ICAI 291109 - Case Studies on Buyback of shares

8/7/2019 ICAI 291109 - Case Studies on Buyback of shares

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Case Studies on Buyback of Shares and Reduction of Share Capital - Accounting and Company

Law Aspects

November 29, 2009

CASE STUDIES ON BUYBACK OFSHARES AND REDUCTION OF

SHARE CAPITAL

ACCOUNTING & COMPANY LAW ASPECTS

CA. Parag Ved

BUYBACK

Buyback is acquiring its own shares from the existing shareholdersout of :-

free reserves; or

securities premium account; or

proceeds of any shares or other specified securities

(Section 77A, 77AA and 77BB of the Companies Act, 1956)


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Law Aspects

November 29, 2009

BUYBACK

Reasons for buy back include:

In the opinion of the management Current market price is muchlower than Intrinsic value of share.

Putting unused cash to use.

raising earnings per share

helping capital restructuring by way of capital reduction

reduced equity base strengthens management control and thus

eliminating any threats of hostile takeover.

obtaining stock for ESOP or pension plans

Conditions for Buy BackConditions for Buy BackConditions for Buy BackConditions for Buy Back

Authorised by its Articles

A special resolution has to be passed in general meeting of theshareholders where buyback is proposed to be more than 10% ofpaid share capital and free reserves

Buyback cannot not exceed 25% of the total paid-up capital and freereserves

The ratio of the Debt owned by the Company is not more than twiceof the capital and its free reserves after such buyback


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Law Aspects

November 29, 2009

Conditions of Buy BackConditions of Buy BackConditions of Buy BackConditions of Buy Back (cont..)

Shares bought should be fully paid up.

The Company shall extinguish the securities within 7 days of lastday of completion of buyback.

Every buy-back shall be completed within 12 months from the dateof passing the resolution.

A company which has bought back any security cannot make anyissue of the same kind of securities in any manner whether by way

of public issue, rights issue upto 6 months from the date ofcompletion of buy back.

Sources from where the shares can beSources from where the shares can beSources from where the shares can beSources from where the shares can be

purchasedpurchasedpurchasedpurchased

The securities can be bought back from :-

existing security-holders on a proportionate basis (tender offer), or

the open market through book building process; stock exchanges, or

odd lots, or

purchasing the securities issued on account of ESOP or sweatequity


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Law Aspects

November 29, 2009

Prohibition ofProhibition ofProhibition ofProhibition of Buy BackBuy BackBuy BackBuy Back

A Company cannot buyback its shares or other specified securitiesout of the proceeds of an earlier issue of the same kind of sharesor specified securities

A company shall not directly or indirectly purchase its own sharesor other specified securities -

(a) through any subsidiary company including its ownsubsidiary companies; or

(b) through any investment company or group of investmentcompanies;

Buyback of Shares Tax Implications

On Buyback of shares the shareholder is liable to tax based on the

following criteria;

Gains on transfer of Shares is taxable at rates prescribed below:

20% **Other Long-Term Gains

** Plus applicable Education Cess & Surcharge

ExemptLong-Term (Listed Shares subjected to STT)

15% **Short-Term (Listed Shares subjected to STT)

normal tax rate**Short-Term (unlisted)


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Law Aspects

November 29, 2009

Buyback OF Shares Tax Implications

Indexation on the cost of acquisition in case of unlisted sharesheld for Long Term

Also in case of listed securities (not subjected to STT) theassessee has tax benefit u/s 112 of the Income Tax Act, 1961 -

Assessee has an option to take cost of acquisition either with orwithout Indexation benefit. Accordingly, the tax rate applicable forcalculating the Long Term Capital Gain tax will be as follows:

10%Without Indexation Benefit

20%With Indexation Benefit

Tax rate ApplicableOption Available

Accounting Entries for Buyback

Shareholders A/c Dr XX

To Bank A/c XX

(with the amount paid on buyback)

For cancellation of shares bought back :

Share Capital A/c Dr XX

(with the nominal value of security bought back) XX

Free Reserves/Securities premium A/c Dr(with the excess amount i.e.,premium over nominal value)

To Shareholders A/c XX

(with the amount paid)


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Law Aspects

November 29, 2009

Accounting Entries for Buyback

Free Reserve A/c Dr XX

Securities Premium A/c Dr XX

To CRR A/c XX

(with the nominal value of shares bought back)

For transfer of nominal value of shares purchased out of

free reserves/securities premium A/c to CRR A/c

Buyback Case Study

Mastek Limited:-

The Company had announced buyback of shares in 2007 at Rs.750per Share through open market route. As of June 30, 2008, theCompany had bought back 14,83,232 equity shares of Rs. 5/-each at an average price of Rs. 393.58 per share(14,83,232 X 393.58 = 5837.70 Lacs)


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Law Aspects

November 29, 2009

Buyback Case Study

45.5644.10EPS - Basic

-(1156.64)1156.64Share premium A/c

PARTICULARS(Mastek)

BEFOREBUYBACK

(Rs. In Lacs)

ADJUSTMENTS

(Rs. In Lacs)

AFTERBUYBACK

(Rs. In Lacs)

(Face Value Rs.5) (Face Value Rs.5)

Share Capital 1423.21 (74.16) 1349.05

Free Reserves 11664.54 (4681.08) 6983.46

CRR - 74.16 74.16

M.P 362

Buyback Case Study

GATEWAY DISTRIPARKS LIMITED :-

Pursuant to the approval of the BOD, for buyback of Equityshares up to 10% of the paid up equity share capital and freereserves of the Company aggregating Rs 6400 lacs at amaximum price of Rs. 110 each.

