SHARE BUYBACK &

DELISTING
BUYBACK (SHARE REPURCHASE)
 Share buyback or share repurchase refers to the process of a company buying back its own shares from its
shareholders
 Reverse of issue of shares- way to which exit is provided to shareholders
 Share buyback leads to reduction in company’s issued capital

Objectives for share buyback

 Financial Objective:

• To address Over capitalization or Capital reduction (ROE<Opportunity cost for shareholders): Boz corporate
enterprise strives for shareholders wealth maximization (ROE>Opportunity cost for shareholders)
• Capital restructuring
• Tax exemption: In India listed companies are exempt from buy-back tax

 Strategic Objectives:
• buyback prevent mergers, takeovers and monopolization
• To shore the promoters stake
• Shareholder Value Management for undervalued shares : Long term EPS increase for long-term investors and
share price increase
• Exit opportunity to shareholders in the time of depressed market
FREE CASH FLOW & SHARE BUYBACK

 Cash thrown up by the operation of a Co. year after year after meeting the
reinvestment need to sustain business

 Understanding and managing free cash flow is an extremely important part of

strategic finance & I -banks plays key advisory role in it.

 In growing Co. discretionary cash can be diverted to financing growth the

left portion is called as agency cost of free cash flow

 Share buyback squeeze out excess free cash flow.

 Some factors in the growth of share repurchases

 Tax savings
 Cash dividends subject to maximum individual tax rate of 39.6%
 Returns of cash from share repurchases may qualify for long-term capital gains rate of
20%
 Management incentives
 Share repurchases increase the percentage ownership of the firm for nonparticipants
such as officers and directors
 Incentives of officers and directors to think as owners will be strengthened
 Reduce agency problems

 Management responsibility
 Shareholders'
trust in their officers and directors is strengthened because excess funds
were not used for negative NPV investments
 Undervaluation signal
 Non-participation of officers and directors in buyback programs may signal that stock
price is undervalued
 Cash flows are likely to increase in the future

 Sharp price declines

 After sharp decline in the stock market in October 1987, many firms initiated substantial
share repurchase programs
 Share repurchases represent a statement by management that overall market decline did
not justify the sharp drop in their firm's share price
 Greater flexibility vis-à-vis dividends: DIVIDENDS ARE STICKY
 Market rewards a history of consistent increases in dividends and punishes company that
fails to do so
 In share repurchases, the expectation is that cash will be returned to shareholders when
funds are available in excess of needs to finance sound investment programs
 Debt to equity ratio
 Share repurchases increase leverage ratio
 Share repurchases could be used to move the firm toward its target debt leverage ratio
 Offset stock options
 Stock options increasingly used in executive compensation programs and in employee incentive
plans
 Exercise of stock options increases firm's shares outstanding creating downward pressure on the
firm's stock price
 Share repurchases can be used to offset the potential dilutive effect of stock options
 Takeover defenses
 Share repurchase price may be viewed more favorably than takeover price
 Share repurchase may cause takeover bidders to offer a higher premium
 In order for takeover bidder to succeed, he must offer a higher premium to the remaining higher reservation
price shareholders
 Required higher premium may deter potential bidders
REGULATORY FRAMEWORK FOR SHARE BUYBACK
 Source of Finance: Free reserves + security premium + out of capital (proceeds from the issue of any other
security)
 Resolution:
• If buyback is ≤ 10% of total paid up capital + free reserves -> board resolution otherwise special resolution
 Limit on Quantum of buyback: 25% of the total paid-up capital + free reserves
• Post buyback D/E ratio ≤ 2:1
 Time gap between two buyback – at least one year from the closing of last buyback
 Time limit for completion of buyback: within one year from the resolution passed date
 Declaration of solvency to ROC
 Mandatory to engage merchant banker
 Reservation of 15 per cent of the buyback offer for small investors with holding of up to Rs. 2 lakh (market
value as on record date)
 All securities that are bought back have to be destroyed within 7 days from the date of conclusion of
buyback program or they can be reissued after a period of 24 months from the date of purchase
 No company shall make a public issue of the same kind of securities that have been bought back within the
period of 6 months from the conclusion of buyback except through issue of bonus shares or conversion of
METHODS OF BUYBACK

A company may buy-back its shares or other specified

securities by any one of the following methods
(a) from the existing security-holders on a proportionate basis
through the tender offer

(b) from the open market through stock exchange;

Methods of Buyback
 Fixed Price Buyback- shareholders on record of the company as of record date are invited to tender
their shares for re-purchase by the company at a fixed price arrived at by the company & disclosed
in the notice, public announcement & letter of offer

 Reverse Book Building- purchase from open market whereby shareholders are invited to put in their
bids for re-purchase of their shares. Board resolution specifies the max. price & quantity at which
securities shall be bought back by the company.

