control of the company, and obtaining stock for employee stock option plans or pension plans. When a company's shareholders vote to authorize a buyback, they aren't obliged to actually undertake the buyback. also called corporate repurchase. Definition 2 A stock buyback, also known as a "share repurchase", is a company's buying back its shares from the marketplace. You can think of a buyback as a company investing in itself, or using its cash to buy its own shares. The idea is simple: because a company can’t act as its own shareholder, repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. When this happens, the relative

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ownership stake of each investor increases because there are fewer shares, or claims, on the earnings of the company Definition 3 Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors Definition 4 The purchase of a long position by a company to offset a short position.

HISTORY OF BUYBACK OF SHARES IN INDIA
Prior to 1998 buybacks were not allowed in India. In the 1970’s period, if MNC’s wanted to continue doing their business in India, they could do so only by diluting their shareholding and getting listed on the exchange. They were thus forced to go public. The buyback ordinance was introduced by the Government of India (GOI) on October 31, 1998. There was Insertion of new sections 77A, 77AA and 77B in the Companies Law which allowed buyback. The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids. The buy back of shares is governed by the Securities and Exchange Board of India's (SEBI) Buy Back of Securities Regulation, 1998, and Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and Takeover Regulations, 1997, and the amended Companies Act 1956. The ordinance was issued along with a set of conditions intended to prevent its misuse by companies and protect the interests of investors. The buyback of shares was allowed only

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if the Articles of Association of the company permitted it to do so and after passing a special resolution at a general meeting It also allowed the promoters of a company to make an open offer (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. Now that the norms have been altered and MNC’s were permitted to carry on their business without any such compulsion, they would rather operate as wholly owned subsidiaries without being listed on the bourses.

Several MNC’s like Philips India Limited, Cadbury India, Otis Elevators, Carrier Aircon, Reckitt Benkiser etc. announced offers to buyback the shares of its Indian subsidiary under SEBI (SAST). This provided a much needed exit option for shareholders in depressed market conditions. However, critics of the buyback option claimed that large multinationals had utilized the buyback option to repurchase the entire floating stock from the market with the objective of delisting from the stock exchange and eliminating an investment opportunity for investors. Post the 11th September 2001 terror attacks in the USA, approximately 240 companies have announced a buyback including the likes of GE, Oracle, Microsoft etc. In India too there have been a lot of companies that have announced buybacks like Reliance Industries, GE Shipping, Bombay Dyeing, Raymond etc. Section 77A, 77AA, and 77B of Companies Act 1956 The amendment of the Companies Act, 1956 came into force on 31st day of October, 1998. There was Insertion of new sections 77A, 77AA and 77B

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OBJECTIVE OF BUYBACK OF SHARES
Shares may be bought back by the company on account of one or more of the following reasons • Unused Cash: If they have huge cash reserves with not many new profitable projects to invest in and if the company thinks the market price of its share is undervalued. Eg. Bajaj Auto went on a massive buy back in 2000 and Reliance's recent buyback. However, companies in emerging markets like India have growth opportunities. Therefore applying this argument to these companies is not logical. This argument is valid for MNCs, which already have adequate R&D budget and presence across markets. Since their incremental growth potential limited, they can • buyback shares as a reward for their shareholders.

Tax Gains Since dividends are taxed at higher rate than capital gains companies prefer buyback to reward their investors instead of distributing cash dividends, as capital gains tax is generally lower. At present, short-term capital gains are taxed at 10% and long-term capital gains are not taxed.

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Market perception By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher. Eg: In October 1987 stock prices in US started crashing. Expecting further fall many companies like Citigroup, IBM et al have come out with buyback offers worth billions of dollars at prices higher than the prevailing rates thus stemming the fall.

Recently the prices of RIL and REL have not fallen, as expected, despite the spat between the promoters. This is mainly attributed to the buyback offer made at higher prices.

Exit option If a company wants to exit a particular country or wants to close the company it can offer to buy back its shares that are trading in the market.

Increase promoter's stake Some companies buyback stock to contain the dilution in promoter holding, EPS and reduction in prices arising out of the exercise of ESOPs issued to employees. Any such exercising leads to increase in outstanding shares and to drop in prices. This also gives scope to takeover bids as the share of promoters dilutes. Eg. Technology companies which have issued ESOPs during dot-com boom in 2000-01 have to buyback after exercise of the same. However the logic of buying back stock to protect from hostile takeovers seem not logical. It may be noted that one of the risks of public listing is welcoming hostile takeovers. This is one method of market disciplining the management. Though this type of buyback is touted as protecting over-all interests of the shareholders, it is true only when management is considered as efficient and working in the interests of the shareholders.

Escape monitoring of accounts and legal controls If a company wants to avoid the regulations of the market regulator by delisting. They avoid any public

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scrutiny

of

its

books

of

accounts.

Show rosier financials Companies try to use buyback method to show better financial ratios. For eg. When a company uses its cash to buy stock, it reduces outstanding shares and also the assets on the balance sheet (because cash is an asset). Thus, return on assets (ROA) actually increases with reduction in assets, and return on equity (ROE) increases as there is less outstanding equity. If the company earnings are identical before and after the buyback earnings per share (EPS) and the P/E ratio would look better even though earnings did not improve. Since investors carefully scrutinize only EPS and P/E figures, an improvement could jump-start the stock. For this strategy to work in the long term, the stock should truly be undervalued.

Generally the intention for the buyback is a mix of any of the above reasons.

Sometimes Governments nationalize the companies by taking over it and then compensates the shareholders by buying back their shares at a predetermined price. Eg. Reserve Bank of India in 1949 by buying back the shares.

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ADVANTAGES AND DISADVANTAGES OF BUYBACK OF SHARES
• Increase confidence in management: It might enhance the confidence of its investors on the company’s board of directors, as these investors know that the directors are ever willing to return surplus cash if it’s not able to earn above the company’s alternative investment or cost of capital. • Enhances shareholders value: Generally, share buybacks are good for shareholders. The laws of supply and demand would suggest that with fewer shares on the market, the share price would tend to rise. Although the company will see a fall in profits because it will no longer receive interest on the cash, this is more than made up for by the reduction in the number of shares. • Higher Share Price: Buying back stock means that the company earnings are now split among fewer shares, meaning higher earnings per share (EPS). Theoretically, higher earnings per share should command a higher stock price which is great! 10

Reduce takeover chances: Buying back stock uses up excess cash. The returns on excess cash in money market accounts can drag down overall company performance. Cash rich companies are also very attractive takeover targets. Buying back stock allows the company to earn a better return on excess cash and keep itself from becoming a takeover target.

Increase ROE: Buying back stock can increase the return on equity (ROE). This effect is greater the more undervalued the shares are when they are repurchased. If shares are undervalued, this may be the most profitable course of action for the company.

Psychological Effect: When a company purchases its own stock it is essentially telling the market that they think that the company’s stock is undervalued. This can have a psychological effect on the market.

Buying back stock allows a company to pass on extra cash to shareholders without raising the dividend. If the cash is temporary in nature it may prove more beneficial to pass on value to shareholders through buybacks rather than raising the dividend.

Excellent Tool For Financial Reengineering: In the case of profit making, high dividend-paying companies whose share prices are languishing, buybacks can actually boost their bottom lines since dividends attract taxes. A buyback and the subsequent neutralisation of shares, can reduce dividend outflows, and if the opportunity cost of funds used is lower than the dividend savings, the company can laugh all the way to the bank.

Tax Implication: Exemption is available only if the shares are sold on a recognised stock exchange and if securities transaction tax (STT) on the sale has been paid. In a buyback scheme, neither does the sale take place on a 11

recognised exchange nor is the STT paid. So, you will have to pay income tax on your long-term capital gain on the buyback after deducting the acquisition cost of your shares plus the benefit of indexation from the year of purchase to the year of buyback. On the resultant gain, the tax would be 20 per cent plus the applicable surcharge, if any, plus 2 per cent education cess. You may also work out the tax at 10 per cent of the gain without considering indexation. Your tax liability will be limited to the lower of the two calculations. • Stock buybacks also raise the demand for the stock on the open market. This point is rather self explanatory as the company is competing against other investors to purchase shares of its own stock. Disadvantages:

Sending Negative Signals: A buyback announcement can send a negative signal in these situations. A typical example is the HP case: From November 1998 through October 2000, the computer giant Hewlett-Packard spent $8.2 billion to buy back 128 million of its shares. The aim was to make opportunistic purchases of HP stock at attractive prices—in other words, at prices they felt undervalued the company. Instead of signaling a good operating prospects to the market, the buyback signal was completely drowned out more powerful contradictory signals about the company’s future which are an aborted acquisition, a protracted business restructuring, slipping financial results, and a decay in the general profitability of key markets. By last January, HP’s shares were trading at around half the average $64 per share paid to repurchase the stock.

Backfire: Buybacks can also backfire for a company competing in a high-growth industry because they may be read as an admission that the company has few important new opportunities on which to otherwise spend its money. In such cases, long-term investors will respond to a buyback announcement by selling the company’s shares.

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The share buyback scheme might become a big disadvantage to the company when it pays too much for its own shares. Indeed, it is foolish to buy in an overpriced market. Instead, the company should put the money into assets that can be easily converted back into cash. This way, when the market swings the other way and is trading below its true value, shares of the company can be bought back at a discount, ensuring current shareholders receive maximum benefit. Strictly, a company should repurchase its shares only when its stock is trading below its expected value and when no better investment opportunities are available.

PROVISIONS / CONDITIONS RELATING TO BUYBACK.
The restrictions were imposed to restrict the companies from using the stock markets as short term money provider apart from protecting interests of small investors. Sec 77A: Power of a company to purchase its own securities. Section 77A was introduced by the Companies (Amendment) Act, 1999, pursuant to the report of the working group which was set up to suggest reforms to the Companies Act. Section 77A(2) of the Companies Act, 1956: 1) Authorised by Articles of Association and a Special Resolution 2) Buyback should be equal to or less than 25%of the total paid up capital and free reserves 3) Shares to be bought back should be fully paid up 4) Debt Equity ratio should not exceed 2:1 post buyback 5) Notice of meeting to the shareholders should have all the details necessary 6) Buyback of shares listed on any recognised stock exchange should be in accordance with SEBI guidelines 7) Explanatory statement stating the following should be prepareda) A full and complete disclosure of all material facts; b) The necessity for the buy-back; 13

c) The class of security intended to be purchased under the buy-back; d) The amount to be invested under the buy-back; and e) The time limit for completion of buy-back 8) A declaration of solvency has to be filed with SEBI and Registrar Of Companies 9) Completion of the buyback should be within 12 months 10) The shares bought back should be extinguished and physically destroyed; 11) The company should not make any further issue of securities within 2 years, except bonus, conversion of warrants, etc.

Filing of return with the Regulator:
A Company shall, after the completion of the buy-back file with the Registrar and the Securities and Exchange Board of India, a return in form 4 C containing such particulars relating to the buy-back within thirty days of such completion. No return shall be filed with the Securities and Exchange Board of India by an unlisted company.

