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REPORT ON

BUYBACK OF SHARES
SUBMITTED

ACKNOWLEDGEMENT

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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.

TABLE OF CONTENTS

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5 6–7 8 .30 31 . 5. 12. raising earnings per share. 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. 19. 18. 2. 16. 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 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 Page No. 11. 17. 13. When a company's shareholders vote to 4 . 7.Serial No. In the case of stocks.33 34 – 44 45 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. 4. 1. 10. 8. giving each remaining shareholder a larger percentage ownership of the company. Reasons for buybacks include putting unused cash to use. this reduces the number of shares outstanding. and obtaining stock for employee stock option plans or pension plans. 15. 6.10 11 . 3. increasing internal control of the company. 14. 20. 9.13 14 – 23 24 – 26 27 .

also known as a "share repurchase". There was Insertion of new sections 77A. The idea is simple: because a company can’t act as its own shareholder. or using its cash to buy its own shares. they aren't obliged to actually undertake the buyback. and the number of outstanding shares on the market is reduced. 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. 1998. In the 1970’s period. 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. They were thus forced to go public. You can think of a buyback as a company investing in itself. 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. or claims. they could do so only by diluting their shareholding and getting listed on the exchange.authorize a buyback. The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids. if MNC’s wanted to continue doing their business in India. repurchased shares are absorbed by the company. The buyback ordinance was introduced by the Government of India (GOI) on October 31. the relative ownership stake of each investor increases because there are fewer shares. is a company's buying back its shares from the marketplace. also called corporate repurchase. Definition 2 A stock buyback. 5 . When this happens.

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. Otis Elevators. Cadbury India. 1997.The buy back of shares is governed by the Securities and Exchange Board of India's (SEBI) Buy Back of Securities Regulation. In India too 6 . and the amended Companies Act 1956. This allowed foreign promoters to utilize their surplus funds and make an open offer to acquire a 100% stake in their Indian subsidiaries. Post the 11th September 2001 terror attacks in the USA. The ordinance was issued along with a set of conditions intended to prevent its misuse by companies and protect the interests of investors. This provided a much needed exit option for shareholders in depressed market conditions. and Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and Takeover Regulations. approximately 240 companies have announced a buyback including the likes of GE. Now that the norms have been altered and MNC’s were permitted to carry on their business without any such compulsion. Carrier Aircon. Oracle. The buyback of shares was allowed only 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. Reckitt Benkiser etc. 1998. they would rather operate as wholly owned subsidiaries without being listed on the bourses. However. Microsoft etc. Several MNC’s like Philips India Limited. announced offers to buyback the shares of its Indian subsidiary under SEBI (SAST).

Eg. Bombay Dyeing. There was Insertion of new sections 77A. Section 77A. 77AA. Bajaj Auto went on a massive buy back in 2000 and Reliance's recent buyback.there have been a lot of companies that have announced buybacks like Reliance Industries. 1998. companies in emerging markets like India have growth opportunities. Raymond etc. and 77B of Companies Act 1956 The amendment of the Companies Act. 77AA and 77B 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. 1956 came into force on 31st day of October. Therefore applying this argument to these companies is not logical. GE Shipping. However. 7 .

Expecting further fall many companies like Citigroup. Eg: In October 1987 stock prices in US started crashing. Any such exercising leads to increase in outstanding shares and to drop in prices. Recently the prices of RIL and REL have not fallen. short-term capital gains are taxed at 10% and long-term capital gains are not taxed. Since their incremental growth potential limited.This argument is valid for MNCs. they can • buyback shares as a reward for their shareholders. At present. Technology companies which have issued ESOPs during dot-com boom in 2000-01 have to buyback after exercise of the same. 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. as expected. This also gives scope to takeover bids as the share of promoters dilutes. which already have adequate R&D budget and presence across markets. Tax Gains Since dividends are taxed at higher rate than capital gains companies prefer buyback to reward their investors instead of distributing cash dividends. as capital gains tax is generally lower. despite the spat between the promoters. • Increase promoter's stake Some companies buyback stock to contain the dilution in promoter holding. However the logic of buying back stock to protect from hostile takeovers 8 . • Market perception By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher. IBM et al have come out with buyback offers worth billions of dollars at prices higher than the prevailing rates thus stemming the fall. Eg. EPS and reduction in prices arising out of the exercise of ESOPs issued to employees.

They avoid any public scrutiny of its books of accounts.seem not logical. and return on equity (ROE) increases as there is less outstanding equity. Though this type of buyback is touted as protecting over-all interests of the shareholders. the stock should truly be undervalued. return on assets (ROA) actually increases with reduction in assets. an improvement could jump-start the stock. Thus. • Show rosier financials Companies try to use buyback method to show better financial ratios. Since investors carefully scrutinize only EPS and P/E figures. This is one method of market disciplining the management. it reduces outstanding shares and also the assets on the balance sheet (because cash is an asset). For eg. 9 . When a company uses its cash to buy stock. 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. It may be noted that one of the risks of public listing is welcoming hostile takeovers. For this strategy to work in the long term. 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.

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.Generally the intention for the buyback is a mix of any of the above reasons. The laws of supply and demand would suggest that with fewer 10 . Reserve Bank of India in 1949 by buying back the shares. 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. Eg. • Enhances shareholders value: Generally. share buybacks are good for shareholders. • Sometimes Governments nationalize the companies by taking over it and then compensates the shareholders by buying back their shares at a predetermined price.

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. This effect is greater the more undervalued the shares are when they are repurchased.shares on the market. This can have a psychological effect on the market. the share price would tend to rise. Buying back stock allows the company to earn a better return on excess cash and keep itself from becoming a takeover target. Cash rich companies are also very attractive takeover targets. • Higher Share Price: Buying back stock means that the company earnings are now split among fewer shares. • Buying back stock allows a company to pass on extra cash to shareholders without raising the dividend. meaning higher earnings per share (EPS). higher earnings per share should command a higher stock price which is great! • Reduce takeover chances: Buying back stock uses up excess cash. 11 . • 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. • Increase ROE: Buying back stock can increase the return on equity (ROE). The returns on excess cash in money market accounts can drag down overall company performance. Theoretically. this is more than made up for by the reduction in the number of shares. Although the company will see a fall in profits because it will no longer receive interest on the cash. If shares are undervalued. this may be the most profitable course of action for the company.

A typical example is the HP case: From November 1998 through October 2000. The aim was to make opportunistic purchases of HP stock at attractive prices—in other words. • Stock buybacks also raise the demand for the stock on the open market. In a buyback scheme. On the resultant gain. This point is rather self explanatory as the company is competing against other investors to purchase shares of its own stock. the buyback signal was completely drowned out more powerful contradictory signals 12 . 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. at prices they felt undervalued the company. Disadvantages: • Sending Negative Signals: A buyback announcement can send a negative signal in these situations. Instead of signaling a good operating prospects to the market. if any. • 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. plus 2 per cent education cess. the computer giant Hewlett-Packard spent $8. the tax would be 20 per cent plus the applicable surcharge. Your tax liability will be limited to the lower of the two calculations. neither does the sale take place on a recognised exchange nor is the STT paid.2 billion to buy back 128 million of its shares. high dividend-paying companies whose share prices are languishing. and if the opportunity cost of funds used is lower than the dividend savings. A buyback and the subsequent neutralisation of shares. buybacks can actually boost their bottom lines since dividends attract taxes. You may also work out the tax at 10 per cent of the gain without considering indexation. So. can reduce dividend outflows.• Excellent Tool For Financial Reengineering: In the case of profit making. the company can laugh all the way to the bank.

