T.A.

PAI MANAGEMENT INSTITUTE, MANIPAL

ADVANCED CORPORATE FINANCE
STOCKS BUYBACK
8/13/2010

PRESENTED BY PUSHAN SHARMA, 09129 RUCHI GUPTA, 09137 SASHANK SHAH, 09141

Table of Contents
1 MEANING OF BUYBACK OF SHARES .......................................................................... 4 1.1 1.2 1.3 1.4 2 3 Definition 1 .................................................................................................................. 4 Definition 2 .................................................................................................................. 4 Definition 3 .................................................................................................................. 4 Definition 4 .................................................................................................................. 4

OBJECTIVE OF BUYBACK OF SHARES ........................................................................ 5 ADVANTAGES AND DISADVANTAGES OF BUYBACK OF SHARES ....................... 6 3.1 3.2 Advantages ................................................................................................................... 6 Disadvantages ............................................................................................................... 8

4 5 6

DIVIDEND OR A BUYBACK WHICH IS A BETTER OPTION ...................................... 9 WHICH COMPANIES SHOULD CONSIDER A SHARE BUY-BACK? ........................ 11 METHODS OF BUYBACK ............................................................................................. 12 6.1 FOR PUBLIC OR LISTED COMPANIES ................................................................. 12 BUYBACK THROUGH TENDER OFFER ........................................................ 12 BUYBACK FROM OPEN MARKET THROUGH STOCK EXCHANGE .......... 14 BUYBACK FROM OPEN MARKET THROUGH BOOK-BUILDING .............. 16 6.1.1 6.1.2 6.1.3

6.2 BUYBACK OF SHARES BY PRIVATE LIMITED COMPANIES OR UNLISTED COMPANIES ....................................................................................................................... 18 7 EFFECTS OF BUYBACK OF SHARES .......................................................................... 20 7.1 Effects on the Company .............................................................................................. 20 SHAREHOLDING PATTERN CHANGES......................................................... 20 IMPROVEMENT IN THE FINANCIAL RATIOS OF THE COMPANY ........... 21 Tax Benefits ........................................................................................................ 23 Higher Proportion of share ................................................................................... 24 Higher Share Price ............................................................................................... 24 7.1.1 7.1.2 7.2 7.2.1 7.2.2 7.2.3 8 8.1

Effects on the Shareholder .......................................................................................... 23

CASE STUDIES ............................................................................................................... 25 HINDUSTAN UNILEVER LIMITED ........................................................................ 25 About Hindustan Unilever Limited ...................................................................... 25 Offer .................................................................................................................... 26 Reason for Buyback ............................................................................................. 26 Effects of Buyback .............................................................................................. 28 8.1.1 8.1.2 8.1.3 8.1.4 8.2

GLAXOSMITHKLINE CONSUMER HEALTH CARE LIMITED............................ 30 1

8.2.1 8.2.2 8.2.3 8.2.4 8.2.5 8.2.6 8.3 8.3.1 8.3.2 8.3.3 8.3.4 9 9.1

About the company .............................................................................................. 30 Present Operations ............................................................................................... 30 Offer .................................................................................................................... 31 Reasons for Buy back .......................................................................................... 32 The Buy Back ...................................................................................................... 32 Various Ratios ..................................................................................................... 33 About the company .............................................................................................. 33 Details of Buyback .............................................................................................. 33 Reasons for buyback ............................................................................................ 33 Result .................................................................................................................. 34

INDIAN RAYON ....................................................................................................... 33

ANALYSIS OF BUYBACKS BY VARIOUS COMPANIES ........................................... 35 KAMA HOLDING LTD ............................................................................................ 35 EFFECT ON FINANCIAL RATIOS ................................................................... 35 EFFECT ON SHAREHOLDING PATTERN ...................................................... 37 EFFECT ON FINANCIAL RATIOS ................................................................... 38 EFFECT ON SHAREHOLDING PATTERN ...................................................... 40 EFFECT ON FINANCIAL RATIOS ................................................................... 40 EFFECT ON SHAREHOLDING PATTERN ...................................................... 42 EFFECT ON FINANCIAL RATIOS ................................................................... 43 EFFECT ON SHAREHOLDING PATTERN ...................................................... 45 EFFECT ON FINANCIAL RATIOS ................................................................... 46 EFFECT ON FINANCIAL RATIOS ................................................................... 48 EFFECT ON SHAREHOLDING PATTERN ...................................................... 50 EFFECT ON FINANCIAL RATIOS ................................................................... 51 EFFECT ON FINANCIAL RATIOS ................................................................... 53 EFFECT ON SHAREHOLDING PATTERN ...................................................... 55 2 9.1.1 9.1.2 9.2 9.2.1 9.2.2 9.3 9.3.1 9.3.2 9.4 9.4.1 9.4.2 9.5 9.6 9.5.1 9.6.1 9.6.2 9.7 9.8 9.7.1 9.8.1 9.8.2

PRIME SECURITIES................................................................................................. 38

SRF LTD. ................................................................................................................... 40

RELIANCE INDUSTRIES ......................................................................................... 43

REVATHI EQUIPMENTS ......................................................................................... 46 RELIANCE INFRASTRUCTURE ............................................................................. 48

NATCO PHARMA .................................................................................................... 51 POLARIS SOFTWARE ............................................................................................. 53

10 11

CONCLUSION ................................................................................................................. 56 REFERENCES ................................................................................................................. 56

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1 MEANING OF BUYBACK OF SHARES
1.1 Definition 1
A corporation's repurchase of stock or bonds it has issued. In the case of stocks, this reduces the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company. This is usually considered a sign that the company's management is optimistic about the future and believes that the current share price is undervalued. Reasons for buybacks include putting unused cash to use, raising earnings per share, increasing internal control of the company, and obtaining stock for employee stock option plans or pension plans. When a company's shareholders vote to authorize a buyback, they aren't obliged to actually undertake the buyback. also called corporate repurchase.

1.2 Definition 2
A stock buyback, also known as a "share repurchase", is a company's buying back its shares from the marketplace. You can think of a buyback as a company investing in itself, or using its cash to buy its own shares. The idea is simple: because a company can¶t act as its own shareholder, repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. When this happens, the relative ownership stake of each investor increases because there are fewer shares, or claims, on the earnings of the company

1.3 Definition 3
Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors

1.4 Definition 4
Stock Buyback is purchase of a long position by a company to offset a short position.

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2 OBJECTIVE OF BUYBACK OF SHARES
1. A company may decide to buy back its shares for one of the following reasons:

2. To return surplus cash to shareholders as an alternative to a higher dividend payment or investing the surplus cash in existing or new operations.