Prohibition of Buy Back :
A company shall not directly or indirectly purchase its own shares or other specified securities – 1) through any subsidiary company including its own subsidiary companies; or 2) through any investment company or group of investment companies; or According to it, a company limited by shares, and a company limited by guarantee and having a share capital, shall not have the power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402. The section also prohibited giving of financial assistance to a person for purchasing shares in companies except in certain situations i.e. lending by a banking company, purchase of fully paid shares of its own or holding company if the purchase is by the trustees for the benefit of the employees of the company or the grant of 14

loans to employees to enable them purchase shares in the company or its holding company. The main reason for this prohibition on trafficking in its own shares was to prevent the company from influencing the market price of its shares by reducing the floating stock to the prejudice of its creditors. Prior to introduction of section 77A the only exceptions to the general principle that the company cannot buy its own shares were
a)

purchase resulting in reduction of capital with the sanction of the court under sections 100 to 104; redemption of redeemable preference shares under section 80; purchase under an order of court in a scheme of arrangement or amalgamation under sections 391 to 394, subject to compliance with sections 100 to 104 and

b) c)

d)

purchase under an order of Company Law Board to purchase shares of minority shareholders under section 402(b).

Thus the company could purchase its shares prior to introduction of section 77A provided the scheme or arrangement therefore had been sanctioned under sections 100 to 104. Section 100 does not prescribe the manner in which the reduction of capital is to be effected. Nor is there any limitation on the power of court to confirm the reduction except that it must be first satisfied that all the creditors entitled to object to the reduction have consented or have been paid or secured. { Punjab Distilling Industries Ltd. v. CIT [1965] 35 Comp Cas 541 (SC); Hindustan Commercial Bank Ltd. v. Hindustan General Electrical Corporation [1960] 30 Comp Cas 367 (Cal).

Register of securities bought back :
After completion of buyback, a company shall maintain a register of the securities/shares so bought and enter therein the following particulars a. b. the the consideration date paid of for the securities of bought-back, securities, cancellation

c. the date of extinguishing and physically destroying of securities and d. such other particulars as may be prescribed 15

Where a company buys-back its own securities, it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back.

Penalty
If a company makes default in complying with the provisions the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both. The offences are, of course compoundable under Section 621A of the Companies Act, 1956

Prior to Section 77A
Prior to the introduction of section 77A, the only manner in which a company could buy back its shares was by following the procedure set out under sections 100 to 104 and section 391 which required the calling of separate meetings of each class of shareholders and creditors as well as (if required by the court) the drawing up of a list of creditors of the company and obtaining of their consent to the scheme for reduction. The legislative intention behind the introduction of section 77A is to provide an alternative method by which a company may buy back up to 25 per cent. of its total paid up equity capital in any financial year subject to compliance with sub-sections (2), (3) and (4). It does not supplant or take away any part of the pre-existing jurisdiction of the company court to sanction a scheme for such reduction under sections 100 to 104 and section 391. The non obstinate clause in section 77A namely "notwithstanding anything contained in this Act ..." only means that notwithstanding the provisions of section 77 and sections 100 to 104, the company can buy back its shares subject to compliance with the conditions mentioned in that section without approaching the court under sections 100 to 104 or section 391. There is nothing in the provision of section 77A to indicate that the jurisdiction of the court under section 391 or 394 has been taken away or substituted. It is

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well settled that the exclusion of the jurisdiction of the court should not readily be inferred; such exclusion should be explicitly or clearly implied. There is nothing in the language of section 77 that gives rise to such an inference. We are, therefore, inclined to hold that section 77A is merely an enabling provision and the court's powers under sections 100 to 104 and section 391 are not in any way affected. The conditions provided in section 77A are applicable only to buy-back of shares under section 77A. The conditions applicable to sections 100 to 104 and section 391 cannot be imported into or made applicable to a buy-back under section 77A. Similarly the conditions for a buyback under section 77A cannot be applied to a scheme under sections 100 to 104 and section 391. The two operate in independent fields. Sec77B: Prohibition for buyback in certain circumstances.

Section 77B of the Companies Act, 1956 :
1. Through any subsidiary company. 2. Through any investment company or group of investment companies. 3. Company is in default in repayment of deposit or interest, or redemption of debenture or preference shares or 4. Company is in default in payment of dividend or repayment of any term loan including interest to banks and FIs.

Section 77AA:
Transfer of certain sums to capital redemption reserve account. The Securities and Exchange Board of India (Buy Back of Securities) Regulations, 1988 provide for the following: 1) Regulations cover only the listed securities of company. 2) Buy back is permitted through the tender offer mode from existing share holders on proportionate basis and from odd lot holders. Buy back through the book-building mode and purchases through stock exchange are allowed for open market transactions.

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3) In the purchases made through the stock exchange, the details of purchases under the buy back scheme shall be made available to the stock exchange on daily basis: the details in turn shall be made available to public regularly. 4) Extensive disclosures need to be made in the Explanatory Statement to be annexed for the notice for general meeting and the Letter of Offer. 5) Pre and post buy back holdings of promotors need to be disclosed carefully. 6) Buy back through negotiated deals, spot transactions or private arrangements is not permitted. 7) To ensure strict compliance with the provisions of SEBI Regulations, merchant banker has been made to be associated in every offer for buy back, wherein he has to give a “due diligence” certificate. 8) To ensure timely completion of buy back process, the Regulations provide for timebound steps in every mode. Thus, except in cases of purchases through stock exchange, an offer for buy back shall not remain open for more than 30 days. 9) To ensure security/safety, the company making the buy back offer has to open an escrow account on the same lines as provided in the Takeover Regulations. The Companies (Amendment) Ordinance (October 31, 1998 and January 7, 1999) allows companies to buy back their own shares subject to regulations laid down by SEBI. The new Sections (77A and 77B) in the Ordinance lay down the provisions/restrictions concerning buy back of shares. 1) A company can finance its buy back out of (i) its free reserves or (ii) the securities premium account or (iii) proceeds of an earlier issue other than fresh issue of shares made specifically for buy back purposes. 2) A company is allowed buy back subject to the following conditions:— (a) the buy back is authorised by its articles; (b) a special resolution has been passed in general meeting of the company authorising buy back; (c) the buy back does not exceed 25 per cent of the total paid up capital and free reserves of the company.

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(d) debt-equity (including free reserves) ratio does not exceed to 2:1 after the proposed buy back; (e) all shares or other specified securities are fully paid- up; and (f) the buy back is in accordance with SEBI regulations framed for this purpose.

Mandatory Disclosures
1) The notice for the meeting convened to pass special resolution on buy back must be accompanied by an explanatory statement giving a full and complete disclosure of all material facts, the necessity for buy back, class of securities to be purchased and the amount to be invested under the buy back, and the time limit for completion of buy back. A maximum time of one year from the date of passing of resolution has been stipulated to complete the buy back. 2) A company is required to destroy the shares bought back within seven days of completion of the buy back. Further, it is prohibited from issuing fresh equities within two years of buy back, except by way of bonus issue or discharge of its existing obligation of converting warrants, preference shares, debentures, stock option schemes, etc. into equity shares. 3) A company which has defaulted on repayment of deposits, term loan, redemption of debenture/preference share, etc. is not allowed to buy back shares. Buy back of shares through subsidiary companies or investment companies is also prohibited. Reforms Suggested in 2006 The Federation of Indian Chambers of Commerce and Industry (FICCI) and Society of Indian Law Firms (SILF) Research Paper on Securities Market Regulations has suggested wide-ranging measures to streamline the operation of the SEBI Act, Regulations on buy-back of shares On buyback of shares, the paper notes that buyback of shares can be done only out of company's free reserves, securities premium account or proceeds of any earlier issue specifically made for buyback purposes. Moreover, companies are allowed to buyback their own shares upto 25 percent of the paid up capital and

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free-reserves. The crucial question, in the emerging global scenario where companies have to consolidate and reposition themselves, is to examine whether there should be any restriction at all for buyback of shares? If so, what percentage of the paid up capital and free reserves should be allowed?

In case of buyback of shares, gains are subject to Capital Gains Tax because the transaction is not through the exchange and there is no incidence of Securities Transaction Tax (STT). It would be in fitness of things to exempt even the buyback offers and put it on par with secondary market transactions. The concept of targeted buyback, where an issuer may buyback shares from a subset of shareholders on a preferential basis was examined by the Committee constituted by the SEBI. The facility is used in some countries (a) effecting a block repurchase from large shareholders (b) effecting purchases from employees (c) thwarting takeover attempts. This concept is not yet addressed in Indian Law. This has been provided for in certain countries like USA, Australia etc. The Committee constituted in one of its recommendations has suggested that this concept could come in the way of proper operation of a competitive market for management control, which is an essential ingredient of the Capital Market. Therefore, the Committee does not find this mechanism to be appropriate at this stage.

Securities And Exchange Board Of India (Buy-Back Of Securities) (Amendment) Regulations, 2007.
In exercise of powers conferred by sub-section (1) of section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) read with clause (f) of sub-section (2) of Section 77A of the Companies Act, 1956 (1 of 1956) the Board hereby makes the following regulations to amend the Securities and Exchange Board of India (BuyBack of Securities) Regulations, 1998, namely:-

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1. These Regulations may be called the Securities and Exchange Board of India (Buy-Back of Securities) (Amendment) Regulations, 2007. 2. They shall come into force on the date of their publication in the Official Gazette. 3. In the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 1998, in Schedule IV, for paragraph (1), the following paragraph shall be substituted, namely:Every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board, pay fees as set out below:Offer size Less than or equal to one crore rupees. More than one crore rupees, but less than or equal to five crore rupees. More than five crore rupees, but less than or equal to ten crore rupees. More than ten crore rupees, but less than or equal to one thousand crore rupees. More than one thousand crore rupees, but less than or equal to five thousand crore rupees. Five crore rupees (Rs. 5,00,00,000/-) plus 0.125% of the portion of the offer size in excess of one thousand crore rupees (Rs.1000,00,00,000/-). More than five thousand crore rupees. Ten crore rupees (Rs.10,00,00,000/-)." 0.5% of the offer size. Three lakh rupees (Rs. 3,00,000/-). Fee (Rs.) One lakh rupees (Rs. 1,00,000/-). Two lakh rupees (Rs. 2,00,000/-).

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Tax

Benefit

In many ways, a buyback is similar to a dividend because the company is distributing money to shareholders. Traditionally, a major advantage that buybacks had over dividends was that they were taxed at the lower capital-gains tax rate, whereas dividends are taxed at ordinary income tax rates. However, with the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003, the tax rate on dividends is now equivalent to the rate on capital gains.

Tax Implications of Buyback of Shares.
1) According to section 46A of income tax buyback of shares is treated as ordinary sale of shares by the shareholder. 2) The amount received less cost of acquisition is treated as capital gain in the year of sale by the shareholder.

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METHODS OF BUYBACK
There are a number of ways in which a company can return wealth to its shareholders. Although stock price appreciation and dividends are the two most common ways of doing this, there are other useful, and often overlooked, ways for companies to share their wealth with investors. Typically, the two ways of buyback are:

1. Tender Offer
Shareholders may be presented with a tender offer by the company to submit, or tender, a portion or all of their shares within a certain time frame. The tender offer will stipulate both the number of shares the company is looking to repurchase and the price range they are willing to pay (almost always at a premium to the market price). When investors take up the offer, they will state the number of shares they want to tender along with the price they are willing to accept. Once the company has received all of the offers, it will find the right mix to buy the shares at the lowest cost.

2. Open Market
The second alternative a company has is to buy shares on the open market, just like an individual investor would, at the market price. It is important to note, however, that when a company announces a buyback it is usually perceived by the market as a positive thing, which often causes the share price to shoot up.

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3. Book-building process.
Companies can also use the book building process to buy back shares. The book building process is a mechanism of price discovery which helps determine market price of securities. If the book building option is used, a draft prospectus has to be filed with SEBI. The prospectus should contain all the details of the offer, except the price at which the securities will be offered (a price band is specified). The copy of the draft prospectus is filed with SEBI and is circulated among institutional buyers by a leading merchant banker acting as the book runner. Institutional investors specify the price as well as the volume of shares they intend to buy. The book runner, on receiving the above information, determines the price at which the offer is to be made to the public. In both 1 & 3 promoters can participate in buyback and not in 2.