Indeed. This way. • 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. By last January. slipping financial results. the company should put the money into assets that can be easily converted back into cash. 1999. Section 77A(2) of the Companies Act. Instead. ensuring current shareholders receive maximum benefit. PROVISIONS / CONDITIONS RELATING TO BUYBACK. HP’s shares were trading at around half the average $64 per share paid to repurchase the stock. Strictly. In such cases. Sec 77A: Power of a company to purchase its own securities. shares of the company can be bought back at a discount. 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. it is foolish to buy in an overpriced market. a company should repurchase its shares only when its stock is trading below its expected value and when no better investment opportunities are available. • The share buyback scheme might become a big disadvantage to the company when it pays too much for its own shares. pursuant to the report of the working group which was set up to suggest reforms to the Companies Act. 1956: 1) Authorised by Articles of Association and a Special Resolution 13 . when the market swings the other way and is trading below its true value. and a decay in the general profitability of key markets. Section 77A was introduced by the Companies (Amendment) Act. a protracted business restructuring.about the company’s future which are an aborted acquisition. long-term investors will respond to a buyback announcement by selling the company’s shares.

conversion of warrants. b) The necessity for the buy-back. c) The class of security intended to be purchased under the buy-back. etc. Prohibition of Buy Back : A company shall not directly or indirectly purchase its own shares or other specified securities – 14 . d) The amount to be invested under the buy-back. after the completion of the buy-back file with the Registrar and the Securities and Exchange Board of India.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. No return shall be filed with the Securities and Exchange Board of India by an unlisted company. 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. 11) The company should not make any further issue of securities within 2 years. a return in form 4 C containing such particulars relating to the buy-back within thirty days of such completion. except bonus. Filing of return with the Regulator: A Company shall.

The section also prohibited giving of financial assistance to a person for purchasing shares in companies except in certain situations i. Section 100 does not prescribe the manner in which the reduction of capital is to be effected. and a company limited by guarantee and having a share capital. or According to it. lending by a banking company. subject to compliance with sections 100 to 104 and b) c) d) purchase under an order of Company Law Board to purchase shares of minority shareholders under section 402(b). { Punjab Distilling Industries Ltd. 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. CIT [1965] 35 Comp Cas 541 (SC).e. redemption of redeemable preference shares under section 80.1) through any subsidiary company including its own subsidiary companies. 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. 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 loans to employees to enable them purchase shares in the company or its holding company. v. 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. purchase under an order of court in a scheme of arrangement or amalgamation under sections 391 to 394. 15 . shall not have the power to buy its own shares. a company limited by shares. or 2) through any investment company or group of investment companies. unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402. 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.

Hindustan General Electrical Corporation [1960] 30 Comp Cas 367 (Cal). b. such other particulars as may be prescribed Where a company buys-back its own securities. a company shall maintain a register of the securities/shares so bought and enter therein the following particulars a. or with fine which may extend to fifty thousand rupees. it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back.Hindustan Commercial Bank Ltd. of course compoundable under Section 621A of the Companies Act. securities. The legislative intention behind the introduction of section 77A is to provide an alternative method by 16 . v. 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. cancellation c. The offences are. the the consideration date paid of for the securities of bought-back. or with both. the date of extinguishing and physically destroying of securities and d. Register of securities bought back : After completion of buyback. 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.

17 . 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. 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 two operate in independent fields. 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. Section 77B of the Companies Act. Company is in default in repayment of deposit or interest. (3) and (4). Sec77B: Prohibition for buyback in certain circumstances. Company is in default in payment of dividend or repayment of any term loan including interest to banks and FIs. There is nothing in the language of section 77 that gives rise to such an inference. The conditions provided in section 77A are applicable only to buy-back of shares under section 77A. of its total paid up equity capital in any financial year subject to compliance with sub-sections (2). We are. Through any subsidiary company. 1956 : 1. The non obstinate clause in section 77A namely "notwithstanding anything contained in this Act . 3.. Through any investment company or group of investment companies.. or redemption of debenture or preference shares or 4. Similarly the conditions for a buyback under section 77A cannot be applied to a scheme under sections 100 to 104 and section 391.which a company may buy back up to 25 per cent. such exclusion should be explicitly or clearly implied. 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. 2." only means that notwithstanding the provisions of section 77 and sections 100 to 104. 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. therefore. It is well settled that the exclusion of the jurisdiction of the court should not readily be inferred.

6) Buy back through negotiated deals.Section 77AA: Transfer of certain sums to capital redemption reserve account. 9) To ensure security/safety. The Securities and Exchange Board of India (Buy Back of Securities) Regulations. an offer for buy back shall not remain open for more than 30 days. 18 . the company making the buy back offer has to open an escrow account on the same lines as provided in the Takeover Regulations. 7) To ensure strict compliance with the provisions of SEBI Regulations. The new Sections (77A and 77B) in the Ordinance lay down the provisions/restrictions concerning buy back of shares. 1998 and January 7. The Companies (Amendment) Ordinance (October 31. Thus. Buy back through the book-building mode and purchases through stock exchange are allowed for open market transactions. 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. 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. merchant banker has been made to be associated in every offer for buy back. wherein he has to give a “due diligence” certificate. 3) In the purchases made through the stock exchange. 8) To ensure timely completion of buy back process. except in cases of purchases through stock exchange. spot transactions or private arrangements is not permitted. 1988 provide for the following: 1) Regulations cover only the listed securities of company. 4) Extensive disclosures need to be made in the Explanatory Statement to be annexed for the notice for general meeting and the Letter of Offer. the Regulations provide for timebound steps in every mode. 2) Buy back is permitted through the tender offer mode from existing share holders on proportionate basis and from odd lot holders.

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

the Committee does not find this mechanism to be appropriate at this stage. in the emerging global scenario where companies have to consolidate and reposition themselves. Moreover. This concept is not yet addressed in Indian Law. is to examine whether there should be any restriction at all for buyback of shares? If so. companies are allowed to buyback their own shares upto 25 percent of the paid up capital and free-reserves. The facility is used in some countries (a) effecting a block repurchase from large shareholders (b) effecting purchases from employees (c) thwarting takeover attempts. securities premium account or proceeds of any earlier issue specifically made for buyback purposes. 20 . Australia etc. Therefore. 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. which is an essential ingredient of the Capital Market. The crucial question.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. the paper notes that buyback of shares can be done only out of company's free reserves. The concept of targeted buyback. It would be in fitness of things to exempt even the buyback offers and put it on par with secondary market transactions. what percentage of the paid up capital and free reserves should be allowed? In case of buyback of shares. 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). This has been provided for in certain countries like USA. Regulations on buy-back of shares On buyback of shares. where an issuer may buyback shares from a subset of shareholders on a preferential basis was examined by the Committee constituted by the SEBI.

2. More than one crore rupees. Two lakh rupees (Rs. More than five crore rupees. namely:1.00.000/-).00. 3. These Regulations may be called the Securities and Exchange Board of India (Buy-Back of Securities) (Amendment) Regulations. Fee (Rs. 1998.125% of the portion of the offer size in 0. 1992 (15 of 1992) read with clause (f) of sub-section (2) of Section 77A of the Companies Act.000/-) plus 0. 21 . the following paragraph shall be substituted. More than ten crore rupees. In the Securities and Exchange Board of India (Buy-Back of Securities) Regulations. More than one thousand crore rupees. namely:Every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board. 2. 5. for paragraph (1). but less than or equal to ten crore rupees. 1. 1998. 3.00. but less than or equal to five thousand crore Five crore rupees (Rs. but less than or equal to one thousand crore rupees.000/-). In exercise of powers conferred by sub-section (1) of section 30 of the Securities and Exchange Board of India Act.00. Three lakh rupees (Rs.000/-). They shall come into force on the date of their publication in the Official Gazette. in Schedule IV. but less than or equal to five crore rupees. 1956 (1 of 1956) the Board hereby makes the following regulations to amend the Securities and Exchange Board of India (BuyBack of Securities) Regulations.Securities And Exchange Board Of India (Buy-Back Of Securities) (Amendment) Regulations.) One lakh rupees (Rs.00. 2007.5% of the offer size. pay fees as set out below:Offer size Less than or equal to one crore rupees. 2007.

whereas dividends are taxed at ordinary income tax rates.1000.00. Tax Implications of Buyback of Shares.00." 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. However. More than five thousand crore rupees.00. a buyback is similar to a dividend because the company is distributing money to shareholders. with the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003.rupees. the tax rate on dividends is now equivalent to the rate on capital gains. Traditionally. 22 .000/-).00. 1) According to section 46A of income tax buyback of shares is treated as ordinary sale of shares by the shareholder.10. excess of one thousand crore rupees (Rs. a major advantage that buybacks had over dividends was that they were taxed at the lower capital-gains tax rate. Ten crore rupees (Rs.000/-).

