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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You can think of a buyback as a company investing in itself. giving each remaining shareholder a larger percentage ownership of the company. 18. In the case of stocks. 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.11. this reduces the number of shares outstanding. 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. the relative 4 . increasing internal control of the company. Definition 2 A stock buyback. is a company's buying back its shares from the marketplace. repurchased shares are absorbed by the company. 17. 14. When this happens. they aren't obliged to actually undertake the buyback. 20. 15. and obtaining stock for employee stock option plans or pension plans. The idea is simple: because a company can’t act as its own shareholder. 13. and the number of outstanding shares on the market is reduced. Reasons for buybacks include putting unused cash to use. or using its cash to buy its own shares. also known as a "share repurchase". also called corporate repurchase. 12. 19. 16. raising earnings per share. When a company's shareholders vote to authorize a buyback.

1997. 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. or claims. They were thus forced to go public. and Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and Takeover Regulations. The buyback ordinance was introduced by the Government of India (GOI) on October 31. 77AA and 77B in the Companies Law which allowed buyback. The ordinance was issued along with a set of conditions intended to prevent its misuse by companies and protect the interests of investors. There was Insertion of new sections 77A. The buy back of shares is governed by the Securities and Exchange Board of India's (SEBI) Buy Back of Securities Regulation.ownership stake of each investor increases because there are fewer shares. The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids. 1998. 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. and the amended Companies Act 1956. HISTORY OF BUYBACK OF SHARES IN INDIA Prior to 1998 buybacks were not allowed in India. In the 1970’s period. 1998. The buyback of shares was allowed only 5 . 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.

This allowed foreign promoters to utilize their surplus funds and make an open offer to acquire a 100% stake in their Indian subsidiaries. In India too there have been a lot of companies that have announced buybacks like Reliance Industries. However. announced offers to buyback the shares of its Indian subsidiary under SEBI (SAST). they would rather operate as wholly owned subsidiaries without being listed on the bourses. Microsoft etc. Oracle. Now that the norms have been altered and MNC’s were permitted to carry on their business without any such compulsion. 77AA. Reckitt Benkiser etc. Raymond etc. Section 77A.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. Several MNC’s like Philips India Limited. and 77B of Companies Act 1956 The amendment of the Companies Act. Carrier Aircon. approximately 240 companies have announced a buyback including the likes of GE. This provided a much needed exit option for shareholders in depressed market conditions. Cadbury India. There was Insertion of new sections 77A. GE Shipping. 1956 came into force on 31st day of October. Post the 11th September 2001 terror attacks in the USA. 1998. 77AA and 77B 6 . 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. Bombay Dyeing. Otis Elevators.

Therefore applying this argument to these companies is not logical. At present. 7 . This argument is valid for MNCs. which already have adequate R&D budget and presence across markets. companies in emerging markets like India have growth opportunities. Since their incremental growth potential limited. Eg.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. Tax Gains Since dividends are taxed at higher rate than capital gains companies prefer buyback to reward their investors instead of distributing cash dividends. short-term capital gains are taxed at 10% and long-term capital gains are not taxed. they can • buyback shares as a reward for their shareholders. However. Bajaj Auto went on a massive buy back in 2000 and Reliance's recent buyback. as capital gains tax is generally lower.

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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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

• 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. can reduce dividend outflows. Cash rich companies are also very attractive takeover targets. The returns on excess cash in money market accounts can drag down overall company performance.• Reduce takeover chances: Buying back stock uses up excess cash. this may be the most profitable course of action for the company. buybacks can actually boost their bottom lines since dividends attract taxes. If shares are undervalued. • Increase ROE: Buying back stock can increase the return on equity (ROE). the company can laugh all the way to the bank. Buying back stock allows the company to earn a better return on excess cash and keep itself from becoming a takeover target. • Excellent Tool For Financial Reengineering: In the case of profit making. neither does the sale take place on a 11 . high dividend-paying companies whose share prices are languishing. and if the opportunity cost of funds used is lower than the dividend savings. This can have a psychological effect on the market. 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. • 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. • Buying back stock allows a company to pass on extra cash to shareholders without raising the dividend. A buyback and the subsequent neutralisation of shares. This effect is greater the more undervalued the shares are when they are repurchased.

This point is rather self explanatory as the company is competing against other investors to purchase shares of its own stock. and a decay in the general profitability of key markets. • Stock buybacks also raise the demand for the stock on the open market. HP’s shares were trading at around half the average $64 per share paid to repurchase the stock. a protracted business restructuring. Your tax liability will be limited to the lower of the two calculations. Instead of signaling a good operating prospects to the market. Disadvantages: • Sending Negative Signals: A buyback announcement can send a negative signal in these situations. 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. plus 2 per cent education cess. The aim was to make opportunistic purchases of HP stock at attractive prices—in other words. at prices they felt undervalued the company. In such cases. long-term investors will respond to a buyback announcement by selling the company’s shares. the tax would be 20 per cent plus the applicable surcharge. You may also work out the tax at 10 per cent of the gain without considering indexation. By last January. the buyback signal was completely drowned out more powerful contradictory signals about the company’s future which are an aborted acquisition.recognised exchange nor is the STT paid. the computer giant Hewlett-Packard spent $8. A typical example is the HP case: From November 1998 through October 2000.2 billion to buy back 128 million of its shares. So. slipping financial results. • 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. if any. 12 .

ensuring current shareholders receive maximum benefit. b) The necessity for the buy-back.• The share buyback scheme might become a big disadvantage to the company when it pays too much for its own shares. 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. when the market swings the other way and is trading below its true value. Indeed. the company should put the money into assets that can be easily converted back into cash. PROVISIONS / CONDITIONS RELATING TO BUYBACK. Section 77A was introduced by the Companies (Amendment) Act. 1999. Instead. a company should repurchase its shares only when its stock is trading below its expected value and when no better investment opportunities are available. Section 77A(2) of the Companies Act. 13 . it is foolish to buy in an overpriced market. Sec 77A: Power of a company to purchase its own securities. This way. Strictly. shares of the company can be bought back at a discount. pursuant to the report of the working group which was set up to suggest reforms to 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.

and a company limited by guarantee and having a share capital. after the completion of the buy-back file with the Registrar and the Securities and Exchange Board of India. a company limited by shares. Filing of return with the Regulator: A Company shall.c) The class of security intended to be purchased under the buy-back. except bonus. unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402.e. 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. conversion of warrants. The section also prohibited giving of financial assistance to a person for purchasing shares in companies except in certain situations i. a return in form 4 C containing such particulars relating to the buy-back within thirty days of such completion. or 2) through any investment company or group of investment companies. lending by a banking company. 11) The company should not make any further issue of securities within 2 years. etc. No return shall be filed with the Securities and Exchange Board of India by an unlisted company. or According to it. 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. shall not have the power to buy its own shares. 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 . d) The amount to be invested under the buy-back.

such other particulars as may be prescribed 15 . 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. b. redemption of redeemable preference shares under section 80. the the consideration date paid of for the securities of bought-back. Section 100 does not prescribe the manner in which the reduction of capital is to be effected. the date of extinguishing and physically destroying of securities and d. v. a company shall maintain a register of the securities/shares so bought and enter therein the following particulars a. 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. Hindustan Commercial Bank Ltd. v. 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). { Punjab Distilling Industries Ltd. Hindustan General Electrical Corporation [1960] 30 Comp Cas 367 (Cal).loans to employees to enable them purchase shares in the company or its holding company. CIT [1965] 35 Comp Cas 541 (SC). 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. cancellation c. securities. 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. Register of securities bought back : After completion of buyback. purchase under an order of court in a scheme of arrangement or amalgamation under sections 391 to 394.