Other methods of buyback are
• Employee-share purchases – purchases of shares held by or for the benefit of current or former employees of a company, including salaried directors, according to the terms of an employee share scheme • Odd-lot purchases – purchases by listed companies of small parcels of shares which are not marketable on the stock exchange. Here odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or • Selective buy-backs – a buy-back that does not fall within any of the other categories, such as the purchase of a particular member’s shares.

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The best example of such a buyback in the Indian context was the buyback of shares undertaken by the Great Eastern Shipping Company (GESCO) to protect itself from a hostile takeover bid led by the A H Dalmia group. In October 2000, the A H Dalmia group of Delhi made a hostile bid for a 45 per cent stake in the Great Eastern Shipping Company (GESCO) at Rs. 27 a share. The price offered was less than half the book value of the company. The offer and counter offers made by the A H Dalmia group and the promoters of GESCO pushed up the bidding cost. The A H Dalmia group ultimately sold its 10.5% stake (around 3 million shares) at Rs 54 per share for a consideration of Rs. 163 million before the year end. The A H Dalmia group had acquired the 10.5% stake in Gesco at an average cost of Rs. 24 per share for a consideration of Rs. 72 million. Hence, the A H Dalmia group was able to make a profit of Rs. 91 million through greenmail transaction in less than 6 months.

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BUYBACK FOR UNLISTED COMPANIES

The buyback of securities by Private Limited Company and Unlisted Public Limited Company not listed on any recognized stock exchange comes under Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999. These were passed by the Central Government on 6th July1999.

Methods
A company may buy-back its shares by either of the following methods: • • from the existing shareholders on a proportionate basis through private offers; By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Special resolution
A special resolution needs to be passed under sub-section (2) of section 77A of the Companies Act, 1956 and the explanatory statement is to be annexed to the notice for the general meeting containing all disclosures. The statement shall contain the date of the Board meeting at which the proposal for buy back was approved, the necessity for the buy-back; the class of security intended to be purchased under the buy-back; the method to be adopted for the buy-back; the basis of arriving at the buy back price; the time limit for the completion of buy-back; etc. It will also state that the BOD has checked that the company would be able to pay all its debts.

Letter of offer

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The Company, authorized by a special resolution, shall file with the Registrar of Companies a draft letter of offer before the buy-back of shares. IT shall also declare solvency in Form No. 4A.

Contents of Letter of Offer
Details of the offer including the total number and percentage of the total paid up capital and free reserves proposed to be bought back and price; • • • • the proposed time table from opening of the offer till the extinguishment of the certificates; disclosure of all material facts, The necessity for the buy back, process, brief information about the company; Audited Financial information for the last 3 years Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern; • • The capital structure including details of outstanding convertible instruments, if any, post buy-back; The letter of offer shall contain pre and post buy-back debt equity ratios etc.

Dispatch LoF
The letter of offer shall be dispatched immediately after filing with Registrar of Companies but not later than 21 days from it’s filing with Registrar of Companies

Buyback Period
The offer for buyback shall remain open to the members for a period not less than 15 days and not exceeding 30 days from the date of dispatch of letter of offer.

Shares tenders exceeds limit
In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the company, the acceptance per shareholder shall be on proportionate basis. 27

Process Completion
The company shall complete the verifications of the offers received within 15 days from the date of closure of the offer and the shares lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the closure of the offer.

Payment to the shareholder
The Company shall immediately after the date of closure of the offer open a special bank account and deposit therein, which would make up the entire sum due and payable as consideration for the buy-back. After the 21 days the company shall within 7 days make payment of consideration in cash or bank draft/pay order to those shareholders whose offer has been accepted or return the share certificates to the shareholders forthwith.

General obligations of the company
The company shall ensure that: • The letter of offer shall contain true, factual and material information i.e. no misleading information and state that the directors of the company accept the responsibility for the information contained in such document; • • • • The company shall not issue any shares including by way of bonus till the date of the closure of the offer under these rules; The company shall confirm in its offer the opening of separate bank account and pay the consideration only by way of cash or Bank draft/pay order; The company shall not withdraw the offer once the draft letter of offer has been filed with the Registrar of Companies; and The company shall not utilize any money borrowed from Banks/Financial Institutions for the purpose of buying back its shares.

Return to be filed with Registrar
A company, after the completion of the buy-back under these rules, shall file with the Registrar a return in the Form, the format of which is mentioned in the Rules.

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Extinguishment of Certificate
The company shall extinguish and physically destroy the share certificates so bought back in the presence of the Company Secretary within 7 days from the date of acceptance of the shares. The company shall furnish a verified certificate to the ROC certifying compliance of these rules within 7 days of the extinguishment and destruction of the certificates. The record of share certificates needs to be maintained

Register of shares
The company shall maintain a Register of shares bought back by the Company in the Form mentioned in the Rules. After all the requirements are fulfilled and document submitted to ROC the company can proceed with the buyback. After the process is complete the company again has to file a form with the ROC and thus the process will be completed.

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BUYBACK FOR LISTED COMPANIES

The regulation is applicable to buyback of shares or other specified securities of a company listed on a Stock Exchange. The buyback of shares can’t take place for delisting of shares from the Stock Exchange. When the company is buying back shares it can’t buy back through negotiated deals with any person or through spot transactions or through any private arrangement.

Special Regulation
Incase the Offer size is greater than 25% of its Equity share capital & free reserves, the company can go ahead with the buy back only if a special resolution is passed at the general meeting. When the notice is being sent to the shareholders an Explanatory Statement must be annexed to the notice containing various disclosures The company can also company can go ahead with the buy back only if a special resolution is through the postal ballot route as per The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001. “Postal Ballot” includes voting by share holders by postal or electronic mode instead of voting personally by presenting for transacting businesses in a general meeting of the company, Method for sending notice: (a) The company may issue notices either,(i) Under Registered Post Acknowledgement Due; or (ii) Under certificate of posting; and (b) With an advertisement published in a leading English Newspaper and in one vernacular Newspaper circulating in the State in which the registered office of the company is situated, about having despatched the ballot papers.”

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Explanatory Statement
The company needs to make the following disclosures in the statement 1. The date of the Board meeting at which the proposal for buy back was approved by the BOD. 2. The necessity for the buy back 3. The company may specify one reason to be adopted for buy-back so that the shareholders authorize the BOD for the same. 4. The maximum amount required under the buy back and the sources of funds from which the buy back would be financed. 5. The basis of arriving at the buy-back price. 6. The number of securities that the company proposes to buy back. 7. a. The aggregate shareholding of the promoter and of the directors of the promoters, as on the date of the notice convening the General Meeting. b. Aggregate number of shares purchased or sold by such persons during a period of six months preceding the date of the Board Meeting c. The maximum and minimum price at which purchases and sales were made along with the relevant dates. 8. Intention of the promoters and persons in control of the company to tender their shares for buy-back indicating the number of shares and details of acquisition with dates and price. 9. A confirmation that there are no defaults subsisting in repayment of deposits, redemption of debentures or preference shares or repayment of term loans to any financial institutions or banks. 10. A confirmation that the BOD has made a full enquiry into the affairs and prospects of the company and are of the opinion-

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a. that there will be no grounds on which the company could be found unable to pay its debts;

b. The company during that year, the company will be able to meet its liabilities as and when they fall due and will not be rendered insolvent within a period of one year from that General Meeting date ; and c. In forming their opinion for the above purposes, the directors have taken into account the liabilities as if the company were being wound up under the provisions of the Companies Act, 1956 11. A report addressed to the BOD by the Company’s auditors stating thata. They have inquired into the company’s state of affairs; b. The amount of the permissible capital payment for the securities is in their view properly determined; and, c. The Board of Directors have formed the opinion on reasonable grounds and that the company will not be rendered insolvent within a period of one-year from that date. After the special resolution (requiring 2/3rd Majority) is passed the company can go ahead with the buyback. This resolution needs to be filed with SEBI and the Stock Exchanges where the shares/ securities are listed with seven days of passing such resolution.

Board Resolution
The Board will pass a resolution to buy back its shares. Before making the Public Announcement the company shall give a public notice in at least one English national daily, one Hindi national daily and a regional language daily, at the place where the registered office of the company is situated. The Board of Directors shall give such public notice, within 2 days of the passing of the resolution. The public notice shall contain the disclosures as specified in the Explanatory Statement

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A copy of the resolution, passed by the Board of Directors at its meeting authorizing buy back of its shares shall be filed with SEBI and the stock exchanges, where the shares of the company are listed, within two days of the date of the passing of the resolution. The Board of Directors can now proceed ahead with the buy-back programme.

METHODS OF BUYBACK OF SHARES UNDER SEBI REGULATIONS
A company may buyback its securities by any one of the following methods:’ 1. From the existing Share and other specified securities on a proportionate basis through the Tender offer; 2. From Open Market. 3. From Odd-Lot holders

TENDER OFFER

A tender offer is an invitation by the company, to its existing shareholder, to buy back its securities. In a buyback by the Tender Offer method, the price and the size of the offer i.e. the number of shares to be bought back, is pre- decided & fixed. The company makes an open offer to all its shareholders to buy back its shares at a given price, usually a premium to the current market price. A company may buyback its securities from its shareholders on a proportionate basis.

Additional Disclosure
The Company is required to submit the following Additional Disclosures in the Explanatory Statement annexed to the notice of the general meeting if its wants to proceed with a tender offer. • • The maximum price at which the buy-back of shares/securities shall be made. Board of Directors of the company are being authorised at the general meeting to determine the specific price at which the buy-back may be made at the appropriate time 33

If the promoter intends to offer their specified securities , if yes ,   The quantum of shares proposed to be tendered; The details of their transactions and their holdings for the last six-months prior to the passing of the special resolution for buy-back including information of number of shares acquired, the price and the date of acquisition.

Public Announcements
The company which has shall before buyback of shares make a public announcement in at least one English National Daily, one Hindi National Daily and a Regional language newspaper.

Details of PA
• • • • Disclaimer clause as may be prescribed by SEBI. Details of the offer including the total number and percentage of the total paid up capital and free reserves proposed to be bought back and price. The proposed time table from opening of the offer till the extinguishment of the certificates. The Specified date: This shall be the `specified date’ for the purpose of determining the names of the shareholders to whom the letter of offer shall be sent. The specified date shall not be earlier than thirty days and not later than forty-two days from the date of the public announcement • • • • • • Authority for the offer of buy back. A full and complete disclosure of all material facts including the contents of the explanatory statement The necessity for the buy back The process and methodology to be adopted for the buy back The maximum amount to be invested under the buy back The minimum and the maximum number of securities that the company proposes to buy back sources of funds from which the buy back would be made and the cost of financing the buy back. • Brief information about the company.

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• • • •

Audited Financial information for the last 3 years Details of escrow account opened and the amount deposited therein. Listing details and stock market data; High, Low and average market prices of the securities of the company proposed to be bought back, during the preceding three years;

i. ii. iii.

Monthly high and low prices for the six months preceding the date of the PA; The Volume on the days when the high and low prices were recorded on the relevant stock exchanges during the above period, The stock market data referred to above shall be shown separately for periods marked by a change in capital structure from the date whne such changes take place , (e.g. when the securities have become ex-rights or ex-bonus);

iv. v.