there are other useful.METHODS OF BUYBACK There are a number of ways in which a company can return wealth to its shareholders. they will state the number of shares they want to tender along with the price they are willing to accept. Once the company has received all of the offers. 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). or tender. When investors take up the offer. Typically. a portion or all of their shares within a certain time frame. Although stock price appreciation and dividends are the two most common ways of doing this. Tender Offer Shareholders may be presented with a tender offer by the company to submit. it will find the 23 . and often overlooked. the two ways of buyback are: 1. ways for companies to share their wealth with investors.

right mix to buy the shares at the lowest cost. The book building process is a mechanism of price discovery which helps determine market price of securities. 3. except the price at which the securities will be offered (a price band is specified). In both 1 & 3 promoters can participate in buyback and not in 2. that when a company announces a buyback it is usually perceived by the market as a positive thing. on receiving the above information. 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. which often causes the share price to shoot up. If the book building option is used. The prospectus should contain all the details of the offer. 2. Institutional investors specify the price as well as the volume of shares they intend to buy. just like an individual investor would. at the market price. It is important to note. The book runner. Open Market The second alternative a company has is to buy shares on the open market. Companies can also use the book building process to buy back shares. determines the price at which the offer is to be made to the public. a draft prospectus has to be filed with SEBI. however. Other methods of buyback are 24 . Book-building process.

or • Selective buy-backs – a buy-back that does not fall within any of the other categories. 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. is smaller than such marketable lot. the A H Dalmia group was able to make a profit of Rs. as may be specified by the stock exchange. 27 a share. 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. that is to say.5% stake (around 3 million shares) at Rs 54 per share for a consideration of Rs. The offer and counter offers made by the A H Dalmia group and the promoters of GESCO pushed up the bidding cost.• Employee-share purchases – purchases of shares held by or for the benefit of current or former employees of a company. In October 2000. The price offered was less than half the book value of the company. whose shares are listed on a recognized stock exchange. 91 million through greenmail transaction in less than 6 months. 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. 24 per share for a consideration of Rs. 72 million. 25 . The A H Dalmia group had acquired the 10. The A H Dalmia group ultimately sold its 10. where the lot of securities of a public company. Hence. such as the purchase of a particular member’s shares. including salaried directors. 163 million before the year end.5% stake in Gesco at an average cost of Rs. Here odd lots.

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. These were passed by the Central Government on 6th July1999. 26 . 1999. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. 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.

brief information about the company. the class of security intended to be purchased under the buy-back. 27 . process.Special resolution A special resolution needs to be passed under sub-section (2) of section 77A of the Companies Act. Audited Financial information for the last 3 years Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern. disclosure of all material facts. 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. • • The capital structure including details of outstanding convertible instruments. The statement shall contain the date of the Board meeting at which the proposal for buy back was approved. the time limit for the completion of buy-back. post buy-back. The necessity for the buy back. the necessity for the buy-back. • • • • the proposed time table from opening of the offer till the extinguishment of the certificates. It will also state that the BOD has checked that the company would be able to pay all its debts. Letter of offer The Company. if any. 4A. 1956 and the explanatory statement is to be annexed to the notice for the general meeting containing all disclosures. shall file with the Registrar of Companies a draft letter of offer before the buy-back of shares. etc. the basis of arriving at the buy back price. the method to be adopted for the buy-back. authorized by a special resolution. IT shall also declare solvency in Form No. The letter of offer shall contain pre and post buy-back debt equity ratios etc.

factual and material information i. 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. 28 . 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. which would make up the entire sum due and payable as consideration for the buy-back.e. Payment to the shareholder The Company shall immediately after the date of closure of the offer open a special bank account and deposit therein.Dispatch LoF The letter of offer shall be dispatched immediately after filing with Registrar of Companies but not later than 21 days from it’s filing with Registrar of Companies Buyback Period The offer for buyback shall remain open to the members for a period not less than 15 days and not exceeding 30 days from the date of dispatch of letter of offer. Shares tenders exceeds limit In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the company. no misleading information and state that the directors of the company accept the responsibility for the information contained in such document. the acceptance per shareholder shall be on proportionate basis. General obligations of the company The company shall ensure that: • The letter of offer shall contain true.

29 . Extinguishment of Certificate The company shall extinguish and physically destroy the share certificates so bought back in the presence of the Company Secretary within 7 days from the date of acceptance of the shares. After all the requirements are fulfilled and document submitted to ROC the company can proceed with the buyback. and The company shall not utilize any money borrowed from Banks/Financial Institutions for the purpose of buying back its shares. The company shall confirm in its offer the opening of separate bank account and pay the consideration only by way of cash or Bank draft/pay order. the format of which is mentioned in the Rules. after the completion of the buy-back under these rules. The company shall not withdraw the offer once the draft letter of offer has been filed with the Registrar of Companies.• • • • The company shall not issue any shares including by way of bonus till the date of the closure of the offer under these rules. 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. shall file with the Registrar a return in the Form. After the process is complete the company again has to file a form with the ROC and thus the process will be completed. Return to be filed with Registrar A company. 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.

Special Regulation Incase the Offer size is greater than 25% of its Equity share capital & free reserves. When the notice is being sent to the shareholders an Explanatory Statement must be annexed to the notice containing various disclosures 30 . The buyback of shares can’t take place for delisting of shares from the Stock Exchange. 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.BUYBACK FOR LISTED COMPANIES The regulation is applicable to buyback of shares or other specified securities of a company listed on a Stock Exchange.

(i) Under Registered Post Acknowledgement Due. The necessity for the buy back 3.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. 4. or (ii) Under certificate of posting. 2001. as on the date of the notice convening the General Meeting. The number of securities that the company proposes to buy back. about having despatched the ballot papers. 6. 2. 7. Method for sending notice: (a) The company may issue notices either. The aggregate shareholding of the promoter and of the directors of the promoters. 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. “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. 5. The company may specify one reason to be adopted for buy-back so that the shareholders authorize the BOD for the same. The basis of arriving at the buy-back price. 31 . a. 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.” Explanatory Statement The company needs to make the following disclosures in the statement 1.

Aggregate number of shares purchased or sold by such persons during a period of six months preceding the date of the Board Meeting c. A confirmation that the BOD has made a full enquiry into the affairs and prospects of the company and are of the opiniona. and c. 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 company during that year. 1956 11. The amount of the permissible capital payment for the securities is in their view properly determined. 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. b. b. The maximum and minimum price at which purchases and sales were made along with the relevant dates. 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. that there will be no grounds on which the company could be found unable to pay its debts. and. 8. In forming their opinion for the above purposes.b. the directors have taken into account the liabilities as if the company were being wound up under the provisions of the Companies Act. c. A confirmation that there are no defaults subsisting in repayment of deposits. redemption of debentures or preference shares or repayment of term loans to any financial institutions or banks. They have inquired into the company’s state of affairs. 9. 32 . A report addressed to the BOD by the Company’s auditors stating thata. 10.

decided & fixed. 3. Board Resolution The Board will pass a resolution to buy back its shares. is pre. From the existing Share and other specified securities on a proportionate basis through the Tender offer. the price and the size of the offer i. From Open Market. From Odd-Lot holders TENDER OFFER A tender offer is an invitation by the company. Before making the Public Announcement the company shall give a public notice in at least one English national daily. where the shares of the company are listed. The company makes 33 . the number of shares to be bought back. 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. passed by the Board of Directors at its meeting authorizing buy back of its shares shall be filed with SEBI and the stock exchanges. METHODS OF BUYBACK OF SHARES UNDER SEBI REGULATIONS A company may buyback its securities by any one of the following methods:’ 1. within two days of the date of the passing of the resolution. The Board of Directors shall give such public notice. within 2 days of the passing of the resolution. one Hindi national daily and a regional language daily. In a buyback by the Tender Offer method. 2.e.After the special resolution (requiring 2/3rd Majority) is passed the company can go ahead with the buyback. The Board of Directors can now proceed ahead with the buy-back programme. The public notice shall contain the disclosures as specified in the Explanatory Statement A copy of the resolution. to its existing shareholder. at the place where the registered office of the company is situated. to buy back its securities.

