REPORT ON

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

Prepared by Dipock Mondal

ROHIT BANKA VIVEK BHIMRAJKA NEHA CHAWLA

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

6057 6063 6066 6092 6161 6179

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

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TABLE OF CONTENTS Serial No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Particulars Meaning Of BuyBack History Of BuyBack Objective Of BuyBack Advantages & Disadvantages Of BuyBack Provisions & Conditions Of BuyBack Methods Of BuyBack BuyBack for Unlisted Companies BuyBack for Listed Companies Methods for BuyBack Under SEBI Merchant Banker Page No. 5 6–7 8 - 10 11 - 13 14 – 23 24 – 26 27 - 30 31 - 33 34 – 44 45
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11. the relative 4 . increasing internal control of the company. In the case of stocks. this reduces the number of shares outstanding. When a company's shareholders vote to authorize a buyback. also called corporate repurchase. and the number of outstanding shares on the market is reduced. 16. Definition 2 A stock buyback. 20. is a company's buying back its shares from the marketplace. 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. raising earnings per share. Reasons for buybacks include putting unused cash to use. You can think of a buyback as a company investing in itself. 18. When this happens. 13. also known as a "share repurchase". 12. 17. 19. repurchased shares are absorbed by the company. and obtaining stock for employee stock option plans or pension plans. 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. they aren't obliged to actually undertake the buyback. The idea is simple: because a company can’t act as its own shareholder. giving each remaining shareholder a larger percentage ownership of the company. 15. 14. or using its cash to buy its own shares.

The buyback ordinance was introduced by the Government of India (GOI) on October 31. or claims. The buy back of shares is governed by the Securities and Exchange Board of India's (SEBI) Buy Back of Securities Regulation. and Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and Takeover Regulations. The ordinance was issued along with a set of conditions intended to prevent its misuse by companies and protect the interests of investors. The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids. 1998. they could do so only by diluting their shareholding and getting listed on the exchange. HISTORY OF BUYBACK OF SHARES IN INDIA Prior to 1998 buybacks were not allowed in India. 77AA and 77B in the Companies Law which allowed buyback. In the 1970’s period. if MNC’s wanted to continue doing their business in India. 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. 1998.ownership stake of each investor increases because there are fewer shares. There was Insertion of new sections 77A. The buyback of shares was allowed only 5 . 1997. and the amended Companies Act 1956. They were thus forced to go public. on the earnings of the company Definition 3 Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price.

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

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

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

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

By last January. A typical example is the HP case: From November 1998 through October 2000. 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. The aim was to make opportunistic purchases of HP stock at attractive prices—in other words. long-term investors will respond to a buyback announcement by selling the company’s shares. 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. 12 .2 billion to buy back 128 million of its shares. In such cases. slipping financial results.recognised exchange nor is the STT paid. So. HP’s shares were trading at around half the average $64 per share paid to repurchase the stock. at prices they felt undervalued the company. Disadvantages: • Sending Negative Signals: A buyback announcement can send a negative signal in these situations. plus 2 per cent education cess. the buyback signal was completely drowned out more powerful contradictory signals about the company’s future which are an aborted acquisition. 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. if any. • Stock buybacks also raise the demand for the stock on the open market. On the resultant gain. the computer giant Hewlett-Packard spent $8. • 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. 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.

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

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

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

or with fine which may extend to fifty thousand rupees. of its total paid up equity capital in any financial year subject to compliance with sub-sections (2). (3) and (4)." only means that notwithstanding the provisions of section 77 and sections 100 to 104. the company can buy back its shares subject to compliance with the conditions mentioned in that section without approaching the court under sections 100 to 104 or section 391. The offences are... 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. 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. 1956 Prior to Section 77A Prior to the introduction of section 77A. the only manner in which a company could buy back its shares was by following the procedure set out under sections 100 to 104 and section 391 which required the calling of separate meetings of each class of shareholders and creditors as well as (if required by the court) the drawing up of a list of creditors of the company and obtaining of their consent to the scheme for reduction. it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back. of course compoundable under Section 621A of the Companies Act. or with both.Where a company buys-back its own securities. 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 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.