The market price immediately after the date of the resolution of the Board of directors approving the buy back; and The volume of securities traded in each month during the six months preceding the date of PA. Along with high, low and average prices of securities of the company, details relating to volume of business transacted should also be stated for respective periods. • • • Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern. The capital structure including details of outstanding convertible instruments, if any post buy back. The aggregate shareholding of the promoter group and of the directors of the promoters, where the promoter is a company shareholding of persons who are in control of the company. • The aggregate number of shares purchased or sold by such persons during a period of twelve months preceding the date of the PA; the maximum and minimum price at which purchases and sales referred were made along with the relevant dates.

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Management discussion and analysis on the likely impact of buy back on the company’s earnings, public holdings, holdings of NRIs/FIIs etc., promoters holdings and any change in management structure.

• • • • •

The details of statutory approvals obtained. Collection and bidding centres. Name of Compliance officer and details of investors service centres. Other disclosures as may be specified by SEBI from time to time by way of guidelines. The PA shall be dated and signed on behalf of the Board of Directors of the company by its manager or secretary, if any, and by at least two directors of the company one of whom shall be a managing director.

Filing draft-letter of offer
The Company within seven working days of the public announcement shall file with SEBI a draft-letter of offer containing disclosures as specified in the regulations through a merchant banker who is not associated with the company. Disclosures of Letter of offer • • • • • • • Disclaimer Clause prescribed by the board Details of the offer including the total number and percentage of the total paid up capital and free reserves proposed to be bought back and price The proposed time table from opening of the offer till the extinguishment of the certificates Specified Date Authority for the offer of buy-back A full and complete disclosure of all material facts including the contents of the explanatory statement The necessity for the buy back

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• • • • •

The process to be adopted for the buy back. The maximum amount to be invested under Buy-Back The minimum and the maximum number of securities that the company proposes cost of financing the buy-back Brief information about the company Audited Financial information for the last 3 years and the company and its Directors shall ensure that the particulars (audited statement and un-audited statement) contained therein shall not be more than 6 months old from the date of the offer document together with financial ratios as may be specified by the Board.

• •

Details of escrow account opened and the amount deposited therein. Listing details and stock market data; o High, Low and average market prices of the securities of the company proposed to be bought back, during the preceding three years; o Monthly high and low prices for the six months preceding the date of filing the draft letter of offer with the Board which shall be updated till the date of the letter of offer. o The number of securities traded on the days when the high and low prices were recorded on the relevant stock exchanges during the period stated above. o The stock market data referred to above shall be shown separately for periods marked by a change in capital structure, with such period commencing from the date the concerned stock exchange recognises the change in the capital structure. (e.g. when the securities have become exrights or ex-bonus) ; o the market price immediately after the date on which the resolution of the Board of directors approving the buy back; and o The volume of securities traded in each month during the six months preceding the date of the offer document . Along with high, low and

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average prices of securities of the company, details relating to volume of business transacted should also be stated for respective periods. • • • Present capital structure (including the number of fully paid and The capital structure including details of outstanding convertible The aggregate shareholding of the promoter group and of the partly paid securities) and shareholding pattern instruments, if any, post buy-back directors of the promoters, where the promoter is a company and of persons who are in control of the company. • The aggregate number of equity shares purchased or sold by such persons during a period of twelve months preceding the date of the PA and from the date of PA to the date of the letter of offer; the maximum and minimum price at which purchases and sales referred to above were made along with the relevant date. • Management discussion and analysis on the likely impact of buy back on the company's earnings, public holdings, holdings of Non Resident Indians/Foreign Institutional Investors, etc., promoters holdings and any change in management structure. • • • centres. • (1) A declaration to be signed by at least two whole time directors that there are no defaults subsisting in repayment of deposit. Redemption of debentures or preference shares or repayment of a term loans to any financial institutions or banks; • (2) A declaration to be signed by at least two whole time directors, one of whom shall be the managing director stating that the Board of Directors has made a full enquiry into the affairs and prospects of the company and that they have formed the opinionDetails of statutory approvals obtained; Collection and Bidding centers Name of Compliance officer and details of investors service

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(i)

As regards its prospects for the year immediately following the date of the letter of offer that, having regard to their intentions with respect to the management of the company's business during the year and to the amount and character of the financial resources which will in their view be available to the company during that year, the company will be able to meet its liabilities and will not be rendered insolvent within a period of one year from the date;

(ii)

In forming their opinion for the above purposes, the directors shall take into account the liabilities as if the company were being wound up under the provisions of the Companies Act, 1956 (including prospective and contingent liabilities) .

The declaration must in addition have annexed to it a report addressed to the directors by the company's auditors stating thato They have inquired into the company's state of affairs, and o The amount of permissible capital payment for the securities in question is in their view properly determined; and o They are not aware of anything to indicate that the opinion expressed by the directors in the declaration as to any of the matters mentioned in the declaration is unreasonable in all the circumstances.

• •

Such other disclosures as may be prescribed by SEBI from time to time. The offer document shall be dated and signed on behalf of Board of Directors of the company by its manager or secretary, if any, and by alteast two directors (one of whom is the managing director).

The draft letter of offer shall be accompanied with fees specified in the Regulations. The Company shall also file a declaration of solvency in the form as may be prescribed, and verified by an affidavit signed by at least two directors of the company, one of whom is the Managing Director 39

Fee Structure
As per the amendment in the Act, as on 28th May 2007, every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board, pay fees as set out below. The fees have to be paid by a pay order/ draft in the name of “Securities and Exchange Board of India Offer size Less than or equal to one crore rupees. More than one crore rupees, but less than or equal to five crore rupees. More than five crore rupees, but less than or equal to ten crore rupees. More than ten crore rupees, but less than or equal to one thousand crore rupees. More than one thousand crore rupees, but less than or equal to five thousand crore rupees. More than five thousand crore rupees. Fee (Rs.) One lakh rupees (Rs. 1,00,000/-). Two lakh rupees (Rs. 2,00,000/-). Three lakh rupees (Rs. 3,00,000/-). 0.5% of the offer size. Five crore rupees (Rs. 5,00,00,000/-) plus 0.125% of the portion of the offer size in excess of one thousand crore rupees (Rs.1000,00,00,000/-). Ten crore rupees (Rs.10,00,00,000/-).”

Modification of LoF
Within twenty-one days from the date of submission of the draft letter of offer, SEBI specifies modifications, if any, in the draft letter of offer. The merchant banker and the

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company shall carry out such modifications before the letter of offer is dispatched to the shareholders.

Dispatch of Lof
The letter of offer shall be dispatched not earlier than twenty-one days from its submission to the Board provided that if.

Offer Procedure
The offer for buy back shall remain open to the members for a period not less than fifteen days and not exceeding thirty days. The date of the opening of the offer shall not be earlier than seven days or later than thirty days after the specified date. The letter of offer shall be sent to shareholders so as to reach them before the opening of the offer. In case the number of shares offered by the share holders is more than the total number of shares to be bought back by the company, the acceptances per share holder shall be equal to the acceptances tendered by the share holders divided by the total acceptances received and multiplied by the total number of shares to be bought back. The company shall complete the verifications of the offers received within fifteen days of the closure of the offer and the shares lodged shall be deemed to be accepted unless a communication of rejection is made within fifteen days from the closure of the offer.

Escrow Account
An Escrow account is the mechanism put in by SEBI to protect the share-holders and give them security. The Company shall by way of security for performance of its obligations, on or before the opening of the offer, deposit in an escrow account a sum as specified below. The escrow amount shall be payable in the following manner: 41

• •

If the consideration payable does not exceed Rs.100 crores - 25% of the consideration payable; If the consideration payable exceeds Rs. 100 crores – 25% up to Rs. 100 crores and 10% thereafter.

The escrow account shall consist of • • • • Cash deposited with a scheduled commercial bank or; Bank guarantee in favor of the merchant banker; or Deposit of acceptable securities with appropriate margin, with the merchant banker, or A combination of above mentioned three points.

The bank guarantee is in favour of the merchant banker and in case of commercial bank he has the power to instruct the bank to issue a bankers cheque or demand draft for the amount lying to credit of the escrow account. The Board in the interest of the shareholders may in case of non-fulfilment of obligations under the regulations by the company forfeit the escrow account either in full or in part. The amount forfeited may be distributed pro rata amongst the share holders who accepted the offer and balance, if any, shall be utilised for investor protection.

Payment to Shareholders
The company shall immediately after the date of closure of the offer open a special account with a bankers and deposit therein, such sum as would, together with the amount lying in the escrow account make-up the entire sum due and payable as consideration for buyback and for this purpose, may transfer the funds from the escrow account. The company shall within seven days of time make payment of consideration in cash to those Shareholders whose offer has been accepted or return the Share certificates to the security holders.

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Extinguishments of Certificate
The company shall extinguish and physically destroy the security certificates so bought back in the presence of a Registrar or the Merchant Banker, and the Statutory Auditor within seven days from the date of acceptance of the securities. The securities offered for buyback if already dematerialized shall be extinguished and destroyed in the manner specified under Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 and the byelaws framed there under. The company shall furnish a certificate to the Board duly verified by • • • The registrar and whenever there is no registrar through the merchant banker; Two whole-time Directors including the Managing Director and; The statutory auditor of the company, and certifying compliance within seven days of extinguishment and destruction of the certificates. The particulars of the Share certificates extinguished and destroyed shall be furnished to the stock exchanges where the shares of the company are listed, within seven days of extinguishments and destruction of the certificates. The company shall maintain a record of the Share certificates, which have been cancelled and destroyed.

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MERCHANT BANKER
A merchant banker, according to SEBI (Merchant Bankers) Regulations, 1992 “is a person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory services in relation to such issue management”. Merchant bankers render services to meet the needs of trade, industry and also investors by performing as intermediary, consultant and a liaison. Merchant banking is a service oriented industry specializing in investment and financial decision making, assisting in making corporate strategies, assessing capital needs and helping in procuring the equity and debt funds for corporate sectors and ultimately helping in establishing favourable economic environment.

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ROLE OF MERCHANT BANKER IN A BUY BACK
 Public Announcements: To ensure that the public announcement has been made in compliance with the Regulations & the offer has been duly filed.  Escrow Account: Escrow account is the trust account established by a broker/ promoter / others under the provisions of the license law for the purpose of holding funds on behalf of the broker’s principal or some other person until the consummation or termination of a transaction. The provisions relating to Escrow Account, as per the regulations, has been made. Ensuring release of balance Escrow amount deposited with the bank. The escrow account shall consist of: o Cash deposited with a scheduled commercial bank or; o Bank guarantee in favor of the merchant banker; or

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o Deposit of acceptable securities with appropriate margin, with the merchant banker, or o A combination of above mentioned three points. Escrow Account can be payable in following manner: o If the consideration payable does not exceed Rs.100 crores - 25% of the consideration payable. o If the consideration payable exceeds Rs. 100 crores 25% + 10% thereafter. On completion of the buyback obligation by the company, the merchant banker inform the bank for release of securities from the escrow account.  Due diligence certificate: the merchant bankers would be required to give `due diligence' certificate which certifies that all the documents of the company with respect to or any dispute cases of patents, collaboration, etc are clean. The disclosures and the legal requirements are in line with the guidelines.  Price fixation: in case of book building method used, s determined by BRLM in consultation with the acquirer or promoter of the company after the offer closing date in accordance with the SEBI guidelines.  Compliance with regulations: The merchant banker shall ensure compliance of section 77A and section 77B of the Companies Act, and other laws or rules as may be applicable  Extinguishing of certificates: Ensuring that the certificates of the bought back shares are destroyed as per the guidelines of SEBI  Report to the SEBI: The merchant banker shall send a final report to the Board within 15 days from the date of closure of the buy-back offer.  Letter of Offer: has to

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o The purpose of this standard letter of offer for Buy Back of equity is to provide the requisite information about the offerer so as to enable the shareholders to make an informed decision of either remaining the shareholders of the offerer or to exit from the offerer company. Care shall be taken by the Merchant Banker (MB) to ensure that the Letter of Offer may not be technical in legal or financial jargons, but it shall be presented in simple, clear, concise and easily understandable language. o This standard Letter of Offer enumerates the minimum disclosure requirements to be contained in the Letter of Offer for the Buy Back of equity. The Merchant Banker/ offerer is free to add any other disclosure(s) which in his opinion is material for the shareholders, provided such disclosure(s) is not presented in an incomplete, inaccurate or misleading manner and is made in accordance with the Regulations.