Public Announcements The company which has shall before buyback of shares make a public announcement in at least one English National Daily. 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 quantum of shares proposed to be tendered. 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 • If the promoter intends to offer their specified securities . if yes .an open offer to all its shareholders to buy back its shares at a given price. 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 maximum price at which the buy-back of shares/securities shall be made. usually a premium to the current market price. the price and the date of acquisition. A company may buyback its securities from its shareholders on a proportionate basis. Additional Disclosure The Company is required to submit the following Additional Disclosures in the Explanatory Statement annexed to the notice of the general meeting if its wants to proceed with a tender offer. The proposed time table from opening of the offer till the extinguishment of the certificates. Details of PA • • • • Disclaimer clause as may be prescribed by SEBI. one Hindi National Daily and a Regional language newspaper. 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 34 .

details relating to volume of business transacted should also be stated for respective periods. low and average prices of securities of the company. The Volume on the days when the high and low prices were recorded on the relevant stock exchanges during the above period.g. ii. during the preceding three years.sent. Audited Financial information for the last 3 years Details of escrow account opened and the amount deposited therein. iv. v. The market price immediately after the date of the resolution of the Board of directors approving the buy back. 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. 35 . Along with high. iii. 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 . • • • • • Brief information about the company. Monthly high and low prices for the six months preceding the date of the PA. and The volume of securities traded in each month during the six months preceding the date of PA. High. Low and average market prices of the securities of the company proposed to be bought back. (e. Listing details and stock market data. i. when the securities have become ex-rights or ex-bonus). 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.

and by at least two directors of the company one of whom shall be a managing director. the maximum and minimum price at which purchases and sales referred were made along with the relevant dates.• • • Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern. The aggregate shareholding of the promoter group and of the directors of the promoters. Filing draft-letter of offer The Company within seven working days of the public announcement shall file with SEBI a draft-letter of offer containing disclosures as specified in the regulations through a merchant banker who is not associated with the company. The capital structure including details of outstanding convertible instruments. Name of Compliance officer and details of investors service centres. • 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. Disclosures of Letter of offer 36 . where the promoter is a company shareholding of persons who are in control of the company. promoters holdings and any change in management structure. Collection and bidding centres. if any. public holdings. if any post buy back.. holdings of NRIs/FIIs etc. • The aggregate number of shares purchased or sold by such persons during a period of twelve months preceding the date of the PA. Other disclosures as may be specified by SEBI from time to time by way of guidelines. • • • • • The details of statutory approvals obtained.

o High.• • • • • • • • • • • • 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 The process to be adopted for the buy back. Low and average market prices of the securities of the company proposed to be bought back. during the preceding three years. Listing details and stock market data. 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. 37 . • • Details of escrow account opened and the amount deposited therein. 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.

• Management discussion and analysis on the likely impact of buy back on the company's earnings. • Details of statutory approvals obtained. holdings of Non Resident Indians/Foreign Institutional Investors. the maximum and minimum price at which purchases and sales referred to above were made along with the relevant date. post buy-back directors of the promoters. and o The volume of securities traded in each month during the six months preceding the date of the offer document . promoters holdings and any change in management structure. • 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. Along with high. where the promoter is a company and of persons who are in control of the company. 38 . if any. etc. (e.. low and average prices of securities of the company. when the securities have become exrights or ex-bonus) . • • • 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. with such period commencing from the date the concerned stock exchange recognises the change in the capital structure. public holdings. details relating to volume of business transacted should also be stated for respective periods.g. o The stock market data referred to above shall be shown separately for periods marked by a change in capital structure. o the market price immediately after the date on which the resolution of the Board of directors approving the buy back.o The number of securities traded on the days when the high and low prices were recorded on the relevant stock exchanges during the period stated above.

• (2) A declaration to be signed by at least two whole time directors. 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. and 39 . 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. the directors shall take into account the liabilities as if the company were being wound up under the provisions of the Companies Act. 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 opinion- (i) As regards its prospects for the year immediately following the date of the letter of offer that. • Collection and Bidding centers Name of Compliance officer and details of investors service (1) A declaration to be signed by at least two whole time directors that there are no defaults subsisting in repayment of deposit. (ii) In forming their opinion for the above purposes. the company will be able to meet its liabilities and will not be rendered insolvent within a period of one year from the date. Redemption of debentures or preference shares or repayment of a term loans to any financial institutions or banks.• • centres. 1956 (including prospective and contingent liabilities) .

• • Such other disclosures as may be prescribed by SEBI from time to time. 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. The Company shall also file a declaration of solvency in the form as may be prescribed. pay fees as set out below. one of whom is the Managing Director Fee Structure As per the amendment in the Act. as on 28th May 2007. 40 .000/-). The offer document shall be dated and signed on behalf of Board of Directors of the company by its manager or secretary.00. More than one crore rupees.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. Two lakh rupees (Rs. and by alteast two directors (one of whom is the managing director).000/-). 1. Fee (Rs. and verified by an affidavit signed by at least two directors of the company. but less than or equal to five crore rupees. 2. The draft letter of offer shall be accompanied with fees specified in the Regulations.) One lakh rupees (Rs.00. if any. every merchant banker shall while submitting the offer document or a copy of the public announcement to the Board.

000/-) plus 0. if any.1000. in the draft letter of offer.00. More than ten crore rupees.10. 5.5% of the offer size. but less than or equal to one thousand crore rupees. Five crore rupees (Rs.000/-). 0.00.00.00. 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 letter of offer shall be sent to shareholders so as to reach them before the opening of the offer.000/-).125% of the portion of the offer size in excess of one thousand crore rupees (Rs.00. Three lakh rupees (Rs. The merchant banker and the company shall carry out such modifications before the letter of offer is dispatched to the shareholders. 3. but less than or equal to ten crore rupees.” Modification of LoF Within twenty-one days from the date of submission of the draft letter of offer.00.More than five crore rupees. the acceptances per share holder shall be equal 41 . More than one thousand crore rupees. More than five thousand crore rupees. 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 date of the opening of the offer shall not be earlier than seven days or later than thirty days after the specified date. SEBI specifies modifications. but less than or equal to five thousand crore rupees.000/-).00. Ten crore rupees (Rs. 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.

deposit in an escrow account a sum as specified below.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 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. on or before the opening of the offer. with the merchant banker. 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. Bank guarantee in favor of the merchant banker. The escrow amount shall be payable in the following manner: • • If the consideration payable does not exceed Rs.25% of the consideration payable. The escrow account shall consist of • • • • Cash deposited with a scheduled commercial bank or. or A combination of above mentioned three points. The Company shall by way of security for performance of its obligations. 100 crores – 25% up to Rs. If the consideration payable exceeds Rs. or Deposit of acceptable securities with appropriate margin.100 crores . 42 . 100 crores and 10% thereafter. Escrow Account An Escrow account is the mechanism put in by SEBI to protect the share-holders and give them security.

may transfer the funds from the escrow account. 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. if any. 43 . such sum as would. 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. 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. 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. The amount forfeited may be distributed pro rata amongst the share holders who accepted the offer and balance. shall be utilised for investor protection.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 particulars of the Share certificates extinguished and destroyed shall be furnished to the stock exchanges where the shares of the company are listed. Two whole-time Directors including the Managing Director and. The company shall maintain a record of the Share certificates.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. The statutory auditor of the company. 44 . 1992 “is a person who is engaged in the business of issue management either by making arrangements regarding selling. within seven days of extinguishments and destruction of the certificates. which have been cancelled and destroyed. MERCHANT BANKER A merchant banker. and certifying compliance within seven days of extinguishment and destruction of the certificates. 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. buying or subscribing to securities as manager. according to SEBI (Merchant Bankers) Regulations.

assisting in making corporate strategies. advisor or rendering corporate advisory services in relation to such issue management”. industry and also investors by performing as intermediary.consultant. consultant and a liaison. Merchant bankers render services to meet the needs of trade. 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. Merchant banking is a service oriented industry specializing in investment and financial decision making. assessing capital needs and helping in procuring the equity and debt funds for corporate sectors and ultimately helping in establishing favourable economic environment. 45 .

