BUYBACK OVERVIEW

Company buys back stocks from shareholders at a

premium over current market value.

 REFERRED AS EQUITY REPURCHASES OR STOCK

REPURCHASES

 POPULAR IN USA & UK

 GOVERNED IN INDIA SEBI BUYBACK REG, 1998

– SEC 77,77AA,77B OF COMPANY’S ACT

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 BUYBACK –POTENTIAL PLAYERS

 WHO…………………….///////////////////?????????????????
 CERTAINLY, NOT ALL COMPANIES
 WELL PLACED COMPANIES (STRONG CASH FLOWS)

 HAVE COMPARITIVELY LARGE EQUITIES

 FAVOURABLE D/E RATIO TO TAKE BUY BACK

 AMPLE RESERVES
– MGT WILLING TO PAY PREMIUM TO PREVAILING SH PRICE TO BUY BACK
SHARES

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 BUYBACK RATIONALE
 Company left with large cash surplus & inadequate mkt liquidity
 Company seeing low valuation & shares currently undervalued
– Bb gives signal that shs undervalued
– Most common reason
 To offset large ESOPs that tend to dilute earnings
 Eliminate small shareholdings.
– Reduce cost of servicing these “small” shareholders.
– SERVICING REDUCED EQUITY BASE

 To avoid threat of takeover

– By mopping up o/s sh from open market

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 BUYBACK RATIONALE
 Consolidate control position.
• INCREASE IN PROPORTIONATE HOLDING OF PROMOTERS

• STRENGTHENS MANAGEMENT CONTROL

 B/S Impact Fewer shares remaining outstanding

– Post buyback EPS rise
– Dividends per share rise
– Market price per share should rise
– APPRECIATE CONSIDERABLY P/E RATIO OF COMPANIES
– VEHICLE FOR DISTRIBUTING FREE CASH FLOWS
– EFFICIENT ALLOCATION OF RESOURCES
– ASSURES HIGHER DIVIDEND YIELD IN FUTURE

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 WHO IS AFFECTED BY BUYBACK

 Shareholders who tender their shares.

 Shareholders who do not tender their shares.
– Why?
• Because they are left holding a smaller “pizza” with lesser “slices”, so value per
“slice” may change.
 Creditors
– Post-buyback, less cash available to service debt.
 Management
– Reduced managerial domain
– As debt:equity ratio rises, particularly in a leveraged share buyback, the
management will have more incentive not to waste cash.

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 BUYBACK IMPACT
 M.CORP EXPECTS RS 66 MILL PAT FOR THE CURRENT YEAR &
PLANS TO DISTRIBUTE 50% OF THIS (RS 33 MILLION) TO ITS
SHAREHOLDERS. THERE ARE 11 MILLION O/S SHARES & MKT
PRICE PER SHARE IS RS 30. CORP BELIVES THAT IT CAN PAY A
CASH DIVIDEND OF RS 3 PER SHARE OR BUYBACK 1 MILLION
SHARES THROUGH A TENDER OFFER AT RS 33 A SHARE . SHOW
IMPACT OF BUYBACK ON EPS & MARKET PRICE PER SHARE OF
THE REMAINING STOCK (Assume that BB Reserves have been created)
 EPS = 66/11 = RS6; PE RATIO = RS 30/6 = RS 5
 AFTER REPURCHSG 1 MILL SH EPS = 66/10 = RS 6.6 (INCREASES)
 EXPCT MKT PRICE AFTER BB (ASSUME PE RATIO UNCHANGED
– = 5 X 6.6 = RS 33 (MKT PRICE INCREASES)
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 BUYBACK IMPACT

IMPACT ILLUSTRATED
 IF SHARES ARE BOUGHT BACK AT LESS THAN RS 33
– NON TENDERING SHARE HOLDERS BENEFIT AT THE EXPENSE OF SELLING
SHARE HOLDERS

 IF SHARES ARE BOUGHT BACK AT MORE THAN RS 33

– SELLING SHAREHOLDERS BENEFIT AT THE EXPENSE OF NON SELLING
SHAREHOLDERS

 P/E RATIO MAY RISE IF INVESORS VIEW BUYBACK POSITIVELY & VICE
VERSA.