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

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

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. Moreover. the necessity for buy back. (e) all shares or other specified securities are fully paid. is not allowed to buy back shares. preference shares. the paper notes that buyback of shares can be done only out of company's free reserves. it is prohibited from issuing fresh equities within two years of buy back. stock option schemes. 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. and the time limit for completion of buy back. 3) A company which has defaulted on repayment of deposits. 2) A company is required to destroy the shares bought back within seven days of completion of the buy back. 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. companies are allowed to buyback their own shares upto 25 percent of the paid up capital and 19 .up. term loan. Regulations on buy-back of shares On buyback of shares. and (f) the buy back is in accordance with SEBI regulations framed for this purpose. debentures. etc. etc. class of securities to be purchased and the amount to be invested under the buy back. Buy back of shares through subsidiary companies or investment companies is also prohibited. redemption of debenture/preference share. securities premium account or proceeds of any earlier issue specifically made for buyback purposes. A maximum time of one year from the date of passing of resolution has been stipulated to complete the buy back. into equity shares. Further.

where an issuer may buyback shares from a subset of shareholders on a preferential basis was examined by the Committee constituted by the SEBI. Therefore.free-reserves. 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 concept of targeted buyback. 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). Securities And Exchange Board Of India (Buy-Back Of Securities) (Amendment) Regulations. in the emerging global scenario where companies have to consolidate and reposition themselves. 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. 2007. It would be in fitness of things to exempt even the buyback offers and put it on par with secondary market transactions. 1998. Australia etc. The facility is used in some countries (a) effecting a block repurchase from large shareholders (b) effecting purchases from employees (c) thwarting takeover attempts. This concept is not yet addressed in Indian Law. 1992 (15 of 1992) read with clause (f) of sub-section (2) of Section 77A of the Companies Act. is to examine whether there should be any restriction at all for buyback of shares? If so. 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. which is an essential ingredient of the Capital Market. namely:- 20 . the Committee does not find this mechanism to be appropriate at this stage. The crucial question. what percentage of the paid up capital and free reserves should be allowed? In case of buyback of shares.

21 . pay fees as set out below:Offer size Less than or equal to one crore rupees. Five crore rupees (Rs. Ten crore rupees (Rs.00.00. These Regulations may be called the Securities and Exchange Board of India (Buy-Back of Securities) (Amendment) Regulations. More than one thousand crore rupees. 1998." 0. 1.000/-).00.5% of the offer size.000/-). 2.00.1000. but less than or equal to five thousand crore rupees.00.00.1.000/-). 2007.) One lakh rupees (Rs. but less than or equal to five crore rupees. More than ten crore rupees. More than five thousand crore rupees. More than five crore rupees. In the Securities and Exchange Board of India (Buy-Back of Securities) Regulations.000/-) plus 0.00. in Schedule IV. 2. More than one crore rupees.00. Three lakh rupees (Rs. Two lakh rupees (Rs. 3. but less than or equal to ten crore rupees. Fee (Rs.000/-). for paragraph (1).000/-). namely:Every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board.10.125% of the portion of the offer size in excess of one thousand crore rupees (Rs.00. 5. the following paragraph shall be substituted. but less than or equal to one thousand crore rupees. 3. They shall come into force on the date of their publication in the Official Gazette.

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

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

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

27 a share. The price offered was less than half the book value of the company.5% stake (around 3 million shares) at Rs 54 per share for a consideration of Rs.5% stake in Gesco at an average cost of Rs. 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. The A H Dalmia group ultimately sold its 10. The A H Dalmia group had acquired the 10.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. 72 million. the A H Dalmia group was able to make a profit of Rs. The offer and counter offers made by the A H Dalmia group and the promoters of GESCO pushed up the bidding cost. 25 . 163 million before the year end. Hence. 24 per share for a consideration of Rs. In October 2000. 91 million through greenmail transaction in less than 6 months.

the necessity for the buy-back. 1999. Letter of offer 26 . 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. Methods A company may buy-back its shares by either of the following methods: • • from the existing shareholders on a proportionate basis through private offers. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. 1956 and the explanatory statement is to be annexed to the notice for the general meeting containing all disclosures. These were passed by the Central Government on 6th July1999. The statement shall contain the date of the Board meeting at which the proposal for buy back was approved.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 basis of arriving at the buy back price. etc. It will also state that the BOD has checked that the company would be able to pay all its debts. the class of security intended to be purchased under the buy-back. the time limit for the completion of buy-back.

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

factual and material information i. 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. Return to be filed with Registrar A company. Payment to the shareholder The Company shall immediately after the date of closure of the offer open a special bank account and deposit therein. 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. which would make up the entire sum due and payable as consideration for the buy-back. The company shall not withdraw the offer once the draft letter of offer has been filed with the Registrar of Companies. 28 . and The company shall not utilize any money borrowed from Banks/Financial Institutions for the purpose of buying back its shares.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. shall file with the Registrar a return in the Form. 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.e. • • • • The company shall not issue any shares including by way of bonus till the date of the closure of the offer under these rules. General obligations of the company The company shall ensure that: • The letter of offer shall contain true. the format of which is mentioned in the Rules.

After the process is complete the company again has to file a form with the ROC and thus the process will be completed. 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. After all the requirements are fulfilled and document submitted to ROC the company can proceed with the buyback.Extinguishment of Certificate The company shall extinguish and physically destroy the share certificates so bought back in the presence of the Company Secretary within 7 days from the date of acceptance of the shares. The 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. 29 .