100 crores .25% of the consideration payable. etc are clean. The escrow account shall consist of: o Cash deposited with a scheduled commercial bank or. Escrow Account: Escrow account is the trust account established by a broker/ promoter / others under the provisions of the license law for the purpose of holding funds on behalf of the broker’s principal or some other person until the consummation or termination of a transaction. or o Deposit of acceptable securities with appropriate margin. 100 crores 25% + 10% thereafter. collaboration. the merchant banker inform the bank for release of securities from the escrow account. s determined by BRLM in consultation with the acquirer or promoter of the company after the offer closing date in accordance with the SEBI guidelines.  Due diligence certificate: the merchant bankers would be required to give `due diligence' certificate which certifies that all the documents of the company with respect to or any dispute cases of patents.  Compliance with regulations: The merchant banker shall ensure compliance of section 77A and section 77B of the Companies Act.  Price fixation: in case of book building method used. Ensuring release of balance Escrow amount deposited with the bank. with the merchant banker. o If the consideration payable exceeds Rs. o Bank guarantee in favor of the merchant banker. The disclosures and the legal requirements are in line with the guidelines. On completion of the buyback obligation by the company. Escrow Account can be payable in following manner: o If the consideration payable does not exceed Rs. and other laws or rules as may be applicable 46 has to . The provisions relating to Escrow Account. has been made. or o A combination of above mentioned three points. as per the regulations.

They use the average closing price (which is a weighted average for volume) for a period immediately before to the buyback announcement. 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. inaccurate or misleading manner and is made in accordance with the Regulations. VALUATION OF BUYBACK OF SHARES There • are two ways companies determine the buyback price. provided such disclosure(s) is not presented in an incomplete. clear. 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. The Merchant Banker/ offerer is free to add any other disclosure(s) which in his opinion is material for the shareholders.  Letter of Offer: 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. Based on the trend and value a buyback price is decided 47 . 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. concise and easily understandable language. but it shall be presented in simple.

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.• Shareholders are invited to sell some or all of their shares within a set price range. the price is fixed at a mark up over and above the average price of the last 12-18 months. Investors are given more say in the buyback price than in the above arrangement.per share. Illustration Glaxo SmithKline: The equity shares of the Company are proposed to be bought back at a price of Rs. This price has been arrived at after taking into consideration factors such as the book value. The low point of the range is at a discount to the market price. return on net worth. 370/. Generally. which allows for the buy-back of the equity shares of the Company at a price not exceeding Rs. Still this method is rarely used. while providing an option to the Shareholders to sell their Shares at a premium over the current market price. Rs. Per share 48 . 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. 370/(Rupees Three hundred seventy only) per equity share in terms of the above resolution. overall trend in prices of the Company's Shares and the possible impact of the buy-back on the Company's earnings per share. while the top of the price range is set at a premium to the market price. earnings per share. The buy-back price as proposed above.

ACCOUNTING FOR BUYBACK 49 .

● 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? ● How would the expenses incidental to buyback. 1999 requires the securities bought back to be extinguished and physically destroyed within seven days of the last date of completion of buyback. legal expenses. fees of advocate and merchant bankers. 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. e. The legal provisions on buyback. This makes it clear that there is a time gap between the buyback of shares and their reduction from the share capital consequent upon the cancellation and physical destruction of such shares.The key issues to be looked at with respect to the accounting are related to the following questions. Sub-section (7) of Section 77A of the Companies (Amendment) Act. 1999. as inserted by the Companies (Amendment) Act. 50 .g. there is a need to see what the law provides. costs of paper announcements and printing of offer letters etc. As the law is silent. the acceptable accounting treatment of the buyback transactions may be determined by applying authoritative accounting principles to the form and substance of the transactions. be treated in books of accounts? Before examining the above issues in Indian context..

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. Such a transfer of profit becomes necessary to prevent capital erosion and hence to ensure that the interests of the creditors.Accordingly. 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. in so far as the use of funds accumulated through plough back of profit. Section 77AA of the Act states that where buyback is done out of free reserves or securities premium account. 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. 1956. Further. there is reduction in net worth of the company as no further issue of capital is made. 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. That is. Hence. 51 . 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. According to Section 77A(1). 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.

e. For instance. as a matter of prudence.15. Thus. if an Rs.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. there is no doubt that the entire Rs. against balance of general reserves or accumulated profit and loss balance or any other free reserve or against securities premium account.The third key accounting issue relates to the excess amount paid on buyback over and above the nominal value of the shares bought back. As there are currently no accounting standard dealing with the accounting treatment of incidental expenses incurred for buyback of shares. But. 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. how should the excess amount of Rs. 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? 52 . But.10 share is bought back for Rs. any premium paid on buyback should be adjusted against free reserves i.5 per share paid on buyback be accounted for by the company? Should such premium of Rs.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. varying treatment may be found in practice. logically..

Thus. such a treatment would also help the company in claiming these expenses as deductions while computing taxable income. In the light of the above discussions and in view of the fact that there is no accounting standard in the U. 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.Although the treatment of the buyback expenses as revenue expenses may reduce the current earnings of the company. the accounting entries for buyback transaction have been developed in the following section. treating the related expenditure as deferred revenue expenditure would perhaps be the best accounting method because the benefit of buyback is expected to accrue over a long span time in future. 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. Moreover. such a treatment would still make it possible for the company to claim the entire expenditure as deduction against taxable profits. or in the U. in the absence of any stipulation regarding the accounting treatment of such incidental buyback expenses.S. Further. to guide such transactions. Since the buyback expenses are not exactly of capital nature. 53 .K.

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. 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 Account’.] Note: Generally free reserves are invested in the assets/ investments of the company. between the sale-proceeds and book-value of such investments. So to utilize free reserves for buyback purposes. (with the issue proceeds) To Debentures/ Other Securities Account (with the nominal value) To Securities Premium Account (with the premium received on such shares. assets/ investments must be realized first. if any) (iii) For buying back of shares/ specified securities: Shareholders’ / Security holders’ Account Dr. To Bank Account (with the amount paid on buyback 54 . (ii) In case the proceeds of fresh issue are used for buyback purpose. then on fresh issue: Bank Account Dr. 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.

varying treatments are likely to be found in practice. there being no legal requirement. Share Capital/ Specified Security Account Dr. should such reserves be capital reserve or reserves available for distribution as dividend? Once again.OTHER ISSUES IN ACCOUNTING Another issue relates to accounting treatment of the discount earned on buyback. (with the nominal value) To Shareholders’/Security holders’ Account (with the amount paid) To Capital Reserve Account (with the amount of discount on buyback) 55 .(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. nor any accounting standard issued by ICAI on the treatment of such discount. 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. (with the nominal value of security bought back) Free Reserves/Securities Premium Account Dr.e.

To Buyback Expenses Account (to the extent the expenses are written-off 56 . To Bank Account (with the amount of such incidental expenses incurred on buyback) (viii) For writing-off buyback expenses against profit and loss account: Profit and Loss Account Dr. Securities Premium Account Dr.(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 Capital Redemption Reserve Account (with the nominal value of securities bought back) (vii): For expenses incurred on buyback of shares Buyback Expenses Account Dr.

33% 25% 60% 66.EFFECTS OF BUYBACK OF SHARES This can be broadly divided into two parts i.e. • • Effects on the Company Effects on the Shareholders Effects On The Company 1.67% 75% 57 .67% Post Buyback case1 case 2 case 3 40% 33. 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 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% 66.

67%.67%.33% to 40%. promoters 33. CASE 3: in this case the company decides to bring down the promoters shares in the company’s equity share capital to 25%. 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% and 66.33% and Non promoters 66. 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. We are assuming that there is a 100% buyback of 25 shares which the company has proposed to make. As the company has offered to buyback 25 shares.e. That means promoters have to offer 19 shares and net offer to the public would be only 6 shares. 17 shares. The impact is more on the positive side.e. Promoters share can increase decrease or remain the same. 2. CASE 2: Here the company decides to keep the shareholding same as before i. Therefore we can say that depending on the policy of the company the shareholding pattern of the company changes.CASE 1: the original proportion of promoters and non promoters share in the total equity capital was 33. 58 . IMPROVEMENT IN THE FINANCIAL RATIOS OF THE COMPANY When a company decides to go for buyback it has a huge impact on the financial ratios of the company.