3. Adjust or change the company¶s capital structure quickly, say for those companies seeking to increase its debt/equity ratio.

4. To increase earnings per share and net asset value per share as a possible signal to the market place that management is of the view that the prospects of the company justify a market price higher than that currently accorded by the market.

5. To improved the various performance parameters like EPS,DPS, operating cash flow per share, etc.

6. To thwart the attempts of a hostile takeover.

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3 ADVANTAGES AND DISADVANTAGES OF BUYBACK OF SHARES
3.1 Advantages
1. 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.

2. 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.

3. 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!

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

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

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

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

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

9. Tax Implication: Exemption is available only if the shares are sold on a recognized stock exchange and if securities transaction tax (STT) on the sale has been paid. In a buyback scheme, neither does the sale take place on a recognized exchange nor is the STT paid. So, you will have to pay income tax on your long-term capital gain on the buyback after deducting the acquisition cost of your shares plus the benefit of indexation from the year of purchase to the year of buyback. On the resultant gain, the tax would be 20 per cent plus the applicable surcharge, if any, plus 2 per cent education cess. You may also work out the tax at 10 per cent of the gain without considering indexation. Your tax liability will be limited to the lower of the two calculations.

10. Stock buybacks also raise the demand for the stock on the open market. This point is rather self explanatory as the company is competing against other investors to purchase shares of its own stock.

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3.2 Disadvantages
1. Sends Negative Signals: A buyback announcement can send a negative signal in these situations. A typical example is the HP case: From November 1998 through October 2000, the computer giant Hewlett-Packard spent $8.2 billion to buy back 128 million of its shares. The aim was to make opportunistic purchases of HP stock at attractive prices²in other words, at prices they felt undervalued the company. Instead of signaling a good operating prospect to the market, the buyback signal was completely drowned out more powerful contradictory signals about the company¶s future which are an aborted acquisition, a protracted business restructuring, slipping financial results, and a decay in the general profitability of key markets. By last January, HP¶s shares were trading at around half the average $64 per share paid to repurchase the stock.

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

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

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4 DIVIDEND OR A BUYBACK WHICH IS A BETTER OPTION
The choice between the two options ± dividend and buyback would depend on the analysis of the various facets to which the company is exposed. The implications of such aspects are as follows:

1. Market price & Re-purchase price of the shares by the company: The given example shall illustrate the repercussions of buying back the shares at various prices. The illustration has been developed to study the effect of the same on the residual shareholders. The underlying example assumes the P/E ratio to be constant and the profit in each case stands at the same level.

Current

Post buyback of shares Case-I Case-II 200 Case-III 160

Price of buyback Value upto which buyback to be done No. of shares which can be bought Net Profit No. of shares after buyback Current Market Price Earnings Per Share(EPS) P/E ratio (assumed constant) Market Price after Buyback Gain to shareholder in case of buyback (per share) Gain to shareholder in case of dividend( per share) 20000000 1000000 150 20 7.5 50000000

400

125000 20000000 875000

250000 20000000 750000

312500 20000000 687500

23 7.5 171 21

27 7.5 200 50

29 7.5 218 68

50

50

50

9

When shares are offered at Rs.400: Due to the high offer price being offered the number of shares that the company can buyback is a small percentage. As a result, the improvement in the EPS is only marginal. The market value of shares has seen an upward lift from Rs.150 to Rs.171. The capital gain to the shareholder is effectively Rs.21, which would be less as compared to the dividend the dividend payment of Rs.50 to be received by the shareholder. Thus, this kind of a situation would call for payment of dividend as against buyback.

When shares are offered at Rs.200: The price when offered is lowered to Rs.200 the corpus of shares that could be bought back is widened, enhancing the EPS by 35% unlike in the previous case where it was a mearly 15%. This pulled the market price further up to Rs.200 giving the shareholder a capital gain of Rs.50, which would be same as receiving the dividend. The company is in the neutral position in this case.

When shares are offered at Rs.160: In this case we can see that when a buyback is made at Rs.160 the share prices after buyback increases to Rs.218 per share. Here the net gain to a shareholder is Rs.68 per share whereas he would be receiving Rs.50 in case of the dividend. In such a case the company should go in for a share buyback.

Therefore the due consideration should be given to market price as well as to the repurchase price before deciding whether the company should go in for a buyback or declare a dividend.

2. Taxation laws of the country: Another most important thing to be considered by the companies is the tax burden on the shareholders. Such tax burden can be in the form of capital gain tax or tax on dividend payment.

Thus the companies should consider the above factors before making a decision on whether they should go for buyback of shares or declare a dividend.

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5 WHICH COMPANIES SHOULD CONSIDER A SHARE BUY-BACK?
A company with some of the following characteristics may find a share buy-back scheme feasible: y A company that has a high net surplus cash position may consider a share buyback.

y

A company that has a low debt/equity ratio may go in for a share buyback for the purpose of increasing the ratio.

y

A company, which does not, has a high capital expenditure requirements in future may go in for a share buyback.

y

A company with a High dividend yield may also consider for a share buyback.

y

The company, which is of view, that the intrinsic value of the shares of the company is substantially higher than the market price of the shares of the company may consider for a share buyback.

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

6.1.1 BUYBACK THROUGH TENDER OFFER y Firstly, it is expedient to obtain approval of shareholders for buy-back by a special resolution. The explanatory statement to be annexed to the notice of the general meeting, for the purpose of passing the special resolution. The notice shall broadly contain the following information: y Maximum price at which the buyback shall be made and whether Board of Directors is authorized at General Meeting to determine subsequently the specific price at which buy back may be made at appropriate time. y y Number of shares/ securities that the company proposes to buy. If promoters are participating in the offer quantum of shares proposed to be tendered; and details of their transactions and their holdings for the last six months prior to the passing of the special resolution for buy back including information of number of shares acquired, the price and the date of acquisition. y The company should file a copy of special resolution with SEBI and concerned stock exchanges where the shares of the company are listed within 7 days of passing such resolution. y The company should file a Declaration of Solvency with SEBI in the prescribed form, duly verified by an affidavit. y The company should nominate a compliance officer and an investor service centre for compliance with the buy back regulations and to redress the grievances of the investors. y The company should make a public announcement of buy back. In the public announcement, the company has to select a record date referred to as µspecified date¶, 12

which shall be the date for the purpose, of determining the names of shareholders to whom the letter of offer shall be sent.

