ITT POWERPOINT

PRESENTATION
Project submitted by:
Harsh shah (Group Leader) - WRO – 0351184
(M) - 9930340001
Sagar Thacker - WRO - 0359166
(M) - 9029371572
Vishma Kapadia - WRO - 0369478
(M) - 9821852286
Harsh Patel - WRO - 0359209
(M) - 8080782128
Manish Yadav - WRO -0381857
(M) - 9870079650
Project Topic - Compliance Relating To
Buy-back of shares

Batch Centre - Sailee International School

Batch Timing - 8:00 am – 12:00pm

Commencement - 18th October, 2010

Of Batch
 Why Buy-back Of Shares?

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

The share market is gaining importance and its fluctuations are having widespread
effects. In such a world, knowledge about shares is vital and this being one part of the
share trading we have decided to choose this topic.
 Why this topic? (contd…)
Share transactions are risky and can affect the financial stability of individuals and
companies alike. Investors must scrutinize financials of the company carefully.

Also, buyback has come into existence in the last decade and it being a relatively new
concept, it has been unexplored. This was another factor helping us in choosing this
topic.

In order to avoid making rash decisions, the knowledge of buyback becomes

necessary.
 Contents
Introduction
Process Of Buy-back
Objectives of Buy-back
Why Companies Buy-back?
Methods Of Buy-back
Resources For Buy-back
Valuation Of Buyback
Cases For Manipulation
Shareholder’s Perspective
Contents (continued..…)
Restrictions On Buyback
A. Other Restrictions
B. Disclosures In Special Resolution
Case Studies
A. Britannia
B. Reliance Energy Ltd.
Conclusion
 Introduction
•The provisions relating to Buy-back were inserted in the Companies
(Amendment) Act, 1999 under section 77A, 77AA, and 77B

•These were framed by SEBI

•The conditions for Private Ltd. Company and Unlisted Public Company with
regard to Buy-back are contained in section 77A(2)(f) and (g) respectively
 Process of Buy-back
In case of issue of shares, the
company comes out with an IPO
(Initial Public Offer) where it
issues shares to the general public.

In case of buy-back, the company

purchases the shares from the
shareholders.
Objectives Of Share Buy-back
 Why Companies Buyback?
Unused Cash
•MNC’s who have limited incremental growth, often go for buy-back of shares
as they have huge cash reserves lying idle

•In a growing market like India, this concept is not applicable as companies
have many growth avenues and thus spending money on buy-back would mean
restricting growth
Show rosier financials
 Why Companies Buy-back (contd…)

Market perception
By buying their shares at a price higher than prevailing market
price company signals that its share valuation should be higher.
E.g.: In October 1987 stock prices in US started crashing.
Expecting further fall many companies like Citigroup, IBM et al
have come out with buyback offers worth billions of dollars at
prices higher than the prevailing rates thus stemming the fall.

Recently the prices of RIL and REL have not fallen, as expected,
despite the spat between the promoters. This is mainly attributed
to the buyback offer made at higher prices.
Why Companies Buy-back (contd…)
Increase promoter's stake

In order to increase/retain promoter’s stake and work in the interest of the

shareholder’s, the company buy-backs the shares.

Sometimes Governments nationalize the companies by taking over it and then

compensates the shareholders by buying back their shares at a predetermined price.
E.g. Reserve Bank of India in 1949 by buying back the shares.
Methods of Buyback
The Resources For Buy-back
 Valuation Of Buyback
They use the average closing price (which is a weighted average for volume) for
a period immediately before to the buyback announcement

In the 2nd, shareholders are invited to sell some or all of their shares within a set
price range. This method is rarely used
 Cases Of Manipulation
The offer is not considered as rejected unless specifically mentioned by the
shareholders. Small shareholders’ unanswered letters often become a subject of
manipulation

Some companies force shareholders’ to sell at specified price mandated by the

company. This is inappropriate as it is forced upon the shareholders

Upto 10% buy-back of paid up capital, only majority shareholder’s approval is

required
 Shareholders’ Perspective
Monitor share price movements of the company closely.

Debt-equity ratio: The companies are hugely under debts are unlikely to have free
cash.

New companies are unlikely to be good candidate of buy-back.

If the management is really interested in shareholders’ welfare then it should complete

the buy-back process with minimum publicity. Too much hype is a cause of concern
because it might cause undue fluctuations in price.
Restrictions On Buy-back
 Other Conditions
The buy-back is authorized by the Articles of association of the Company.

A special resolution has been passed in the general meeting of the company
authorizing the buy-back. In the case of a listed company, this approval is
required by means of a postal ballot. Also, the shares for buy back should be
free from lock in period/non transferability.
Disclosures In Special Resolution
Notice
 Other Conditions (contd…)
No default in any of the following:
A.In repayment of deposit or interest payable thereon.
B.Redemption of debentures/preference shares.
C.Payment of dividend.
D.Repayment of loan or interest thereon to any financial institution.

Debt Equity ratio is 2:1 after buy-back.

No default Annual Return, Payment of Dividend,
and form and contents of Annual Accounts.

All the shares or other specified securities for buy-

back are fully paid-up.

The buy-back of the shares or other specified

securities listed on any recognized stock exchange
and all regulations are complied with.
Case Studies
 Britannia
During the year, 1,221,887 equity shares of Rs.10/-
each have been brought back and extinguished
under an approved scheme of buyback, at an
average price of Rs. 636.81 per share resulting in
a total outflow of Rs. 778.1 mn.

The number of paid up equity shares now stands

reduced from 25, 112, 050 to 23,890,163 equity
shares.
No public announcement was made pursuant to the fourth round of buyback, as
per the scheme approved by the members of passing a special resolution at the
Annual General Meeting 19th August, 2004 in terms of Section 77A(2)(b) of the
Companies Act 1956, since the market price of the shares generally remained
above the maximum price of Rs.650/- per share determined as per the approved
scheme.

The validity of back as per section 77A(4) is upto 18th August, 2005.
 Reliance Energy Ltd.
The Company made an offer on 9th of June, 2004 for buy-back of equity shares
in terms of the Securities And Exchange Board of India (Buyback of Securities)
Regulations 1998. (“Buyback Regulations”)
The Buy-back was at a price not exceeding Rs.525 per equity share,
aggregating to Rs.350 crores.
The Buy-back offer was valid for an initial period of 90 days up to 17th
September, 2004 and was extended from time to time.
It will be completed within the statutory validity
period of twelve months from the date of the
resolution i.e. on or before 8th June, 2005.

Keeping in view the market conditions and the

movement in share prices, the company has not
bought any shares under the offer.
 Conclusion
Buyback of shares has its pros and cons.
On one hand it prevents takeovers and mergers, thus preventing monopolization
and aiding the survival of consumer sovereignty
On the other hand, Buy-back of shares can help in manipulating the records,
inflating share prices, P/E ratios, Earnings Per Shares thus misleading
shareholders.
Thus knowledge of the impacts of Buyback becomes vital and every
shareholder must reconsider all his views before purchasing the shares of
companies involved in the process of buy-back.
 Bibliography
www.indianxlri.com
www.google.com
www.legalservicesindia.com