There are four majors Ratios which gets impacted due to buyback. Pre Particulars Cash Assets Earnings Outstanding Buyback 1000 10000 1500 150 Post Buyback 625 9625 1500 125 59 . 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 Example: Company B Ltd.

This is due to decrease in the shareholder’s equity. The reason behind this increase is that there is a reduction in the total assets.Shares Equity share Reserves Shareholders Equity Market Share 1500 200 1700 10 0.88 10 1 1250 75 1325 15 0.15 0. Price – Earning Ratio: Here market value of the share has increased from Rs. which has gone down from Rs.10. Since the overall increase in the market value of the share is much more than the increase of EPS.10 to Rs.13 12 1.12.88% to 1. Total assets have gone down from Rs.25 Price Financial Ratios Return on Assets (ROA) Return on Equity (ROE) Earning per share (EPS) Price-Earning Ratio (P/E) Explanation Return on Assets: We can see that ROA has increased after buyback.13%. The reason behind the increase of EPS is that the numbers of shares have reduced from 150 to 125. income remaining same. Return on Equity: It has also increased from 0. Earning Per Share:It has also increased from Rs.1250. On the other hand EPS has also increased from 10 to 12. which is a 50% hike in the price.1500 to Rs. 000 to Rs.15.9625. causing EPS ratio to increase. Therefore we can see an increase in the priceearning ratio.16 1.10 to Rs. which is a 20% hike. 60 .

Therefore by Buying back shares. 61 . company gives surplus cash to the shareholder and saves tax for the shareholders. When a company pays dividend they are entitled to pay tax at the rate of 15%.Effects On The Shareholder Tax Benefits: When a company has surplus cash. This cost has to be born by shareholders. who receive less cash then what is declared. they can either pay it off as dividend or buy back shares.

if the company would have given them surplus cash by way of dividend.600 based of their fundamental and technical analysis. So the net amount which would be received by the shareholder would be Rs.5 crore. So after 100% buyback.500 and company believes that the price of their share should be at Rs. 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. For example a company market price of the share is Rs. Higher Share Price: One of the reasons why a company goes for a buyback is that they think that their shares are undervalued.5 crore. company would have 750 shares outstanding. This can be explained with the help of an example: A company which has 1000 outstanding shares goes for buyback of 250 shares.150 crore is received by the shareholder. That is why they buyback share at a premium or at a price that they think it should command in the market.67%. Thus shareholders save tax of Rs. Higher Proportion of share: When a company goes for buyback. 62 . If a company decides to go for buyback of shares then the entire amount of Rs.150 crore as dividend then company has to pay tax of Rs.127.22.5 crore. That means proportion of an individual investor increases.22.150 crore and if they declare Rs. which they would have incurred.Example: A company has surplus cash of Rs. Thus there is an increase in his/her proportional share. number of shares outstanding reduces.

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.

CASE STUDY ON HINDUSTAN UNILEVER LIMITED
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. Care Products and Foods & Beverages. 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

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

Offer

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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. Reason 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. 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.

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47 2796.68 2502.94 1874.09 66 .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 220.14 37.13 35.47 2166.09 217.88 37.13 35.

8 2 221 2166.APPLICATION OF FUNDS Net Block 1400.82 218 share 216 230 PAT 1855 1855 Assuming PAT to remain the same in the year 2007 67 .51 1321.09 2092.75 DATA 2006 2007(E) 2796.7 5 3362.5 Current Liabilites Provision Net Current assets Investments Capital work in progress 3362.42 -1128.0 Total Assets Net Worth No of Shares Mrkt price of 9 2722.09 1 1321.85 2413.75 3 1146.09 1400.33 1146.26 2796.26 2166.75 1778.85 2413.3 Current Assets Loans & Advances 2408.93 110.4 2 1758.93 110.

86.68 8.51 in 2007.39 25.66 and in year 2007 it will become 0.89 in 2007.73 0.68 in 2006 to 0.09 crore as the cash is reduced by Rs 630 crore for buying back shares @ Rs 230 each.86 0. 68 . ROE: Company’s ROE has increased from 0.KEY FINANCIAL RATIOS (31st DECEMBER) 2006 2007(E) Return on Assets Return on Equity Earning per Share Price-earning Ratio 0. This is due to reduction in the total assets which goes down from Rs 2796. reason behind this is that total net worth of the company has gone down from Rs 2722.51 27.39 in 2006 to 8.82 crore in 2006 to Rs 2092.03 COMPARISON: Effects on the company ROA: Company’s ROA in the year 2006 was 0. EPS: Company’s EPS has increased from 8.09 crore to Rs 2166.94 crore in 2007.68 crore in 2006 to Rs 217. Reason behind this is that total number of share outstanding has reduced from Rs 220.66 0.82 crore in 2007.89 8.

Reason behind this is that the market price of the share has increased from Rs 216/ share in 2006 to Rs 230/ share in 2007.5 crore.06%. Promoters share: Its share in the company was 50. Higher Share price: Usually a company buy backs share at a premium from the public thus increasing it market price. Rs 94. Thus increasing promoters share to 51. 69 .03 in 2007.73 in 2006 to 27. Effects on the Shareholder Tax Benefits: If company would have given Rs 630 crore as dividend.P/E Ratio: Company’s P/E Ratio has increased from 25. Thus by buyback method company saves tax for the shareholders. then it would have attracted dividend tax @ 15% i. This tax cost would have been born by the investor causing net cash in hand to reduce to Rs 535. After buyback number of shares outstanding has reduced to 218 crore shares. this lead to an increase in the market price of the share.37% during the year 2006 when number of shares was 221 crore.5 crore.e. When HUL offered to buyback shares at Rs 230 each when share was trading at Rs 196.

1979. 1958 with the name Hindustan Milk food Manufacturers Private Limited. The Company was promoted by Horlicks Limited of Buckinghamshire. Beecham (India) Private Limited merged with Hindustan Milk food Manufacturers Limited in January. 70 . Consequently the name of the Company was changed to HMM Limited on March 1. 1979. Smith Kline Beecham Consumer Healthcare Limited on March 29. the name of the Company was changed to: Smith Kline Beecham Consumer Brands Limited on September 16.BUY BACK OF GLAXOSMITHKLINE CONSUMER HEALTH CARE LIMITED: About the company: GlaxoSmithKline Consumer Healthcare Ltd. 1991. was incorporated in India on October 30. and GlaxoSmithKline Consumer Healthcare Limited on April 23. UK primarily to manufacture and sell malted food under the brand name of ‘Horlicks’. The world-wide interests of Horlicks Limited were purchased by Beecham Group Limited of UK in 1969. Subsequently. 1994. 2002.

325. Junior Horlicks.33 % of the outstanding fully paid up shares of the Company at a price of Rs. Section 77 A and 77 B of the Companies Act. 1998. Mumbai (BSE). representing up to 7. through Tender Offer in accordance with the provisions of the Articles of the Association of the Company. Viva.Present Operations The products manufactured by the Company are sold under various brand namely – • Horlicks. equivalent to 25% and 23. 123.24% of the paid up equity capital and free reserves of the Company as on December 2003 and 2004 respectively. The manager to the buy back offer for the company was Citigroup Global Markets Private Limited. namely Eno Fruit Salt. The Company’s Shares are at present listed on The Stock Exchange. and subsequent amendments thereof (“The Regulations”). The mode of payment is cash and the consideration shall be paid by way of cheque / demand draft.81 lacs.02. Buy Back: The offer will open on March 14th 2005 and close on April 12th 2005. 10/each. the National Stock Exchange (NSE). Crocin and Iodex on behalf of its associate companies in India.per share for an aggregate amount not exceeding Rs. Horlicks Biscuits. 71 . 1956 and the Securities and Exchange Board of India (Buy-back of Securities) Regulations. Boost.083 fully paid equity shares of Rs. Maltova and Gopika Ghee. 370/. The Company also markets certain OTC brands. The company decided to buy-back up to 3. Mother’s Horlicks.

pre.Since the Buy-back was approved by the Board of Directors on December 10. Godrej. The company will buy back the shares through the Tender Offer to all the shareholders. therefore this is one of the reason why the company has bought back its shares.buy back. The Promoters decided not to participate in the buy back and as such their percentage holding in the Company. It can be seen that as the company does not have any long term debt. and now HUL is 72 .16%. was increased to 43. 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. Glaxo. Few buy back of FMCG companies are Britania. post buy back. 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. 2004. improve return on Net Worth and enhance the Earning per share of the company. The company will not buy back the shares through a negotiated transaction or through any private arrangement. which would mean that there would not be any major payments in the future. 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. 2003. they tend to utilize these funds by buying back its shares. Reasons for Buy back: The buy back of shares had been done by the company in order to create long term Shareholders value. 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. 2004.