y

The company should file a draft letter of offer with SEBI within 7 days of public announcement through a merchant banker not associated with the company. The company should issue the letter of offer to the shareholder after incorporating the change, if any suggested by SEBI.

y

The date of opening the offer shall not be earlier than 7 days or later than 30 days after the µspecified date¶.

y

The company shall on or before the opening of offer, deposit in an escrow account 25% of the consideration payable, where the maximum amount payable under the buyback is less than Rs. 100 crores; or 10% of the consideration payable where the maximum amount is in excess of Rs. 100 crores

The escrow can be in the form of:  Cash deposited with a scheduled commercial bank  Bank guarantee in favour of merchant banker  Deposit of acceptable securities with merchant banker  Any combination of the above If the escrow is in the form of bank guarantees or acceptable securities, the company shall also deposit with the bank in cash a sum of at least 10% of the total consideration payable.

In the event of non-fulfillment of obligations prescribed in the Regulations, SEBI may forfeit the escrow account either in full or in part. The amount so forfeited may be distributed pro rata amongst the shareholders who have accepted the offer and balance remaining, if any, should be utilized for investor protection.

The offer shall remain open to the members for a period of at least 15 days but not more than 30 days.

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Verify the offers received and communicate acceptance rejection within 15 days of the closure of offer.

y

Make payment to the shareholders, whose offer for buy back has been accepted within 7 days from the date of completion of verification. The amount lying in escrow is allowed to be utilized for the purpose of making the payment.

y

File the particulars of share certificates that are extinguished and destroyed with stock exchanges within 7 days.

6.1.2 BUYBACK FROM OPEN MARKET THROUGH STOCK EXCHANGE y The company should obtain approval of shareholders for buy back by a special resolution. The explanatory statement to be annexed to the notice of the general meeting for the purpose of passing the special resolution for buy back. The notice shall broadly contain the following information:  Maximum price at which the buy back would be made.  Number of shares/securities that the company proposes to buy. Since the promoters are not permitted to participate in the buy back, the information regarding their shareholding etc., is not required to be given.

y

y

File a copy of special resolution with SEBI and concerned stock exchanges where the shares of eh company are listed within 7 days of passing such resolution.

y

File a Declaration of Solvency with SEBI in the prescribed form, duly verified by an affidavit.

y

Nominate a compliance officer and an investor service center for compliance with the buy back regulations and to redress the grievances of the investors.

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y

Appoint a merchant banker.

y

Make a public announcement of buy back (at least 7 days prior to commencement of buy back). Public announcement shall also contain disclosures regarding details of brokers, stock exchanges through which the buy back of shares would be made and appointment of merchant banker.

y

Copy of public announcement, along with the fees, to be filed with SEBI within 2 days of making the announcement.

Buy back shall be made:  Only on stock exchanges with electronic trading facility; and  Only through the order matching mechanism except ³all or none´ order matching system The identity of the company as a purchaser shall appear on the electronic screen when the order is placed.

The company and merchant banker to furnish the information to the stock exchange on a daily basis regarding the shares purchased for buy back. Such information shall also be published in a national daily.

The company has to complete verification of acceptances within 15 days of the payout.

File the particulars of share certificates that are extinguished and destroyed with stock exchanges within 7 days.

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6.1.3 BUYBACK FROM OPEN MARKET THROUGH BOOK-BUILDING y Obtain approval of shareholders for buy-back by a special resolution. The explanatory statement to be annexed to the notice of the general meeting for the purpose of passing the special resolution for buy-back. The notice shall broadly contain the following information:  Maximum price at which the buy-back would be made  Number of shares/securities that the company proposes to buy File a copy of special resolution with SEBI and concerned stock exchanges where the shares of the Company are listed within 7 days of passing such resolution.

y

y

File a Declaration of Solvency with SEBI in the prescribed form, duly verified by an affidavit.

y

Nominate a compliance officer and an investor service center for compliance with the buy-back regulations and to redress the grievances of the investors.

y

Appoint a merchant banker.

y

The company shall, before public announcement, deposit in an escrow account:  25% of the consideration payable where the maximum amount payable under the buy back is less than Rs. 100 crores; or  10% of the consideration payable where the maximum amount in excess of Rs. 100 crores. The amount of deposit shall be determined with reference to the maximum price specified in the public announcement.

The escrow can be in the form of:  Cash deposited with a specified commercial bank  Bank guarantee in favour of merchant banker 16 

Deposit of acceptable securities with merchant banker Any combination of the above

y

Make public announcement of buy-back (at least 7 days prior to commencement of buyback). Public announcement shall also contain disclosures regarding detailed book building process, the manner of acceptance, the format of acceptance to be sent by the shareholders, details of the bidding centers and appointment of merchant banker.

y

Copy of the public announcement along with the fees, to be filed with SEBI within 2 days of making the announcement.

y

Book-Building process shall be made through an electronically linked transparent facility. The number of bidding centers shall not be less than 30 and there shall be at least one electronically linked computer terminal at all bidding centers.

y

The offer shall remain open to the members for a period of at least 15 days but not more than 30 days.

y

Verify the offers received and communicate acceptance/rejection within 15 days of the closure of offer.

y

The merchant banker and the company shall determine the buy-back price based on acceptances received. The final buy-back price shall be the highest price accepted for buy-back.

y

Make payment to the shareholders whose offer for buyback has been accepted, within 7 days from the date of completion of verification. The amount lying in escrow is allowed to be utilized for the purpose of making the payment.

y

File the particulars of share certificates that are extinguished and destroyed with stock exchanges within 7 days. 17

6.2 BUYBACK OF SHARES BY PRIVATE LIMITED COMPANIES OR UNLISTED COMPANIES
The following are the methodologies and procedures that would be required in relation to buy back of shares by private limited companies or unlisted companies: -

y

Special resolutions, explanatory statement, solvency declaration, register maintenance, etc. should be done.

y

The company should make a Letter of Offer to the shareholders after the resolution is passed as also file a copy of the same with the Registrar of Companies.

y

The letter of offer should be sent to the shareholders within 21 days of filing of the Return with the Registrar of Companies.

y

The letter of offer filed with ROC should disclose the company¶s pre and post buyback debt equity ratio.

y

A minimum period of 15 days and a maximum period of 30 days should be allowed to the shareholders for acceptance of the offer.