(3) and (4). of its total paid up equity capital in any financial year subject to compliance with sub-sections (2).Where a company buys-back its own securities. or with both. it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back. 1956 Prior to Section 77A Prior to the introduction of section 77A. 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. 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 course compoundable under Section 621A of the Companies Act. 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.. 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." only means that notwithstanding the provisions of section 77 and sections 100 to 104. 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 . It is 16 . 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. or with fine which may extend to fifty thousand rupees. The offences are.

2. such exclusion should be explicitly or clearly implied. Company is in default in payment of dividend or repayment of any term loan including interest to banks and FIs. Sec77B: Prohibition for buyback in certain circumstances. therefore. 2) Buy back is permitted through the tender offer mode from existing share holders on proportionate basis and from odd lot holders.well settled that the exclusion of the jurisdiction of the court should not readily be inferred. Section 77B of the Companies Act. The two operate in independent fields. 1956 : 1. 1988 provide for the following: 1) Regulations cover only the listed securities of company. The Securities and Exchange Board of India (Buy Back of Securities) Regulations. Section 77AA: Transfer of certain sums to capital redemption reserve account. Buy back through the book-building mode and purchases through stock exchange are allowed for open market transactions. Similarly the conditions for a buyback under section 77A cannot be applied to a scheme under sections 100 to 104 and section 391. Through any investment company or group of investment companies. We are. Through any subsidiary company. 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. 3. or redemption of debenture or preference shares or 4. 17 . 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. Company is in default in repayment of deposit or interest. There is nothing in the language of section 77 that gives rise to such an inference.

1998 and January 7. an offer for buy back shall not remain open for more than 30 days. 6) Buy back through negotiated deals. (c) the buy back does not exceed 25 per cent of the total paid up capital and free reserves of the company. 5) Pre and post buy back holdings of promotors need to be disclosed carefully. 9) To ensure security/safety. (b) a special resolution has been passed in general meeting of the company authorising buy back. 18 . the Regulations provide for timebound steps in every mode. Thus. 1999) allows companies to buy back their own shares subject to regulations laid down by SEBI. except in cases of purchases through stock exchange. 7) To ensure strict compliance with the provisions of SEBI Regulations. The Companies (Amendment) Ordinance (October 31. The new Sections (77A and 77B) in the Ordinance lay down the provisions/restrictions concerning buy back of shares. spot transactions or private arrangements is not permitted. 8) To ensure timely completion of buy back process. 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. 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.3) In the purchases made through the stock exchange. merchant banker has been made to be associated in every offer for buy back. wherein he has to give a “due diligence” certificate. the company making the buy back offer has to open an escrow account on the same lines as provided in the Takeover Regulations. 2) A company is allowed buy back subject to the following conditions:— (a) the buy back is authorised by its articles. 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.

debentures. securities premium account or proceeds of any earlier issue specifically made for buyback purposes. term loan. Moreover. A maximum time of one year from the date of passing of resolution has been stipulated to complete the buy back. it is prohibited from issuing fresh equities within two years of buy back. Further. 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.up. the necessity for buy back. and (f) the buy back is in accordance with SEBI regulations framed for this purpose. stock option schemes. etc. 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. companies are allowed to buyback their own shares upto 25 percent of the paid up capital and 19 . is not allowed to buy back shares. and the time limit for completion of buy back. (e) all shares or other specified securities are fully paid. Buy back of shares through subsidiary companies or investment companies is also prohibited. class of securities to be purchased and the amount to be invested under the buy back. 2) A company is required to destroy the shares bought back within seven days of completion of the buy back. preference shares. redemption of debenture/preference share. 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. etc. into equity shares. except by way of bonus issue or discharge of its existing obligation of converting warrants.(d) debt-equity (including free reserves) ratio does not exceed to 2:1 after the proposed buy back. 3) A company which has defaulted on repayment of deposits.

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. is to examine whether there should be any restriction at all for buyback of shares? If so. which is an essential ingredient of the Capital Market. 1956 (1 of 1956) the Board hereby makes the following regulations to amend the Securities and Exchange Board of India (BuyBack of Securities) Regulations. The crucial question. This has been provided for in certain countries like USA. In exercise of powers conferred by sub-section (1) of section 30 of the Securities and Exchange Board of India Act. in the emerging global scenario where companies have to consolidate and reposition themselves. The facility is used in some countries (a) effecting a block repurchase from large shareholders (b) effecting purchases from employees (c) thwarting takeover attempts. 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). 1998. 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. 1992 (15 of 1992) read with clause (f) of sub-section (2) of Section 77A of the Companies Act. Therefore. Securities And Exchange Board Of India (Buy-Back Of Securities) (Amendment) Regulations. 2007. what percentage of the paid up capital and free reserves should be allowed? In case of buyback of shares. namely:- 20 .free-reserves. where an issuer may buyback shares from a subset of shareholders on a preferential basis was examined by the Committee constituted by the SEBI. This concept is not yet addressed in Indian Law. the Committee does not find this mechanism to be appropriate at this stage.

Two lakh rupees (Rs. Fee (Rs.5% of the offer size. for paragraph (1).00. pay fees as set out below:Offer size Less than or equal to one crore rupees.00. 3. 21 . More than ten crore rupees.000/-) plus 0. 5. They shall come into force on the date of their publication in the Official Gazette.125% of the portion of the offer size in excess of one thousand crore rupees (Rs. More than one thousand crore rupees.00. More than one crore rupees.) One lakh rupees (Rs." 0.1000.1. In the Securities and Exchange Board of India (Buy-Back of Securities) Regulations. but less than or equal to ten crore rupees.000/-).00. More than five thousand crore rupees. but less than or equal to five thousand crore rupees. 3.00.000/-).000/-).000/-). 2007. 2. These Regulations may be called the Securities and Exchange Board of India (Buy-Back of Securities) (Amendment) Regulations. 1. Five crore rupees (Rs.10. but less than or equal to five crore rupees. in Schedule IV.00. More than five crore rupees. Three lakh rupees (Rs.000/-). 1998.00. the following paragraph shall be substituted. Ten crore rupees (Rs.00.00. but less than or equal to one thousand crore rupees. 2. namely:Every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board.

a major advantage that buybacks had over dividends was that they were taxed at the lower capital-gains tax rate. 22 . 2) The amount received less cost of acquisition is treated as capital gain in the year of sale by the shareholder. However. Traditionally. a buyback is similar to a dividend because the company is distributing money to shareholders. with the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003.Tax Benefit In many ways. 1) According to section 46A of income tax buyback of shares is treated as ordinary sale of shares by the shareholder. whereas dividends are taxed at ordinary income tax rates. the tax rate on dividends is now equivalent to the rate on capital gains. Tax Implications of Buyback of Shares.

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). they will state the number of shares they want to tender along with the price they are willing to accept. at the market price. It is important to note. a portion or all of their shares within a certain time frame. however. and often overlooked. ways for companies to share their wealth with investors. Tender Offer Shareholders may be presented with a tender offer by the company to submit. Once the company has received all of the offers. which often causes the share price to shoot up. there are other useful. When investors take up the offer. just like an individual investor would. or tender. it will find the right mix to buy the shares at the lowest cost. Open Market The second alternative a company has is to buy shares on the open market. Typically. that when a company announces a buyback it is usually perceived by the market as a positive thing.METHODS OF BUYBACK There are a number of ways in which a company can return wealth to its shareholders. the two ways of buyback are: 1. Although stock price appreciation and dividends are the two most common ways of doing this. 2. 23 .