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 BUYBACK RESOURCES
 Free Reserves
– A sum equal to nominal value of share so purchased transferred to capital
redemption reserve a/c
 Securities Premium A/c
 Proceeds of any share or other specified securities

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 BUYBACK REGULATION
 Tender Offer:
– From existing sh holders on a proportionate basis
– At specific price

 Open Market
– Book building Process (Dutch Auction)
– Stock Exchange

 From Odd lot Holders

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 TENDER OFFER BUYBACK
 ONLY TO REGISTERED HOLDERS
 MAX & MIN NO. OF SHARES
 FIXED PRICE (USUALLY AT PREMIUM)
 TIME PERIOD (USUALLY ONE MONTH)
 MAY WITHDRAW THE OFFER IF FEWER SHARES
TENDERED
 PRO RATA ALLOTMENT IN CASE OF OVERSUBS
 OFFICERS & DIRECTORS DO NOT PARTICIPATE
EXAMPLE
A ANNOUNCES 100000 SH TO BE BOUGHT
THROUGH TENDER OFFER AT RS 75 PER SHARE.
PREVAILING MARKET PRICE IS RS 55 10
TENDER OFFER BUYBACK

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 OPEN MARKET BUYBACK – Stock Ex.
 Sp. resolution specifies max bb price
 Promoters not to participate
 Merchant banker appointed
 Pub announcement made (7 days prior to commencement)
– Max no. of shs co. wants to bb, Max bb price
– Offer open – min 15 days – max 30 days
– Detail of brokers & stock ex through which bb would be made
– Stock ex with electronic ex facility only
– Bb through order matching mechanism
– Can buy directly or through intermediary

 M. banker give inf to stock ex on daily basis regarding sh purchased for bb

 Price so decided to be pd to all holders whose shs have been accepted for bb

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 OPEN MARKET BUYBACK – Stock Ex.

A ANNOUNCES 40000
SH TO BE BOUGHT
THROUGH OPEN
MKT REPURCAHSE
AT MAX PRICE OF
RS 175 PER SHARE.
PREVAILING MKT
PRICE IS RS 75

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 OPEN MARKET BUYBACK – Book Building
 Sp. resolution specifies max bb price, Merchant banker appointed
 Pub announcement made (7 days prior to commencement)
– Offer open – min 15 days – max 30 days
– Detailed methodology of book bldg process, Sets the price range for bidding
– Manner & format of acceptance

 Deposit in escrow a/c made with ref to bb price

 Made through electronic linked transparent facility
– Bidding centers – 30, Electronically linked computer terminal – min 1