y

If the shares accepted under buyback by shareholders are more than the shares under offer by the company for buy back, a proportionate number of shares only can be bought back.

y

The company should verify within 15 days of acceptance of buy back offer from the shareholders and rejection, if any, should be conveyed within 21 days.

y

The payment should be made within 7 days of completion of acceptance of offer for buy back by way of opening escrow account with a bank and consideration should be made in

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by cash or demand draft or by pay order. In case of rejection, share certificates should be returned to the shareholders.

y

It is provided that the letter of offer should contain true, factual and material information and that it should not be misleading in any manner, for which the directors should accept the responsibility.

y

The letter of offer is not permitted to be withdrawn.

y

No funding is permissible from banks/ financial institutions.

y

Within 7 days of completion of buy back, that is payment of consideration, certificates of shares that are bought back should be extinguished/physically destroyed within 7 days.

y

A certificate is to be sent to the ROCs and should be signed by two whole time directors (including a managing director and a practicing company secretary) certifying that the rules relating to buy back have been complied with and this certificate is to be filed within 7 days.

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7 EFFECTS OF BUYBACK OF SHARES
This can be broadly divided into two parts i.e.

7.1 Effects on the Company
7.1.1 SHAREHOLDING PATTERN CHANGES Company: A Ltd Total no of shares Face Value Equity Capital Buyback of equity shares Max offer price Price 150 10 1500 25 15

SHARE HOLDING PATTERN OF COMPANY A LTD Particulars Pre Buyback Post Buyback case1 Promoters ( no of shares) Non promoters (No of shares) SHAREHOLDING PATTERN IN%TERM Particulars Pre Buyback Post Buyback case1 Promoters ( no of shares) Non promoters (No of shares) 66.67% 60% 66.67% 75% 33.33% 40% case 2 case 3 50 100 50 75 case 2 42 83 case 3 31 94

33.33% 25%

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ASSUMPTIONS CASE 1: the original proportion of promoters and non promoters share in the total equity capital was 33.33% and 66.67%. We are assuming that there is a 100% buyback of 25 shares which the company has proposed to make. Therefore all the shares that are proposed to be bought are bought from the no promoters group and nothing has been offered by promoters. Thus the proportion of promoters share in the total equity capital increases from 33.33% to 40%.

CASE 2: Here the company decides to keep the shareholding same as before i.e. promoters 33.33% and Non promoters 66.67%. As the company has offered to buyback 25 shares, to maintain the same shareholding pattern promoters has to offer 8 shares of their own and the rest would be the net offer to the public i.e. 17 shares.

CASE 3: in this case the company decides to bring down the promoters shares in the company¶s equity share capital to 25%. That means promoters have to offer 19 shares and net offer to the public would be only 6 shares.

Therefore we can say that depending on the policy of the company the shareholding pattern of the company changes. Promoters share can increase decrease or remain the same.

7.1.2 IMPROVEMENT IN THE FINANCIAL RATIOS OF THE COMPANY When a company decides to go for buyback it has a huge impact on the financial ratios of the company. The impact is more on the positive side.

There are four majors Ratios which gets impacted due to buyback. They are as follows:

Return on Assets: Return on Equity:

ROA = Net Income / Total Assets ROE = Net Income / Shareholder¶s Equity 21

Earning per Share: Price Earning Ratio:

EPS = profit after tax / number of shares P/E ratio = market value of share / EPS

Example: Company B Ltd,

Pre Particulars Cash Assets Earnings Outstanding Shares Equity share Reserves Shareholders Equity Market Share Price Financial Ratios Return on Assets (ROA) Return on Equity (ROE) Earning per share (EPS) Price-Earning Ratio (P/E) 0.15 0.88 10 1 10 1700 150 1500 200 Buyback 1000 10000 1500

Post Buyback 625 9625 1500

125 1250 75

1325

15

0.16 1.13 12 1.25

Explanation

Return on Assets: We can see that ROA has increased after buyback. The reason behind this increase is that there is a reduction in the total assets. Total assets have gone down from Rs.10, 000 to Rs.9625, income remaining same. 22

Return on Equity: It has also increased from 0.88% to 1.13%. This is due to decrease in the shareholder¶s equity, which has gone down from Rs.1500 to Rs.1250.

Earnings Per Share: It has also increased from Rs.10 to Rs.12. The reason behind the increase of EPS is that the numbers of shares have reduced from 150 to 125, causing EPS ratio to increase.

Price to Earnings Ratio: Here market value of the share has increased from Rs.10 to Rs.15, which is a 50% hike in the price. On the other hand EPS has also increased from 10 to 12, which is a 20% hike. Since the overall increase in the market value of the share is much more than the increase of EPS. Therefore we can see an increase in the price-earning ratio.

7.2 Effects on the Shareholder

7.2.1 Tax Benefits When a company has surplus cash, they can either pay it off as dividend or buy back shares. When a company pays dividend they are entitled to pay tax at the rate of 15%. This cost has to be born by shareholders, who receive less cash then what is declared.

Therefore by Buying back shares, company gives surplus cash to the shareholder and saves tax for the shareholders.

Example: A company has surplus cash of Rs.150 crore and if they declare Rs.150 crore as dividend then company has to pay tax of Rs.22.5 crore. So the net amount which would be received by the shareholder would be Rs.127.5 crore.

If a company decides to go for buyback of shares then the entire amount of Rs.150 crore is received by the shareholder. Thus shareholders save tax of Rs.22.5 crore, which they would have incurred, if the company would have given them surplus cash by way of dividend.

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7.2.2 Higher Proportion of share When a company goes for buyback, number of shares outstanding reduces. That means proportion of an individual investor increases.

This can be explained with the help of an example: A company which has 1000 outstanding shares goes for buyback of 250 shares. So after 100% buyback, company would have 750 shares outstanding.

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

7.2.3 Higher Share Price One of the reasons why a company goes for a buyback is that they think that their shares are undervalued. That is why they buyback share at a premium or at a price that they think it should command in the market.

For example a company market price of the share is Rs.500 and company believes that the price of their share should be at Rs.600 based of their fundamental and technical analysis.

Therefore company buys back share at Rs.600 from the market and thus increasing the market value of the share from Rs.500 to Rs.600.

