a company may buy back its own shares.WHAT IS BUYBACK 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 for the investors ´ Traditionally. subject to the restrictions envisaged in the section .companies were not permitted to purchase their own shares. Section 77-A. subject to a few exceptions specified in S.77.has caused this structural change that.1999.brought in by the companies(Amendment) Act.

as capital gains tax is generally lower Market perception: By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher. .WHY COMPANIES BUYBACK? 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. Eg. Bajaj Auto went on a massive buy back in 2000 and Reliance's recent buyback of shares Tax Gains: Since dividends are taxed at higher rate than capital gains companies prefer buyback to reward their investors instead of distributing cash dividends.

Show rosier financials Companies try to use buyback method to show better financial ratios like ROA. . Escape monitoring of accounts and legal controls :If a company wants to avoid the regulations of the market regulator by delisting. They avoid any public scrutiny of its books of accounts.Exit option: If a company wants to exit a particular country or wants to close the company. P/E ratio. ROE. EPS.

itself.To protect from hostile takeovers: The objective is to prevent persons from acquiring control of a co. Generally the intention is mix of any of the above Sometimes Governments nationalize the companies by taking over it and then compensates the shareholders by buying back their shares at a predetermined price. . Eg. by paying for its shares out of the accumulated assets of the co. Reserve Bank of India in 1949 by buying back the shares.

The company should not make any further issue of securities within 2 years. conversion of warrants. A special resolution has to be passed in general meeting of the shareholders 3. 2. except bonus. etc. A declaration of solvency has to be filed with SEBI and Registrar Of Companies 5.The buy-back is authorised by the Articles of association of the Company.RESTRICTIONS ON BUYBACK BY INDIAN COMPANIES Some of the features in government regulation for buyback of shares are: 1. Buyback should not exceed 25% of the total paid-up capital and free reserves 4. The shares bought back should be extinguished and physically destroyed 6. These restrictions were imposed to restrict the companies from using the stock markets as short term money provider apart from protecting interests of small investors. .

. then a sum equal to the nominal/face value of the share so purchased shall be transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance-sheet or (ii) Securities premium account BUT NOT FROM:Proceeds of any shares or other specified securities.RESOURCES OF BUYBACK A Company can purchase its own shares from : ( i ) Free reserves: Where a company purchases its own shares out of free reserves. A Company cannot buyback its shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares or specified securities.

3. 2. Another variety of this is Dutch auction. in which companies state a range of prices at which it's willing to buy and accepts the bids.WHAT ARE THE METHODS IN WHICH BUYBACK CAN HAPPEN? Share buyback can take place in 3 ways: 1. It buys at the lowest price at which it can buy the desired number of shares. . In both 1 & 2 promoters can participate in buyback and not in 3. Shareholders are presented with a tender offer where they have the option to submit a portion of or all of their shares within a certain time period and at usually a price higher than the current market value. Companies can buy shares from the open market over a long-term period subject to various regulatory guidelines by SEBI. Through book-building process.

The letter of offer shall then be dispatched to the members of the company. 4.PROCEDURE FOR BUY BACK 1. . one Hindi National daily and Regional Language Daily at the place where the registered office of the company is situated. which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent. after passing of the special/board resolution make a public announcement in at least one English National Daily. Where a company proposes to buy back its shares. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations. The public announcement shall specify a date. it shall. A draft letter of offer shall be filed with SEBI through a merchant Banker. 3. 2.

A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges. 8. .5. 6. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date 7. The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days. A company opting for buy back through the public offer or tender offer shall open an Escrow Account.

while the top of the price range is set at a premium to the market price. shareholders are invited to sell some or all of their shares within a set price range. Investors are given more say in the buyback price than in the above arrangement. The low point of the range is at a discount to the market price. Based on the trend and value a buyback price is decided In the 2nd. ´ .VALUATION OF BUYBACK There are two ways companies determine the buyback price ´ They use the average closing price (which is a weighted average for volume) for a period immediately before to the buyback announcement. the price is fixed at a mark up over and above the average price of the last 12-18 months. Still this method is rarely used. Generally.

where the lot of securities of a public company. whose shares are listed on a recognized stock exchange. as may be specified by the stock exchange.Purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. (ii) stock exchanges or 3.Existing security holders on a proportionate basis Buyback of shares may be made through a tender offer inviting a letter of offer from the holders of shares of the company or 2-The open market through (i)book building process. or 4. is smaller than such marketable lot.That is to say. .Odd lots:.SOURCES FROM WHERE THE SHARES CAN BE PURCHASED The securities can be bought back from : 1.

3) Positive impact on cos. . ratios.1) Reduction in outstanding number of equity shares & an Increase in EPS.Buy back approved by shareholders & purchase through open mechanism on NSE & BSE. .2) Imrovement In ROI/RONW and other fin.ILLUSTRATION Reliance Infrastructure buy back of shares(2009):. . Share prices.} proposed buy back.A 700 cr. .At a premium of 27% on the current prices. .Reasons:.[ Largest ever buy-back by any corporate in India ] .{USD 143 mn. .

with a lot of publicity. the prima facie assumption is that the promoters have been up to tricks. empowering the Board to buy back whenever allowed. there is enough scope for suspicion. Debt-equity ratio: The companies are hugely under debts are unlikely to have free cash Companies that have just come to the capital markets to raise money are unlikely to be good candidates for buyback. If there was a significant rise.CHECKLIST FOR INVESTORS BEFORE ACCEPTING THE COMPANY'S BUYBACK OFFER ‡ Take a look at the share price movement immediately before the buyback. Anybody with the genuine intention of buying back to enhance shareholders' wealth would try to do so with minimum publicity so that the share price does not flare up due to speculators ‡ ‡ ‡ . When the management has passed special resolutions.

. the consideration paid for the securities bought-back b. such other particulars as may be prescribed Where a company buys-back its own securities. it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back. a company shall maintain a register of the securities/shares so bought and enter therein the following particulars a. the date of extinguishing and physically destroying of securities and d. the date of cancellation of securities c.REGISTER OF SECURITIES BOUGHT BACK After completion of buyback.

No return shall be filed with the Securities and Exchange Board of India by an unlisted company. Filing of return with the Regulator A Company shall. A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue. ´ ´ . after the completion of the buy-back file with the Registrar and the Securities and Exchange Board of India.ISSUE OF FURTHER SHARES AFTER BUY BACK ´ Every buy-back shall be completed within twelve months from the date of passing the special resolution or Board resolution as the case may be. rights issue up to six months from the date of completion of buy back. a return in form 4C containing such particulars relating to the buy-back within thirty days of such completion.

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. or with both.PENALTY If a company makes default in complying with the provisions. The offences are. compoundable under Section 621A of the Companies Act. or with fine which may extend to fifty thousand rupees.

CONCLUSION ´ Effect of buybacks on stock exchanges: Buyback may lead to abnormal increase of prices posing heavy risk to those who value shares based on fundamentals. Eg: It was feared in 2001-03 that de-listing by many MNCs may drop the money flow to stock exchanges. Therefore investors should be cautious of unscrupulous promoters' traps. ´ . This may also lead to reduction in investor interest in the market particularly with de-listing of good shares. It may be remembered that buyback has no impact on the fundamentals of the economy or the company.

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