Book-building process. 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. whose shares are listed on a recognized stock exchange. 24 . The prospectus should contain all the details of the offer. or • Selective buy-backs – a buy-back that does not fall within any of the other categories.3. Institutional investors specify the price as well as the volume of shares they intend to buy. including salaried directors. 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. 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. Companies can also use the book building process to buy back shares. determines the price at which the offer is to be made to the public. where the lot of securities of a public company. If the book building option is used. Here odd lots. The book building process is a mechanism of price discovery which helps determine market price of securities. is smaller than such marketable lot. that is to say. on receiving the above information. such as the purchase of a particular member’s shares. The book runner. as may be specified by the stock exchange. except the price at which the securities will be offered (a price band is specified). In both 1 & 3 promoters can participate in buyback and not in 2. a draft prospectus has to be filed with SEBI.

Hence. The A H Dalmia group had acquired the 10. the A H Dalmia group was able to make a profit of Rs.5% stake in Gesco at an average cost of Rs. 25 .5% stake (around 3 million shares) at Rs 54 per share for a consideration of Rs. 24 per share for a consideration of Rs. 27 a share. 91 million through greenmail transaction in less than 6 months. In October 2000. The A H Dalmia group ultimately sold its 10. 72 million.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. 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. 163 million before the year end. 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 statement shall contain the date of the Board meeting at which the proposal for buy back was approved. 1956 and the explanatory statement is to be annexed to the notice for the general meeting containing all disclosures. 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. These were passed by the Central Government on 6th July1999.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. the necessity for the buy-back. the basis of arriving at the buy back price. the time limit for the completion of buy-back. It will also state that the BOD has checked that the company would be able to pay all its debts. Letter of offer 26 . By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. etc. Special resolution A special resolution needs to be passed under sub-section (2) of section 77A of the Companies Act. the method to be adopted for the buy-back. 1999. the class of security intended to be purchased under the buy-back.

• • • • the proposed time table from opening of the offer till the extinguishment of the certificates. post buy-back. • • The capital structure including details of outstanding convertible instruments. disclosure of all material facts. The letter of offer shall contain pre and post buy-back debt equity ratios etc. 27 . 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 necessity for the buy back. the acceptance per shareholder shall be on proportionate basis. shall file with the Registrar of Companies a draft letter of offer before the buy-back of shares. Audited Financial information for the last 3 years Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern. 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. IT shall also declare solvency in Form No.The Company. if any. authorized by a special resolution. brief information about the company. 4A. process.

Return to be filed with Registrar A company. which would make up the entire sum due and payable as consideration for the buy-back. 28 . 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. shall file with the Registrar a return in the Form. General obligations of the company The company shall ensure that: • The letter of offer shall contain true. and The company shall not utilize any money borrowed from Banks/Financial Institutions for the purpose of buying back its shares. no misleading information and state that the directors of the company accept the responsibility for the information contained in such document. after the completion of the buy-back under these rules.e.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. 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. factual and material information i. • • • • The company shall not issue any shares including by way of bonus till the date of the closure of the offer under these rules. Payment to the shareholder The Company shall immediately after the date of closure of the offer open a special bank account and deposit therein. the format of which is mentioned in the Rules.

After all the requirements are fulfilled and document submitted to ROC the company can proceed with the buyback. 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.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. After the process is complete the company again has to file a form with the ROC and thus the process will be completed. 29 . 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.

about having despatched the ballot papers.BUYBACK FOR LISTED COMPANIES The regulation is applicable to buyback of shares or other specified securities of a company listed on a Stock Exchange. or (ii) Under certificate of posting. 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. 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. the company can go ahead with the buy back only if a special resolution is passed at the general meeting. The buyback of shares can’t take place for delisting of shares from the Stock Exchange. Method for sending notice: (a) The company may issue notices either. “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. 2001. 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.” 30 .(i) Under Registered Post Acknowledgement Due.

The date of the Board meeting at which the proposal for buy back was approved by the BOD. A confirmation that the BOD has made a full enquiry into the affairs and prospects of the company and are of the opinion- 31 . The maximum and minimum price at which purchases and sales were made along with the relevant dates. The maximum amount required under the buy back and the sources of funds from which the buy back would be financed. 9. The number of securities that the company proposes to buy back. 6. as on the date of the notice convening the General Meeting. b. 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. 10. The aggregate shareholding of the promoter and of the directors of the promoters. 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. 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. Aggregate number of shares purchased or sold by such persons during a period of six months preceding the date of the Board Meeting c. 8. 7. a. 5.Explanatory Statement The company needs to make the following disclosures in the statement 1. The basis of arriving at the buy-back price. 4. 2.

1956 11. b. They have inquired into the company’s state of affairs. b. After the special resolution (requiring 2/3rd Majority) is passed the company can go ahead with the buyback. The Board of Directors shall give such public notice. and c. that there will be no grounds on which the company could be found unable to pay its debts. 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 . A report addressed to the BOD by the Company’s auditors stating thata. In forming their opinion for the above purposes. Board Resolution The Board will pass a resolution to buy back its shares. 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. the directors have taken into account the liabilities as if the company were being wound up under the provisions of the Companies Act. The public notice shall contain the disclosures as specified in the Explanatory Statement 32 .a. The company during that year. Before making the Public Announcement the company shall give a public notice in at least one English national daily. at the place where the registered office of the company is situated. and. one Hindi national daily and a regional language daily. within 2 days of the passing of the resolution. 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. The amount of the permissible capital payment for the securities is in their view properly determined.

is pre. within two days of the date of the passing of the resolution. The company makes an open offer to all its shareholders to buy back its shares at a given price. passed by the Board of Directors at its meeting authorizing buy back of its shares shall be filed with SEBI and the stock exchanges. the number of shares to be bought back.decided & fixed. 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 Board of Directors can now proceed ahead with the buy-back programme. From Odd-Lot holders TENDER OFFER A tender offer is an invitation by the company. to its existing shareholder. • • The maximum price at which the buy-back of shares/securities shall be made.e. METHODS OF BUYBACK OF SHARES UNDER SEBI REGULATIONS A company may buyback its securities by any one of the following methods:’ 1. A company may buyback its securities from its shareholders on a proportionate basis. In a buyback by the Tender Offer method. usually a premium to the current market price.A copy of the resolution. From Open Market. the price and the size of the offer i. to buy back its securities. 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 . From the existing Share and other specified securities on a proportionate basis through the Tender offer. 3. where the shares of the company are listed. 2.

34 . • Brief information about the company. The proposed time table from opening of the offer till the extinguishment of the certificates. 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. 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.• If the promoter intends to offer their specified securities . Public Announcements The company which has shall before buyback of shares make a public announcement in at least one English National Daily. 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 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. Details of PA • • • • Disclaimer clause as may be prescribed by SEBI. if yes . one Hindi National Daily and a Regional language newspaper. the price and the date of acquisition. 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.   The quantum of shares proposed to be tendered.

low and average prices of securities of the company. if any post buy back. where the promoter is a company shareholding of persons who are in control of the company. iii. Along with high. ii. The market price immediately after the date of the resolution of the Board of directors approving the buy back. The aggregate shareholding of the promoter group and of the directors of the promoters. i. Monthly high and low prices for the six months preceding the date of the PA. details relating to volume of business transacted should also be stated for respective periods. 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 . 35 . during the preceding three years. The Volume on the days when the high and low prices were recorded on the relevant stock exchanges during the above period. (e. v. • • • Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern.g. The capital structure including details of outstanding convertible instruments. Low and average market prices of the securities of the company proposed to be bought back. • The aggregate number of shares purchased or sold by such persons during a period of twelve months preceding the date of the PA.• • • • Audited Financial information for the last 3 years Details of escrow account opened and the amount deposited therein. iv. High. when the securities have become ex-rights or ex-bonus). Listing details and stock market data. and The volume of securities traded in each month during the six months preceding the date of PA. the maximum and minimum price at which purchases and sales referred were made along with the relevant dates.