VALUATION OF BUYBACK OF SHARES
There • are two ways companies determine the buyback price.

They use the average closing price (which is a weighted average for volume) for a period immediately before to the buyback announcement. Based on the trend and value a buyback price is decided

Shareholders are invited to sell some or all of their shares within a set price range. The low point of the range is at a discount to the market price, while the top of the price range is set at a premium to the market price. Investors are given more say in the buyback price than in the above arrangement. Still this method is rarely used. Generally, the price is fixed at a mark up over and above the average price of the last 12-18 months.

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Illustration Glaxo SmithKline: The equity shares of the Company are proposed to be bought back at a price of Rs. 370/(Rupees Three hundred seventy only) per equity share in terms of the above resolution, which allows for the buy-back of the equity shares of the Company at a price not exceeding Rs. 370/- per share. This price has been arrived at after taking into consideration factors such as the book value, earnings per share, return on net worth, the market price of the Shares as on the date of the intimation of the date of the Board Meeting for considering the buy-back to the Stock Exchanges, overall trend in prices of the Company's Shares and the possible impact of the buy-back on the Company's earnings per share. The buy-back price as proposed above, while providing an option to the Shareholders to sell their Shares at a premium over the current market price, will ensure that the growth of the Company is not impaired in any way and that the value of the Shares after the buy-back for the continuing Shareholders is preserved.

Rs. Per share

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ACCOUNTING FOR BUYBACK
The key issues to be looked at with respect to the accounting are related to the following questions. ● How will surplus of price paid over face value of shares bought back be accounted for? Will the excess of such price paid over book value be written off in profit and loss account? ● What would happen if the price bid for buyback is lower than the book value? ● Will the appropriate portion of the free reserves be frozen by way of transfer to capital reserves restricting any use except issue of bonus shares?

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● How would the expenses incidental to buyback, e.g. fees of advocate and merchant bankers, legal expenses, costs of paper announcements and printing of offer letters etc., be treated in books of accounts?

Before examining the above issues in Indian context, there is a need to see what the law provides. The legal provisions on buyback, as inserted by the Companies (Amendment) Act, 1999, do not expressly deal with the accounting aspects of buyback thereby giving total freedom to the Indian companies to treat the buyback transactions as they think fit. As the law is silent, the acceptable accounting treatment of the buyback transactions may be determined by applying authoritative accounting principles to the form and substance of the transactions. Sub-section (7) of Section 77A of the Companies (Amendment) Act, 1999 requires the securities bought back to be extinguished and physically destroyed within seven days of the last date of completion of buyback. This makes it clear that there is a time gap between the buyback of shares and their reduction from the share capital consequent upon the cancellation and physical destruction of such shares.

Accordingly, the entries in the accounting books for the cancellation of the shares bought back by way of reduction from the share capital would be passed on a date subsequent to the purchase of such shares. According to Section 77A(1), buyback can be financed out of free reserves or securities premium account or the proceeds of any shares or other specified securities not of the same kind as those bought back. Further, Section 77AA of the Act states that where buyback is done out of free reserves or securities premium account, a sum equivalent to the nominal value of the shares repurchased shall be transferred to the Capital Redemption Reserve Account on the same line as is done in case of redemption of preference shares out of distributive profits under Section 80(1)(d) of the Companies Act,

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1956. Such a transfer of profit becomes necessary to prevent capital erosion and hence to ensure that the interests of the creditors, debenture-holders and financial institutions are not adversely affected on account of buyback. That is, in so far as the use of funds accumulated through plough back of profit, there is reduction in net worth of the company as no further issue of capital is made. Hence, to maintain sanctity of the capital structure of the business and to prevent capital reduction, it is provided that there should be a transfer to capital redemption reserve that can be utilized only for issue of fully paid bonus shares. It may also be noted that the requirement to make a transfer to the capital redemption reserve do not apply when buyback is funded from the proceeds of any share issue because the company’s distributable reserves and the aggregate value of the paid-up capital remain intact in this case as the new kind of securities simply replaces those which are bought back.

The third key accounting issue relates to the excess amount paid on buyback over and above the nominal value of the shares bought back. For instance, if an Rs.10 share is bought back for Rs.15, how should the excess amount of Rs.5 per share paid on buyback be accounted for by the company? Should such premium of Rs.5 per share be debited to the profit and loss account of the current year as revenue expenditure or should it be debited to free reserves/ securities premium account as capital expenditure?

There being no clear-cut guidelines nor any accounting standard issued by the Institute of Chartered Accountants of India (ICAI) in the context of payment of premium on buyback, varying treatment may be found in practice. But, logically, there is no doubt that the entire Rs.15 payment per share on buyback (in the above example) is capital expenditure and no part of it is in the nature of capital payment. Thus, any premium paid 51

on buyback should be adjusted against free reserves i.e., against balance of general reserves or accumulated profit and loss balance or any other free reserve or against securities premium account. But, as a matter of prudence, such discount benefit earned by a company in the event of buyback should be treated as a capital gain and credited to capital reserve not available for distribution as dividend. As there are currently no accounting standard dealing with the accounting treatment of incidental expenses incurred for buyback of shares, there arises a number of critical questions relating to accounting treatment of such expenses: ● Should these expenses be set off against the current Profit and Loss Account of the company as revenue items? Or ● Should these expenses be treated as capital expenses and hence debited to Free Reserves as they represent the related costs of buyback? Or ● Should the expenditure be capitalized and amortised over a definite period of time and hence carried forward in the Balance Sheet as a deferred revenue expenditure till it is fully written off? Although the treatment of the buyback expenses as revenue expenses may reduce the current earnings of the company, yet it may be justified on the ground that these expenses are incurred during the current period and should be matched against the revenues of that period. Moreover, such a treatment would also help the company in claiming these expenses as deductions while computing taxable income. Since the buyback expenses are not exactly of capital nature, treating the expenses as deferred revenue expenditure and capitalizing and amortising them over a definite period may be more justified because the purpose for which such expenses are incurred is likely to benefit the company for a sizeable length of time. Further, such a treatment would still make it possible for the company to claim the entire expenditure as deduction against taxable profits. Thus, in the absence of any stipulation regarding the accounting treatment

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of such incidental buyback expenses, treating the related expenditure as deferred revenue expenditure would perhaps be the best accounting method because the benefit of buyback is expected to accrue over a long span time in future. In the light of the above discussions and in view of the fact that there is no accounting standard in the U.S. or in the U.K. to guide such transactions, the accounting entries for buyback transaction have been developed in the following section.

Accounting entries
Since reissue for treasury operations of the shares bought back is not permitted under the existing Indian statutory framework, the following journal entries may be passed in the account books chronologically to record buyback of shares and its cancellation:(i) In case investments are sold for buying back own shares: Bank Account Dr. (with the amount realized) To Investment Account (with the book-value) [The difference, if any, between the sale-proceeds and book-value of such investments, will be either credited to ‘Profit On Sale of Investment Account’ or debited to ‘Loss on Sale of Investment Account’, which in turn will be transferred to ‘Profit and Loss 53

Account’.] Note: Generally free reserves are invested in the assets/ investments of the company. So to utilize free reserves for buyback purposes, assets/ investments must be realized first. (ii) In case the proceeds of fresh issue are used for buyback purpose, then on fresh issue: Bank Account Dr. (with the issue proceeds) To Debentures/ Other Securities Account (with the nominal value) To Securities Premium Account (with the premium received on such shares, if any) (iii) For buying back of shares/ specified securities: Shareholders’ / Security holders’ Account Dr. To Bank Account (with the amount paid on buyback

OTHER ISSUES IN ACCOUNTING
Another issue relates to accounting treatment of the discount earned on buyback. Should the discount amount be credited to the profit and loss account of the current year as a revenue gain or should it be credited to reserves treating it as a capital gain? If it is credited to reserves, should such reserves be capital reserve or reserves available for distribution as dividend? Once again, there being no legal requirement, nor any accounting standard issued by ICAI on the treatment of such discount, varying treatments are likely to be found in practice.

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Share Capital/ Specified Security Account Dr. (with the nominal value of security bought back) Free Reserves/Securities Premium Account Dr.(with the excess amount i.e., premium paid over nominal value) To Shareholders’/ Security holders’ Account (with the amount paid) (v) In case the shares/specified securities are bought back at a discount:Share Capital/ Specified Security Account Dr. (with the nominal value) To Shareholders’/Security holders’ Account (with the amount paid) To Capital Reserve Account (with the amount of discount on buyback)

(vi) For transfer of nominal value of shares purchased out of free reserves/securities premium account to capital redemption reserve account: Free Reserve Account Dr. Securities Premium Account Dr. To Capital Redemption Reserve Account (with the nominal value of securities bought back) (vii): For expenses incurred on buyback of shares Buyback Expenses Account Dr. To Bank Account (with the amount of such incidental expenses incurred on buyback)

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(viii) For writing-off buyback expenses against profit and loss account: Profit and Loss Account Dr. To Buyback Expenses Account (to the extent the expenses are written-off

EFFECTS OF BUYBACK OF SHARES
This can be broadly divided into two parts i.e. • • Effects on the Company Effects on the Shareholders

Effects On The Company
1. SHAREHOLDING PATTERN CHANGES Company: A Ltd Total no of shares Face Value Equity Capital Buyback of equity shares Max offer price Price 150 10 1500 25 15

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SHARE HOLDING PATTERN OF COMPANY A LTD Pre Particulars Promoters ( no of shares) Non promoters (No of shares) Buyback 50 100 Post Buyback case1 case 2 50 42 75 83 case 3 31 94

SHAREHOLDING PATTERN IN %TERM Pre Particulars Promoters ( no of shares) Non promoters (No of shares) ASSUMPTIONS Buyback 33.33% 66.67% Post Buyback case1 case 2 case 3 40% 33.33% 25% 60% 66.67% 75%

CASE 1: the original proportion of promoters and non promoters share in the total equity capital was 33.33% and 66.67%. We are assuming that there is a 100% buyback of 25 shares which the company has proposed to make. Therefore all the shares that are proposed to be bought are bought from the no promoters group and nothing has been offered by promoters. Thus the proportion of promoters share in the total equity capital increases from 33.33% to 40%. CASE 2: Here the company decides to keep the shareholding same as before i.e. promoters 33.33% and Non promoters 66.67%. As the company has offered to buyback 25 shares, to maintain the same shareholding pattern promoters has to offer 8 shares of their own and the rest would be the net offer to the public i.e. 17 shares. CASE 3: in this case the company decides to bring down the promoters shares in the

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company’s equity share capital to 25%. That means promoters have to offer 19 shares and net offer to the public would be only 6 shares.