(i) Under Registered Post Acknowledgement Due. Special Regulation Incase the Offer size is greater than 25% of its Equity share capital & free reserves. the company can go ahead with the buy back only if a special resolution is passed at the general meeting. When the 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. or (ii) Under certificate of posting. 2001. The buyback of shares can’t take place for delisting of shares from the Stock Exchange.BUYBACK FOR LISTED COMPANIES The regulation is applicable to buyback of shares or other specified securities of a company listed on a Stock Exchange. “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.” 30 . 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. 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. Method for sending notice: (a) The company may issue notices either. about having despatched the ballot papers.

6. 8. The number of securities that the company proposes to buy back. A confirmation that the BOD has made a full enquiry into the affairs and prospects of the company and are of the opinion- 31 . 10. A confirmation that there are no defaults subsisting in repayment of deposits. as on the date of the notice convening the General Meeting. 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. The maximum amount required under the buy back and the sources of funds from which the buy back would be financed. The date of the Board meeting at which the proposal for buy back was approved by the BOD. 5. redemption of debentures or preference shares or repayment of term loans to any financial institutions or banks. The company may specify one reason to be adopted for buy-back so that the shareholders authorize the BOD for the same. a. b. 9. The aggregate shareholding of the promoter and of the directors of the promoters. The basis of arriving at the buy-back price. The maximum and minimum price at which purchases and sales were made along with the relevant dates.Explanatory Statement The company needs to make the following disclosures in the statement 1. The necessity for the buy back 3. Aggregate number of shares purchased or sold by such persons during a period of six months preceding the date of the Board Meeting c. 7. 4. 2.

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

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

• If the promoter intends to offer their specified securities .   The quantum of shares proposed to be tendered. 34 . • Brief information about the company. 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. Details of PA • • • • Disclaimer clause as may be prescribed by SEBI. Public Announcements The company which has shall before buyback of shares make a public announcement in at least one English National Daily. if yes . 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. the price and the date of acquisition. The details of their transactions and their holdings for the last six-months prior to the passing of the special resolution for buy-back including information of number of shares acquired. The proposed time table from opening of the offer till the extinguishment of the certificates. The Specified date: This shall be the `specified date’ for the purpose of determining the names of the shareholders to whom the letter of offer shall be sent. one Hindi National Daily and a Regional language newspaper. 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 capital structure including details of outstanding convertible instruments. i. ii. The aggregate shareholding of the promoter group and of the directors of the promoters. The market price immediately after the date of the resolution of the Board of directors approving the buy back. if any post buy back. (e.g. Monthly high and low prices for the six months preceding the date of the PA. High. Listing details and stock market data. low and average prices of securities of the company. 35 . Along with high. when the securities have become ex-rights or ex-bonus). the maximum and minimum price at which purchases and sales referred were made along with the relevant dates. where the promoter is a company shareholding of persons who are in control of the company. during the preceding three years. • • • Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern. v. details relating to volume of business transacted should also be stated for respective periods.• • • • Audited Financial information for the last 3 years Details of escrow account opened and the amount deposited therein. The Volume on the days when the high and low prices were recorded on the relevant stock exchanges during the above period. and The volume of securities traded in each month during the six months preceding the date of PA. • The aggregate number of shares purchased or sold by such persons during a period of twelve months preceding the date of the PA. Low and average market prices of the securities of the company proposed to be bought back. 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 . iii. iv.

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

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

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

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

if any. but less than or equal to five thousand crore rupees.00.000/-). More than five crore rupees. More than ten crore rupees.000/-).Fee Structure As per the amendment in the Act. 1. Two lakh rupees (Rs. 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. but less than or equal to ten crore rupees.000/-) plus 0.000/-).00. Ten crore rupees (Rs.000/-). 3. Fee (Rs. More than five thousand crore rupees. More than one thousand crore rupees. 2. 5.125% of the portion of the offer size in excess of one thousand crore rupees (Rs.” Modification of LoF Within twenty-one days from the date of submission of the draft letter of offer.00.00. Three lakh rupees (Rs.00.00. but less than or equal to five crore rupees.000/-). in the draft letter of offer.5% of the offer size. pay fees as set out below. Five crore rupees (Rs. every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board.10.) One lakh rupees (Rs.00.00. but less than or equal to one thousand crore rupees. More than one crore rupees.1000. SEBI specifies modifications. 0. The merchant banker and the 40 .00. as on 28th May 2007.