 M. banker 7 co. decide bb price based on acceptance recvd

– Bids collected & sorted in ascending order
– Price so decided to be pd to all holders whose shs have been accepted for bb
EXAMPLE
A ANNOUNCES 100000 SH TO BE BOUGHT THROUGH DUTCH
AUCTION AT PRICE BAND OF (RS 48-55) PER SHARE. PREVAILING
MARKET PRICE IS RS 45 14
 OPEN MARKET BUYBACK – Book Building
All shareholders who tendered at prices above the
highest accepted bid price i.e., at price levels of
Rs.52, Rs. 53, Rs. 54 and Rs. 55 are, however,
excluded from the deal and their shares are returned
to them.
Rs. 51 per share is the lowest price (or the
highest accepted bid) at which the buyback
objectives of the company and that of the
shareholders would match and hence buyback
can be made at this price from the
shareholders proportionately so that the total
number of shares bought back is exactly
1,00,000.
All shareholders who tendered at Rs. 51 per
share or below Rs. 51 per share but not below
the lowest end of price range (i.e., Rs. 48 per
share) shall be included in the buyback
program and shall be paid a common price
which is the highest accepted bid price (i.e.,
Rs. 51 per share) for their shares.
•Shares would be bought back proportionately
in the ratio of 20 : 21 (i.e. 1,00,0000 1,05,000
= 20/ 21) so that the number of shares
accepted for buyback by the company from
each one of them aggregates to the number
sought by the company for buyback (i.e.,
1,00,000). 15
 BUYBACK REGULATION – PRE ISSUE
 AOA must authorise, BOD to approve
 Listed cos intimate Stock ex of general meeting & resol passed by
postal ballot (resol. valid for 12 months)
 Offer document filed with SEBI (within 7 days)
 Offer remains open 15-20 days
 Public announcement in dailies
 All shares for bb fully pd up
 Prohibition from issuing same class of shares for a period of 24
months from the time of bb
 Promoters & directors not to participate
 No negotiated deal, private arrangement, insider trading
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 BUYBACK REGULATION- PRE ISSUE
 Bb not to exceed 25% of total paid up cap & free reser in one fincl yr
 Debt equity not to exceed 2:1
 Lower of above two taken for bb
PRE BUY BACK BALANCE SHEET OF A LTD
PAID UP CAPITAL
20,000 EQ @ RS 10 2,00,000
FREE RESERVES 3,00,000
SHARE PREMIUM 1,00,000
DEBENTURES 4,00,000
CURRENT LIABILITIES 2,00,000 12,00,000

1. AMOUNT OF BUY BACK WILL BE EQUAL TO OR LESS THAN

•25% OF FREE RESERVE* & PAIDUP CAPITAL (25% of 6,00,000) 1,50,000
•AMOUNT OF EQUITY AVAILABLE AFTER
SATISFYING POST BUY BACK D/E RATIO OF 2:1 3,00,000 **
*INCLUDES SHARE PREMIUM (**GO TO NEXT SLIDE) 17
 BUYBACK REGULATION- PRE ISSUE
ASSUMING ‘X’ AS TOTAL VALUE OF SHARES TO BE BOUGHT BACK
2:1 = DEBT*/EQUITY** - X
THUS X = 6,00,000/6,00,000 -X = RS 3,00,000

THUS MAXIMUM AMT AVAILABLE = EQUITY AMOUNT - EQUITY

AMT REQD AFTER BUY BACK
EQUITY AMT = PAIDUP CAPTL+FREE RES + SH PREM = 6,00,000
LESS : EQ REQD AFTER BUY BACK = 3,00,000
THUS, MAX AMT AVAILABLE = 3,00,000
BUY BACK TO BE 25% OF PAIDUP CAP+RES = 1,50,000
*(DEBT INCLUDES CURRENT LIABILITIES)
** (EQUITY INCLUDES PAID UP EQ + ALL RESERVES)

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 BUYBACK REGULATION-PRE ISSUE

IF CURRENT MKT PRICE IS RS 50

NO. OF SHARES BOUGHT BACK = 1,50,000/50=3000 SH @RS 50
FREE RESERVE ACCOUNT ADJUSTMENT
BALANCE IN ACOUNT 3,00,000
LESS: CAPT REDEMP/SHARE BUY BACK
RESERVE OF 3000
SHARES @ RS 10* 30,000
PREMIUM ON SHARE BUY BACK
(3000 X RS 40) 1,20,000 1,50,000
REMAINING BALANCE 1,50,000
*OUT OF FREE RESERVE AMT EQUIVALENT TO PAR VALUE OF SECTS PAID BACK
TRANSFERRED TO CAPTL REDEMPTION RESERVE A/C OR SHARE BUY BACK
RESERVE WITH APPROPRIATE DISCLOSURE
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 BUYBACK REGULATION-PRE ISSUE
POST BUY BACK BALANCE SHEET OF A LTD
PAID UP CAPITAL
17,000 EQ @ RS 10 1,70,000
BUY BACK RESERVE* 30,000
FREE RESERVES 1,50,000
SHARE PREMIUM 1,00,000
DEBENTURES 4,00,000
CURRENT LIABILITIES 2,00,000
10,50,000
 PREMIUM PAYABLE ON SH BUY BACK TO BE PROVIDED OUT OF FREE
RESERVE OR SH PREM A/C