. Name of Compliance officer and details of investors service centres. and by at least two directors of the company one of whom shall be a managing director.• Management discussion and analysis on the likely impact of buy back on the company’s earnings. public holdings. 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 36 . holdings of NRIs/FIIs etc. 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. • • • • • The details of statutory approvals obtained. The PA shall be dated and signed on behalf of the Board of Directors of the company by its manager or secretary. if any. promoters holdings and any change in management structure. Collection and bidding centres. Other disclosures as may be specified by SEBI from time to time by way of guidelines.

Along with high. low and 37 . (e. Listing details and stock market data.• • • • • The process to be adopted for the buy back. o The stock market data referred to above shall be shown separately for periods marked by a change in capital structure.g. o the market price immediately after the date on which the resolution of the Board of directors approving the buy back. 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. Low and average market prices of the securities of the company proposed to be bought back. 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. during the preceding three years. 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. when the securities have become exrights or ex-bonus) . o High. with such period commencing from the date the concerned stock exchange recognises the change in the capital structure. • • Details of escrow account opened and the amount deposited therein. and o The volume of securities traded in each month during the six months preceding the date of the offer document .

• Management discussion and analysis on the likely impact of buy back on the company's earnings. • (1) A declaration to be signed by at least two whole time directors that there are no defaults subsisting in repayment of deposit. details relating to volume of business transacted should also be stated for respective periods. etc. the maximum and minimum price at which purchases and sales referred to above were made along with the relevant date. • (2) A declaration to be signed by at least two whole time directors. Redemption of debentures or preference shares or repayment of a term loans to any financial institutions or banks. • 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. where the promoter is a company and of persons who are in control of the company.. • • • centres. 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. holdings of Non Resident Indians/Foreign Institutional Investors.average prices of securities of the company. if any. promoters holdings and any change in management structure. • • • 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. public holdings. Collection and Bidding centers Name of Compliance officer and details of investors service 38 . post buy-back directors of the promoters.

1956 (including prospective and contingent liabilities) . the company will be able to meet its liabilities and will not be rendered insolvent within a period of one year from the date. 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. 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 verified by an affidavit signed by at least two directors of the company.(i) As regards its prospects for the year immediately following the date of the letter of offer that. • • Such other disclosures as may be prescribed by SEBI from time to time. The draft letter of offer shall be accompanied with fees specified in the Regulations. the directors shall take into account the liabilities as if the company were being wound up under the provisions of the Companies Act. The Company shall also file a declaration of solvency in the form as may be prescribed. and by alteast two directors (one of whom is the managing director). (ii) In forming their opinion for the above purposes. 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. one of whom is the Managing Director 39 . • 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.

000/-) plus 0.000/-). 1. every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board. in the draft letter of offer. pay fees as set out below.00.00.00. Three lakh rupees (Rs. SEBI specifies modifications. Two lakh rupees (Rs. 5. More than one crore rupees. but less than or equal to five thousand crore rupees.5% of the offer size.000/-).” Modification of LoF Within twenty-one days from the date of submission of the draft letter of offer.10. 2. More than one thousand crore rupees.00. Ten crore rupees (Rs. More than five crore rupees.000/-). as on 28th May 2007.000/-).000/-).00. 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 five thousand crore rupees. but less than or equal to five crore rupees. Five crore rupees (Rs.00.00. 3.125% of the portion of the offer size in excess of one thousand crore rupees (Rs.00. The merchant banker and the 40 . but less than or equal to one thousand crore rupees.1000. Fee (Rs. if any. More than ten crore rupees. but less than or equal to ten crore rupees.) One lakh rupees (Rs.00. 0.Fee Structure As per the amendment in the Act.

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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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. industry and also investors by performing as intermediary. advisor or rendering corporate advisory services in relation to such issue management”. according to SEBI (Merchant Bankers) Regulations. Merchant banking is a service oriented industry specializing in investment and financial decision making. consultant and a liaison.MERCHANT BANKER A merchant banker. buying or subscribing to securities as manager. Merchant bankers render services to meet the needs of trade. 1992 “is a person who is engaged in the business of issue management either by making arrangements regarding selling. 44 . consultant.

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. o Bank guarantee in favor of the merchant banker. or 45 . The escrow account shall consist of: o Cash deposited with a scheduled commercial bank or.  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. as per the regulations. The provisions relating to Escrow Account. Ensuring release of balance Escrow amount deposited with the bank. has been made.

with the merchant banker.o Deposit of acceptable securities with appropriate margin. 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.  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. etc are clean. 100 crores 25% + 10% thereafter.  Letter of Offer: has to 46 . collaboration.  Price fixation: in case of book building method used. On completion of the buyback obligation by the company. The disclosures and the legal requirements are in line with the guidelines.100 crores . o If the consideration payable exceeds Rs.25% of the consideration payable. the merchant banker inform the bank for release of securities from the escrow account.  Compliance with regulations: The merchant banker shall ensure compliance of section 77A and section 77B of the Companies Act. Escrow Account can be payable in following manner: o If the consideration payable does not exceed Rs. 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. or o A combination of above mentioned three points.

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. while the top of the price range is set at a premium to the market price. 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. 47 . Generally. Still this method is rarely used.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. Investors are given more say in the buyback price than in the above arrangement. inaccurate or misleading manner and is made in accordance with the Regulations. provided such disclosure(s) is not presented in an incomplete. clear. VALUATION OF BUYBACK OF SHARES There • are two ways companies determine the buyback price. the price is fixed at a mark up over and above the average price of the last 12-18 months. The low point of the range is at a discount to the market price. They use the average closing price (which is a weighted average for volume) for a period immediately before to the buyback announcement. concise and easily understandable language. The Merchant Banker/ offerer is free to add any other disclosure(s) which in his opinion is material for the shareholders. but it shall be presented in simple. 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.

370/(Rupees Three hundred seventy only) per equity share in terms of the above resolution.Illustration Glaxo SmithKline: The equity shares of the Company are proposed to be bought back at a price of Rs. This price has been arrived at after taking into consideration factors such as the book value. Per share 48 . 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 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. The buy-back price as proposed above. earnings per share. 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. while providing an option to the Shareholders to sell their Shares at a premium over the current market price.per share. return on net worth. 370/. Rs. which allows for the buy-back of the equity shares of the Company at a price not exceeding Rs.

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? 49 .

Further. be treated in books of accounts? Before examining the above issues in Indian context. e. costs of paper announcements and printing of offer letters etc. 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. As the law is silent. 1999. the acceptable accounting treatment of the buyback transactions may be determined by applying authoritative accounting principles to the form and substance of the transactions. The legal provisions on buyback. fees of advocate and merchant bankers. 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. 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. 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. According to Section 77A(1). 1999 requires the securities bought back to be extinguished and physically destroyed within seven days of the last date of completion of buyback. 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. legal expenses. as inserted by the Companies (Amendment) Act.● How would the expenses incidental to buyback.g. there is a need to see what the law provides. 50 .. Section 77AA of the Act states that where buyback is done out of free reserves or securities premium account. Accordingly. Sub-section (7) of Section 77A of the Companies (Amendment) Act.

there is no doubt that the entire Rs. any premium paid 51 .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. if an Rs. to maintain sanctity of the capital structure of the business and to prevent capital reduction. Hence.5 per share paid on buyback be accounted for by the company? Should such premium of Rs. logically. how should the excess amount of Rs. there is reduction in net worth of the company as no further issue of capital is made.1956. For instance. Such a transfer of profit becomes necessary to prevent capital erosion and hence to ensure that the interests of the creditors. 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.15. That is. debenture-holders and financial institutions are not adversely affected on account of buyback. But. in so far as the use of funds accumulated through plough back of profit. 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.10 share is bought back for Rs. The third key accounting issue relates to the excess amount paid on buyback over and above the nominal value of the shares bought back. varying treatment may be found in practice.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.