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8 CASE STUDIES
8.1 HINDUSTAN UNILEVER LIMITED
8.1.1 About Hindustan Unilever Limited Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company, touching the lives of two out of three Indians. HUL¶s mission is to ³add vitality to life´ through its presence in over 20 distinct categories in Home & Personal Care Products and Foods & Beverages. The company meets everyday needs for nutrition, hygiene, and personal care, with brands that help people feel good, look good and get more out of life.

Other relevant information about the company 1) Beginnings: The Company¶s journey in India started with Sunlight soap in 1888. With it, began an era of marketing branded Fast Moving Consumer Goods (FMCG) in India. Sunlight was followed soon after by Lifebuoy in 1895 and other famous brands like Pears, Lux and Vim.

2) Corporate History: The Company¶s corporate existence came into being with the establishment of Hindustan Vanaspati Manufacturing Company. This was followed by Lever Brothers India Limited in 1933 and United Traders Limited in 1935. These three companies merged to form Hindustan Lever Limited in November 1956. The company was renamed as Hindustan Unilever Limited in June 2007.

3) Listing: The Company created history when it was listed in the Bombay, Kolkata, and Madras Stock Exchanges in 1956 and offered 10% of its equity to Indian shareholders. The company became the first foreign subsidiary company in India to offer equity to the Indian public. Today, HUL is listed in the Bombay Stock Exchange and the National Stock Exchange.

4) Shareholding: HUL¶s parent Company, Unilever holds 51.42% of its equity, while 17.50% is owned by Resident Individuals, 12.32% by Foreign Institutional Investors, 12.93% by Insurance

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companies and Financial Institutions and the rest by Mutual Funds, Private Corporate Bodies, and NRI OCB. Today, the company has 410,000 resident shareholders.

8.1.2 Offer Hindustan Unilever Limited has decided to go for buyback of shares at its meeting held on 29th July, 2007. The company proposes to buyback shares at a price not exceeding Rs 230 a share and up to an aggregate amount of Rs 630 crore that is less that 25% of the total paid-up capital and free reserves of the company as per the audited balance sheet as on Dec. 31, 2006.

The maximum price is at a premium of 17% over the closing price of the Company¶s share as on 27th July 2007. The average closing price of HUL share in the BSE for the last six months is Rs 196.

HUL net worth as on December 2006 stood close to Rs 2,724 crore, so 25% of that would be about Rs 681 crore. When this news was announced, the maximum number of shares that HUL could have bought was 3.5 crore on its total equity base of 221 crore shares outstanding. So in terms of equity value, HUL's buy-back is not substantial and more of probably a sentiment booster for the stock.

8.1.3 Reason for Buyback The Unilever management feels the stock is undervalued and they believe in the prospects of the Indian FMCG story. Which is why they may be willing to buy-back some of their own stock to create wealth for shareholders

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

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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.

BALANCE SHEET AS ON 31ST DECEMBER 2006 Rs in Crore 2007 SOURCES OF FUNDS 2006 Equity share capital Reserves Secured loans Unsecured Loans 2006 220.68 2502.14 37.13 35.47 2796.09 APPLICATION OF FUNDS Net Block 2006 2006 1400.75 2007 (E) 2007(E) 1400.75 (E) 2007(E) 217.94 1874.88 37.13 35.47 2166.09

Current Assets Loans & Advances

2408.33 1146.75

1778.33 1146.75

Current Liabilities Provision

3362.51 1321.42

3362.51 1321.42 -

Net Current assets

-1128.85

1758.85

Investments

2413.93

2413.93

Capital work in progress

110.26 2796.09

110.26 2166.09

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DATA 2006 Total Assets Net Worth No of Shares Market price of share PAT * 2007(E)

2796.09 2166.09 2722.82 2092.82 221 216 1855 218 230 1855

*Assuming PAT to remain the same in the year 2007

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

8.1.4 Effects of Buyback

8.1.4.1 Effects on the company ROA: Company¶s ROA in the year 2006 was 0.66 and in year 2007 it will become 0.86. This is due to reduction in the total assets which goes down from Rs 2796.09 crore to Rs 2166.09 crore as the cash is reduced by Rs 630 crore for buying back shares @ Rs 230 each.

ROE: Company¶s ROE has increased from 0.68 in 2006 to 0.89 in 2007. Reason behind this is that total net worth of the company has gone down from Rs 2722.82 crore in 2006 to Rs 2092.82 crore in 2007.

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EPS: Company¶s EPS has increased from 8.39 in 2006 to 8.51 in 2007. Reason behind this is that total number of share outstanding has reduced from Rs 220.68 crore in 2006 to Rs 217.94 crore in 2007.

P/E Ratio: Company¶s P/E Ratio has increased from 25.73 in 2006 to 27.03 in 2007. Reason behind this is that the market price of the share has increased from Rs 216/ share in 2006 to Rs 230/ share in 2007.

Promoters share: Its share in the company was 50.37% during the year 2006 when number of shares was 221 crore. After buyback number of shares outstanding has reduced to 218 crore shares. Thus increasing promoters share to 51.06%.

8.1.4.2 Effects on the Shareholder Tax Benefits: If company would have given Rs 630 crore as dividend, then it would have attracted dividend tax @ 15% i.e. Rs 94.5 crore. This tax cost would have been born by the investor causing net cash in hand to reduce to Rs 535.5 crore. Thus by buyback method company saves tax for the shareholders.

Higher Share price: Usually a company buy backs share at a premium from the public thus increasing it market price. When HUL offered to buyback shares at Rs 230 each when share was trading at Rs 196. This led to an increase in the market price of the share.

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8.2 GLAXOSMITHKLINE CONSUMER HEALTH CARE LIMITED

8.2.1 About the company GlaxoSmithKline Consumer Healthcare Ltd. was incorporated in India on October 30, 1958 with the name Hindustan Milk food Manufacturers Private Limited. The Company was promoted by Horlicks Limited of Buckinghamshire, UK primarily to manufacture and sell malted food under the brand name of µHorlicks¶. The world-wide interests of Horlicks Limited were purchased by Beecham Group Limited of UK in 1969.

Beecham (India) Private Limited merged with Hindustan Milk food Manufacturers Limited in January, 1979. Consequently the name of the Company was changed to HMM Limited on March 1, 1979. Subsequently, the name of the Company was changed to: Smith Kline Beecham Consumer Brands Limited on September 16, 1991; Smith Kline Beecham Consumer Healthcare Limited on March 29, 1994; and GlaxoSmithKline Consumer Healthcare Limited on April 23, 2002.

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

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8.2.3 Offer The offer opened on March 14th 2005 and closed on April 12th 2005.