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

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

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

inaccurate or misleading manner and is made in accordance with the Regulations. provided such disclosure(s) is not presented in an incomplete. Still this method is rarely used. Investors are given more say in the buyback price than in the above arrangement. the price is fixed at a mark up over and above the average price of the last 12-18 months. o This standard Letter of Offer enumerates the minimum disclosure requirements to be contained in the Letter of Offer for the Buy Back of equity. The low point of the range is at a discount to the market price. concise and easily understandable language. 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. VALUATION OF BUYBACK OF SHARES There • are two ways companies determine the buyback price. Based on the trend and value a buyback price is decided • Shareholders are invited to sell some or all of their shares within a set price range. The 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. while the top of the price range is set at a premium 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. clear.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. 47 . Generally.

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

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 .

e. Accordingly. 1999 requires the securities bought back to be extinguished and physically destroyed within seven days of the last date of completion of buyback. 50 .. 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. do not expressly deal with the accounting aspects of buyback thereby giving total freedom to the Indian companies to treat the buyback transactions as they think fit. as inserted by the Companies (Amendment) Act. 1999. Sub-section (7) of Section 77A of the Companies (Amendment) Act. be treated in books of accounts? Before examining the above issues in Indian context. fees of advocate and merchant bankers. costs of paper announcements and printing of offer letters etc. 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. there is a need to see what the law provides. 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.● How would the expenses incidental to buyback. the acceptable accounting treatment of the buyback transactions may be determined by applying authoritative accounting principles to the form and substance of the transactions. As the law is silent. 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. The legal provisions on buyback. According to Section 77A(1). Further. Section 77AA of the Act states that where buyback is done out of free reserves or securities premium account. legal expenses.g.

if an Rs. Hence. The third key accounting issue relates to the excess amount paid on buyback over and above the nominal value of the shares bought back. in so far as the use of funds accumulated through plough back of profit. Thus. varying treatment may be found in practice. debenture-holders and financial institutions are not adversely affected on account of buyback. to maintain sanctity of the capital structure of the business and to prevent capital reduction. how should the excess amount of Rs. there is no doubt that the entire Rs.5 per share paid on buyback be accounted for by the company? Should such premium of Rs.10 share is bought back for Rs.1956. there is reduction in net worth of the company as no further issue of capital is made. any premium paid 51 . That is.15. But. Such a transfer of profit becomes necessary to prevent capital erosion and hence to ensure that the interests of the creditors. it is provided that there should be a transfer to capital redemption reserve that can be utilized only for issue of fully paid bonus shares. It may also be noted that the requirement to make a transfer to the capital redemption reserve do not apply when buyback is funded from the proceeds of any share issue because the company’s distributable reserves and the aggregate value of the paid-up capital remain intact in this case as the new kind of securities simply replaces those which are bought back.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.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. For instance. logically.

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

In the light of the above discussions and in view of the fact that there is no accounting standard in the U. to guide such transactions. will be either credited to ‘Profit On Sale of Investment Account’ or debited to ‘Loss on Sale of Investment Account’. if any. which in turn will be transferred to ‘Profit and Loss 53 . 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. or in the U. the accounting entries for buyback transaction have been developed in the following section.K.of such incidental buyback expenses. between the sale-proceeds and book-value of such investments.S. 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. (with the amount realized) To Investment Account (with the book-value) [The difference.

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

Securities Premium Account Dr.(with the excess amount i. premium paid over nominal value) To Shareholders’/ Security holders’ Account (with the amount paid) (v) In case the shares/specified securities are bought back at a discount:Share Capital/ Specified Security Account Dr.. (with the nominal value) To Shareholders’/Security holders’ Account (with the amount paid) To Capital Reserve Account (with the amount of discount on buyback) (vi) For transfer of nominal value of shares purchased out of free reserves/securities premium account to capital redemption reserve account: Free Reserve Account Dr. To Bank Account (with the amount of such incidental expenses incurred on buyback) 55 . (with the nominal value of security bought back) Free Reserves/Securities Premium Account Dr.Share Capital/ Specified Security Account Dr. To Capital Redemption Reserve Account (with the nominal value of securities bought back) (vii): For expenses incurred on buyback of shares Buyback Expenses Account Dr.e.

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

67% Post Buyback case1 case 2 case 3 40% 33. We are assuming that there is a 100% buyback of 25 shares which the company has proposed to make.33% 25% 60% 66. Thus the proportion of promoters share in the total equity capital increases from 33.e. As the company has offered to buyback 25 shares.SHARE HOLDING PATTERN OF COMPANY A LTD Pre Particulars Promoters ( no of shares) Non promoters (No of shares) Buyback 50 100 Post Buyback case1 case 2 50 42 75 83 case 3 31 94 SHAREHOLDING PATTERN IN %TERM Pre Particulars Promoters ( no of shares) Non promoters (No of shares) ASSUMPTIONS Buyback 33.33% and Non promoters 66. CASE 3: in this case the company decides to bring down the promoters shares in the 57 . 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. CASE 2: Here the company decides to keep the shareholding same as before i.67%. 17 shares.33% 66.67%.67% 75% CASE 1: the original proportion of promoters and non promoters share in the total equity capital was 33.33% and 66.33% to 40%. to maintain the same shareholding pattern promoters has to offer 8 shares of their own and the rest would be the net offer to the public i.e.