Further. in the absence of any stipulation regarding the accounting treatment 52 . 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. such a treatment would still make it possible for the company to claim the entire expenditure as deduction against taxable profits. such a treatment would also help the company in claiming these expenses as deductions while computing taxable income. 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 a matter of prudence. But. against balance of general reserves or accumulated profit and loss balance or any other free reserve or against securities premium account. Moreover. As there are currently no accounting standard dealing with the accounting treatment of incidental expenses incurred for buyback of shares.on buyback should be adjusted against free reserves i. 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.e. Since the buyback expenses are not exactly of capital nature.. Thus. 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.

of such incidental buyback expenses. to guide such transactions. if any. the accounting entries for buyback transaction have been developed in the following section. 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.S. 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’. (with the amount realized) To Investment Account (with the book-value) [The difference. which in turn will be transferred to ‘Profit and Loss 53 . or in the U.K. 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. Accounting entries Since reissue for treasury operations of the shares bought back is not permitted under the existing Indian statutory framework. In the light of the above discussions and in view of the fact that there is no accounting standard in the U.

(with the issue proceeds) To Debentures/ Other Securities Account (with the nominal value) To Securities Premium Account (with the premium received on such shares. then on fresh issue: Bank Account Dr. 54 . varying treatments are likely to be found in practice. there being no legal requirement. So to utilize free reserves for buyback purposes. nor any accounting standard issued by ICAI on the treatment of such discount.] Note: Generally free reserves are invested in the assets/ investments of the company. if any) (iii) For buying back of shares/ specified securities: Shareholders’ / Security holders’ Account Dr.Account’. assets/ investments must be realized first. should such reserves be capital reserve or reserves available for distribution as dividend? Once again. 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. 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. (ii) In case the proceeds of fresh issue are used for buyback purpose.

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.e. 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. Securities Premium Account Dr. (with the nominal value of security bought back) Free Reserves/Securities Premium Account Dr. To Bank Account (with the amount of such incidental expenses incurred on buyback) 55 .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.(with the excess amount i.

e. 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. • • Effects on the Company Effects on the Shareholders Effects On The Company 1.(viii) For writing-off buyback expenses against profit and loss account: Profit and Loss Account Dr. 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 56 .

33% and Non promoters 66.e. CASE 2: Here the company decides to keep the shareholding same as before i.e.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 33.67%.67%.67% 75% CASE 1: the original proportion of promoters and non promoters share in the total equity capital was 33. 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.33% 25% 60% 66.33% 66. Thus the proportion of promoters share in the total equity capital increases from 33. CASE 3: in this case the company decides to bring down the promoters shares in the 57 .33% and 66. Therefore all the shares that are proposed to be bought are bought from the no promoters group and nothing has been offered by promoters. promoters 33. We are assuming that there is a 100% buyback of 25 shares which the company has proposed to make. 17 shares.67% Post Buyback case1 case 2 case 3 40% 33.33% to 40%. As the company has offered to buyback 25 shares.

That means promoters have to offer 19 shares and net offer to the public would be only 6 shares. 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. There are four majors Ratios which gets impacted due to buyback. The impact is more on the positive side. 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. 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 58 . 2.company’s equity share capital to 25%.

Example: Company B Ltd.88 10 1 15 0. Pre Particulars Cash Assets Earnings Outstanding Shares Equity share Reserves Shareholders Equity Market Share 10 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 59 .15 0.

13%. which has gone down from Rs.88% to 1.10 to Rs.9625. Price – Earning Ratio: Here market value of the share has increased from Rs.10. Therefore we can see an increase in the priceearning ratio. which is a 20% hike. On the other hand EPS has also increased from 10 to 12. Since the overall increase in the market value of the share is much more than the increase of EPS. 000 to Rs.1250. 60 .12. income remaining same.10 to Rs. which is a 50% hike in the price.1500 to Rs. Total assets have gone down from Rs.15. This is due to decrease in the shareholder’s equity. The reason behind the increase of EPS is that the numbers of shares have reduced from 150 to 125. The reason behind this increase is that there is a reduction in the total assets. Return on Equity: It has also increased from 0.Return on Assets: We can see that ROA has increased after buyback. causing EPS ratio to increase. Earning Per Share:It has also increased from Rs.

company would have 750 shares outstanding. When a company pays dividend they are entitled to pay tax at the rate of 15%.22.Effects On The Shareholder Tax Benefits: When a company has surplus cash.5 crore.5 crore. Example: A company has surplus cash of Rs. they can either pay it off as dividend or buy back shares. This can be explained with the help of an example: A company which has 1000 outstanding shares goes for buyback of 250 shares. This cost has to be born by shareholders. So after 100% buyback. number of shares outstanding reduces.127. Therefore by Buying back shares. Higher Proportion of share: When a company goes for buyback. So the net amount which would be received by the shareholder would be Rs.5 crore.150 crore and if they declare Rs. 61 . if the company would have given them surplus cash by way of dividend. That means proportion of an individual investor increases. If a company decides to go for buyback of shares then the entire amount of Rs. which they would have incurred.150 crore as dividend then company has to pay tax of Rs. who receive less cash then what is declared.150 crore is received by the shareholder. company gives surplus cash to the shareholder and saves tax for the shareholders.22. Thus shareholders save tax of Rs.

67%. Thus there is an increase in his/her proportional share.600. That is why they buyback share at a premium or at a price that they think it should command in the market.600 based of their fundamental and technical analysis.500 to Rs.500 and company believes that the price of their share should be at Rs.600 from the market and thus increasing the market value of the share from Rs. Therefore company buys back share at Rs. For example a company market price of the share is Rs. Higher Share Price: One of the reasons why a company goes for a buyback is that they think that their shares are undervalued. 62 .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.

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. This was followed by Lever Brothers India Limited in 1933 and United Traders Limited in 1935.CASE STUDY ON HINDUSTAN UNILEVER LIMITED About Hindustan Unilever Limited Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company. with brands that help people feel good. The company was renamed as Hindustan Unilever Limited in June 2007. hygiene. and Madras Stock Exchanges in 1956 and offered 10% of its equity to Indian shareholders. touching the lives of two out of three Indians. Sunlight was followed soon after by Lifebuoy in 1895 and other famous brands like Pears. Other relevant information about the company 1) Beginnings: The company's journey in India started with Sunlight soap in 1888. and get more out of life. Kolkata. With it. Lux and Vim. 2) Corporate History: The company's corporate existence came into being with the establishment of Hindustan Vanaspati Manufacturing Company. These three companies merged to form Hindustan Lever Limited in November 1956. look good 63 . and personal care. 3) Listing: The company created history when it was listed in the Bombay. began an era of marketing branded Fast Moving Consumer Goods (FMCG) in India. Care Products and Foods & Beverages.

2006. HUL's buy-back is not substantial and more of probably a sentiment booster for the stock. so 25% of that would be about Rs 681 crore. 12.42% of its equity. 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. the company has 410.32% by Foreign Institutional Investors.000 resident shareholders. HUL net worth as on December 2006 stood close to Rs 2. When this news was announced.The company became the first foreign subsidiary company in India to offer equity to the Indian public. 4) Shareholding: HUL’s parent Company. Private Corporate Bodies. and NRI OCB. HUL is listed in the Bombay Stock Exchange and the National Stock Exchange. Offer Hindustan Unilever Limited has decided to go for buyback of shares at its meeting held on 29th July. 31.93% by Insurance companies and Financial Institutions and the rest by Mutual Funds. The maximum price is at a premium of 17% over the closing price of the Company’s share as on 27th July 2007. Unilever holds 51.724 crore. Today. 12. The average closing price of HUL share in the BSE for the last six months is Rs 196.5 crore on its total equity base of 221 crore shares outstanding. Today. So in terms of equity value. while 17. Reason The Unilever management feels the stock is undervalued and they believe in the prospects of the Indian FMCG story.50% is owned by Resident Individuals. 2007. Which is why they may be willing to buy-back some of their own stock to create wealth for shareholders 64 . the maximum number of shares that HUL could have bought was 3.

