Case Studies on Buyback of Shares and Reduction of Share Capital - Accounting and Company Law Aspects

CASE STUDIES ON BUYBACK OF SHARES AND REDUCTION OF SHARE CAPITAL
ACCOUNTING & COMPANY LAW ASPECTS

CA. Parag Ved

BUYBACK
Buyback is acquiring its own shares from the existing shareholders out of :•

free reserves; or securities premium account; or proceeds of any shares or other specified securities

(Section 77A, 77AA and 77BB of the Companies Act, 1956)

November 29, 2009

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Case Studies on Buyback of Shares and Reduction of Share Capital . • obtaining stock for ESOP or pension plans Conditions for Buy Back Authorised by its Articles A special resolution has to be passed in general meeting of the shareholders where buyback is proposed to be more than 10% of paid share capital and free reserves Buyback cannot not exceed 25% of the total paid-up capital and free reserves The ratio of the Debt owned by the Company is not more than twice of the capital and its free reserves after such buyback November 29. 2009 2 . • raising earnings per share • helping capital restructuring by way of capital reduction • reduced equity base strengthens management control and thus eliminating any threats of hostile takeover.Accounting and Company Law Aspects BUYBACK Reasons for buy back include: • In the opinion of the management Current market price is much lower than Intrinsic value of share. • Putting unused cash to use.

Every buy-back shall be completed within 12 months from the date of passing the resolution. or purchasing the securities issued on account of ESOP or sweat equity November 29.) The Company shall extinguish the securities within 7 days of last day of completion of buyback. or odd lots. A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue. or the open market through • book building process.Accounting and Company Law Aspects Conditions of Buy Back Shares bought should be fully paid up. • stock exchanges. Sources from where the shares can be purchased The securities can be bought back from :existing security-holders on a proportionate basis (tender offer). (cont..Case Studies on Buyback of Shares and Reduction of Share Capital . rights issue upto 6 months from the date of completion of buy back. 2009 3 .

Case Studies on Buyback of Shares and Reduction of Share Capital . 2009 4 . Gains on transfer of Shares is taxable at rates prescribed below: Short-Term (unlisted) normal tax rate** Short-Term (Listed Shares subjected to STT) 15% ** Long-Term (Listed Shares subjected to STT) Exempt Other Long-Term Gains 20% ** ** Plus applicable Education Cess & Surcharge November 29. or through any investment company or group of investment companies.Accounting and Company Law Aspects Prohibition of Buy Back A Company cannot buyback its shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares or specified securities A company shall not directly or indirectly purchase its own shares or other specified securities (a) (b) through any subsidiary company including its own subsidiary companies. Buyback of Shares – Tax Implications On Buyback of shares the shareholder is liable to tax based on the following criteria.

Accordingly.Accounting and Company Law Aspects Buyback OF Shares – Tax Implications Indexation on the cost of acquisition in case of unlisted shares held for Long Term Also in case of listed securities (not subjected to STT) the assessee has tax benefit u/s 112 of the Income Tax Act.premium over nominal value) To Shareholders A/c (with the amount paid) XX XX XX November 29. the tax rate applicable for calculating the Long Term Capital Gain tax will be as follows: Option Available With Indexation Benefit Without Indexation Benefit Tax rate Applicable 20% 10% Accounting Entries for Buyback Shareholders A/c To Bank A/c (with the amount paid on buyback) Dr XX XX For cancellation of shares bought back : Share Capital A/c Dr (with the nominal value of security bought back) Free Reserves/Securities premium A/c Dr (with the excess amount i.e.. 2009 5 .Case Studies on Buyback of Shares and Reduction of Share Capital . 1961 Assessee has an option to take cost of acquisition either with or without Indexation benefit.

the Company had bought back 14.Case Studies on Buyback of Shares and Reduction of Share Capital .58 per share (14. 2008. 393.58 = 5837. 2009 6 .232 X 393.83.232 equity shares of Rs. 5/each at an average price of Rs.70 Lacs) November 29.750 per Share through open market route.Accounting and Company Law Aspects Accounting Entries for Buyback For transfer of nominal value of shares purchased out of free reserves/securities premium A/c to CRR A/c Free Reserve A/c Dr Securities Premium A/c Dr To CRR A/c (with the nominal value of shares bought back) XX XX XX Buyback – Case Study Mastek Limited:The Company had announced buyback of shares in 2007 at Rs.83. As of June 30.