The manager to the buyback offer for the company was Citigroup Global Markets Private Limited.

The company decided to buy-back up to 3,325,083 fully paid equity shares of Rs. 10/- each, representing up to 7.33 % of the outstanding fully paid up shares of the Company at a price of Rs. 370/- per share for an aggregate amount not exceeding Rs. 123,02.81 lacs, equivalent to 25% and 23.24% of the paid up equity capital and free reserves of the Company as on December 2003 and 2004 respectively, through Tender Offer in accordance with the provisions of the Articles of the Association of the Company, Section 77 A and 77 B of the Companies Act, 1956 and the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998, and subsequent amendments thereof (³The Regulations´). The mode of payment is cash and the consideration shall be paid by way of cheque / demand draft.

Since the Buy-back was approved by the Board of Directors on December 10, 2004, prior to the close of the financial year ended December 31, 2004, the size of the Offer has been determined based on the paid up equity capital and free reserves as of December 31, 2003.

The company will buy back the shares through the Tender Offer to all the shareholders. The company will not buy back the shares through a negotiated transaction or through any private arrangement.

The aggregate shareholding of the Promoters and of the Directors of the Promoters and of the person who are in control of the Company represented 39.99% of the issued share capital, prebuy back. The Promoters decided not to participate in the buy back and as such their percentage holding in the Company, post buy back, was increased to 43.16%.

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8.2.4 Reasons for Buy back The buyback of shares had been done by the company in order to create long term Shareholders value, improve return on Net Worth and enhance the Earning per share of the company. The company seems to have surplus reserves with no current opportunities and it has also mentioned that if in the future there is any growth opportunity they have enough reserves to fund its growth and because of the availability of such reserves the company has bought back its shares rather than keeping the reserves idle. It can be seen that as the company does not have any long term debt, which would mean that there would not be any major payments in the future, therefore this is one of the reason why the company has bought back its shares.

Glaxo SmithKline Consumer HealthCare Limited is an FMCG company and it has been observed that this industry do not have any major expansion plan and because they have surplus funds available with them, they tend to utilize these funds by buying back its shares. Few buy back of FMCG companies are Britannia, Godrej, Glaxo, and now HUL is also coming up with a buyback program. This indicates that the major FMCG companies have huge reserves with no current expansion plan and as such they tend to buy back its shares.

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

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8.2.6 Various Ratios Pre Buy back Dec 04 Net Worth(Rs Lacks) Return on Net Worth Earning Per share(Rs) Book value Per share(Rs) P/E 599,35.17 13.82% 16.12 116.65 20.50 Post Buy back Dec 05 47511.18 22.55% 25.48 96.62 24

8.3 INDIAN RAYON
8.3.1 About the company Is into the garment business, it is an AV Birla Group Company

8.3.2 Details of Buyback In 1999, AV Birla group company Indian Rayon announced buying back up to one-fourth (25%) of its equity share capital at a price ranging between Rs 75 and Rs 85 per share. Total 76.06 lakh equity shares After buyback; the Birlas' stake in Indian Rayon will go up to 28.7 per cent from the present 21.5 per cent. . If the buyback offer is fully subscribed to, it will result in an outflow of Rs 127-144 crores approximately, depending on the final price.

8.3.3 Reasons for buyback The reason given by the management for the buyback was that Indian Rayon is working at below capacity and there were no major capital expenditure plans at that time. Hence the best way to add value to shareholders is to return the funds to them.

The buy-back was unlikely to cause any material impact on the profitability of Indian Rayon, except to the extent of loss of interest income on the amount to be utilized for buy-back. The buy-back will also enhance the EPS of the company and create long-term shareholder value. 33

A number of investors had invested in Indian Rayon because of the fact that it was in the cement business. Since this business has been hived off to Grasim, such investors would now have an exit route. With the two of the three main businesses of the company--viscose filament yarn and insulators--not doing well and no further investments planned, the buyback is likely to prop up shareholder value.

Considering the above factors the management was confident about the success of the buyback scheme. 8.3.4 Result The share buyback scheme met with limited success as it could repurchase only 11 per cent of its outstanding shares as against the maximum 25 per cent offered, despite hiking the repurchase prices to Rs.85 per share.

The company in the last five years has seen its market capitalization falling to Rs.455 crores as against Rs.1397 crores from early 1999. Sale of assets like cement unit to Grasim had led to huge cash surplus from which the company wanted to buy back its shares but the shareholders decided to hold on to their shares as the offer was extremely unattractive.

Shareholders had seen their wealth falling considerably, thus it was not surprising that they decided to reject the offer made by the management. In the last three years they have seen the company losing its crucial assets and in the last few months the company's scrip has crashed from Rs.207 to Rs.67. The buybacks raised doubts over whether these have been pursued with surplus cash and enhance valuation or to indirectly raise the promoter's stake

The graph below shows the comparison of the IRIL share price and the BSE Sensex. The investors were justified in rejecting the offer. The IRL buyback had been launched at a wrong time when the company was also not doing well and the markets were crashing.

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9 ANALYSIS OF BUYBACKS BY VARIOUS COMPANIES
For the analysis, the companies which went for buyback in 2005 or after that were taken. The rationale behind this was that we wanted to observe the changes in companies¶ financial ratios at least 3 years prior the buyback and 3 years post buyback.

9.1 KAMA HOLDING LTD
Kama Holdings announced buyback 19th Dec. 2005 and the end date for buyback was 7th Dec. 2006. The company decided to go for buyback at Rs. 275 per share with value not exceeding Rs. 661 crore.

