BUYBACK OF SHARES

Buy Back ?The repurchase of outstanding shares

(repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

A buyback is a method for company to invest in itself since they can't own themselves. Thus,

buybacks reduce the number of shares outstanding on the market which increases the proportion of shares the company owns.

Sections The provisions regulating buy back of shares are

contained in Section 77A, 77AA and 77B of the Companies Act,1956.

These were inserted by the Companies (Amendment) Act,1999.

The Securities and Exchange Board of India (SEBI) framed the SEBI (Buy Back of Securities) Regulations,1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy Back of Securities) rules,1999 pursuant to Section 77A(2)(f) and (g) respectively.

Objectives To increase promoters holding Increase earning per share Rationalize the capital structure by writing off capital

not represented by available assets. Support share value To thwart takeover bid To pay surplus cash not required by business In fact the best strategy to maintain the share price in

a bear run is to buy back the shares from the open market at a premium over the prevailing market price.

Resources of Buy BackA Company can purchase its own shares from

free reserves; Where a company purchases its own shares out of free reserves, then a sum equal to

the nominal 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

securities premium account; or proceeds of any shares or other specified securities. 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.

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. The buy back can be made by a Board resolution If the quantity of buyback is or less than ten(10%) percent of the paid up capital and free reserves;

The buy-back is of less than twenty-five(25%) per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five(25%) per cent of its total paid-up equity capital in that financial year;

The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back;

Conditions continue…

There has been no default in any of the following

in repayment of deposit or interest payable thereon, redemption of debentures, or preference shares or payment of dividend, if declared, to all shareholders within the

stipulated time of 30 days from the date of declaration of dividend or

repayment of any term loan or interest payable thereon to any financial institution or bank;

There has been no default in complying with the provisions of filing of 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;

Conditions continue…

The buy-back of the shares or other specified securities listed on any recognized stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and

The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.

Sources from where the shares will be purchased The securities can be bought back from

existing security-holders on a proportionate basis; Buyback of shares may be made by a tender offer through a letter of offer from the holders of shares of the company or

the open market through book building process; stock exchanges or

odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or

purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Procedure Where a company proposes to buy back its shares, it shall,

after passing of the special/Board resolution make a public announcement at least one English National Daily, one Hindi National daily and Regional Language Daily at the place where the registered office of the company is situated.

The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.

A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations.

A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.

Procedure continue…

A copy of the Board resolution authorizing the buy back shall be filed with the SEBI and stock exchanges.

The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date

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.

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, or with fine which may extend to fifty thousand rupees, or with both. The offences are, of course compoundable under Section 621A of the Companies Act,1956.

Issue of further shares after Buy back

Every buy-back shall be completed within twelve (12) months from the date of passing the special resolution or Board resolution as the case may be.

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, rights issue up to six(6) months from the date of completion of buy back.

SHARE BUY-BACK: POSITIVE ASPECTS

It could enable a company to achieve its desired capital structure more quickly or facilitate a major restructuring.

It could avert a hostile takeover bid by reducing the number of shares in circulation

Market generally interprets buy-back as a positive aspect

Shareholders have a choice of deciding whether or not to receive the payout by selling or holding their shares, unlike a dividend payout.

Returning excess cash by way of a share buy-back gives a company greater flexibility with regard to it’s dividend policy

SHARE BUY-BACK: NEGATIVE ASPECTS

Re-purchase of it’s own shares may conversely have a negative signaling effect.

Management may not seek to utilize any existing excess cash effectively

Possible mismanagements may arise if- • Too high a price is paid for the re-purchased

shares or if• Cash resources are eroded to the level that

could give rise to a risk of insolvency.

A return of funds by way of a share buy-back is less certain than an annual dividend stream.

CASE STUDY : BERGER PAINTS

INTRODUCTION TO BERGER

17 December, 1923- Started

Presently Dhingra , their relatives and companies controlled by them, currently hold 73.53% of the paid-up capital of the Company.

Profit making company having an uninterrupted dividend record since 1981.

OBJECTIVE

To provide an exit opportunity to those shareholders who so desire

This is expected to enhance the EPS of the Company in future and create long-term share value.

THE OFFER AND PRICE

29 April, 2005 -approved the proposal for buy-back of the Company’s own fully equity shares of Rs. 2/- each.

Buy-back to the extent of or less than: 10% of the paid up equity capital and free reserves of

the Company not exceed 25% of the paid up equity capital of the

Company at a price not exceeding Rs. 60/- per equity share and the total amount of consideration not exceeding Rs.

1859 lakhs.

THE OFFER AND PRICE

• The number of equity shares bought back would depend upon the average price paid for the equity shares bought back.

maximum offer price = Rs. 60/- per equity share

aggregate consideration amount=Rs.1859 lakhs

maximum number of shares = 3098333 equity shares

aggregating=1.56% of the total paid up equity shares as on 29 April 2005.

THE OFFER AND PRICE

The aggregate shareholding of the promoters as on 29 April 2005 is 146543273 equity shares constituting 73.53 % of the listed share capital of the Company.

Share purchased - 1009924 equity shares The maximum purchase price - Rs. 37.00 on 2

February, 2005 The minimum purchase price was Rs. 30.75 on

9 November, 2004 Shares Sold - 89620 equity shares representing

inter se sale among promoters only.

SOURCES & METHOD OF BUYBACK

SOURCES The maximum

amount of Rs. 1859 lakhs was met out of the free reserves and/or the share premium account of the Company.

METHOD Open market

purchases through the National Stock Exchange of India Limited (NSE)

IMPACT

• The buy-back had not impaired the growth of the Company and also contributes to the overall enhancement of shareholder value.

• Generated sufficient cash flows to meet the requirements of the present business and to its stakeholders.

• The debt equity = 2:1

CONCLUSION

Buybacks should be used as an opportunity to exit only when there is concern over a company’s prospects or when the post-buyback free float is expected to shrink considerably. In most other cases, buybacks do offer the lure of an immediate benefit–but you might be better off as a residual shareholder, and gain from a hike in the share of assets and profits of the business.

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