Therefore we can say that depending on the policy of the company the shareholding pattern of the company changes. Promoters share can increase decrease or remain the same. 2. IMPROVEMENT IN THE FINANCIAL RATIOS OF THE COMPANY When a company decides to go for buyback it has a huge impact on the financial ratios of the company. The impact is more on the positive side. There are four majors Ratios which gets impacted due to buyback. They are as follows: Return on Assets: Return on Equity: Earning per Share: Price Earning Ratio: ROA = Net Income / Total Assets ROE = Net Income / Shareholder’s Equity EPS = profit after tax / number of shares P/E ratio = market value of share / EPS

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Example: Company B Ltd, Pre Particulars Cash Assets Earnings Outstanding Shares Equity share Reserves Shareholders Equity Market Share 10 0.15 0.88 10 1 15 0.16 1.13 12 1.25 Buyback 1000 10000 1500 150 1500 200 1700 Post Buyback 625 9625 1500 125 1250 75 1325

Price Financial Ratios Return on Assets (ROA) Return on Equity (ROE) Earning per share (EPS) Price-Earning Ratio (P/E)

Explanation

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Return on Assets: We can see that ROA has increased after buyback. The reason behind this increase is that there is a reduction in the total assets. Total assets have gone down from Rs.10, 000 to Rs.9625, income remaining same.

Return on Equity: It has also increased from 0.88% to 1.13%. This is due to decrease in the shareholder’s equity, which has gone down from Rs.1500 to Rs.1250. Earning Per Share:It has also increased from Rs.10 to Rs.12. The reason behind the increase of EPS is that the numbers of shares have reduced from 150 to 125, causing EPS ratio to increase. Price – Earning Ratio: Here market value of the share has increased from Rs.10 to Rs.15, which is a 50% hike in the price. On the other hand EPS has also increased from 10 to 12, which is a 20% hike. Since the overall increase in the market value of the share is much more than the increase of EPS. Therefore we can see an increase in the priceearning ratio.

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Effects On The Shareholder
Tax Benefits: When a company has surplus cash, they can either pay it off as dividend or buy back shares. When a company pays dividend they are entitled to pay tax at the rate of 15%. This cost has to be born by shareholders, who receive less cash then what is declared. Therefore by Buying back shares, company gives surplus cash to the shareholder and saves tax for the shareholders. Example: A company has surplus cash of Rs.150 crore and if they declare Rs.150 crore as dividend then company has to pay tax of Rs.22.5 crore. So the net amount which would be received by the shareholder would be Rs.127.5 crore. If a company decides to go for buyback of shares then the entire amount of Rs.150 crore is received by the shareholder. Thus shareholders save tax of Rs.22.5 crore, which they would have incurred, if the company would have given them surplus cash by way of dividend. Higher Proportion of share: When a company goes for buyback, number of shares outstanding reduces. That means proportion of an individual investor increases. This can be explained with the help of an example: A company which has 1000 outstanding shares goes for buyback of 250 shares. So after 100% buyback, company would have 750 shares outstanding.

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If an individual investor has 50 shares then its proportional share in the company’s total paid up equity share capital would be 5% before buyback and after buyback it would be 6.67%. Thus there is an increase in his/her proportional share.

Higher Share Price: One of the reasons why a company goes for a buyback is that they think that their shares are undervalued. That is why they buyback share at a premium or at a price that they think it should command in the market. For example a company market price of the share is Rs.500 and company believes that the price of their share should be at Rs.600 based of their fundamental and technical analysis. Therefore company buys back share at Rs.600 from the market and thus increasing the market value of the share from Rs.500 to Rs.600.

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CASE STUDY ON HINDUSTAN UNILEVER LIMITED
About Hindustan Unilever Limited Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company, touching the lives of two out of three Indians. Care Products and Foods & Beverages. and get more out of life. Other relevant information about the company 1) Beginnings: The company's journey in India started with Sunlight soap in 1888. With it, began an era of marketing branded Fast Moving Consumer Goods (FMCG) in India. Sunlight was followed soon after by Lifebuoy in 1895 and other famous brands like Pears, Lux and Vim. 2) Corporate History: The company's corporate existence came into being with the establishment of Hindustan Vanaspati Manufacturing Company. This was followed by Lever Brothers India Limited in 1933 and United Traders Limited in 1935. These three companies merged to form Hindustan Lever Limited in November 1956. The company was renamed as Hindustan Unilever Limited in June 2007. 3) Listing: The company created history when it was listed in the Bombay, Kolkata, and Madras Stock Exchanges in 1956 and offered 10% of its equity to Indian shareholders. HUL’s mission is to “add vitality to life” through its presence in over 20 distinct categories in Home & Personal The company meets everyday needs for nutrition, hygiene, and personal care, with brands that help people feel good, look good

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The company became the first foreign subsidiary company in India to offer equity to the Indian public. Today, HUL is listed in the Bombay Stock Exchange and the National Stock Exchange. 4) Shareholding: HUL’s parent Company, Unilever holds 51.42% of its equity, while 17.50% is owned by Resident Individuals, 12.32% by Foreign Institutional Investors, 12.93% by Insurance companies and Financial Institutions and the rest by Mutual Funds, Private Corporate Bodies, and NRI OCB. Today, the company has 410,000 resident shareholders.

Offer Hindustan Unilever Limited has decided to go for buyback of shares at its meeting held on 29th July, 2007. The company proposes to buyback shares at a price not exceeding Rs 230 a share and up to an aggregate amount of Rs 630 crore that is less that 25% of the total paid-up capital and free reserves of the company as per the audited balance sheet as on Dec. 31, 2006. The maximum price is at a premium of 17% over the closing price of the Company’s share as on 27th July 2007. The average closing price of HUL share in the BSE for the last six months is Rs 196. HUL net worth as on December 2006 stood close to Rs 2,724 crore, so 25% of that would be about Rs 681 crore. When this news was announced, the maximum number of shares that HUL could have bought was 3.5 crore on its total equity base of 221 crore shares outstanding. So in terms of equity value, HUL's buy-back is not substantial and more of probably a sentiment booster for the stock. Reason The Unilever management feels the stock is undervalued and they believe in the prospects of the Indian FMCG story. Which is why they may be willing to buy-back some of their own stock to create wealth for shareholders

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The buyback is proposed to effectively utilize the surplus cash and make the balance sheet leaner and more efficient to improve returns. Financials of the company (Pre and Post Buyback): Post Buyback Assumption: 100% buyback happens at the maximum price quoted by the company Rs 230 per share.

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BALANCE SHEET AS ON 31ST DECEMBER Rs in Crore 2007 SOURCES OF FUNDS 2006 2006 (E) 2007(E)

Equity share capital Reserves Secured loans Unsecured Loans APPLICATION OF FUNDS Net Block

220.68 2502.14 37.13 35.47 2796.09

217.94 1874.88 37.13 35.47 2166.09

1400.75 1778.3

1400.75

Current Assets Loans & Advances

2408.33 1146.75

3 1146.7 5 3362.5

Current Liabilites Provision Net Current assets Investments Capital work in progress

3362.51 1321.42 -1128.85 2413.93 110.26 2796.09

1 1321.4 2 1758.85 2413.93 110.26 2166.09

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DATA 2006 2007(E) 2796.0 Total Assets Net Worth No of Shares Mrkt price of 9 2722.8 2 221 2166.09 2092.82 218

share 216 230 PAT 1855 1855 Assuming PAT to remain the same in the year 2007

KEY FINANCIAL RATIOS (31st DECEMBER) 2006 2007(E) Return on Assets Return on Equity Earning per Share Price-earning Ratio 0.66 0.68 8.39 25.73 0.86 0.89 8.51 27.03

COMPARISON:

Effects on the company

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ROA: Company’s ROA in the year 2006 was 0.66 and in year 2007 it will become 0.86. This is due to reduction in the total assets which goes down from Rs 2796.09 crore to Rs 2166.09 crore as the cash is reduced by Rs 630 crore for buying back shares @ Rs 230 each. ROE: Company’s ROE has increased from 0.68 in 2006 to 0.89 in 2007. reason behind this is that total net worth of the company has gone down from Rs 2722.82 crore in 2006 to Rs 2092.82 crore in 2007. EPS: Company’s EPS has increased from 8.39 in 2006 to 8.51 in 2007. Reason behind this is that total number of share outstanding has reduced from Rs 220.68 crore in 2006 to Rs 217.94 crore in 2007. P/E Ratio: Company’s P/E Ratio has increased from 25.73 in 2006 to 27.03 in 2007. Reason behind this is that the market price of the share has increased from Rs 216/ share in 2006 to Rs 230/ share in 2007. Promoters share: Its share in the company was 50.37% during the year 2006 when number of shares was 221 crore. After buyback number of shares outstanding has reduced to 218 crore shares. Thus increasing promoters share to 51.06%.

Effects on the Shareholder

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Tax Benefits: If company would have given Rs 630 crore as dividend, then it would have attracted dividend tax @ 15% i.e. Rs 94.5 crore. This tax cost would have been born by the investor causing net cash in hand to reduce to Rs 535.5 crore. Thus by buyback method company saves tax for the shareholders. Higher Share price: Usually a company buy backs share at a premium from the public thus increasing it market price. When HUL offered to buyback shares at Rs 230 each when share was trading at Rs 196. this lead to an increase in the market price of the share.

BUY BACK OF GLAXOSMITHKLINE CONSUMER HEALTH CARE LIMITED:

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About the company:
GlaxoSmithKline Consumer Healthcare Ltd. was incorporated in India on October 30, 1958 with the name Hindustan Milk food Manufacturers Private Limited. The Company was promoted by Horlicks Limited of Buckinghamshire, UK primarily to manufacture and sell malted food under the brand name of ‘Horlicks’. The world-wide interests of Horlicks Limited were purchased by Beecham Group Limited of UK in 1969. Beecham (India) Private Limited merged with Hindustan Milk food Manufacturers Limited in January, 1979. Consequently the name of the Company was changed to HMM Limited on March 1, 1979. Subsequently, the name of the Company was changed to: Smith Kline Beecham Consumer Brands Limited on September 16, 1991; Smith Kline Beecham Consumer Healthcare Limited on March 29, 1994; and GlaxoSmithKline Consumer Healthcare Limited on April 23, 2002.

Present Operations
The products manufactured by the Company are sold under various brand namely – • Horlicks, Boost, Junior Horlicks, Horlicks Biscuits, Mother’s Horlicks, Viva, Maltova and Gopika Ghee. The Company also markets certain OTC brands, namely Eno Fruit Salt, Crocin and Iodex on behalf of its associate companies in India. The Company’s Shares are at present listed on The Stock Exchange, Mumbai (BSE), the National Stock Exchange (NSE).

Buy Back:

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The offer will open on March 14th 2005 and close on April 12th 2005. The manager to the buy back offer for the company was Citigroup Global Markets Private Limited. The company decided to buy-back up to 3,325,083 fully paid equity shares of Rs. 10/each, representing up to 7.33 % of the outstanding fully paid up shares of the Company at a price of Rs. 370/- per share for an aggregate amount not exceeding Rs. 123,02.81 lacs, equivalent to 25% and 23.24% of the paid up equity capital and free reserves of the Company as on December 2003 and 2004 respectively, through Tender Offer in accordance with the provisions of the Articles of the Association of the Company, Section 77 A and 77 B of the Companies Act, 1956 and the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998, and subsequent amendments thereof (“The Regulations”). The mode of payment is cash and the consideration shall be paid by way of cheque / demand draft. Since the Buy-back was approved by the Board of Directors on December 10, 2004, prior to the close of the financial year ended December 31, 2004, the size of the Offer has been determined based on the paid up equity capital and free reserves as of December 31, 2003. The company will buy back the shares through the Tender Offer to all the shareholders. The company will not buy back the shares through a negotiated transaction or through any private arrangement. The aggregate shareholding of the Promoters and of the Directors of the Promoters and of the person who are in control of the Company represented 39.99% of the issued share capital, pre- buy back. The Promoters decided not to participate in the buy back and as such their percentage holding in the Company, post buy back, was increased to 43.16%.