9.1.1 EFFECT ON FINANCIAL RATIOS
2001 0.03 0.04 3.69 2002 0.04 0.07 5.02 2003 0.03 0.07 5.79 2.96 2004 0.02 0.06 5.03 5.96 2005 0.03 0.07 6.94 9.62 2006 0.03 0.07 7.43 28.69 2007 0.03 0.08 9.52 12.22 2008 -0.06 -0.23 -21.69 -6.68 2009 0.17 0.25 31.62 3.60

ROA ROE EPS P/E

Depiction of change in Various Ratios

P/E KAMA
35 30 25 20 15 10 5 0 -5 -10 2001 2002 2003 2004 2005 2006 2007 2008 2009 P/E

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ROE OF KAMA
0.3 0.2 0.1 0 -0.1 -0.2 -0.3 2001 2002 2003 2004 2005 2006 2007 2008 2009 ROE OF KAMA

EPS OF KAMA
40 30 20 10 EPS 0 -10 -20 -30 2001 2002 2003 2004 2005 2006 2007 2008 2009

ROA OF KAMA
0.2 0.15 0.1 0.05 0 -0.05 -0.1 2001 2002 2003 2004 2005 2006 2007 2008 2009 ROA OF KAMA

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KEY FINDINGS The buyback was successful because of following reasons:

y Since the P/E multiple in 2005 reached a very high level of 28.68 compared to industry, company decided to buyback shares worth Rs. 3.39 crores at Rs. 21 in Dec 2006

y This buyback did result in increase in EPS, ROE, ROA and decrease in P/E in 2007 y However company could not leverage on this benefit as in 2008 it reported loss due to increase in raw material and other manufacturing expenses y In 2009, company is done extremely well as its EPS, ROE and ROA has increased significantly and also its P/E multiple is in check.

9.1.2 EFFECT ON SHAREHOLDING PATTERN YEAR 2007 2008 2009 SHAREHOLDING PATTERN (%) PROMOTER NON PROMOTER 66.76 33.24 74.36 25.64 74.36 25.64

Also there was a major increase in promoters¶ shareholding from 67% to around 74%

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9.2 PRIME SECURITIES
Prime Securities announced buyback 27th Jan. 2006 and the end date for buyback was 2nd Mar. 2006. The company decided to go for buyback at Rs. 101 per share with value not exceeding Rs. 2 crore.

9.2.1 EFFECT ON FINANCIAL RATIOS
2001 -0.03 -0.06 -9.53 -0.43 2002 -0.06 -0.13 -2.53 -0.91 2003 -0.03 -0.07 -3.69 -0.42 2004 0.09 0.14 6.83 1.04 2005 0.28 0.36 5.92 3.81 2006 0.37 0.44 8.62 6.61 2007 0.40 0.48 3.71 11.09 2008 0.14 0.16 11.43 7.62 2009 -0.18 -0.22 -1.41 -8.44

ROA ROE P/E EPS

P/E PRIME SEC
15 10 5 0 -5 -10 -15 2001 2002 2003 2004 2005 2006 2007 2008 2009 P/E

ROE Prime Sec
0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3

ROE

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

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EPS Prime Sec
15 10 5 EPS 0 2000 -5 -10 2001 2002 2003 2004 2005 2006 2007 2008 2009

ROA Prime Sec
0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ROA

KEY FINDINGS The buyback was unsuccessful because of following reasons:

y The buyback of shares took place in 2006. The company could achieve increase in EPS, ROA and ROE for only one year. y After 2007, there has been fall in EPS, ROA and ROE ever since y The company could not achieve what it desired through the buyback 39

9.2.2 EFFECT ON SHAREHOLDING PATTERN There was no significant change in promoters¶ shareholding.

9.3 SRF LTD.
SRF Ltd. announced buyback 4th Jul 2006 and the end date for buyback was 26th Sep 2006. The company decided to go for buyback at Rs. 250 per share with value not exceeding Rs. 35 crore.

9.3.1 EFFECT ON FINANCIAL RATIOS
2001 2002 2003 2004 2005 2006 2007 2008 2009 ROA 0.037647 0.029728 0.034321 0.042626 0.046498 0.066245 0.163438 0.071142 0.068931 ROE 0.080807 0.071318 0.079608 0.094392 0.122942 0.174724 0.330823 0.142791 0.167213 P/E 2.512039 4.202381 4.251012 5.434109 9.548872 20.39409 2.845233 4.931507 2.768488 EPS 6.23 4.2 4.94 6.45 9.31 16.24 42.58 20.44 26.91

EPS SRF
60 50 40 30 EPS 20 10 0 01 02 03 04 05 06 07 08 09 10

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ROA SRF
0.2 0.15 0.1 ROA 0.05 0 01 02 03 04 05 06 07 08 09 10

ROE SRF
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 01 02 03 04 05 06 07 08 09 10

ROE

P/E SRF
25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 P/E

41

Key Findings y The P/E multiple in 2006 reached a very high level in comparison to industry. Thus the company decided to buyback shares worth Rs. 35 crores at Rs. 250 in June 2006 y This buyback was completed in Sep 2006. After this EPS, ROE, ROA increased in 2007, but again fell in 2008 y The benefits could not be sustained. Hence the buyback can be called unsuccessful.

9.3.2 EFFECT ON SHAREHOLDING PATTERN YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 SHAREHOLDING PATTERN (%) PROMOTER NON PROMOTER 26.43 73.57 23.89 76.11 31.65 68.34 31.65 68.34 37.05 62.95 39.4 60.6 42.42 57.58 42.39 57.61 46.2 53.8

The promoters¶ share actually reduced after the buyback.

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9.4 RELIANCE INDUSTRIES
The company went for buyback starting on 10th Jan 2005 and the buyback was completed by 5th Aug 2005. The buyback share price of Rs. 570 was offered which resulted in total cash outflow of Rs. 2999 crores.

9.4.1 EFFECT ON FINANCIAL RATIOS
2001 2002 2003 2004 2005 2006 2007 2008 2009 0.088555 0.057114 0.064074 0.071506 0.093532 0.097293 0.101516 0.129593 0.062245 0.179177 0.116329 0.135124 0.149776 0.187402 0.1821 0.186712 0.238903 0.121144 15.59856 9.772506 9.451282 14.56157 10.04693 12.23494 15.96488 16.91693 15.65789 25.06 30.77 29.25 36.95 54.34 65.08 85.71 133.86 97.28

ROA ROE P/E EPS

EPS RIL
160 140 120 100 80 60 40 20 0 01 02 03 04 05 06 07 08 09 10 EPS

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ROA RIL
0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 01 02 03 04 05 06 07 08 09 10 ROA

ROE RIL
0.3 0.25 0.2 0.15 ROE 0.1 0.05 0 01 02 03 04 05 06 07 08 09 10

P/E OF RIL
20 15 10 P/E OF RIL 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Key Findings y The main rationale for buyback was to increase the promoters¶ shareholding in the company from 48% to 51% y As can be seen, there has been no significant impact of the this buyback on the company¶s performance.

