BUYBACK OF SHARES

Buy Back ?
The repurchase of outstanding shares (repurchase)
by a company in order to reduce the number of
shares on the market. Companies will buyback
shares either to increase the value of shares still
available (reducing supply), or to eliminate any
threats by shareholders who may be looking for a
controlling stake.
A buyback is a method for company to invest in
itself since they can't own themselves. Thus,
buybacks reduce the number of shares
outstanding on the market which increases the
proportion of shares the company owns.
$ections
The provisions regulating buy back of shares are
contained in $ection 77A, 77AA and 77B of the
Companies Act,1956.
These were inserted by the Companies (Amendment)
Act,1999.
The $ecurities and Exchange Board of India ($EBI)
framed the $EBI (Buy Back of $ecurities)
Regulations,1999 and the Department of Company
Affairs framed the Private Limited Company and
Unlisted Public company (Buy Back of $ecurities)
rules,1999 pursuant to $ection 77A(2)(f) and (g)
respectively.
bjectives
To increase promoters holding
Increase earning per share
Rationalize the capital structure by writing off capital
not represented by available assets.
$upport share value
To thwart takeover bid
To pay surplus cash not required by business
In fact the best strategy to maintain the share price in
a bear run is to buy back the shares from the open
market at a premium over the prevailing market
price.
Resources of Buy Back
A Company can purchase its own shares from
free reserves; Where a company purchases its own
shares out of free reserves, then a sum equal to
the nominal value of the share so purchased shall
be transferred to the capital redemption reserve
and details of such transfer shall be disclosed in
the balance-sheet or
securities premium account; or
proceeds of any shares or other specified
securities. A Company cannot buyback its shares
or other specified securities out of the proceeds of
an earlier issue of the same kind of shares or
specified securities.
Conditions
The buy-back is authorized by the Articles of association of the
Company;
A special resolution has been passed in the general meeting of the
company authorizing the buy-back. In the case of a listed
company, this approval is required by means of a postal ballot.
Also, the shares for buy back should be free from lock in
period/non transferability. The buy back can be made by a Board
resolution If the quantity of buyback is or less than ten(10%)
percent of the paid up capital and free reserves;
The buy-back is of less than twenty-five(25%) per cent of the total
paid-up capital and fee reserves of the company and that the buy-
back of equity shares in any financial year shall not exceed
twenty-five(25%) per cent of its total paid-up equity capital in that
financial year;
The ratio of the debt owed by the company is not more than twice
the capital and its free reserves after such buy-back;
Conditions continue.
There has been no default in any of the following
in repayment of deposit or interest payable thereon,
redemption of debentures, or preference shares or
payment of dividend, if declared, to all shareholders within the
stipulated time of 30 days from the date of declaration of
dividend or
repayment of any term loan or interest payable thereon to any
financial institution or bank;
There has been no default in complying with the provisions of filing
of Annual Return, Payment of Dividend, and form and contents of
Annual Accounts;
All the shares or other specified securities for buy-back are fully
paid-up;
Conditions continue.
The buy-back of the shares or other specified
securities listed on any recognized stock
exchange shall be in accordance with the
regulations made by the $ecurities and
Exchange Board of India in this behalf; and
The buy-back in respect of shares or other
specified securities of private and closely held
companies is in accordance with the
guidelines as may be prescribed.
$ources from where the shares will be purchased
The securities can be bought back from
existing security-holders on a proportionate basis; Buyback of
shares may be made by a tender offer through a letter of offer
from the holders of shares of the company or
the open market through
book building process;
stock exchanges or
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
purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.
Procedure
Where a company proposes to buy back its shares, it shall,
after passing of the special/Board resolution make a public
announcement at least one English National Daily, one Hindi
National daily and Regional Language Daily at the place
where the registered office of the company is situated.
The public announcement shall specify a date, which shall
be "specified date" for the purpose of determining the
names of shareholders to whom the letter of offer has to be
sent.
A public notice shall be given containing disclosures as
specified in $chedule I of the $EBI regulations.
A draft letter of offer shall be filed with $EBI through a
merchant Banker. The letter of offer shall then be
dispatched to the members of the company.
Procedure continue.
A copy of the Board resolution authorizing the buy
back shall be filed with the $EBI and stock exchanges.
The date of opening of the offer shall not be earlier
than seven days or later than 30 days after the
specified date
The buy back offer shall remain open for a period of
not less than 15 days and not more than 30 days.
A company opting for buy back through the public
offer or tender offer shall open an escrow Account.
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 $ection 621A of the Companies
Act,1956.
Issue of further shares after Buy back
Every buy-back shall be completed within
twelve (12) months from the date of
passing the special resolution or Board
resolution as the case may be.