55% 25. The buy back Committee followed the method of proportional acceptance of shares and only 33.also coming up with a buy back program.873 equity shares 135% more than the shares to be bought back by the company.17 13.48 96.50 Post Buy back Dec 05 47511.18 22.62 24 Net Worth(Rs Lacks) Return on Net Worth Earning Per share(Rs) Book value Per share(Rs) P/E 73 .12 116.35. Post buy back the shares were extinguished and consequently the share capital of the company reduced. 22. The company received offers for buy back of 78. 25.083 shares were bought back.65 20. The Buy Back: The company had a successful buy back offer. 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. Various Ratios: Pre Buy back Dec 04 599.82% 16.

000 fully paid up equity shares of Rs. 1985. 50.10/. the Companies Amendment Ordinance 2001 and the SEBI (Buy-Back of Securities) 74 . investment in debt and equity mutual funds.e. 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.The Company was originally engaged in telecom products and pipes. 77AA and 77B of the Companies Act.f 12th May. Name of the company was changed to Apollo Finvest (India) Limited w. 1956.CASE STUDY: APOLLO FINVEST LTD COMPANY Apollo Finvest (India) Limited was originally incorporated as Apollo Mercantile Limited on 29th July. Company is presently engaged into various activities like leasing and hire purchase finance. Company then diversified by entering into financial services. from the existing owners/ beneficial owners of the shares of the company through “tender offer route” in accordance with Section 77A.each of the Company. 1992.

00 per share payable in cash for an aggregate amount not exceeding 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. 10. Further the company is debt free. Basis of the offer The buy back price is 52. 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. being the date of the board resolution approving the buy back of equity shares through tender offer route 75 .67% more than the average of the high low of closing prices of the shares on BSE during the 26 weeks period prior to 31/12/2004.115. The shares of the company are listed at the stock exchanges of Mumbai.Regulations 1998 at a price of Rs.00 Lacs (Rupees One Hundred and fifteen Lacs Only). 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. at present there is no immediate need for these funds.

each to maintain their shareholding at 58. Public Announcement to this effect was issued on 07/01/2005 1.75% of the paid up equity share capital of the company.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. representing 58. 76 .75%. 115.000 equity shares The total amount invested in the Buyback is Rs. considering buy back of equity shares to the fullest extent. 10/.93.e 58.3 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 11.675 equity shares of Rs 10/.74. thus buy back from other shareholders will be to an extent of 4. promoters will have to tender 6.50.per share. 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.2 The Buyback was effected through the tender offer route 1.00 lacs The Shares were bought back at a price of Rs.425 equity shares.75.75%.

513 43.44 3.AFIL received 617 applications for 12. Pushpa Soni Demat 6.005 equity shares were rejected on technical grounds and 584 applications for 11. Name of the shareholder Mode No. M/s Saksham Holding Ltd Demat 3.575 2. 50.08. Since the buyback offer was oversubscribed. Ms.349 equity shares were returned to 577 applicants. Suman Agarwal Demat 5. 68. Mr. Details of shareholders who have sold the shares exceeding 1% of the total number of shares bought back.849 13.75 20. 33 applications for 10.35.354 equity shares in response to the Buy-Back Offer leading to the subscription of 110.04 77 .18 1.29%.000 62. Gnanamudhan D N Demat 6.000 equity shares were accepted proportionately under the buyback offer.81 1.75. Out of this. Ms. Mr. shares were proportionately accepted from among the valid applications and accordingly 1.520 12.000 (%) 58. of shares % of shares bought back No of Shares 1. Ms. Anju Innani Demat 2. No. Sr.43 5. Vipul Agarwal Demat 4.

SEBI has an exhaustive list of guidelines that a company must follow in the event of a buy back its own shares. If the company has not been able to fulfill any of these conditions laid down by SEBI. 77AA and 77B in the Companies (Amendment) Act.UNSUCCESSFUL BUYBACK The reason for a failure of a buy back can be divided into: 1) Regulatory 2) Investor rejection REGULATORY – LEGISLATIVE In accordance with 77A. 1999. 78 . its buyback will not be considered valid.

Moreover. To explain this further.000 fully paid up equity shares of Rs. Buy-Back case Apollo Finvest (India) Limited was originally incorporated as Apollo Mercantile Limited on 29th July. Their buy-back offer driven by Essar Shipping and Logistics Ltd (ESLL).10/.f 12th May. required for the purposes of delisting.each of the Company. investment in debt and equity mutual funds. we can take the example of Ruias-promoted Essar Shipping. Company is presently engaged into various activities like leasing and hire purchase finance. 1992. A 79 . companies are allowed to buyback their own shares up to 25 percent of the paid up capital and free-reserves. buyback of shares can be done only out of company's free reserves. has failed to receive the minimum number of shares. Apollo Finvest ltd co.For example. Board Resolutions need to be passed. 1956. Name of the company was changed to Apollo Finvest (India) Limited w. Company then diversified by entering into financial services. 1985. from the existing owners/ beneficial owners of the shares of the company through “tender offer route” in accordance with Section 77A.00 per share payable in cash for an aggregate amount not exceeding Rs. the largest shareholder and promoter of the company. securities premium account or proceeds of any earlier issue specifically made for buyback purposes. 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. the Companies Amendment Ordinance 2001 and the SEBI (Buy-Back of Securities) Regulations 1998 at a price of Rs. 50. post buyback DER has to be maximum 2:1 etc.e. approving the buyback decision.The Company was originally engaged in telecom products and pipes. 77AA and 77B of the Companies Act.00 Lacs (Rupees One Hundred and fifteen Lacs Only). 10.115.

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 shares of the company are listed at the stock exchanges of Mumbai.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. 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. Therefore it is proposed to buy back a part of equity shares which will provide an opportunity to the company to return the surplus funds to the shareholder and improve return on equity. Further the company is debt free. 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 80 .

10/.74.93. Out of this.00 lacs The Shares were bought back at a price of Rs.005 equity shares were rejected on technical grounds and 584 applications for 11. 50.each to maintain their shareholding at 58.29%. considering buy back of equity shares to the fullest extent. 115.2 The Buyback was effected through the tender offer route 1. 33 applications for 10.per share.675 equity shares of Rs 10/. Public Announcement to this effect was issued on 07/01/2005 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.000 81 .e 58. representing 58. thus buy back from other shareholders will be to an extent of 4.50.75%. 68. promoters will have to tender 6.000 equity shares The total amount invested in the Buyback is Rs.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. AFIL received 617 applications for 12.329 equity shares.354 equity shares in response to the Buy-Back Offer leading to the subscription of 110.75% of the paid up equity share capital of the company.75.75%.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.

Details of shareholders who have sold the shares exceeding 1% of the total number of shares bought back.43 5. Anju Innani Demat 2.000 (%) 58.75 20. Suman Agarwal Demat 5. Since the buyback offer was oversubscribed.520 12. Ms. Ms.75. Ms.349 equity shares were returned to 577 applicants. Mr. No. Mr.575 2. shares were proportionately accepted from among the valid applications and accordingly 1.18 1.08. Vipul Agarwal Demat 4. M/s Saksham Holding Ltd Demat 3. Sr.81 1.849 13.000 62.35.04 82 . Name of the shareholder Mode No.equity shares were accepted proportionately under the buyback offer. Pushpa Soni Demat 6. of shares % of shares bought back No of Shares 1.513 43. Gnanamudhan D N Demat 6.44 3.