Basic M. In Lacs) (74.08) (1156. In Lacs) (Face Value Rs.56 362 74.16) (4681. 6400 lacs.412 equity shares through open market transactions at an average price of Rs.P ADJUSTMENTS (Rs. 110 each. for buyback of Equity shares up to 10% of the paid – up equity share capital and free reserves of the Company aggregating Rs 6400 lacs at a maximum price of Rs. 2009 7 . November 29.Accounting and Company Law Aspects Buyback – Case Study BEFORE BUYBACK (Rs.64 44. In Lacs) (Face Value Rs.5) 1423.16 Buyback – Case Study GATEWAY DISTRIPARKS LIMITED :- Pursuant to the approval of the BOD.46 74.54 1156.Case Studies on Buyback of Shares and Reduction of Share Capital . The Company has bought back 7.05 6983.16 45.10 1349.18 each aggregating to Rs.5) PARTICULARS (Mastek) Share Capital Free Reserves Share premium A/c CRR EPS .883. 81.21 11664.64) AFTER BUYBACK (Rs.

2009 8 .88 (788.559.46 6.66 33. 11.Case Studies on Buyback of Shares and Reduction of Share Capital .009 equity shares from open market at an average price of Rs 330.67 3. November 29.34 10.769. In Lacs) (Face Value Rs.157.39 128.611. 2009 bought back 2.34) (5. In Lacs) AFTER BUYBACK (Rs. In Lacs) (Face Value Rs.10) PARTICULARS (Gateway) ADJUSTMENTS (Rs.75 Buyback – Case Study IPCA LABORATORIES LIMITED :In the terms of scheme of Buyback of Equity shares.771. the Company has upto the year ended 31st March.10) Share Capital General Reserves Share premium A/c CRR EPS M.P.Accounting and Company Law Aspects Buyback – Case Study BEFORE BUYBACK (Rs.03.93.735 38.66) 788. These shares have been extinguished and the paid up capital has been reduced accordingly by Rs 20 lacs.34 7.33 2946.80 788.34) (788.

November 29. 4850 Lacs.90 45000 20 36.P 2518. As on 31st March. In Lacs) AFTER BUYBACK (Rs.Basic M.978 equity shares were bought back at an average price of Rs.60 per share. In Lacs) (Face Value Rs.Case Studies on Buyback of Shares and Reduction of Share Capital .50 940 Buyback – Case Study HEG LIMITED :The Board of Directors of the Company has approved the Buyback of its Equity shares from Open market through Stock exchange. In Lacs) (Face Value Rs.90 45690 36. 2009 9 .10) ADJUSTMENTS (Rs. 2009. 127.20 (20) (690) 20 2498.44. The Buyback is approved for an amount not exceeding Rs. 17.10) Share Capital General Reserves CRR EPS .Accounting and Company Law Aspects Buyback – Case Study PARTICULARS (IPCA) BEFORE BUYBACK (Rs.

84 7745.2008. Resulting in reduction of Bank’s equity share capital from Rs.P 4431. November 29.32 174. In Lacs) (Face Value Rs.12.55 23. In Lacs) (Rs.54936 lacs and GOI’s equity share holding from 74. In Lacs) (Face Value Rs.79936 lacs to Rs.5 AFTER ADJUSTMENTS BUYBACK (Rs.25000 lacs out of equity holding of the GOI into Perpetual Non-Cumulative Preference Shares (PNCPS) of equal amount carrying a coupon rate of Repo + 100 basis points to be reset annually.43 174.23) 174.Basic M.10) Share Capital Free Reserves Share premium A/c CRR EPS . Bank has converted Rs.10) 4257.59%.98% to 63.Case Studies on Buyback of Shares and Reduction of Share Capital . 2009 10 .50 (2052.Accounting and Company Law Aspects Buyback – Case Study BEFORE BUYBACK (Rs.34 5693.14 305 PARTICULARS (HEG Limited) Buyback – Case Study UCO BANK:On approval of Bank’s capital restructuring plan by the GOI effective from 22.5 24.

