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7/31/2019 Buyback and delisting of shares
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Click to edit Master subtitle style8/30/12
BUYBACKS AND DE-LISTING
By Group 1
Garvit Agarwal
Gyan PrakashKaran GuptaRanveer DesaiRavikumar SoniSahil Singla
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Introduction
Share buyback refers to the process of a companybuying back its own shares from its shareholders
Research in the US shows that the market doesnot value a company for its liquid cash balancesand near cash investments
Therefore Companies should look for maximizingshare value through a build up of book value,earnings, dividends and return of surplus capital
through share repurchases Share repurchases tend to keep a company from
being over-capitalised
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Implication of ShareRepurchase
Correction of over capitalisation
Excess liquidity can lead to reductionin ROCE which can in turn lead to fallin ROE.
Repurchase of equity shares: this will
reduce capital and excess liquiditytherefore reducing shareholdersfund.
It leads to improved perception in
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Contd
Exit mechanism
Buyback is an investor-friendly measure intimes of depressed market as the investor
gets a respectable exit from the shares.
Shareholder value management
Buyback is required in times whencompany is not able to generate return onsurplus capital to offset the opportunitycost to shareholders which leads to low
shareholder value
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Equity Repurchases inIndia
Till 1998, companies were notallowed to buyback equity sharesfrom their shareholders or from the
secondary market.Selling in secondary market was only
exit route.
As per Companies Act, companieswere allowed to buyback their sharessubject to a lot of statutory
restriction.
R
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Regu atory ramewor orEquity Repurchase
Introduced in October,1998
Sec 77A and 77B of Companies Act
Financed out of free reserves orsecurity premium accounts
Completion of buy back process in12 months from the date of therelevant resolution
From existing shareholder, fromemployees and directors out of
ESOPs and Sweat equity
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Cant make public issue of same kindsecurities within six months
Two buy back programmes separatedby 365 days period
Only direct company can purchase.
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Public Companies and
Private companiesNo pricing guidelines- Board or the company free to fix.
Letter of Offer sent to shareholdercontains-
All material facts
Audited financial information for theprevious three years together withspecified financial ratios pre and postbuyback.
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Impact of buy back on companies earning,shareholding pattern, managementstructure
Auditors report
The Declaration of Solvency
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Procedure for Buyback
Kept open for not less than 15 daysand not more than 30 days
Offer accepted in proportionate basis
Verification by company within 15days
Open special bank account
Make payment by 7 days
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Buyback by ListedCompanies
Companies act, SEBI (Buy-back ofsecurities, 1998), provisions of listing
agreement.Appoint merchant banker mandatory
to prepare the Letter of Offer and
manage the buyback offer.No price mechanism
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Methods
Fixed price tender offer
Book-building method
Open market purchase
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Fixed price tender offer
Shareholders are invited to tender theirshare for re-purchase by the company ata fixed price arrived at by the company.
This method may not realise the bestprice for the shareholders.
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Book-building method
For purchases from the open market
Shareholders are invited to put in bids forre-purchase of their shares
Company specifies the maximum price atwhich the securities shall be bought backby the company
Company fixes the buy-back price basedon the highest price bid received fromthe shareholders.
Bidders who bid low, will also receive the
highest price therefore being beneficial
O k t
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Open marketpurchase
Company buys back the shares directly from thesecondary market
Hence, company buys the shares at varying priceson prevailing market prices, and therefore buyingat average price which maybe less than themaximum price approved
This is a more transparent method
This method is suitable when promoters wish toconsolidate their stakes
Drawback of this system is that promoters cannotsell their own shares and company may not enjoya good free float therefore not getting sufficient
quantities for buy-back
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Determining Buy-backPrice
q Price to be fixed at a premium overcurrent market price.
Lower the current P/E, higher thecompany can pay.
Price should not be lower than issueprice
If company doesnt have too longhistory of listing it is better to workout IRR.
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Determinants forBuyback premium
Present ROE before buyback.
Current P/E ratio.
Premium
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Quantum of buyback
q Buy back in value terms of sharesshall not exceed 25% of total paid upcapital and free reserves.
Debt equity ratio shall not exceed2:1 after buyback.
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Case Of a SuccessfulBuyback
GLAXOSMITHKLINE ConsumerHealthcare Ltd.