 Open Market Repurchase- Board resolution shall specify the max price at which securities shall be
bought back by the company however the method of repurchase is different as company procure
shares directly from the secondary market by placing buy orders in its name using the electronic
trading system (company cannot buyback shares belonging to the promoter group)

 Company is prohibited from using any other modes of buyback such as through negotiated deals,
spot transactions or off market private deals
 TENDER OFFER VS OPEN MARKET REPURCHASE

 In Open mkt offer, firms buy shares in the securities markets at the
prevailing market price & do not have to offer the premiums
required for tender offer
 Firms do not have to disclose publicly their intent to buy back
shares in the market in an open market repurchase but the same is
not true in case of tender offer
 Open market purchase can be spread out over much long time
periods than tender offers
IB PERSPECTIVE IN SHARE BUYBACKS
 Under SEBI regulations, IB can se associated as managers to all
buyback offers by listed companies advising them on
transaction structure, size of the offer, method of buyback,
pricing the offer, preparing offer document & other statutory
compliance
 Tender offer price is different from pricing a share issue because
it is exit price paid by the company to its shareholders unlike the
share issue which offers entry price
PRICING OF SHARE BUYBACK
 Buyback do not fundamentally change the business reality of a Co. It is an indigenous way of
improving EPS & ROE through capital restructuring.

 Thus, pricing in buyback is an extremely important decision, so as not to erode the value of the
continuing shareholders

 Pricing of buy back is a trade off between value distribution to existing shareholders Vs value
preservation to continuing shareholders

 Normally post buy back -> PE Ratio ↑ due to ↑ EPS on reduced capital base.

 But the Reduced capital base depends on exit price paid to shareholders.

 Overpriced buy back -> substantial reduction in capital -> ↓ EPS even on reduced capital base.
 METHODS OF SHARE BUYBACK PRICING
 To prevent fall in market price after buyback, buy back happened at
premium
 Determinant of buy back premium
 P (premium over ruling market price) ≤ {[1/(RONW*PE Ratio)] – 1}
 RONW & PE Ratio : In case of lower level of these variables Co. can
pay higher
DE-LISTING
 DE-LISTING OF A LISTED COMPANY
 Company whose shares are listed on Stock Exchange is taken private once again by getting its
publicly held shares bought over by private shareholders & terminating listing agreement with
Stock Exchange
 Voluntary delisting: Buy out of the minority by the majority to make a company private. It is
called ‘going private’. This process managed by merchant bank. Going pvt. Common in stressed mkt
conditions and in the condition when trading volume are too low to justify the listing fee. Sometime
MNCs also demands 100% ownership in the subsidiaries e.g. Castrol India, Cadbury
 Compulsory delisting: Forced delisting by stock exchange e.g. SE penalises a company for non-
payment of listing fees, violation of listing/statutory agreement, Company declares a bankruptcy,
Being liquidated by law.
MARKET CONDITION FOR LISTING AND DE-LISTING
Good mkt conditions (cost of PE> cost of public equityGO PUBLIC)
 PE players have to spend out more to acquire stakes which constrains spread of their
portfoliosrisk concentration is higherreturn expectations is higher. Also PE being
illiquidreturn expectations
 Return expectations by public equity investors will be low given liquidity