Promoters share can increase decrease or remain the same. There are four majors Ratios which gets impacted due to buyback. The impact is more on the positive side. 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. That means promoters have to offer 19 shares and net offer to the public would be only 6 shares.company’s equity share capital to 25%. 2. Therefore we can say that depending on the policy of the company the shareholding pattern of the company changes. 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 .

88 10 1 15 0.15 0. Pre Particulars Cash Assets Earnings Outstanding Shares Equity share Reserves Shareholders Equity Market Share 10 0.Example: Company B Ltd.13 12 1.16 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 .

which has gone down from Rs. On the other hand EPS has also increased from 10 to 12. The reason behind this increase is that there is a reduction in the total assets. which is a 50% hike in the price. Earning Per Share:It has also increased from Rs. income remaining same.10 to Rs. The reason behind the increase of EPS is that the numbers of shares have reduced from 150 to 125. Return on Equity: It has also increased from 0.10. 60 . This is due to decrease in the shareholder’s equity. Therefore we can see an increase in the priceearning ratio.13%.15.12. Since the overall increase in the market value of the share is much more than the increase of EPS.10 to Rs. Total assets have gone down from Rs. causing EPS ratio to increase. Price – Earning Ratio: Here market value of the share has increased from Rs. which is a 20% hike.1500 to Rs.9625. 000 to Rs.Return on Assets: We can see that ROA has increased after buyback.88% to 1.1250.

When a company pays dividend they are entitled to pay tax at the rate of 15%. So the net amount which would be received by the shareholder would be Rs. Higher Proportion of share: When a company goes for buyback.127.22.5 crore. they can either pay it off as dividend or buy back shares.150 crore as dividend then company has to pay tax of Rs. This cost has to be born by shareholders. if the company would have given them surplus cash by way of dividend.150 crore is received by the shareholder. who receive less cash then what is declared. 61 .5 crore. which they would have incurred. If a company decides to go for buyback of shares then the entire amount of Rs. Example: A company has surplus cash of Rs. number of shares outstanding reduces. Thus shareholders save tax of Rs.5 crore.150 crore and if they declare Rs. That means proportion of an individual investor increases. Therefore by Buying back shares. company would have 750 shares outstanding. company gives surplus cash to the shareholder and saves tax for the shareholders. This can be explained with the help of an example: A company which has 1000 outstanding shares goes for buyback of 250 shares.22.Effects On The Shareholder Tax Benefits: When a company has surplus cash. So after 100% buyback.

500 to Rs.600. 62 .600 based of their fundamental and technical analysis.600 from the market and thus increasing the market value of the share from Rs.500 and company believes that the price of their share should be at Rs. Thus there is an increase in his/her proportional share. Higher Share Price: One of the reasons why a company goes for a buyback is that they think that their shares are undervalued. Therefore company buys back share at Rs. That is why they buyback share at a premium or at a price that they think it should command in the market.If an individual investor has 50 shares then its proportional share in the company’s total paid up equity share capital would be 5% before buyback and after buyback it would be 6.67%. For example a company market price of the share is Rs.

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

50% is owned by Resident Individuals. 2006. Which is why they may be willing to buy-back some of their own stock to create wealth for shareholders 64 . 31. the company has 410. HUL's buy-back is not substantial and more of probably a sentiment booster for the stock. 2007. Unilever holds 51. 4) Shareholding: HUL’s parent Company. and NRI OCB. the maximum number of shares that HUL could have bought was 3.The company became the first foreign subsidiary company in India to offer equity to the Indian public.93% by Insurance companies and Financial Institutions and the rest by Mutual Funds.42% of its equity. HUL is listed in the Bombay Stock Exchange and the National Stock Exchange. 12. so 25% of that would be about Rs 681 crore. 12. When this news was announced. Today. HUL net worth as on December 2006 stood close to Rs 2. Private Corporate Bodies. 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.32% by Foreign Institutional Investors.5 crore on its total equity base of 221 crore shares outstanding. while 17.724 crore. Reason The Unilever management feels the stock is undervalued and they believe in the prospects of the Indian FMCG story. The average closing price of HUL share in the BSE for the last six months is Rs 196. The maximum price is at a premium of 17% over the closing price of the Company’s share as on 27th July 2007. So in terms of equity value. Offer Hindustan Unilever Limited has decided to go for buyback of shares at its meeting held on 29th July.000 resident shareholders. Today.

