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 Back
A 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 METHOD
 The maximum  Open market
amount of Rs. 1859 purchases through
lakhs was met out of the National Stock
the free reserves Exchange of India
and/or the share Limited (NSE)
premium account of
the Company.
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.
THANK YOU