Sellers of Horlicks, Boost, Crocin, Iodex andmany others
Made an open offer to buyback during March2005
Offered to buy 3.3 Mn shares. At Rs 370/Share, not exceeding 123 Cr in value
Represented 23.24% of free reserves
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Reasons for Buyback
Promoters holding would increase from 39.99% to43.16%
Had excess reserves with no major expansionplans
Wanted to use its reserves instead of keeping itidle
Felt share was undervalued
FMCG industry in that period had limited growthplans
Thus Britannia, Godrej and HUL all came withbuyback plans
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Success of Buyback
Received more than double the required offers(7.8 Mn)
Bought back using Proportional AcceptanceMethod. Pre Buy back Dec 04 Post Buy back Dec 05
Net Worth(Rs Lacs) 59,935.17 47,511.18Return on Equity 13.82% 22.55%
Earning Per share(Rs) 16.12 25.48
Book value Per
share(Rs)
116.65 96.62
P/E 20.50 24
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Case Of an UnsuccessfulBuyback
INDIAN RAYON
Is into the garment business, it is an AV Birla
Group Company Announced buyback in September 1999
Buyback of 25% equity share capital
Price offered was in the range Rs 75-85
Intended cash outflow Rs 127-144 Cr
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Reasons for Buyback
To increase promoters stake from 21.5% to 28.7%
Working at below capacity and no major Capexplanned
Wanted to add value to share holders by returningcapital to them
Their Cement business was hived off to Grasim
Buyback would give investors an exit route
i i d S f
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Limited Success ofBuyback
Could purchase only 11% of its outstanding sharesas against the 25% offered
Hiked the price on offer to Rs. 85
The Market cap fell from 1397 Cr in 1999 to 455 Crin 2004
The share price plunged from Rs. 207 to Rs. 67
Launched at wrong time-
Company was not doing well and Markets wereCrashing
Market was not happy over the transfer of the Cementdivision of Indian Rayon to Grasim
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Effects of Buyback KamaHoldings (Dec 2006)
0
2
4
6
8
10
12
EPS OF KAMA
0
2
4
6
8
10
12ROE OF KAMA
0
2
4
6
8
10
12
ROA OF KAMA
0
2
4
6
8
10
12P/E KAMA
K Fi di K
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Key Findings- KamaHoldings
Since the P/E multiple in 2005 reached a very high levelof 28.68 compared to the industry average, the Companydecided to buyback shares worth Rs. 3.39 crores at Rs. 21in Dec 2006
This buyback resulted in increase in EPS, ROE, ROA anddecrease in P/E in 2007
However the Company could not leverage on this benefitas in 2008 it reported loss due to increase in raw materialand other manufacturing expenses
In 2009, Company did extremely well as its EPS, ROE andROA had increased significantly and also its P/E multiplewas in check
There was a major increase in promoters shareholdingfrom 67% to around 74%
This buyback was successful
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Effects of Buybacks RelianceInfrastructure (Jun 05)
0
2
4
6
8
10
12P/E Of REL INFRA
0
2
4
6
8
10
12
EPS REL INFRA
0
2
4
6
8
10
12ROE REL INFRA
0
2
4
6
8
10
12
ROA REL INFRA
K Fi di R li
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Key Findings- RelianceInfrastructure
As the P/E multiple of the company had increasedsignificantly in 2004, the company went forBuyback
This helped the Company in reducing its P/E ratio
and increase its EPS, ROA and ROE There was a significant increase in the Promoters
Shareholding from around 50% to 53%
Thus the buyback was Successful
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Conclusion: Buybacks
Not all buybacks are successful
Companies use buybacks to change theshareholding pattern, improve financial ratiosor/and increase price of the share
The timing of the buyback is very crucial. Ifcompany is not doing well then the buyback mightnot succeed
It is a means of returning excess funds to the
shareholders Gives the market a signal that promoters believe
in the company
D li i Of A Li d
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Delisting Of A ListedCompany
Delisting is a process by which
A company whose shares are listedon the stock exchange is taken
private once againIt is done getting its publicly held
shares bought over by private
shareholder andTerminating the listing agreement
with the stock exchange.
It is also known as Going Private
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Reasons for Delisting
Stock exchange penalizes companyfor
Non payment of listing feesViolation of listing agreement
Statutory violation as non filing of
accountsVoluntary delisting (Listed at least 3
years prior to date of delisting)
Amalgamation
Wh i f
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Why companies go forDelisting?
Capital markets should not becomean obligation for the company intimes of depressed market conditions
.Safety from unwanted intrusions
through secondary market route.
Wh i f
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Why companies go forDelisting?
Cost for companies to stay listed
Cost of regulatory compliance.
Cost of Equity which is higher than cost of
debt.
If Cost of remaining listed outweighs thebenefit sought to be received then de-
listing is a valid decision.
Pricing a Voluntary
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Pricing a VoluntaryDelisting
Reverse book building processfollowed Public announcement for floor price
Floor price determined as average of26 weeks traded quotes
No cap prices
The price at which the quantityoffered is maximum is selected as
the final price.
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New SEBI norm
SEBI mandating all listed companies toincrease public shareholding to aminimum 25% by August 2013
Companies have to take a call whetherto reduce promoter holding or go fordelisting mechanism;
There are 181 non-PSUs, which are yetnot compliant with these regulations.
If the PSUs are also taken underconsideration, then shares worth nearly
Rs 40,000 crore will have to be sold by
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Alfa Laval (India) Limited
Promoters holding: 88.77%
Floor Price: Rs. 2,045/-
Indicative Offer Price: Rs. 2,850/-
No of shares: 10.2 lakhs
Bid opened on February 15, 2012 andclosed on February 22, 2012
Manager to the offer: JM FinancialConsultants Private Limited
Discovered Price/Exit Price: Rs. 4,000
Status: Successful
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Patni Computer Systems
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Patni Computer SystemsLimited
Promoters holding: 80.74%
Floor Price: Rs. 356.74/-
Indicative Offer Price: Rs. 385.4/-
No of shares: 26.8 mn Bid opened on March 28, 2012 and
closed on March 30, 2012
Manager to the offer: Kotak MahindraCapital Company Limited
Discovered Price/Exit Price: Rs. 520
Status: successful
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Goodyear India Ltd.
Promoters holding: 74%
Floor Price: Rs. 194/-
Indicative Offer Price: Rs. 245/-
No of shares: 59.97 mn Bid opened on May 28, 2010 and closed
on June 3, 2010
Manager to the offer: Citigroup GlobalMarkets India Private Limited
Discovered Price/Exit Price: Rs. 340
Status: failed
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Buyback versus Delisting
Share Buyback Delisting Offer
Applies to equity shares,preference shares and other
specified securities
Applies to equity shares,preference shares and other
specified securities
Governed by section 77A/77Band respective guidelines by
SEBI
Applicable for listedcompanies alone. Governed
by de-listing guidelines of
SEBIPricing determined by the
company as Fixed Price/Book-Built Price/Open Market Price
Price to be determined onlythrough reverse book buildingusing Dutch Auction process