65 . 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.The buyback is proposed to effectively utilize the surplus cash and make the balance sheet leaner and more efficient to improve returns.

88 37.13 35.85 2413.14 37.75 Current Assets Loans & Advances 2408.47 2166.13 35.09 1 1321.42 -1128.3 1400.47 2796.93 110.5 Current Liabilites Provision Net Current assets Investments Capital work in progress 3362.09 1400.33 1146.26 2796.09 66 .26 2166.75 3 1146.7 5 3362.75 1778.85 2413.09 217.4 2 1758.94 1874.51 1321.68 2502.93 110.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.

03 COMPARISON: Effects on the company 67 .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 0.51 27.39 25.86 0.68 8.09 2092.8 2 221 2166.0 Total Assets Net Worth No of Shares Mrkt price of 9 2722.DATA 2006 2007(E) 2796.66 0.89 8.73 0.

51 in 2007.94 crore in 2007.68 in 2006 to 0. Promoters share: Its share in the company was 50.68 crore in 2006 to Rs 217.39 in 2006 to 8.89 in 2007.73 in 2006 to 27.37% during the year 2006 when number of shares was 221 crore. reason behind this is that total net worth of the company has gone down from Rs 2722. ROE: Company’s ROE has increased from 0. After buyback number of shares outstanding has reduced to 218 crore shares.66 and in year 2007 it will become 0. Reason behind this is that total number of share outstanding has reduced from Rs 220. Effects on the Shareholder 68 .82 crore in 2006 to Rs 2092.09 crore as the cash is reduced by Rs 630 crore for buying back shares @ Rs 230 each.09 crore to Rs 2166.06%. Thus increasing promoters share to 51.86. EPS: Company’s EPS has increased from 8. P/E Ratio: Company’s P/E Ratio has increased from 25.ROA: Company’s ROA in the year 2006 was 0.82 crore in 2007.03 in 2007. This is due to reduction in the total assets which goes down from Rs 2796. 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.

then it would have attracted dividend tax @ 15% i.Tax Benefits: If company would have given Rs 630 crore as dividend. Higher Share price: Usually a company buy backs share at a premium from the public thus increasing it market price. Rs 94. this lead to an increase in the market price of the share.5 crore.e. Thus by buyback method company saves tax for the shareholders.5 crore. BUY BACK OF GLAXOSMITHKLINE CONSUMER HEALTH CARE LIMITED: 69 . When HUL offered to buyback shares at Rs 230 each when share was trading at Rs 196. This tax cost would have been born by the investor causing net cash in hand to reduce to Rs 535.

Boost. Present Operations The products manufactured by the Company are sold under various brand namely – • Horlicks. 1979. Crocin and Iodex on behalf of its associate companies in India. Consequently the name of the Company was changed to HMM Limited on March 1. The Company was promoted by Horlicks Limited of Buckinghamshire. 1979. Viva. Horlicks Biscuits. The world-wide interests of Horlicks Limited were purchased by Beecham Group Limited of UK in 1969. 1958 with the name Hindustan Milk food Manufacturers Private Limited. Maltova and Gopika Ghee. Mumbai (BSE). and GlaxoSmithKline Consumer Healthcare Limited on April 23.About the company: GlaxoSmithKline Consumer Healthcare Ltd. 1994. UK primarily to manufacture and sell malted food under the brand name of ‘Horlicks’. namely Eno Fruit Salt. Mother’s Horlicks. Subsequently. Beecham (India) Private Limited merged with Hindustan Milk food Manufacturers Limited in January. 1991. Smith Kline Beecham Consumer Healthcare Limited on March 29. 2002. The Company’s Shares are at present listed on The Stock Exchange. The Company also markets certain OTC brands. was incorporated in India on October 30. the name of the Company was changed to: Smith Kline Beecham Consumer Brands Limited on September 16. Junior Horlicks. the National Stock Exchange (NSE). Buy Back: 70 .

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.per share for an aggregate amount not exceeding Rs. The company will not buy back the shares through a negotiated transaction or through any private arrangement.99% of the issued share capital.083 fully paid equity shares of Rs. The mode of payment is cash and the consideration shall be paid by way of cheque / demand draft. The manager to the buy back offer for the company was Citigroup Global Markets Private Limited. 1998. 123.16%. The company will buy back the shares through the Tender Offer to all the shareholders.The offer will open on March 14th 2005 and close on April 12th 2005. the size of the Offer has been determined based on the paid up equity capital and free reserves as of December 31. 1956 and the Securities and Exchange Board of India (Buy-back of Securities) Regulations.24% of the paid up equity capital and free reserves of the Company as on December 2003 and 2004 respectively. 2003. and subsequent amendments thereof (“The Regulations”).325. Section 77 A and 77 B of the Companies Act. Since the Buy-back was approved by the Board of Directors on December 10. representing up to 7. Reasons for Buy back: 71 . through Tender Offer in accordance with the provisions of the Articles of the Association of the Company. equivalent to 25% and 23. was increased to 43. pre. post buy back. prior to the close of the financial year ended December 31. 10/each. The Promoters decided not to participate in the buy back and as such their percentage holding in the Company.buy back. 370/.81 lacs. 2004.02. 2004.33 % of the outstanding fully paid up shares of the Company at a price of Rs. The company decided to buy-back up to 3.

The buy back of shares had been done by the company in order to create long term Shareholders value. Few buy back of FMCG companies are Britania. Godrej. they tend to utilize these funds by buying back its shares. 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. and now HUL is also coming up with a buy back program. 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. improve return on Net Worth and enhance the Earning per share of the company. It can be seen that as the company does not have any long term debt. The Buy Back: 72 . Glaxo. 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 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.

50 Post Buy back Dec 05 47511. Post buy back the shares were extinguished and consequently the share capital of the company reduced.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.873 equity shares 135% more than the shares to be bought back by the company. 25.55% 25. Various Ratios: Pre Buy back Dec 04 599. The company received offers for buy back of 78. 22. Name of the company was changed to Apollo Finvest (India) Limited 73 . 1985.083 shares were bought back.12 116.35.18 22. The buy back Committee followed the method of proportional acceptance of shares and only 33.17 13.The company had a successful buy back offer.48 96.82% 16.65 20.

Further the company is debt free. from the existing owners/ beneficial owners of the shares of the company through “tender offer route” in accordance with Section 77A.00 Lacs (Rupees One Hundred and fifteen Lacs Only). jaipur and ahmedabad the buy back will provide an exit opportunity to those shareholders who so 74 . 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. Company is presently engaged into various activities like leasing and hire purchase finance. at present there is no immediate need for these funds.each of the Company.w.e. 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. investment in equities through PMS and investment and trading in shares Details of buy-back Apollo Finvest (India) Limited had announced the buyback of upto11.115. 50.000 fully paid up equity shares of Rs. Company then diversified by entering into financial services.10/. investment in debt and equity mutual funds.The Company was originally engaged in telecom products and pipes.f 12th May. 1992.00 per share payable in cash for an aggregate amount not exceeding Rs. The shares of the company are listed at the stock exchanges of Mumbai. 1956. 10. 77AA and 77B of the Companies Act. the Companies Amendment Ordinance 2001 and the SEBI (Buy-Back of Securities) Regulations 1998 at a price of Rs.