The buyback is proposed to effectively utilize the surplus cash and make the balance sheet leaner and more efficient to improve returns. Financials of the company (Pre and Post Buyback): Post Buyback Assumption: 100% buyback happens at the maximum price quoted by the company Rs 230 per share. 65 .

42 -1128.3 1400.7 5 3362.93 110.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 220.75 3 1146.5 Current Liabilites Provision Net Current assets Investments Capital work in progress 3362.68 2502.26 2166.75 Current Assets Loans & Advances 2408.09 217.47 2166.85 2413.09 66 .13 35.13 35.26 2796.51 1321.14 37.33 1146.47 2796.09 1 1321.85 2413.75 1778.93 110.4 2 1758.09 1400.94 1874.88 37.

0 Total Assets Net Worth No of Shares Mrkt price of 9 2722.86 0.68 8.8 2 221 2166.DATA 2006 2007(E) 2796.66 0.03 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 0.09 2092.39 25.51 27.89 8.73 0.

06%. ROE: Company’s ROE has increased from 0.94 crore in 2007. Reason behind this is that total number of share outstanding has reduced from Rs 220. This is due to reduction in the total assets which goes down from Rs 2796.82 crore in 2007. After buyback number of shares outstanding has reduced to 218 crore shares.66 and in year 2007 it will become 0.68 crore in 2006 to Rs 217.86. P/E Ratio: Company’s P/E Ratio has increased from 25. Thus increasing promoters share to 51. EPS: Company’s EPS has increased from 8.09 crore as the cash is reduced by Rs 630 crore for buying back shares @ Rs 230 each.51 in 2007.09 crore to Rs 2166.82 crore in 2006 to Rs 2092.89 in 2007. Reason behind this is that the market price of the share has increased from Rs 216/ share in 2006 to Rs 230/ share in 2007. Promoters share: Its share in the company was 50.37% during the year 2006 when number of shares was 221 crore.39 in 2006 to 8.ROA: Company’s ROA in the year 2006 was 0.68 in 2006 to 0.73 in 2006 to 27. reason behind this is that total net worth of the company has gone down from Rs 2722. Effects on the Shareholder 68 .03 in 2007.

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

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

and subsequent amendments thereof (“The Regulations”). equivalent to 25% and 23.16%. Section 77 A and 77 B of the Companies Act.24% of the paid up equity capital and free reserves of the Company as on December 2003 and 2004 respectively. 1998. 370/. through Tender Offer in accordance with the provisions of the Articles of the Association of the Company. Since the Buy-back was approved by the Board of Directors on December 10. Reasons for Buy back: 71 . 2004. The company will buy back the shares through the Tender Offer to all the shareholders. 2004. the size of the Offer has been determined based on the paid up equity capital and free reserves as of December 31. prior to the close of the financial year ended December 31. 10/each. 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. The company will not buy back the shares through a negotiated transaction or through any private arrangement. The mode of payment is cash and the consideration shall be paid by way of cheque / demand draft. was increased to 43. The manager to the buy back offer for the company was Citigroup Global Markets Private Limited.02.325. 1956 and the Securities and Exchange Board of India (Buy-back of Securities) Regulations. 123.buy back. pre. representing up to 7.083 fully paid equity shares of Rs.33 % of the outstanding fully paid up shares of the Company at a price of Rs. post buy back. The company decided to buy-back up to 3. 2003.per share for an aggregate amount not exceeding Rs.99% of the issued share capital. The Promoters decided not to participate in the buy back and as such their percentage holding in the Company.The offer will open on March 14th 2005 and close on April 12th 2005.81 lacs.

Godrej. Few buy back of FMCG companies are Britania. 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. Glaxo. It can be seen that as the company does not have any long term debt. 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. they tend to utilize these funds by buying back its shares. The Buy Back: 72 . therefore this is one of the reason why the company has bought back its shares. Glaxo SmithKLine Consumer HealthCare Limited is an FMCG company and it has been observed that this industry do not have any major expansion plan and because they have surplus funds available with them. which would mean that there would not be any major payments in the future.The buy back of shares had been done by the company in order to create long term Shareholders value. and now HUL is also coming up with a buy back program. improve return on Net Worth and enhance the Earning per share of the company.