* CAN BE USED ONLY FOR ISSUE OF FULLY PAD BONUS SHRS WITHIN 24
MONTHS FROM DATE OF BUY BACK
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 BUYBACK REGULATION-POST ISSUE

 MAIN PROVISIONS POST ISSUE

– VERIFICATION OF OFFERS WITHIN 15 DAYS
– IN CASE OF OVER SUBS PROPORTIONATE ALLOTMT
– WITHIN 7 DAYS PAYMT OF CONSID MADE TO HOLDERS
– WITHIN 7 DAYS SH CERTIFICATES EXTGSHD/DESTROYD
IN PRESENCE OF REGISTRARS, M.BANKERS, AUDITORS
– EXCHANGE, SEBI NOTIFIED
– NO FRESH ISSUE OF EQ SH TILL 6 MONTHS AFTER
COMPLETING BUYBACK

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 DECIDING BUYBACK PRICE

 EQUILIBRIUM FORMULA
•S = Number Of Shares Outstanding Prior To Distribution
(S X Pc)
•Pc = Current market price per share prior to distribution P*
•N = number of shares to be repurchased (S - n)
•P*= Equilibrium repurchase price
lASSUMES A FIXED PRICE TENDER OFFER
lDEPENDSON CURRENT MKT PRICE & PROPOR OF SHRS A COMPY WISHES TO
REPURCHASE
lIDEAIS TO ESTABLISH A PRICE THAT HOLDERS WHO DO NOT TENDER WILL BE NO
BETTER OR WORSE OFF THAN HOLDERS WHO TENDER & VICE VERSA
lDOES NOT TAKE ACCOUNT THE OPPORTUNITY COST ASSOCIATED WITH USING
LIQUIDITY TO REPURCHASE SHARES
lWEASSUME THAT THIS LIQUIDITY IS IN EXCESS & SHOULD BE DISTRIBUTED TO SHARE
HOLDERS
lWITH RESPECT TO MONIES REALIIZED STOCK HOLDERS WOULD BE PRESUMABLY
INDIFFERENT 22
 DECIDING BUYBACK PRICE
 EQUILIBRIUM FORMULA (SH HOLDERS WHO DO NOT TENDER WILL BE
NO BETTER OR WORSE OFF THAN SH HOLDERS WHO TENDER & VICE
VERSA
• Mk has issued and paid up capital of Rs 500,00,000, the paid value is Rs 10 each.
The present market price of share is at Rs 74. The company has decided to
repurchase 20,00,000 shares. Calculate the repurchase price of the shares
• (S X Pc) (50,00,000 X 74)
P*
.
P*  Rs 123.33
(S - n) (50,00,000 - 20,00,000)

a. If repurchase price is more than Rs 123.33 shareholders who are selling shares
would gain at the expense of those who continued to hold the stock.
b. If repurchase price is less than Rs 123.33, the selling stock holders would lose and
the continuing shareholders would be benefited.

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 DECIDING BUYBACK PRICE

 REBUILDING THE EQUILIBRIUM FORMULA

•S = Number Of Shares Outstanding Prior To Distribution
(S X Pc)
•Pc = Current market price per share prior to distribution P*
•N = number of shares to be repurchased (S - n)
•P*= Equilibrium repurchase price

More accurately: P* (S-N) = Pc X S – PT(N) + W

Where:
PT(N) is the cash paid out on
the tender offer
W is the tender offer effect
(signaling effect)

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