9.4.2 EFFECT ON SHAREHOLDING PATTERN

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009

SHAREHOLDING PATTERN (%) PROMOTER NON PROMOTER 43.24 56.76 43.77 56.22 46.52 53.48 46.67 53.33 46.76 53.23 47.9 52.1 50.98 45.44 51.37 44.92 49.03 47.54

Thus we observe that after the buyback in 2006, the promoter¶s shareholding increased from 48% to 51%. This seems the main rationale behind going for the buyback i.e. to increase the promoter¶s shareholding in the company.

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9.5 REVATHI EQUIPMENTS
Revathi Equipments went for buyback on 22nd Jan 2007 and the buyback was completed by 28th Jun 2007. The buyback offer price was Rs. 700 and the company expected to undertake the cash outflow of Rs. 1000 crores.

9.5.1 EFFECT ON FINANCIAL RATIOS
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0.20 0.12 0.14 0.07 0.15 0.17 0.10 0.06 0.11 0.16 0.28 0.18 0.17 0.08 0.18 0.30 0.17 0.12 0.19 0.25 38.92 24.81 25.66 13.76 35.84 82.15 52.16 39.84 71.56 103.28 5.64 6.69 7.05 4.58 6.44 18.32 16.18 13.15 3.62

ROA ROE EPS P/E

EPS
120.00 100.00 80.00 60.00 EPS 40.00 20.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

46

ROE REVATHI
0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ROE

ROA REVATHI
0.25 0.20 0.15 0.10 0.05 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ROA

P/E REVATHI
20 15 10 P/E 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009

47

Key Findings y Buyback was successful as the EPS, ROA, ROE increased and P/E multiple fell y Also the promoters¶ shareholding in the company increased marginally

9.6 RELIANCE INFRASTRUCTURE
Reliance Infrastructure went for buyback from 21st Jun 2004 to 8th Jun 2008. The buyback offer price was Rs. 525 and the cash outflow was Rs. 350 crores

9.6.1 EFFECT ON FINANCIAL RATIOS
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0.07 0.07 0.06 0.03 0.04 0.04 0.04 0.04 0.05 0.05 0.13 0.12 0.10 0.05 0.07 0.08 0.08 0.09 0.09 0.10 21.52 22.87 20.26 8.85 21.36 28.04 30.63 35.07 45.86 50.38 8.73 9.69 10.63 86.64 24.81 21.82 16.17 35.68 11.24

ROA ROE EPS PE

EPS REL INFRA
60 50 40 30 EPS 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

48

ROE REL INFRA
0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ROE

ROA REL INFRA
0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

ROA

P/E Of REL INFRA
100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
PE

Key Findings 49

y Since the P/E multiple of the company had increased significantly, the company went for buyback y This helped in reducing P/E along with increase in EPS, ROA and ROE y Also there was a significant increase in promoters¶ shareholding from around 50% to 53% y Thus the buyback was Successful 9.6.2 EFFECT ON SHAREHOLDING PATTERN

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009

SHAREHOLDING PATTERN (%) PROMOTER NON PROMOTER 100 0 100 0 58.22 41.78 48.11 51.89 50.15 49.85 53.38 46.62 34.45 63.2 35.95 61.48 37.55 61.84 There was a significant increase in promoters¶ shareholding from around 50% to 53%

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9.7 NATCO PHARMA
The company went for the buyback of shares on 12th Feb 2007 and completed the buyback on 30th Jul 2007. The offer price was Rs. 150 and the total cash outflow for the firm was Rs 7 crores

9.7.1 EFFECT ON FINANCIAL RATIOS
2001 2002 2003 2004 2005 2006 2007 2008 2009 0.002 0.002 0.010 0.035 0.005 0.080 0.090 0.099 0.086 0.004 0.006 0.033 0.098 0.014 0.161 0.169 0.183 0.166 0.200 0.260 1.410 3.730 0.600 8.760 11.020 14.280 15.240 61.750 42.308 19.716 24.853 214.417 15.234 13.203 5.935 3.166

ROA ROE EPS P/E

EPS Natco
20 15 10 5 0 -5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 EPS

ROE Natco
0.2 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 -0.2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ROE

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ROA Natco
0.12 0.1 0.08 0.06 0.04 0.02 0 -0.02 -0.04 -0.06 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ROA

P/E NATCO
250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 P/E

The buyback was successful for NATCO as its EPS, ROA, ROE increased after the buyback

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9.8 POLARIS SOFTWARE
Polaris Software went for the buyback from 1st Jun 2005 to 10th Nov 2005. The total cash flow for the company was Rs. 49 crores and the buyback price was Rs. 115.

9.8.1 EFFECT ON FINANCIAL RATIOS
2001 0.264 0.312 17.610 14.216 2002 0.219 0.253 12.040 16.786 2003 0.093 0.124 10.530 11.562 2004 0.118 0.137 6.930 25.310 2005 0.086 0.101 5.450 19.890 2006 0.021 0.025 1.350 86.815 2007 0.113 0.140 8.070 22.305 2008 0.071 0.088 5.330 14.737 2009 0.123 0.160 11.270 3.984

ROA ROE EPS P/E

EPS POLARIS
20 15 10 EPS 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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ROE POLARIS
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ROE

ROA POLARIS
0.3 0.25 0.2 0.15 ROA 0.1 0.05 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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P/E Of POLARIS
100 90 80 70 60 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009

P/E

Key Findings y The buyback resulted in not much significant increase in EPS, ROA or ROE. y Just the P/E reduced significantly

9.8.2 EFFECT ON SHAREHOLDING PATTERN YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 SHAREHOLDING PATTERN (%) PROMOTER NON PROMOTER 46.34 53.65 46.37 53.63 46.35 53.65 24.42 75.57 24.41 75.58 24.25 75.75 27.79 72.21 28.37 71.63 29.16 70.84

Thus we see that the Promoters¶ shareholding increased from around 24% to 28% after the buyback.

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10 CONCLUSION
y Not all buybacks are successful y Companies mainly use buybacks to change the shareholding pattern, improve financial ratios or/and increase price of the share y The timing of the buyback is very crucial. If company is not doing well then the buyback might not succeed y It is a means of returning excess funds to the shareholders y Gives the market a signal that promoters believe in the company y The demand supply dynamics go in favour of the company

11 REFERENCES
Books y y Corporate Finance, Second Edition, Aswath Damodaran Financial Management and Policy, 12th Edition, James C. Van Horne

Databases y y Prowess Database Various companies Annual reports

Websites y y y www.moneycontrol.com http://en.wikipedia.org/wiki/Share_repurchase http://dividendmoney.com/stock-buybacks-who-benefits-the-most/

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