CASE STUDY: STERLITE INDUSTRIES 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 83 .

. 2002. Copper and Zinc operations in India and Australia. Copper Cathodes and Copper Rods meet global quality benchmarks.major with Aluminum. SIIL’s main products. 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. 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). which has to be sent to Sterlite by June 21. These are secured non-convertible debentures with a coupon rate of 10 per cent and redeemable at the end of the fourth.79 crores equity shares (representing approximately 50 per cent of the paid-up equity) from the shareholders. 84 . fifth and sixth year from the date of allotment. This arrangement of buyback met with a lot of uproar from SEBI as well as the investors with respect to legalities. Sterlite Industries proposes to purchase around 2. In 2001. This has to be done by exercising his option using an option form provided for the purpose. o Unlike an open offer or buyback. if the shareholder chooses to remain a shareholder of Sterlite. in this scheme of arrangement. 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. Sterlite Industries will apply for delisting of the shares from the stock exchanges. o If the public shareholding is reduced below 10 per cent. he must intimate to the company his intention to continue to hold equity shares.

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. Section 77A. 1. you will find a cheque in the mail soon thereafter and your shares bought and cancelled. It said that Sterlite had violated the Companies Act Provisions. 391 & 77 (a) and that the scheme also violated the Depositories Act under which shareholders' share could not be cancelled without their consent. Thus. it follows a furor over the terms of the Sterlite open offer. A move without precedent.Charges against Sterlite The Securities and Exchange Board of India (Sebi) moved the Mumbai high court for a stay of Sterlite’s buyback offer. Shareholders have to communicate their non-acceptance of the offer to the company. legally speaking. 2. Hence. 1956. it was believed that the company had left some grey areas. that provides for buyback. Once the tender of shares is done the registrar (after considering over subscription. for instance. sign and send to the company along with the cheque if they did not want to sell their holdings. even while there is an existing provision in the Companies Act. if. if any. you missed reading the notice or forgot to send a letter of rejection. 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. if any) will send the cheque for the accepted shares and the unaccepted shares. 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. The scheme provided that unless the shareholders rejected the offer specifically they would be deemed to have accepted it. 85 .

This procedure, 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.

3. Undervalued Price: There were also some rumblings that the company is buying back its equity cheap. The argument was based on the below contention. o As of June 30, 2001, the book value per share of Sterlite worked out to Rs 297.29. the free reserves (on a per share basis) —worked out to over Rs 125 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. According to the break-up available for investments loans and advances and cash and bank balances as of June 30, 2001, the non-operating assets on a per share basis works out to Rs 188 per share. This is significantly higher than the total consideration payable under the scheme of arrangement working out to Rs 150 per share. Due to the above charge against Sterlite the court had put a stay order on the proceedings.

Judgment:
The Court in its judgment declared that Section 391 of the Companies Act, 1956 could govern Sterlite's buyback scheme is distinctly independent of Section 77A of the Companies Act, 1956. “The legislative intention behind the introduction of section 77A is to provide an alternative method by which a company may buy back up to 25 per cent. of its total paid up equity capital in any financial year. It does not replace or take away any 86

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.” With respect to the arrangement of negative consent, 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. 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. Within a period of three months, 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. 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. However in the midst of the legal battle, the high court approved the scheme of arrangements after imposing a lot of conditions. 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 company had intended to delist the company from the exchange if it were able to mope up 50% shares from the market. Since it would have acquired 90% promoter's shares. However this was not possible as the buyback was only 30%.

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INVESTOR REJECTION
During a buyback, the actual buyer seller relation is reversed, the company becomes the buyer & its shareholders the seller. The choice of subscribing to the buyback offer lies with the investor. There are cases when the Buyback offer is rejected by the public due to various reasons. To explain this further, we can take the case of Indian Rayon and Industries Ltd (IRIL).

CASE: INDIAN RAYON
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. 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. 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. 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.

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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 it was not surprising that they decided to reject the offer made by the management. the company faced with a rather unsuccessful buyback 89 . The IRL buyback had been launched at a wrong time when the company was also not doing well and the markets were crashing.Considering the above factors the management was confident about the success of the buyback scheme. Shareholders had seen their wealth falling considerably. 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. despite hiking the repurchase prices to Rs. The investors were justified in rejecting the offer. Thus.455 crores as against Rs. 1956.207 to Rs. Sale of assets like cement unit to Grasim had led to huge cash surplus from which the company wanted to buy back its shares but the shareholders decided to hold on to their shares as the offer was extremely unattractive. inspite of compliance of all the regulations as per the SEBI as well as the Companies Act.1397 crores from early 1999.67.85 per share. 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.

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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. the US-based firm has reportedly been lobbying the Indian government for over a year to amend the SEBI takeover code.ORACLE I.100 per share . The move will help it to integrate I-flex with its business worldwide.its offer price of December 7. The amendment was aimed at compelling the minority shareholders to surrender the shares of I-flex in favor of Oracle. Rs. However the SEBI has refused to amend its norms as suggested by Oracle. if the minority shareholders do not surrender shares willingly to the new promoter. 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. 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. it added a rider stating it may think of an open offer if the share price is below Rs 2. 91 . 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. It would require a little over 90 per cent of shares to do so. however. In a recent filing with the US Securities and Exchange Commission. Stung by this cold response from the market.FLEX STORY US-based Oracle has repeatedly tried to buyback the shares of I-flex in order to gain a controlling stake in the company and eventually delist the company from the exchange. 2100 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. since its open offers received a tepid response. However its efforts have continuously received lukewarm response from the investors. Under current norms of SEBI. 2100. a government source said. 2006.

8 per cent. 2006 make an open offer to buy up to 20 per cent I-flex equity 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 12.1 billion 92 .5 per share.307. 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. 2006: Dec 7. Shares issued on Aug 14.475 a share Price of the open offer increased by 42 per cent to Rs 2.45 million shares at Rs 1. 2007: per share Oracle accepted the 23 million shares tendered in the offer for approximately $1. in I-flex solutions for $593 Nov 2005 Mar-Jun 2006 million.How Oracle acquired I-flex Year Acquired Shares Oracle obtained 42.100 Sept 12. 06 Jan 6.

those equity investors. However.first money being flowing from investors to the company and then back. In that case. This instrument to instrument transaction could save enormous administrative hassles and financial loss to both the investors and issuers. Then company would use the same funds for buying the equity back from the said investors. In the present scenario. It may be prudent to argue here that all the equity holders may not be interested in the debt instrument. In other words. there is a feeling in the market that the same may be allowed. buy back of shares by the companies is allowed only for the cash. It means that the company may raise the funds through say a debt instrument for paying for the equity. In the instant case. as per the buy back regulations. 93 . This would open up a very wide opportunity zone for the companies to be creative and do something distinctly different in the market place. Accordingly. it is always possible that some existing shareholders of the company would be subscribing to the debt offer of the company. company could offer the debt instrument to the said investor instead of first receiving the cash and then paying it back. This is resulting in the two cycles of cash movement . would be given the cash back for their equity. Hence. who subscribed to the debt offer of the company. planned to be bought back. Both the said transactions can be squeezed to one by allowing the buyback of shares for other than the cash. investors may be paid cash by the company through some alternative arrangement of the funds. this may be made optional for the investors to take debt instrument or the cash for their equity holding. 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.INNOVATION Buyback of the shares for other than the cash At present. which is made to raise funds to meet the buy back outflow.

there would be the requirement of the offered instrument being of minimum investment grade quality. 94 . it makes enormous sense for the companies to go for exchange of instruments i.Further. being practices globally at a large scale as a corporate restructuring exercise. buyback may be allowed. This is. allowing companies to buyback for other than the cash would pave the way for enormous creativity in the system. Further. On the similar lines and the global experiences. It may be relevant to mention here that acquisition of the shares in Takeover cases is allowed for other than the cash.e. indeed. In addition. 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. company may like to replace the equity with the debt or any other instruments. Therefore. for the Capital restructuring.

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