• To return excess cash to its shareholders where there is no likelihood of the cash ever being required for the business November 29. CAPITAL REDUCTION Capital Reduction is the process of decreasing a company’s shareholder equity through share cancellations and share repurchases so as to: • increase shareholder value • produce more efficient capital structure Situations in which a Company may reduce its capital: • Where the capital is unrepresented by assets. in 2 tranches of Rs 45000 lacs and Rs 75000 lacs during the years 2008-09 and 2009-10 resp.Case Studies on Buyback of Shares and Reduction of Share Capital . 2009 11 . 2009 and accordingly allotted PNCPS to the GOI.Accounting and Company Law Aspects Buyback – Case Study As per the plan. • Where substantial losses have accumulated. GOI will be subscribing a sum of Rs 120000 lacs in innovative type capital instruments of the bank. The Bank has received Rs 45000 lacs on 30th March.

• • Accounting Entries for Capital Reduction Share Capital A/c To capital reduction A/c (being amount written off from share capital) Dr XX XX Reserve A/c To capital reduction A/c (being reserves utilized for capital reduction) Dr XX XX Capital reduction A/c To Profit & Loss A/c (being accumulated Loss written off) Dr XX XX November 29. 2009 12 . This may be done either through buyback or reduction of capital. which is lost. extinguishing or reducing the liability on any of its shares. or is not represented by available assets. Cancel any paid-up share capital.Case Studies on Buyback of Shares and Reduction of Share Capital . which is in excess of the needs of the company.Accounting and Company Law Aspects Capital Reduction (cont…) Reduction of share capital may be effected in the following ways: • In respect of share capital not paid-up. or Pay off the paid-up share capital.

80 18. 2009 13 .38) AFTER (Rs.410 lacs.) (Face Value Rs. had approved capital reduction by reducing the face value of equity shares from the existing Rs 10/.073.) (Face Value Rs.410.to Rs 5/.and also the waiver of the entire amount of preference share capital pursuant to financial restructuring proposal of the Company The paid up share capital of the Company. in Lacs. November 29.Case Studies on Buyback of Shares and Reduction of Share Capital .24 (40987.76 - PARTICULARS The excess is transferred to general reserves.Accounting and Company Law Aspects Capital Reduction – Case Study Hindustan Copper Limited :The Ministry of Corporate Affairs in 2008. in Lacs.90 15496.821. 10) Share Capital (Equity Shares) Preference Shares Reserves and Surplus Profit & Loss 76. stands reduced from Rs 94. Capital Reduction – Case Study BEFORE (Rs. as such.895 lacs to Rs 38.5) 38.

in Lacs. 10 per share to Re. in Lacs. 10) AFTER (Rs.59. subscribed and paid-up equity share capital of the Company stood reduced from Rs.817 equity shares of the face value of Re.599 lacs comprising of 13.599.) (Face Value Rs. 2007.817 equity shares of the face value of Rs.1) 13. 1 per share effective Nov 1.93 Share Capital (Equity Shares) 13. the existing issued.) (Face Value Rs. 1956 as approved by the shareholders and Bombay High Court. 10/each fully paid-up to Rs. Consequently.59.28 November 29. 1/. • Capital Reduction – Case Study PARTICULARS BEFORE (Rs.Accounting and Company Law Aspects Capital Reduction – Case Study COLGATE-PALMOLIVE (INDIA) LIMITED:• Pursuant to the scheme of reduction of share capital u/s 100 of the Companies Act.Case Studies on Buyback of Shares and Reduction of Share Capital . 2009 14 . 13.359 lacs comprising of 13.92.92. the Company reduced the face value of it’s shares from Rs.each fully paid-up.1.59.

Case Studies on Buyback of Shares and Reduction of Share Capital .Accounting and Company Law Aspects Thank You November 29. 2009 15 .

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