A company which has bought back any
security cannot make any issue of the same
kind of securities in any manner whether by
way of public issue, rights issue up to six(6)
months from the date of completion of buy
back.
$HARE BUY-BACK: P$ITIVE
A$PECT$
It could enable a company to achieve
its desired capital structure more quickly
or facilitate a major restructuring.
It could avert a hostile takeover bid by
reducing the number of shares in
circulation
arket generally interprets buy-back as a
positive aspect
$hareholders have a choice of deciding whether
or not to receive the payout by selling or
holding their shares, unlike a dividend payout.
Returning excess cash by way of a share buy-
back gives a company greater flexibility with
regard to it´s dividend policy
$HARE BUY-BACK: NEGATIVE
A$PECT$
Re-purchase of it´s own shares may
conversely have a negative signaling
effect.
anagement may not seek to utilize any
existing excess cash effectively
Possible mismanagements may arise if-
W Too high a price is paid for the re-purchased
shares or if
W Cash resources are eroded to the level that
could give rise to a risk of insolvency.
A return of funds by way of a share buy-back is
less certain than an annual dividend stream
CA$E $TUDY : BERGER
PAINT$
INTRDUCTIN T BERGER
17 Dcccmlcr, 1923- Siaricd
Prcscnily DIingra , iIcir rclaiivcs and companics
conirollcd ly iIcm, currcnily Iold 73.53% of iIc
paid-up capiial of iIc Company.
Profii maling company Iaving an uninicrrupicd
dividcnd rccord sincc 1981.
BJECTIVE
%o providc an c×ii opporiuniiy io iIosc
sIarcIoldcrs wIo so dcsirc
%Iis is c×pccicd io cnIancc iIc EPS of iIc
Company in fuiurc and crcaic long-icrm
sIarc valuc.
THE ER AND PRICE
29 April, 2005 -approvcd iIc proposal for luy-lacl of iIc
Company's own fully cquiiy sIarcs of Fs. 21- cacI.
Duy-lacl io iIc c×icni of or lcss iIan.
10% of iIc paid up cquiiy capiial and frcc rcscrvcs of iIc
Company
noi c×cccd 25% of iIc paid up cquiiy capiial of iIc
Company
ai a pricc noi c×cccding Fs. 601- pcr cquiiy sIarc and
iIc ioial amouni of considcraiion noi c×cccding Fs. 1859
lalIs.
THE ER AND PRICE
W %Ic numlcr of cquiiy sIarcs lougIi lacl would
dcpcnd upon iIc avcragc pricc paid for iIc cquiiy
sIarcs lougIi lacl.
ma×imum offcr pricc ÷ Fs. 601- pcr cquiiy sIarc
aggrcgaic considcraiion amouni÷Fs.1859 lalIs
ma×imum numlcr of sIarcs ÷ 3098333 cquiiy
sIarcs
aggrcgaiing÷1.56% of iIc ioial paid up cquiiy
sIarcs as on 29 April 2005.
THE ER AND PRICE
%Ic aggrcgaic sIarcIolding of iIc promoicrs as
on 29 April 2005 is 146543273 cquiiy sIarcs
consiiiuiing 73.53 % of iIc lisicd sIarc capiial of
iIc Company.
SIarc purcIascd - 1009924 cquiiy sIarcs
%Ic ma×imum purcIasc pricc - Fs. 37.00 on 2
Fclruary, 2005
%Ic minimum purcIasc pricc was Fs. 30.75 on
9 Novcmlcr, 2004
SIarcs Sold - 89620 cquiiy sIarcs rcprcscniing
inicr sc salc among promoicrs only.
$URCE$ & ETHD
BUYBACK
SOURCES
%Ic ma×imum
amouni of Fs. 1859
lalIs was mci oui of
iIc frcc rcscrvcs
and1or iIc sIarc
prcmium accouni of
iIc Company.
ETHOD
pcn marlci
purcIascs iIrougI
iIc Naiional Siocl
E×cIangc of India
Limiicd (NSE
IPACT
W %Ic luy-lacl Iad noi impaircd iIc growiI of iIc
Company and also coniriluics io iIc ovcrall
cnIanccmcni of sIarcIoldcr valuc.
W cncraicd sufficicni casI flows io mcci iIc
rcquircmcnis of iIc prcscni lusincss and io iis
sialcIoldcrs.
W %Ic dcli cquiiy ÷ 2.1
CNCLU$IN
Buybacks should be used as an
opportunity to exit only when there is
concern over a company´s prospects or
when the post-buyback free float is
expected to shrink considerably. In most
other cases, buybacks do offer the lure
of an immediate benefit-but you might
be better off as a residual shareholder,
and gain from a hike in the share of
assets and profits of the business.
1PINr Y0u

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