Reasons for Buy back:

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The buy back of shares had been done by the company in order to create long term Shareholders value, improve return on Net Worth and enhance the Earning per share of the company. The company seems to have surplus reserves with no current opportunities and it has also mentioned that if in the future there is any growth opportunity they have enough reserves to fund its growth and because of the availability of such reserves the company has bought back its shares rather than keeping the reserves idle. It can be seen that as the company does not have any long term debt, which would mean that there would not be any major payments in the future, therefore this is one of the reason why the company has bought back its shares. Glaxo SmithKLine Consumer HealthCare Limited is an FMCG company and it has been observed that this industry do not have any major expansion plan and because they have surplus funds available with them, they tend to utilize these funds by buying back its shares. Few buy back of FMCG companies are Britania, Godrej, Glaxo, and now HUL is also coming up with a buy back program. This indicates that the major FMCG companies have huge reserves with no current expansion plan and as such they tend to buy back its shares.

The Buy Back:

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The company had a successful buy back offer. The company received offers for buy back of 78, 22,873 equity shares 135% more than the shares to be bought back by the company. The buy back Committee followed the method of proportional acceptance of shares and only 33, 25,083 shares were bought back. Post buy back the shares were extinguished and consequently the share capital of the company reduced.

Various Ratios:
Pre Buy back Dec 04 599,35.17 13.82% 16.12 116.65 20.50 Post Buy back Dec 05 47511.18 22.55% 25.48 96.62 24

Net Worth(Rs Lacks) Return on Net Worth Earning Per share(Rs) Book value Per share(Rs) P/E

CASE STUDY: APOLLO FINVEST LTD COMPANY

Apollo Finvest (India) Limited was originally incorporated as Apollo Mercantile Limited on 29th July, 1985. Name of the company was changed to Apollo Finvest (India) Limited

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w.e.f 12th May, 1992.The Company was originally engaged in telecom products and pipes. Company then diversified by entering into financial services. Company is presently engaged into various activities like leasing and hire purchase finance, investment in debt and equity mutual funds, investment in equities through PMS and investment and trading in shares

Details of buy-back Apollo Finvest (India) Limited had announced the buyback of upto11, 50,000 fully paid up equity shares of Rs.10/- each of the Company, from the existing owners/ beneficial owners of the shares of the company through “tender offer route” in accordance with Section 77A, 77AA and 77B of the Companies Act, 1956, the Companies Amendment Ordinance 2001 and the SEBI (Buy-Back of Securities) Regulations 1998 at a price of Rs. 10.00 per share payable in cash for an aggregate amount not exceeding Rs.115.00 Lacs (Rupees One Hundred and fifteen Lacs Only). A

Managers to the buy back-Keynote corporate services ltd Registrar to the buy back-Intime spectrum registry ltd

Rationale for buy back The company has accumulated free reserves and satisfactory liquidity. at present there is no immediate need for these funds. Further the company is debt free. Therefore it is proposed to buy back a part of equity shares which will provide an opportunity to the company to return the surplus funds to the shareholder and improve return on equity. The shares of the company are listed at the stock exchanges of Mumbai, jaipur and ahmedabad the buy back will provide an exit opportunity to those shareholders who so

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desire in a manner that does not substantially impact the market price of the company’s shares to the detriment of the continuing shareholders The buy back is expected to enhance the earning per share of the company in future and create long term shareholder value.

Basis of the offer The buy back price is 52.67% more than the average of the high low of closing prices of the shares on BSE during the 26 weeks period prior to 31/12/2004, being the date of the board resolution approving the buy back of equity shares through tender offer route

Process and methodology for buy back The company has proposed the buy back through tender offer route on a proprtianate basis from the exisiting equity shareholders of the company

Promoters holding The promoters currently hold 28,93,329 equity shares, representing 58.75% of the paid up equity share capital of the company. The promoter proposed to tender the equity shares of afil held buy them in the buy back offer to such an extent that teir shareholding post buy back remains equal to their present shareholding i.e 58.75%. considering buy back of equity shares to the fullest extent, promoters will have to tender 6,75,675 equity shares of Rs 10/- each to maintain their shareholding at 58.75%. thus buy back from other shareholders will be to an extent of 4,74,425 equity shares.

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Public Announcement to this effect was issued on 07/01/2005 1.2 The Buyback was effected through the tender offer route 1.3 The Buyback Offer was open from 01/03/2005 to 30/03/2005

POST DETAILS OF THE BUYBACK The total number of shares bought back under the Buyback is 11,50,000 equity shares The total amount invested in the Buyback is Rs. 115.00 lacs The Shares were bought back at a price of Rs. 10/- per share. AFIL received 617 applications for 12, 68,354 equity shares in response to the Buy-Back Offer leading to the subscription of 110.29%. Out of this, 33 applications for 10,005 equity shares were rejected on technical grounds and 584 applications for 11, 50,000 equity shares were accepted proportionately under the buyback offer. Since the buyback offer was oversubscribed, shares were proportionately accepted from among the valid applications and accordingly 1,08,349 equity shares were returned to 577 applicants.

Details of shareholders who have sold the shares exceeding 1% of the total number of shares bought back.

Sr. No. Name of the shareholder Mode No. of shares % of shares bought back

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No of Shares 1. Ms. Anju Innani Demat 2. M/s Saksham Holding Ltd Demat 3. Mr. Vipul Agarwal Demat 4. Ms. Suman Agarwal Demat 5. Mr. Gnanamudhan D N Demat 6. Ms. Pushpa Soni Demat 6,75,575 2,35,000 62,513 43,849 13,520 12,000

(%) 58.75 20.43 5.44 3.81 1.18 1.04

UNSUCCESSFUL BUYBACK
The reason for a failure of a buy back can be divided into:

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1) Regulatory 2) Investor rejection

REGULATORY – LEGISLATIVE
In accordance with 77A, 77AA and 77B in the Companies (Amendment) Act, 1999, SEBI has an exhaustive list of guidelines that a company must follow in the event of a buy back its own shares. If the company has not been able to fulfill any of these conditions laid down by SEBI, its buyback will not be considered valid. For example, buyback of shares can be done only out of company's free reserves, securities premium account or proceeds of any earlier issue specifically made for buyback purposes. Moreover, companies are allowed to buyback their own shares up to 25 percent of the paid up capital and free-reserves. Board Resolutions need to be passed, approving the buyback decision, post buyback DER has to be maximum 2:1 etc. To explain this further, we can take the example of Ruias-promoted Essar Shipping. Their buy-back offer driven by Essar Shipping and Logistics Ltd (ESLL), the largest shareholder and promoter of the company, has failed to receive the minimum number of shares, required for the purposes of delisting. Apollo Finvest ltd co. Buy-Back case

Apollo Finvest (India) Limited was originally incorporated as Apollo Mercantile Limited on 29th July, 1985. Name of the company was changed to Apollo Finvest (India) Limited w.e.f 12th May, 1992.The Company was originally engaged in telecom products and pipes. Company then diversified by entering into financial services. Company is presently engaged into various activities like leasing and hire purchase finance, investment in debt and equity mutual funds, investment in equities through PMS and investment and trading in shares

Details of buy-back

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Apollo Finvest (India) Limited had announced the buyback of upto11, 50,000 fully paid up equity shares of Rs.10/- each of the Company, from the existing owners/ beneficial owners of the shares of the company through “tender offer route” in accordance with Section 77A, 77AA and 77B of the Companies Act, 1956, the Companies Amendment Ordinance 2001 and the SEBI (Buy-Back of Securities) Regulations 1998 at a price of Rs. 10.00 per share payable in cash for an aggregate amount not exceeding Rs.115.00 Lacs (Rupees One Hundred and fifteen Lacs Only). A

Managers to the buy back-Keynote corporate services ltd Registrar to the buy back-Intime spectrum registry ltd

Rationale for buy back The company has accumulated free reserves and satisfactory liquidity. at present there is no immediate need for these funds. Further the company is debt free. Therefore it is proposed to buy back a part of equity shares which will provide an opportunity to the company to return the surplus funds to the shareholder and improve return on equity. The shares of the company are listed at the stock exchanges of Mumbai, jaipur and ahmedabad the buy back will provide an exit opportunity to those shareholders who so desire in a manner that does not substantially impact the market price of the company’s shares to the detriment of the continuing shareholders The buy back is expected to enhance the earning per share of the company in future and create long term shareholder value.

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Basis of the offer The buy back price is 52.67% more than the average of the high low of closing prices of the shares on BSE during the 26 weeks period prior to 31/12/2004, being the date of the board resolution approving the buy back of equity shares through tender offer route

Process and methodology for buy back The company has proposed the buy back through tender offer route on a proprtianate basis from the exisiting equity shareholders of the company

Promoters holding The promoters currently hold 28,93,329 equity shares, representing 58.75% of the paid up equity share capital of the company. The promoter proposed to tender the equity shares of afil held buy them in the buy back offer to such an extent that teir shareholding post buy back remains equal to their present shareholding i.e 58.75%. considering buy back of equity shares to the fullest extent, promoters will have to tender 6,75,675 equity shares of Rs 10/- each to maintain their shareholding at 58.75%. thus buy back from other shareholders will be to an extent of 4,74,425 equity shares.

Public Announcement to this effect was issued on 07/01/2005 1.2 The Buyback was effected through the tender offer route 1.3 The Buyback Offer was open from 01/03/2005 to 30/03/2005

POST DETAILS OF THE BUYBACK

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The total number of shares bought back under the Buyback is 11,50,000 equity shares The total amount invested in the Buyback is Rs. 115.00 lacs The Shares were bought back at a price of Rs. 10/- per share. AFIL received 617 applications for 12, 68,354 equity shares in response to the Buy-Back Offer leading to the subscription of 110.29%. Out of this, 33 applications for 10,005 equity shares were rejected on technical grounds and 584 applications for 11, 50,000 equity shares were accepted proportionately under the buyback offer. Since the buyback offer was oversubscribed, shares were proportionately accepted from among the valid applications and accordingly 1,08,349 equity shares were returned to 577 applicants.

Details of shareholders who have sold the shares exceeding 1% of the total number of shares bought back.

Sr. No. Name of the shareholder Mode No. of shares % of shares bought back No of Shares 1. Ms. Anju Innani Demat 2. M/s Saksham Holding Ltd Demat 3. Mr. Vipul Agarwal Demat 4. Ms. Suman Agarwal Demat 5. Mr. Gnanamudhan D N Demat 6. Ms. Pushpa Soni Demat 6,75,575 2,35,000 62,513 43,849 13,520 12,000 (%) 58.75 20.43 5.44 3.81 1.18 1.04

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CASE STUDY: STERLITE INDUSTRIES

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Sterlite Industries (India) Ltd (SIIL) is a leading producer of copper in India. It is the principal subsidiary of the Vedanta Resources Group a London listed metals and mining major with Aluminum, Copper and Zinc operations in India and Australia,. Sterlite was the first company in India to set up a Copper Smelter and Refinery in Private Sector and operate the largest capacity continuous Cast Copper Rod plants. SIIL’s main products, Copper Cathodes and Copper Rods meet global quality benchmarks. In 2001, Homegrown metals major Sterlite Industries made an offer to its non-promoter shareholders to buy back their holdings UNDER a scheme of arrangement (approved by the Mumbai High Court), Sterlite Industries proposes to purchase around 2.79 crores equity shares (representing approximately 50 per cent of the paid-up equity) from the shareholders. The following arrangement was made for the same: o The consideration for the purchase is payable in two parts : a) a cash consideration of Rs 100 and b) five debentures of the face value of Rs 10 each. These are secured non-convertible debentures with a coupon rate of 10 per cent and redeemable at the end of the fourth, fifth and sixth year from the date of allotment. o Unlike an open offer or buyback, in this scheme of arrangement, if the shareholder chooses to remain a shareholder of Sterlite, he must intimate to the company his intention to continue to hold equity shares. This has to be done by exercising his option using an option form provided for the purpose, which has to be sent to Sterlite by June 21, 2002.

o If the public shareholding is reduced below 10 per cent, Sterlite Industries will apply for delisting of the shares from the stock exchanges.