The Company has bought back 7,883,412 equity shares throughopen market transactions at an average price of Rs. 81.18 each

aggregating to Rs. 6400 lacs.


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Law Aspects

November 29, 2009

Buyback Case Study

7.396.88EPS

128.75M.P.

788.34788.34-CRR

33,157.80(5,611.66)38,769.46Share premium A/c

2946.66(788.34)3,735General Reserves

10,771.33(788.34)11,559.67Share Capital

(Face Value

Rs.10)(Face Value

Rs.10)

AFTERBUYBACK

(Rs. In Lacs)

ADJUSTMENTS

(Rs. In Lacs)

BEFOREBUYBACK

(Rs. In Lacs)PARTICULARS

(Gateway)

Buyback Case Study

IPCA LABORATORIES LIMITED :-

In the terms of scheme of Buyback of Equity shares, the Company hasupto the year ended 31st March, 2009 bought back 2,03,009 equityshares from open market at an average price of Rs 330.93.

These shares have been extinguished and the paid up capital has beenreduced accordingly by Rs 20 lacs.


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Law Aspects

November 29, 2009

Buyback Case Study

36.5036.20EPS - Basic

940M.P

2020-CRR

45000(690)45690General Reserves

2498.90(20)2518.90Share Capital

(Face Value

Rs.10)

(Face Value

Rs.10)

AFTERBUYBACK

(Rs. In Lacs)

ADJUSTMENTS

(Rs. In Lacs)

BEFOREBUYBACK

(Rs. In Lacs)PARTICULARS

(IPCA)

Buyback Case Study

HEG LIMITED :-

The Board of Directors of the Company has approved the Buyback ofits Equity shares from Open market through Stock exchange. TheBuyback is approved for an amount not exceeding Rs. 4850 Lacs.

As on 31st March, 2009, 17,44,978 equity shares were bought back atan average price of Rs. 127.60 per share.


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Law Aspects

November 29, 2009

Buyback Case Study

24.1423.43EPS - Basic

305M.P

174.5174.5-CRR

5693.32(2052.23)7745.55Share premium A/c

---Free Reserves

4257.34174.504431.84Share Capital

(Face ValueRs.10)

(Face ValueRs.10)

AFTERBUYBACK

(Rs. In Lacs)

ADJUSTMENTS

(Rs. In Lacs)

BEFOREBUYBACK

(Rs. In Lacs)PARTICULARS(HEG Limited)

Buyback Case Study

UCO BANK:-

On approval of Banks capital restructuring plan by the GOI effectivefrom 22.12.2008, Bank has converted Rs.25000 lacs out of equityholding of the GOI into Perpetual Non-Cumulative Preference Shares(PNCPS) of equal amount carrying a coupon rate of Repo + 100 basispoints to be reset annually.

Resulting in reduction of Banks equity share capital from Rs.79936lacs to Rs.54936 lacs and GOIs equity share holding from 74.98% to

63.59%.


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Law Aspects

November 29, 2009

Capital Reduction (cont)

Reduction of share capital may be effected in the following ways:

In respect of share capital not paid-up, extinguishing or reducingthe liability on any of its shares;

Cancel any paid-up share capital, which is lost, or is notrepresented by available assets; or

Pay off the paid-up share capital, which is in excess of the needsof the company. This may be done either through buyback orreduction of capital.

Accounting Entries for

Capital Reduction

Share Capital A/c Dr XX

To capital reduction A/c XX

(being amount written off from share capital)

Reserve A/c Dr XX

To capital reduction A/c XX

(being reserves utilized for capital reduction)

Capital reduction A/c Dr XX

To Profit & Loss A/c XX

(being accumulated Loss written off)


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Law Aspects

November 29, 2009

Capital Reduction Case Study

Hindustan Copper Limited :-

The Ministry of Corporate Affairs in 2008, had approved capitalreduction by reducing the face value of equity shares from theexisting Rs 10/- to Rs 5/- and also the waiver of the entire amountof preference share capital pursuant to financial restructuringproposal of the Company

The paid up share capital of the Company, as such, standsreduced from Rs 94,895 lacs to Rs 38,410 lacs.


PARTICULARS

BEFORE

(Rs. in Lacs.)

AFTER

(Rs. in Lacs.)

(Face Value Rs. 10) (Face Value Rs.5)

Share Capital(Equity Shares) 76,821.80 38,410.90

Preference Shares 18,073.24 -

Reserves and

Surplus - 15496.76

Profit & Loss (40987.38) -

The excess is transferred to general reserves.


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Law Aspects

November 29, 2009


COLGATE-PALMOLIVE (INDIA) LIMITED:-

Pursuant to the scheme of reduction of share capital u/s 100 of theCompanies Act, 1956 as approved by the shareholders and BombayHigh Court, the Company reduced the face value of its shares fromRs. 10 per share to Re. 1 per share effective Nov 1, 2007.

Consequently, the existing issued, subscribed and paid-up equityshare capital of the Company stood reduced from Rs. 13,599 lacscomprising of 13,59,92,817 equity shares of the face value of Rs. 10/-each fully paid-up to Rs.1,359 lacs comprising of 13,59,92,817 equityshares of the face value of Re. 1/- each fully paid-up.


13,59.9313,599.28Share Capital (EquityShares)

(Face Value Rs.1)(Face Value Rs. 10)

AFTER

(Rs. in Lacs.)

BEFORE

(Rs. in Lacs.)PARTICULARS


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Law Aspects

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Documents

ICAI 291109 - Case Studies on Buyback of shares