329 equity shares.75%.75%.each to maintain their shareholding at 58. 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. 75 .93. promoters will have to tender 6.675 equity shares of Rs 10/.425 equity shares. thus buy back from other shareholders will be to an extent of 4.74.e 58.67% 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. Basis of the offer The buy back price is 52. considering buy back of equity shares to the fullest extent. representing 58.75.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.75% of the paid up equity share capital of the company. 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.

33 applications for 10. 10/.354 equity shares in response to the Buy-Back Offer leading to the subscription of 110. 68.005 equity shares were rejected on technical grounds and 584 applications for 11. shares were proportionately accepted from among the valid applications and accordingly 1. of shares % of shares bought back 76 .per share. Name of the shareholder Mode No. Out of this.Public Announcement to this effect was issued on 07/01/2005 1. Sr.08.29%.000 equity shares were accepted proportionately under the buyback offer.50. 50.349 equity shares were returned to 577 applicants.000 equity shares The total amount invested in the Buyback is Rs.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. AFIL received 617 applications for 12. Details of shareholders who have sold the shares exceeding 1% of the total number of shares bought back.00 lacs The Shares were bought back at a price of Rs.2 The Buyback was effected through the tender offer route 1. Since the buyback offer was oversubscribed. No. 115.

Mr. Ms.35.44 3.No of Shares 1.75 20. Gnanamudhan D N Demat 6.849 13.575 2. Suman Agarwal Demat 5.513 43. Mr. Ms.81 1.75.43 5.520 12. Vipul Agarwal Demat 4. Ms. M/s Saksham Holding Ltd Demat 3.000 62.18 1. Pushpa Soni Demat 6.000 (%) 58.04 UNSUCCESSFUL BUYBACK The reason for a failure of a buy back can be divided into: 77 . Anju Innani Demat 2.

buyback of shares can be done only out of company's free reserves.f 12th May. securities premium account or proceeds of any earlier issue specifically made for buyback purposes. 1985. For example. approving the buyback decision. Moreover. If the company has not been able to fulfill any of these conditions laid down by SEBI. its buyback will not be considered valid. Their buy-back offer driven by Essar Shipping and Logistics Ltd (ESLL). Name of the company was changed to Apollo Finvest (India) Limited w. Company then diversified by entering into financial services. Apollo Finvest ltd co. 77AA and 77B in the Companies (Amendment) Act. post buyback DER has to be maximum 2:1 etc.The Company was originally engaged in telecom products and pipes. has failed to receive the minimum number of shares. SEBI has an exhaustive list of guidelines that a company must follow in the event of a buy back its own shares. Company is presently engaged into various activities like leasing and hire purchase finance. Buy-Back case Apollo Finvest (India) Limited was originally incorporated as Apollo Mercantile Limited on 29th July. required for the purposes of delisting. Board Resolutions need to be passed. investment in equities through PMS and investment and trading in shares Details of buy-back 78 . investment in debt and equity mutual funds. 1992. the largest shareholder and promoter of the company. To explain this further. we can take the example of Ruias-promoted Essar Shipping. 1999.1) Regulatory 2) Investor rejection REGULATORY – LEGISLATIVE In accordance with 77A. companies are allowed to buyback their own shares up to 25 percent of the paid up capital and free-reserves.e.

The shares of the company are listed at the stock exchanges of Mumbai.00 per share payable in cash for an aggregate amount not exceeding Rs.10/. the Companies Amendment Ordinance 2001 and the SEBI (Buy-Back of Securities) Regulations 1998 at a price of Rs. 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. 79 . 10.00 Lacs (Rupees One Hundred and fifteen Lacs Only). 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. 50. 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. Further the company is debt free. 77AA and 77B of the Companies Act.Apollo Finvest (India) Limited had announced the buyback of upto11. at present there is no immediate need for these funds. 1956.000 fully paid up equity shares of Rs.115. from the existing owners/ beneficial owners of the shares of the company through “tender offer route” in accordance with Section 77A.each of the Company.

considering buy back of equity shares to the fullest extent.74.67% 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. Public Announcement to this effect was issued on 07/01/2005 1.Basis of the offer The buy back price is 52. thus buy back from other shareholders will be to an extent of 4.675 equity shares of Rs 10/. promoters will have to tender 6.75.75% 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.329 equity shares.3 The Buyback Offer was open from 01/03/2005 to 30/03/2005 POST DETAILS OF THE BUYBACK 80 .75%.93.2 The Buyback was effected through the tender offer route 1.425 equity shares.e 58.75%.each to maintain their shareholding at 58. representing 58.

Ms. Since the buyback offer was oversubscribed.575 2. No. Anju Innani Demat 2. Out of this. 68. Vipul Agarwal Demat 4. shares were proportionately accepted from among the valid applications and accordingly 1. Name of the shareholder Mode No.81 1.44 3. 115. 50. Ms.35.000 (%) 58. of shares % of shares bought back No of Shares 1.18 1.000 equity shares were accepted proportionately under the buyback offer. Mr.354 equity shares in response to the Buy-Back Offer leading to the subscription of 110.005 equity shares were rejected on technical grounds and 584 applications for 11.04 81 . Ms. 33 applications for 10.50. Gnanamudhan D N Demat 6.000 62.520 12.The total number of shares bought back under the Buyback is 11.per share.849 13. AFIL received 617 applications for 12.08.29%. M/s Saksham Holding Ltd Demat 3.00 lacs The Shares were bought back at a price of Rs. 10/.000 equity shares The total amount invested in the Buyback is Rs.349 equity shares were returned to 577 applicants.43 5. Pushpa Soni Demat 6. Sr. Mr. Details of shareholders who have sold the shares exceeding 1% of the total number of shares bought back.75 20.513 43.75. Suman Agarwal Demat 5.

CASE STUDY: STERLITE INDUSTRIES 82 .

which has to be sent to Sterlite by June 21. 2002. 83 . Sterlite Industries will apply for delisting of the shares from the stock exchanges. SIIL’s main products. fifth and sixth year from the date of allotment. These are secured non-convertible debentures with a coupon rate of 10 per cent and redeemable at the end of the fourth. Copper Cathodes and Copper Rods meet global quality benchmarks. Copper and Zinc operations in India and Australia. Sterlite Industries proposes to purchase around 2. In 2001. 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. in this scheme of arrangement. 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. if the shareholder chooses to remain a shareholder of Sterlite. he must intimate to the company his intention to continue to hold equity shares. 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).79 crores equity shares (representing approximately 50 per cent of the paid-up equity) from the shareholders. It is the principal subsidiary of the Vedanta Resources Group a London listed metals and mining major with Aluminum.Sterlite Industries (India) Ltd (SIIL) is a leading producer of copper in India.. o If the public shareholding is reduced below 10 per cent. This has to be done by exercising his option using an option form provided for the purpose. o Unlike an open offer or buyback.

it was believed that the company had left some grey areas. 391 & 77 (a) and that the scheme also violated the Depositories Act under which shareholders' share could not be cancelled without their consent. you 84 . if any) will send the cheque for the accepted shares and the unaccepted shares. if any. legally speaking. Thus. 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. Shareholders have to communicate their non-acceptance of the offer to the company. that provides for buyback. 1956. And silence would be construed as an acceptance of the offer. if. for instance. A move without precedent. it follows a furor over the terms of the Sterlite open offer. 2.This arrangement of buyback met with a lot of uproar from SEBI as well as the investors with respect to legalities. The scheme provided that unless the shareholders rejected the offer specifically they would be deemed to have accepted it. 1. Hence. Once the tender of shares is done the registrar (after considering over subscription. Charges against Sterlite The Securities and Exchange Board of India (Sebi) moved the Mumbai high court for a stay of Sterlite’s buyback offer. It said that Sterlite had violated the Companies Act Provisions. Legal hindrance: The company had formulated the scheme under Section 391-394 of the Companies Act. sign and send to the company along with the cheque if they did not want to sell their holdings. 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. Section 77A. even while there is an existing provision in the Companies Act.