55% 25. The buy back Committee followed the method of proportional acceptance of shares and only 33. 25. The company received offers for buy back of 78.48 96.65 20.17 13.62 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. 22.873 equity shares 135% more than the shares to be bought back by the company.35.The company had a successful buy back offer. Various Ratios: Pre Buy back Dec 04 599.12 116.82% 16.18 22. Name of the company was changed to Apollo Finvest (India) Limited 73 . Post buy back the shares were extinguished and consequently the share capital of the company reduced.083 shares were bought back.50 Post Buy back Dec 05 47511. 1985.

from the existing owners/ beneficial owners of the shares of the company through “tender offer route” in accordance with Section 77A. jaipur and ahmedabad the buy back will provide an exit opportunity to those shareholders who so 74 .The Company was originally engaged in telecom products and pipes.000 fully paid up equity shares of Rs. 10. 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. 77AA and 77B of the Companies Act. investment in debt and equity mutual funds.00 per share payable in cash for an aggregate amount not exceeding Rs.f 12th May. 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.10/. Further the company is debt free.each of the Company. The shares of the company are listed at the stock exchanges of Mumbai. the Companies Amendment Ordinance 2001 and the SEBI (Buy-Back of Securities) Regulations 1998 at a price of Rs. 1992.115.00 Lacs (Rupees One Hundred and fifteen Lacs Only).w. Company then diversified by entering into financial services. at present there is no immediate need for these funds. 1956. 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. Company is presently engaged into various activities like leasing and hire purchase finance.e. 50.

Basis of the offer The buy back price is 52. considering buy back of equity shares to the fullest extent. 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%.75%.each to maintain their shareholding at 58.75% of the paid up equity share capital of the company.93. 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 28.425 equity shares.675 equity shares of Rs 10/.329 equity shares.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.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. 75 .e 58. promoters will have to tender 6.74. representing 58.75. thus buy back from other shareholders will be to an extent of 4.

No.00 lacs The Shares were bought back at a price of Rs.2 The Buyback was effected through the tender offer route 1. AFIL received 617 applications for 12.349 equity shares were returned to 577 applicants.per share. Details of shareholders who have sold the shares exceeding 1% of the total number of shares bought back. Since the buyback offer was oversubscribed. 50.000 equity shares The total amount invested in the Buyback is Rs.29%. 68.3 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.Public Announcement to this effect was issued on 07/01/2005 1. of shares % of shares bought back 76 . 10/.354 equity shares in response to the Buy-Back Offer leading to the subscription of 110.08.50. Sr.000 equity shares were accepted proportionately under the buyback offer. Name of the shareholder Mode No. Out of this.005 equity shares were rejected on technical grounds and 584 applications for 11. 115. 33 applications for 10. shares were proportionately accepted from among the valid applications and accordingly 1.

18 1.No of Shares 1. Ms. Anju Innani Demat 2. Ms.35. Mr.000 62.75. Pushpa Soni Demat 6.75 20. Mr.43 5.81 1. Vipul Agarwal Demat 4.44 3.575 2.849 13.513 43. Suman Agarwal Demat 5.520 12. M/s Saksham Holding Ltd Demat 3.000 (%) 58. Ms.04 UNSUCCESSFUL BUYBACK The reason for a failure of a buy back can be divided into: 77 . Gnanamudhan D N Demat 6.

1985. approving the buyback decision. Apollo Finvest ltd co. Their buy-back offer driven by Essar Shipping and Logistics Ltd (ESLL). To explain this further. investment in equities through PMS and investment and trading in shares Details of buy-back 78 . investment in debt and equity mutual funds. 77AA and 77B in the Companies (Amendment) Act. required for the purposes of delisting. Company is presently engaged into various activities like leasing and hire purchase finance. 1992. For example.1) Regulatory 2) Investor rejection REGULATORY – LEGISLATIVE In accordance with 77A. Company then diversified by entering into financial services. its buyback will not be considered valid. has failed to receive the minimum number of shares. Board Resolutions need to be passed. companies are allowed to buyback their own shares up to 25 percent of the paid up capital and free-reserves. 1999. SEBI has an exhaustive list of guidelines that a company must follow in the event of a buy back its own shares.The Company was originally engaged in telecom products and pipes. If the company has not been able to fulfill any of these conditions laid down by SEBI. post buyback DER has to be maximum 2:1 etc. Name of the company was changed to Apollo Finvest (India) Limited w. the largest shareholder and promoter of the company.e. we can take the example of Ruias-promoted Essar Shipping.f 12th May. Moreover. buyback of shares can be done only out of company's free reserves. securities premium account or proceeds of any earlier issue specifically made for buyback purposes. Buy-Back case Apollo Finvest (India) Limited was originally incorporated as Apollo Mercantile Limited on 29th July.

