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Buy Back Of Shares & Share Split

Buyback and share spilt

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Page 1: Buyback and share spilt

Buy Back Of Shares&

Share Split

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Buy Back Of Share

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The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back 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.

Definition

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Sources of Buyback , Section 77A (1) Buyback can be done either out of :i . Its free reservesii. Security premium accountiii. Proceeds of any shares or other specified

securitiesNote: Buyback of shares of any kind is

not allowedout of fresh issue of shares of the same

kind .

Provisions under Companies Act1956

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company is allowed to purchase its own shares or other specified securities unless

a) The buyback is authorized by its articlesb) A special resolution has been passed in general meeting

of the company authorizing the buybackc) The buyback is less than twenty-five per cent of the total

paid capital and free reserves of the companyd) The ratio of the debt owed by the company is not more

than twice the capital and its free reserves after such buyback

e) All the shares or other specified securities for buyback arefully paid upf) The buyback is in accordance with the regulations made

by the SEBI in this behalf

Conditions to be fulfilled U/S 77A (2)

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Buyback within 1 year U/S 77A (4) Every Buyback shall be completed within 12 months from the date of passing the special regulation.Methods of Buyback U/S 77A (5) The Buyback may be made : a) From the existing share holders on a proportionate

basis b) From the open market c) From odd lots d) By purchasing the securities issued to the

employees of the company under ESOS

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Company is required to make Public announcement in One NATIONAL English Daily One Hindi National Daily One Regional Language Daily Public announcement should specify Specified Date i.e. the date of dispatch of the offer letter not

later than 30 days but not later than 42 days Company should inform SEBI within 7 days, Offer shall remain

open at least for 15 days Company shall complete verification with in 15 days from the

date of closure Buyback is permitted through six routes, namely the tenderroute, open offer route, reverse book building, odd-lot share

purchase, reverse rights and purchase of employee stock option

SEBI GUIDELINES

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Objectives of Buy Back: Shares may be bought back by the company on account of one or more of the following reasonsi. To increase promoters holdingii. Increase earning per shareiii. Rationalise the capital structure by writing off capital not represented by available assets. iv. Support share valuev. To pay surplus cash not required by businessIn 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.

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Helps company in reducing its share capital Results in lower capital base Company has advantage of servicing reduced

capital base with higher dividend yield It is a good check on companies having poor

liquidity position Provides capital appreciation to investors Gives signal to market that shares are

undervalued Helps promoters to formulate an effective

defence strategy against hostile takeover bids

ADVANTAGES OF BUYBACK OF SHARES

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Buyback implies under valuation of companies stock

There exists less or no scope for further expansion

Clever way for managers to invest cheaply in a company

It does not make difference to shareholders, whether the company returns cash in the form of increased dividend or by way of repurchase

DISADVANTAGES OF BUYBACK OF SHARES

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EXAMPLE:  Shares of Zee Entertainment rose over 2% in early trade on Monday after the company said it may buy-back equity shares of the company up to a value not exceeding 10 per cent of the paid up capital and free reserves. In a filing to the BSE, ZEEL said a meeting of its board of directors will be held on April 4 to consider the proposal. Earlier this month, ZEEL had announced closure of a buy-back programme that commenced on July 27, 2011. At 11:10 a.m., shares of the company were trading 2.5% higher at Rs 129.70. The stock has hit a high of Rs 135.50 and a low of Rs 128.10.

 

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Stock Split

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An increase in the number of outstanding shares of a company's stock, such that proportionate equity of each shareholder remains the same. This requires approval from the board of directors and shareholders.

A corporation whose stock is performing well may choose to split its shares, distributing additional shares to existing shareholders. The most common stock split is two-for-one, in which each share becomes two shares.

The price per share immediately adjusts to reflect the stock split, since buyers and sellers of the stock all know about the stock split (in this example, the share price would be cut in half).

Some companies decide to split their stock if the price of the stock rises significantly and is perceived to be too expensive for small investors to afford. also called split.

Stock Split

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Stock Dividends (expressed as percentage)• Payment of additional shares to common stockholders. A 10% stock dividend means that shareholders get 1

additional share for every 10 they own. Stock Splits (expressed as ratio)• A proportionate increase in the number of common

shares. A 2:1 stock split means that stockholders will receive one additional share for every one they own.• In both cases, share value is diluted but total equity

remains the same

Stock Dividends and Stock Splits

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The total number of shares outstanding increases.• In a 3-for-2 stock split, 3 new shares are

issued for every 2 pre-split shares outstanding.• Thus, there is a 50% increase in the

number of shares outstanding.• A stock split alters the par value of the

shares But there is no transfer of balances between the equity accounts(no transfer from reserves to share capital)

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Some believe that there is an advantage for an investor when a company decides to split its stock. This action be a leading indicator that the company is doing well and expects revenue to increase in the near future. Although some disagree with this theory, there are not many companies who would split their stock if they were losing money.

Advantages for Investors

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The main advantage of a stock split for a company is that when a stock is split, it may lead to a buying frenzy. Many perceive the stock split as an indication that the company is doing well, but that is not always the case. If there is a buying frenzy, the stock will naturally begin to rise in price.

Advantages for Companies

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Although many see a reverse stock split as a sign that a company is in some trouble, a reverse stock split can also provide an advantage. When a stock price becomes too low, companies will sometimes do a reverse split, which will allow the company to remain listed in their particular exchange when they would otherwise be delisted.

Reverse Stock Splits

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On the downside, stock splits may cause investors to expect more about how the company performs. If these expectations are not met investor confidence may be shaken and the result could be a drop in share prices.

The bottom line is a stock split does nothing to affect the worth or performance of a company. It may be nice to own more shares, but in the end your 2 five-dollar bills are still worth the same as your ten-dollar bill.

Disadvantages of Stock Splits

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Apple split its shares on Feb. 28, 2005, by two-for-one, and also on June 21, 2000, by two-for-one. Apple's stock was trading for about $90 a share on an unadjusted basis when it split in 2005 and $100 a share when it split in 2000.

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After a stock dividend, • the per-share cash dividend is usually

unchanged.• After a stock split, the cash dividend is

either unchanged or reduced less than proportionately.

• In both cases, the cash dividend per original share increases.

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Assume the share price is $45 before the stock distribution.

After a 3-for-2 stock split, the share price will be ___________