Buy- Back of sharesMeaning

Take back the equity shares from market or shareholders by paying cash and reduce equity shares available in the share market. It is also known as a stock repurchase. , cash is exchanged for a reduction in the number of shares outstanding. The firm either retires the shares or keeps them as treasury stock, available for re issuance.

Methods of pr-purchase of shares in the USA

1. Open market share purchase: 95% of repurchase is done through this method Daily re-purchase of shares from market is limited The company may not openly announce that it will re-purchase shares from open market

2. Fixed price tender offer

Single purchase price and number of shares sought are mentioned. Person would like to sell to the company should come with offer of the price and number of shares that he offers to the company. If offer from public exceeds than shares sought it may buy on pro rata basis.

Method-3. Dutch auction share repurchases

Range of prices that the company would like to re-purchase are mentioned in the offer. Shareholders can indicate their prices within the range prescribed. Lowest bidder to highest price bidder are chosen The company has right to cancel the entire offer if a few take holders.

4.Equal access buy-backs

All share holders have given equal opportunity to sell shares to the company.

5.Selective buy-backs
In broad terms, a selective buy-back is one in which identical offers are not made to every shareholder, for example, if offers are made to only some of the shareholders in the company. The scheme must first be approved by all shareholders, or by a special resolution (requiring a 75% majority) of the members in which no vote is cast by selling shareholders or their associates. Selling shareholders may not vote in favour of a special resolution to approve a selective buy-back

Employees stock option repurchase

A company may also buy back shares held by or for employees or salaried directors of the company or a related company. This type of buy-back, referred to as an employee share scheme buy-back, requires an ordinary resolution

on-market buy-backs and minimum holding buy-back

A listed company may also buy back its shares in on-market trading on the stock exchange, following the passing of an ordinary resolution.The stock exchanges rules apply to onmarket buy-backs. A listed company may also buy unmarketable parcels of shares from shareholders (called a minimum holding buy-back). This does not require a resolution but the purchased shares must still be cancelled.

Why companies buyback

Unused Cash Tax Gains Market perception Exit option To increase promoters holding Increase earning per share Rationalise the capital structure by writing off capital not represented by available assets. To thwart takeover bid

Contradicting sections on Buyback of shares in India

Section 77 of the Companies Act does not allow a company to buy its own shares until the winding up of companies. but the subsequent Section 77A permits buyback subject to certain conditions. What is the rationale behind?

Section-77 of the Companies Act

Most of the sections in the Companies Act tries to protect the interest of the outsiders who had lent money in the form of debentures or loans or deposits by restricting company not to pay unless outsiders(loan vendors) are paid fully. Share holders are paid last and has taken maximum risk in the company.

Buy back of shares( Sec.77A)

Why buy back of shares introduced in India? In late 1996-1999 Indian share market did not move. People hesitate to buy and people were not interested in sell shares as they felt that share market might go up. It is one of the mechanism to make the market to be vibrant in such situation.How?

How?
When shares were issued at premium, the company earned capital profits. If shares are quoted in the market less than nominal value or a little above nominal value the company has a chance to re-purchase such shares from market at low price and cancel such shares from the share capital. The remaining share holders value go up because net worth of the firm remain almost the same to the remaining number of shares.

 to allow promoters to get a better hold on the company. To wit, if the existing promoters in the saddle are having 20 per cent of the shares and the company announces a 20 per cent buyback in which obviously the promoters will not participate, the bottomline would be their stake now going up to 25 per cent (20 divided by 80). There cannot be a simpler and less expensive way of beefing up one's control in a company. In fact the promoters gain at the expense of the company whose cash is used in bankrolling this exercise.

Buy back and Companies Act

1. 2. 3. Section-77A(since 1999) Sources for buy back Free reserves(divisible profit) The security premium account Fresh issue of shares

Maximum Buy back

Upto 25% of total paid up share capital and free reserves.

Other conditions
1. Debt equity ratio should not be more than 2:1 after buy back (all secured and unsecured debts are included) 2. All the shares other securities are fully paid up( It is same like redemption of preference shares) 3. Such securities are to be listed on recognised stock exchange 4. If free reserves used the amount used for such purpose to be transferred to Capital Redemption Reserve Account.

Other conditions
There has been no default in any of the following i. in repayment of deposit or interest payable thereon, ii. redemption of debentures, or preference shares or iii. payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or iv. 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;

Disclosures in the explanatory statement

The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating (a) a full and complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of security intended to be purchased under the buy-back; (d) the amount to be invested under the buy-back; and (e) the time-limit for completion of buy-back

Buy-Back from whom?

1. Existing security holders on a proportional basis 2. From open market 3. ESOP 4.If listed securities smaller than such buy back, as prescribed by Stock exchange.

Procedure for buy back

. one English National Daily, one Hindi National daily and Regional
Language Daily at the place where the registered office of the company is situated. b. The public announcement shall specify a date, c. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations. d. 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. e. A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges. f. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date

Procedure for buy back

g. The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days. h. 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.

Advantages of buy back

Increase insider control Cash to needy shareholders One time return of cash Support their stock price Manage volatility Improve financial parameters Financial restructuring

Dis advantages
Collusive trading, depress prices create anxiety among investors.

Companies examples- bajaj auto, finolex cables, GE shipping, Raymond MNCs listed on exchanges have taken this route in a big way in 2001-2003

Thank you