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This arrangement of buyback met with a lot of uproar from SEBI as well as the investors with respect to legalities. Charges against Sterlite The Securities and Exchange Board of India (Sebi) moved the Mumbai high court for a stay of Sterlite’s buyback offer. A move without precedent, it follows a furor over the terms of the Sterlite open offer. It said that Sterlite had violated the Companies Act Provisions, 391 & 77 (a) and that the scheme also violated the Depositories Act under which shareholders' share could not be cancelled without their consent. 1. Legal hindrance: The company had formulated the scheme under Section 391-394 of the Companies Act, 1956, even while there is an existing provision in the Companies Act, Section 77A, that provides for buyback. Hence, it was believed that the company had left some grey areas, legally speaking.

2.

Procedural hindrance: Generally a company that wants to buy-back shares makes the offer to the shareholders who tender their shares to the registrars if they want to sell their holdings. Once the tender of shares is done the registrar (after considering over subscription, if any) will send the cheque for the accepted shares and the unaccepted shares, if any.

But instead of following this method Sterlite sent cheques in advance to the shareholders with a form for non-acceptance of the offer which they could fill in, sign and send to the company along with the cheque if they did not want to sell their holdings. Shareholders have to communicate their non-acceptance of the offer to the company. And silence would be construed as an acceptance of the offer. The scheme provided that unless the shareholders rejected the offer specifically they would be deemed to have accepted it. Thus, if, for instance, you

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missed reading the notice or forgot to send a letter of rejection, you will find a cheque in the mail soon thereafter and your shares bought and cancelled. This procedure, termed negative consent is a little confusing to the investors because they would be inclined to believe that acceptance is mandatory because cheques are sent even before they tender their share.

3. Undervalued Price: There were also some rumblings that the company is buying back its equity cheap. The argument was based on the below contention. o As of June 30, 2001, the book value per share of Sterlite worked out to Rs 297.29. the free reserves (on a per share basis) —worked out to over Rs 125 per share, higher than the cash consideration payable on this offer. o Sterlite has been on an investment spree over the past couple of years. According to the break-up available for investments loans and advances and cash and bank balances as of June 30, 2001, the non-operating assets on a per share basis works out to Rs 188 per share. This is significantly higher than the total consideration payable under the scheme of arrangement working out to Rs 150 per share. Due to the above charge against Sterlite the court had put a stay order on the proceedings.

Judgment:
The Court in its judgment declared that Section 391 of the Companies Act, 1956 could govern Sterlite's buyback scheme is distinctly independent of Section 77A of the Companies Act, 1956. “The legislative intention behind the introduction of section 77A is 85

to provide an alternative method by which a company may buy back up to 25 per cent. of its total paid up equity capital in any financial year. It does not replace or take away any part of the pre-existing jurisdiction of the company court to sanction a scheme for such reduction under sections 100 to 104 and section 391.” With respect to the arrangement of negative consent, the court ordered to provide for a safety net for shareholders who had not responded in any way to the option form sent to them. The court said that the shares of these shareholders should be held in trust for a period of three months before considering them surrendered and extinguishing them. Within a period of three months, any such shareholder who had neither responded to the company's offer nor accepted the consideration may communicate to the company of his desire to continue as a shareholder. In this case the company will then make available equivalent number of shares which have been purchased from him against surrender held in trust for him. However in the midst of the legal battle, the high court approved the scheme of arrangements after imposing a lot of conditions. And ultimately Sterlite was able to cancel only 30% of the total paid up equity capital as opposed to the 50% which was intended. The company had intended to delist the company from the exchange if it were able to mope up 50% shares from the market. Since it would have acquired 90% promoter's shares. However this was not possible as the buyback was only 30%.

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INVESTOR REJECTION
During a buyback, the actual buyer seller relation is reversed, the company becomes the buyer & its shareholders the seller. The choice of subscribing to the buyback offer lies with the investor. There are cases when the Buyback offer is rejected by the public due to various reasons. To explain this further, we can take the case of Indian Rayon and Industries Ltd (IRIL).

CASE: INDIAN RAYON
In 1999, AV Birla group company Indian Rayon announced buying back up to one-fourth (25%) of its equity share capital at a price ranging between Rs 75 and Rs 85 per share. Total 76.06 lakh equity shares After buyback; the Birlas' stake in Indian Rayon will go up to 28.7 per cent from the present 21.5 per cent. . If the buyback offer is fully subscribed to, it will result in an outflow of Rs 127-144 crores approximately, depending on the final price. Reasons: The reason given by the management for the buyback was that Indian Rayon is working at below capacity and there were no major capital expenditure plans at that time. Hence the best way to add value to shareholders is to return the funds to them. The buy-back was unlikely to cause any material impact on the profitability of Indian Rayon, except to the extent of loss of interest income on the amount to be utilized for buy-back. The buy-back will also enhance the EPS of the company and create long-term shareholder value. A number of investors had invested in Indian Rayon because of the fact that it was in the cement business. Since this business has been hived off to Grasim, such investors would now have an exit route. With the two of the three main businesses of the company-viscose filament yarn and insulators--not doing well and no further investments planned, the buyback is likely to prop up shareholder value.

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Considering the above factors the management was confident about the success of the buyback scheme.

Result
The share buyback scheme met with limited success as it could repurchase only 11 per cent of its outstanding shares as against the maximum 25 per cent offered, despite hiking the repurchase prices to Rs.85 per share. The company in the last five years has seen its market capitalisation falling to Rs.455 crores as against Rs.1397 crores from early 1999. Sale of assets like cement unit to Grasim had led to huge cash surplus from which the company wanted to buy back its shares but the shareholders decided to hold on to their shares as the offer was extremely unattractive. Shareholders had seen their wealth falling considerably, thus it was not surprising that they decided to reject the offer made by the management. In the last three years they have seen the company losing its crucial assets and in the last few months the company's scrip has crashed from Rs.207 to Rs.67. The buybacks raised doubts over whether these have been pursued with surplus cash and enhance valuation or to indirectly raise the promoter's stake The graph below shows the comparison of the IRIL share price and the BSE Sensex. The investors were justified in rejecting the offer. The IRL buyback had been launched at a wrong time when the company was also not doing well and the markets were crashing. Thus, inspite of compliance of all the regulations as per the SEBI as well as the Companies Act, 1956, the company faced with a rather unsuccessful buyback

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ORACLE I- FLEX STORY
US-based Oracle has repeatedly tried to buyback the shares of I-flex in order to gain a controlling stake in the company and eventually delist the company from the exchange. However its efforts have continuously received lukewarm response from the investors. Stung by this cold response from the market, Oracle has maintained it has no plans to come out with additional open offers for I-flex shareholders for at least the next five years. In a recent filing with the US Securities and Exchange Commission, however, it added a rider stating it may think of an open offer if the share price is below Rs 2,100 per share - its offer price of December 7, 2006. Rs. 2100 was the final offer price given by Oracle for the purchase of shares of I flex Oracle holds 83 per cent of I-flex's shares and has been consistently trying to acquire the rest in a bid to delist I-flex from the Indian bourses. It would require a little over 90 per cent of shares to do so. The move will help it to integrate I-flex with its business worldwide. Under current norms of SEBI, if the minority shareholders do not surrender shares willingly to the new promoter, the Securities and Exchange Board of India's takeover code requires the new promoter to come out with a proposal to buy back the rest of the shares from the minority shareholders in order to delist the company. However, since its open offers received a tepid response, the US-based firm has reportedly been lobbying the Indian government for over a year to amend the SEBI takeover code. The amendment was aimed at compelling the minority shareholders to surrender the shares of I-flex in favor of Oracle, a government source said. The amendment was suggested on the lines of the "minority squeeze-out norms" of the US under which minority shareholders of an acquired company are compelled to surrender their shares in favour of the new promoter that has acquired a majority stake. However the SEBI has refused to amend its norms as suggested by Oracle. Hence Oracle has taken a stante that it will not delist I-flex at least 5 more yrs unless sit gets the required shares form the open market at a price lower than Rs. 2100. 90

How Oracle acquired I-flex Year Acquired Shares Oracle obtained 42.8 per cent; in I-flex solutions for $593 Nov 2005 Mar-Jun 2006 million. The company made additional purchases of I-flex common stock through ordinary brokerage transactions I-flex board of directors approved a preferential allotment of 4.45 million shares at Rs 1,307.5 per share. Shares issued on Aug 14, 2006 September 14 cost Oracle approximately $126 million and increased its ownership to 55 per cent Oracle notified public shareholders of I-flex of intention to Sept 12, 2006 make an open offer to buy up to 20 per cent I-flex equity at Rs 1,475 a share Price of the open offer increased by 42 per cent to Rs 2,100 Sept 12, 2006: Dec 7, 06 Jan 6, 2007: per share Oracle accepted the 23 million shares tendered in the offer for approximately $1.1 billion

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INNOVATION Buyback of the shares for other than the cash

At present, as per the buy back regulations, buy back of shares by the companies is allowed only for the cash. However, Buy back regulations allow the companies to raise the funds through the securities other than the shares for the specific purpose of buying back its shares. It means that the company may raise the funds through say a debt instrument for paying for the equity, planned to be bought back. In the present scenario, it is always possible that some existing shareholders of the company would be subscribing to the debt offer of the company, which is made to raise funds to meet the buy back outflow. Then company would use the same funds for buying the equity back from the said investors. Hence, those equity investors, who subscribed to the debt offer of the company, would be given the cash back for their equity. This is resulting in the two cycles of cash movement - first money being flowing from investors to the company and then back. Both the said transactions can be squeezed to one by allowing the buyback of shares for other than the cash. In the instant case, company could offer the debt instrument to the said investor instead of first receiving the cash and then paying it back. This instrument to instrument transaction could save enormous administrative hassles and financial loss to both the investors and issuers. Accordingly, there is a feeling in the market that the same may be allowed. It may be prudent to argue here that all the equity holders may not be interested in the debt instrument. In that case, investors may be paid cash by the company through some alternative arrangement of the funds. In other words, this may be made optional for the investors to take debt instrument or the cash for their equity holding. This would open up a very wide opportunity zone for the companies to be creative and do something distinctly different in the market place.

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Further, for the Capital restructuring, it makes enormous sense for the companies to go for exchange of instruments i.e. company may like to replace the equity with the debt or any other instruments. Therefore, allowing companies to buyback for other than the cash would pave the way for enormous creativity in the system. Further, while making the buy back offer even for other than the cash all other existing requirements of the regulations would be complied with by the issuer companies. In addition, there would be the requirement of the offered instrument being of minimum investment grade quality. It may be relevant to mention here that acquisition of the shares in Takeover cases is allowed for other than the cash. On the similar lines and the global experiences, buyback may be allowed. This is, indeed, being practices globally at a large scale as a corporate restructuring exercise.

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