the non-operating assets on a per share basis works out to Rs 188 per share. the book value per share of Sterlite worked out to Rs 297. you will find a cheque in the mail soon thereafter and your shares bought and cancelled. o As of June 30. According to the break-up available for investments loans and advances and cash and bank balances as of June 30.missed reading the notice or forgot to send a letter of rejection. This procedure. 2001.29. 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. higher than the cash consideration payable on this offer. the free reserves (on a per share basis) —worked out to over Rs 125 per share. 1956. This is significantly higher than the total consideration payable under the scheme of arrangement working out to Rs 150 per share. o Sterlite has been on an investment spree over the past couple of years. Undervalued Price: There were also some rumblings that the company is buying back its equity cheap. 3. 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. 2001. The argument was based on the below contention. “The legislative intention behind the introduction of section 77A is 85 .

of its total paid up equity capital in any financial year. Since it would have acquired 90% promoter's shares. 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. the high court approved the scheme of arrangements after imposing a lot of conditions. However this was not possible as the buyback was only 30%. 86 . 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. And ultimately Sterlite was able to cancel only 30% of the total paid up equity capital as opposed to the 50% which was intended. However in the midst of the legal battle. The company had intended to delist the company from the exchange if it were able to mope up 50% shares from the market.to provide an alternative method by which a company may buy back up to 25 per cent. 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. 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. 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.” With respect to the arrangement of negative consent. Within a period of three months.

the buyback is likely to prop up shareholder value. Since this business has been hived off to Grasim. .INVESTOR REJECTION During a buyback. There are cases when the Buyback offer is rejected by the public due to various reasons. such investors would now have an exit route. 87 . the actual buyer seller relation is reversed. except to the extent of loss of interest income on the amount to be utilized for buy-back. A number of investors had invested in Indian Rayon because of the fact that it was in the cement business. it will result in an outflow of Rs 127-144 crores approximately. The choice of subscribing to the buyback offer lies with the investor. the Birlas' stake in Indian Rayon will go up to 28. Hence the best way to add value to shareholders is to return the funds to them. If the buyback offer is fully subscribed to. CASE: INDIAN RAYON In 1999. With the two of the three main businesses of the company-viscose filament yarn and insulators--not doing well and no further investments planned. we can take the case of Indian Rayon and Industries Ltd (IRIL). depending on the final price.5 per cent. Total 76. The buy-back will also enhance the EPS of the company and create long-term shareholder value. To explain this further. The buy-back was unlikely to cause any material impact on the profitability of Indian Rayon. 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. the company becomes the buyer & its shareholders the seller.06 lakh equity shares After buyback.7 per cent from the present 21. 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.

207 to Rs. 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. The investors were justified in rejecting the offer. The company in the last five years has seen its market capitalisation falling to Rs. thus it was not surprising that they decided to reject the offer made by the management. 1956. inspite of compliance of all the regulations as per the SEBI as well as the Companies Act.85 per share. Shareholders had seen their wealth falling considerably.1397 crores from early 1999. 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. The IRL buyback had been launched at a wrong time when the company was also not doing well and the markets were crashing. 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. 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. the company faced with a rather unsuccessful buyback 88 .67.455 crores as against Rs. Thus.Considering the above factors the management was confident about the success of the buyback scheme.

1000 2000 3000 4000 5000 6000 0 S e p 10 0 10 5 20 0 20 5 30 0 D 0 -9 5 0 e c -9 7 Sensex 7 M a r -9 8 8 8 -9 -9 -9 8 9 J u J u n e p e c a r S D M -9 Se pN 97 ov -9 Ja 7 n9 M 8 ar -9 M 8 ay -9 Ju 8 l-9 Se 8 pN 98 ov -9 Ja 8 n -9 M 9 ar -9 M 9 ay -9 Ju 9 l-9 Se 9 p9 N 9 ov -9 Ja 9 n0 M 0 ar M 00 ay -0 Ju 0 l-0 Se 0 p0 N 0 ov -0 Ja 0 n0 M 1 ar -0 M 1 ay -0 Ju 1 l-0 Se 1 p0 N 1 ov -0 Ja 1 n0 M 2 ar M 02 ay -0 2 89 .

In a recent filing with the US Securities and Exchange Commission. 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. 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. However the SEBI has refused to amend its norms as suggested by Oracle. if the minority shareholders do not surrender shares willingly to the new promoter. it added a rider stating it may think of an open offer if the share price is below Rs 2.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. 2100. 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 its efforts have continuously received lukewarm response from the investors. since its open offers received a tepid response. The amendment was aimed at compelling the minority shareholders to surrender the shares of I-flex in favor of Oracle. the US-based firm has reportedly been lobbying the Indian government for over a year to amend the SEBI takeover code. 90 . 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. a government source said. It would require a little over 90 per cent of shares to do so. 2006. Stung by this cold response from the market.its offer price of December 7.100 per share . The move will help it to integrate I-flex with its business worldwide. 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. However. Under current norms of SEBI.ORACLE I.

1 billion 91 . 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. 2007: per share Oracle accepted the 23 million shares tendered in the offer for approximately $1. Shares issued on Aug 14.How Oracle acquired I-flex Year Acquired Shares Oracle obtained 42. 2006 make an open offer to buy up to 20 per cent I-flex equity at Rs 1. 06 Jan 6.307.45 million shares at Rs 1. 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 12.475 a share Price of the open offer increased by 42 per cent to Rs 2.8 per cent.100 Sept 12. 2006: Dec 7. in I-flex solutions for $593 Nov 2005 Mar-Jun 2006 million.5 per share.

first money being flowing from investors to the company and then back. This would open up a very wide opportunity zone for the companies to be creative and do something distinctly different in the market place. who subscribed to the debt offer of the company. would be given the cash back for their equity. buy back of shares by the companies is allowed only for the cash. In the present scenario. In the instant case. planned to be bought back. 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. this may be made optional for the investors to take debt instrument or the cash for their equity holding. investors may be paid cash by the company through some alternative arrangement of the funds. Both the said transactions can be squeezed to one by allowing the buyback of shares for other than the cash. Hence. In other words. which is made to raise funds to meet the buy back outflow. those equity investors. Accordingly.INNOVATION Buyback of the shares for other than the cash At present. it is always possible that some existing shareholders of the company would be subscribing to the debt offer of the company. company could offer the debt instrument to the said investor instead of first receiving the cash and then paying it back. It may be prudent to argue here that all the equity holders may not be interested in the debt instrument. there is a feeling in the market that the same may be allowed. However. In that case. Then company would use the same funds for buying the equity back from the said investors. as per the buy back regulations. 92 . This instrument to instrument transaction could save enormous administrative hassles and financial loss to both the investors and issuers. This is resulting in the two cycles of cash movement . It means that the company may raise the funds through say a debt instrument for paying for the equity.

e. Therefore. This is. In addition. allowing companies to buyback for other than the cash would pave the way for enormous creativity in the system. buyback may be allowed. company may like to replace the equity with the debt or any other instruments. 93 . it makes enormous sense for the companies to go for exchange of instruments i. indeed. there would be the requirement of the offered instrument being of minimum investment grade quality. 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. 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. Further. being practices globally at a large scale as a corporate restructuring exercise. for the Capital restructuring.Further.

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