The shares of the company are listed at the stock exchanges of Mumbai. 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.00 per share payable in cash for an aggregate amount not exceeding Rs.Apollo Finvest (India) Limited had announced the buyback of upto11.115. 50.10/.each of the Company. 79 .000 fully paid up equity shares of Rs. 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. at present there is no immediate need for these funds. 77AA and 77B of the Companies Act. from the existing owners/ beneficial owners of the shares of the company through “tender offer route” in accordance with Section 77A. Further the company is debt free. 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. the Companies Amendment Ordinance 2001 and the SEBI (Buy-Back of Securities) Regulations 1998 at a price of Rs. 1956. 10.00 Lacs (Rupees One Hundred and fifteen Lacs Only).

considering buy back of equity shares to the fullest extent. thus buy back from other shareholders will be to an extent of 4. Public Announcement to this effect was issued on 07/01/2005 1.Basis of the offer The buy back price is 52. 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 28.329 equity shares.67% more than the average of the high low of closing prices of the shares on BSE during the 26 weeks period prior to 31/12/2004.74.3 The Buyback Offer was open from 01/03/2005 to 30/03/2005 POST DETAILS OF THE BUYBACK 80 .675 equity shares of Rs 10/. promoters will have to tender 6.93.e 58.each to maintain their shareholding at 58.425 equity shares. representing 58.75.75%.75%.75% of the paid up equity share capital of the company.2 The Buyback was effected through the tender offer route 1. 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.

M/s Saksham Holding Ltd Demat 3.per share. Since the buyback offer was oversubscribed.000 equity shares The total amount invested in the Buyback is Rs. 50. No. Vipul Agarwal Demat 4.43 5. Sr.005 equity shares were rejected on technical grounds and 584 applications for 11.50.29%.75 20. Anju Innani Demat 2.81 1. 10/.00 lacs The Shares were bought back at a price of Rs.513 43. Ms. shares were proportionately accepted from among the valid applications and accordingly 1.000 62.08. of shares % of shares bought back No of Shares 1.354 equity shares in response to the Buy-Back Offer leading to the subscription of 110. Ms. 115. Mr.04 81 .575 2. Out of this. 33 applications for 10.The total number of shares bought back under the Buyback is 11. Name of the shareholder Mode No.849 13. Pushpa Soni Demat 6.44 3.75.520 12.35.000 equity shares were accepted proportionately under the buyback offer. Ms. Mr. Suman Agarwal Demat 5.000 (%) 58. Details of shareholders who have sold the shares exceeding 1% of the total number of shares bought back.349 equity shares were returned to 577 applicants. 68. Gnanamudhan D N Demat 6. AFIL received 617 applications for 12.18 1.

CASE STUDY: STERLITE INDUSTRIES 82 .

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

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

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

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

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

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. 1956. The IRL buyback had been launched at a wrong time when the company was also not doing well and the markets were crashing. the company faced with a rather unsuccessful buyback 88 .Considering the above factors the management was confident about the success of the buyback scheme.1397 crores from early 1999. The company in the last five years has seen its market capitalisation falling to Rs. 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. Thus. Shareholders had seen their wealth falling considerably. thus it was not surprising that they decided to reject the offer made by the management.207 to Rs.67. The investors were justified in rejecting the offer.455 crores as against Rs. 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. inspite of compliance of all the regulations as per the SEBI as well as the Companies Act. despite hiking the repurchase prices to Rs. 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.85 per share.

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 .

a government source said. The amendment was aimed at compelling the minority shareholders to surrender the shares of I-flex in favor of Oracle. Rs. it added a rider stating it may think of an open offer if the share price is below Rs 2.ORACLE I. The move will help it to integrate I-flex with its business worldwide. 2006. Stung by this cold response from the market. since its open offers received a tepid response.100 per share .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. 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.its offer price of December 7. However. 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. Under current norms of SEBI. 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. if the minority shareholders do not surrender shares willingly to the new promoter. 90 . 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. however. 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 its efforts have continuously received lukewarm response from the investors. the US-based firm has reportedly been lobbying the Indian government for over a year to amend the SEBI takeover code. In a recent filing with the US Securities and Exchange Commission. It would require a little over 90 per cent of shares to do so. However the SEBI has refused to amend its norms as suggested by Oracle. 2100.

1 billion 91 .475 a share Price of the open offer increased by 42 per cent to Rs 2. The company made additional purchases of I-flex common stock through ordinary brokerage transactions I-flex board of directors approved a preferential allotment of 4.5 per share. Shares issued on Aug 14.45 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. 06 Jan 6. 2007: per share Oracle accepted the 23 million shares tendered in the offer for approximately $1.How Oracle acquired I-flex Year Acquired Shares Oracle obtained 42.307. 2006: Dec 7. 2006 make an open offer to buy up to 20 per cent I-flex equity at Rs 1.8 per cent.100 Sept 12. in I-flex solutions for $593 Nov 2005 Mar-Jun 2006 million.

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

93 . In addition. for the Capital restructuring. 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. It may be relevant to mention here that acquisition of the shares in Takeover cases is allowed for other than the cash. 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. Further.Further. This is. allowing companies to buyback for other than the cash would pave the way for enormous creativity in the system.e. being practices globally at a large scale as a corporate restructuring exercise. company may like to replace the equity with the debt or any other instruments. buyback may be allowed. Therefore. On the similar lines and the global experiences.

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