Weak & highly regulated mkt conditions (cost of public equity>cost of PE GO PRIVATE)
 Return expectations from public equity increases due to absence of exit route & cost of
regulatory compliance increasescost of servicing public equity is higher
 PE can get good stakes in larger amount of portfolios at attractive valuations return
expectations is moderate. Also PE be involved in decision making while in board and privy to
information.
REGULATORY REQUIREMENTS FOR VOLUNTARY DE-LISTING
 Presently a company cant delist unless a specific de-listing offer is made through the reverse book
building route under regulations
 The first step is appointing a merchant banker to oversee the electronic bidding. The banker
and promoter then advertise the offer and dispatch a letter detailing the floor price for
the buyback to all public shareholders.
 Stock exchanges then facilitate a reverse book building process through an online, fully
automated, screen-based bidding system.
 The tender price or the price at which the shareholder is bidding to sell his shares needs to
be equal or above the floor price notified by the company.
 The final buy back price will be determined only after the offer closes after aggregating all
shareholder bids. Delisting price is the price at which the holding of the promoter group
hits 90 per cent, based on the offers received. Once the price is finalised, all offers below
DETERMINATION OF THE FLOOR PRICE

Where the equity shares are frequently traded in all the

recognized stock exchanges where they are listed, the floor price
shall be higher of the following:
A.) the average of the weekly high and low of the closing prices of
the equity shares of the company during the 26 weeks .
OR
B.) 2 weeks preceding the date on which the recognized stock
exchanges were notified of the board meeting in which the
delisting proposal was considered,
 HIGHLIGHTS OF COMPULSORY DE-LISTING

 Public notice by the exchange for inviting the representation by the aggrieved
persons.
 Determination of exit price by the independent valuer (CA or Merchant Banker)
appointed by the concerned stock exchange.
 No requirement of going through the reverse book building process.
 Acquisition of shares by the promoters at fair value.
 Where a company has been compulsorily delisted, the company itself, its whole
time directors, its promoters and the companies which are promoted by any of
them shall not directly or indirectly access the securities market or seek listing
for any equity shares for a period of 10 years from the date of such delisting
DELISTING & INSOLVENCY & BANKRUPTCY CODE
 There are hundreds of listed companies under the Insolvency and
Bankruptcy Code (IBC), where  the existing shareholders are expected to
get a raw deal because of the new promoter or successful bidder bringing in
fresh equity with a majority control.
 The existing shareholders will get reduced to a minority in these companies.
 E.g. new promoter Vedanta in the Electrosteel Steels, one of the 12
companies, referred to bankruptcy code, is bringing in Rs 1,800 crore
as fresh equity, which will give Vedanta a 90 per cent stake. The
existing shareholders will get crunched  within the 10 per cent equity
while new promoters get 90% equity.
 In many other cases, the new promoters will own anywhere between
50-90 % equity so existing shareholders will get a raw deal.
INSOLVENCY & BANKRUPTCY CODE
 Eventually, in the delisting case of Electrosteel Steels which was acquired
by Vedanta Group. The company offered a delisting price of only 19 paisa
per share while the Electrosteel shares were trading at around Rs 26 in the
stock exchange platform at the time of announcement.
 Similarly, in case of Assam Company, the acquirer BRS Ventures has
offered to pay only 10 paisa per share to existing public shareholders even
as the stock was trading at around Rs 5 at the time of announcement.
 Shareholding of public investors in Electrosteel Steels has reduced from
54.7 per cent before restructuring to 2 per cent post the exercise.
INSOLVENCY & BANKRUPTCY CODE: SO WHAT ARE
THE RIGHTS OF THESE MINORITY SHAREHOLDERS?
1. There is a strong possibility that the new promoter or successful bidder apply for a
delisting of shares from the stock exchanges.
2. For Voluntary delisting promoter first has to acquire 90 per cent shareholding through a
buyback offer and then apply for delisting. The minority shareholders can raise the issue
of 'pricing' if  it is not fair and correct.

3. But the special regulations released by SEBI for delisting of IBC bound companies
provide flexibility to the acquirers, including exemption from any reverse book
building and requirement for minority shareholders’ approval. As a result, the new
managements are providing exit to existing shareholders by paying a paltry value
4. IBC is a creditor driven process and equity shareholders have no say in the process.
This is primarily due to lack of any minority shareholder representation in IBC process
RE-LISTING

Cooling period:-
 The company that has voluntarily delisted its securities can

relist its securities only after a period of 5 years.

 The company that has been compulsory delisted by the

exchange can relist its securities only after a period of 10

years

Relisting of sick companies

 The sick companies are exempted from the provision of

cooling period.