149668 954593 esop_and_buyback_25_march_cci

BUY BACK OF

SHARES

Meaning of Buy Back of Shares

There is no definition given by the Company Act, 1956 about the buy back of shares. But in simple words, we can say that buy back of shares means repurchase of its own shares by the company. In other words, buy back of shares means a company buying its own shares

Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors

It was opted by company if there was an addition funds with company and there is no profitable application where these funds can be invested.

Objective of Buy Back of Shares

Shares may be bought back by the company on account of one or more of the following reasons

•To increase promoters holding.•Increase earning per share.•To maintain a target capital structure.•Support share value.•To prevent takeover.•To pay surplus cash not required by business.

SECTION

These were inserted by the Companies (Amendment) Act,1999.

The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the Companies Act, 1956.

SEBI 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.

Resources Of Buy Back

Free reserves

The securities premium account

The proceeds of any shares or other specified securities.

Conditions Of Buy Back

The articles should permit buyback.

A special resolution should be passed in general meeting of the company authorizing buyback.

The buyback should be equal to or less than 25% of the total paid up capital and free reserves of the company.

All the shares for buy back should be fully paid up.

Buy Back should be in Accordance with the SEBI Regulations

The ratio of debt owned by the company should not be more than twice the capital and its free reserves, in thatparticular financial year.

Before making purchases under buy back , a declaration of solvency in the prescribed form has to be filed with the ROC.

Affidavit has to be submitted.

Declaration should be signed by atleast two directors of the company.

Prohibition from further issue of securities within a period of two years.

The securities should be extinguished and physically destroyed within seven days of the last date of completion of buy back.

Maintaining a register of securities – the consideration paid , the date of extinguishing and physically destroying of securities etc.

Any default to comply with the requirements /rules is punishable

Prohibition of Buy Back

Through any/own subsidiary company

Through any investment company or a group of investment companies.

If the company has defaulted in respect of repayment.

Conditions Shareholders’ Buyback Board BuybackEnabling Provisions

Must be authorized by the Article of Association.

A Special Resolution of the shareholders must be passed. For listed companies it must be by way of a Postal Ballot.

Resolution of the Board of Directors.

Buyback Limits 25% of the total Paid-up Capital + Free Reserves; and

10% of the total Paid-up Equity Capital + Free Reserves.

(This limit is only for amount utilized in the buy back).

Not more than 25% of the total Paid-up Equity in that financial year.

(This limit is for No. of shares to be bought back in a financial year).

Buyback under Companies Act : Snapshot

Manner of Buyback

From Open Market. From Existing Shareholders on

Proportionate basis. From Odd Lots (i.e., where the lots 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).

By Purchasing ESOP/ Sweat Equity shares.

Debt-Equity Ratio

Not More than 2:1 (Debt/ (Equity Capital + Preference Capital + Reserves) after the buyback.

Types of shares which can be bought back

Fully Paid-up.


Explanatory Statement to Notice calling the General Meeting

Must contain the prescribed details.

Not Applicable

Pricing Free Pricing – No fixed basisDate of Completion

Within 12 months of the Resolution.

Further Buyback Not within 365 days from the date of buyback


Extinguishments of shares bought back

Within 7 days of the completion of Buyback.

Further Issue of Shares

A Further issue of the same kind of securities or u/s 81(1)(a) cannot be made within 6 months of the buy-back, except by way of Bonus, Sweat Equity, ESOP, conversion of financial instruments, etc.

Transfer to Capital Redemption Reserve

If the Buyback is made out of Free Reserves, then amount equal to the Nominal Value of shares bought back must be transferred to the Capital Redemption Reserve account.


A COMPANY CAN BUY BACK ITS OWN SECURITIES BY ONE OF THE FOLLOWING METHODS

FROM THE EXISTING SHAREHOLDERS ON A PROPORTIONATE BASIS THROUGH TENDER OFFER.

FROM OPEN MARKET

FROM ODD LOT HOLDER

SEBI Buy-Back of Securities by Listed Companies Regulation, 1998

To buy back securities, a company should be authorized by

Special Resolution under Section 77-A(2) of the companies Act

A resolution passed by its Board of Directors under Section 77-A(2)(b)(i).

Release of the Public Announcement (Regulation 8)

Filling of Offer Document.

Dispatch of letter of offer to security holders.

Contents of Explanatory Statement

1. The date of the meeting at which the proposal for buy-back was approved by the Board of Directors of the company.

2. The necessity of Buy-back.3. The maximum amount required under the

Buyback and the sources of funds from which the buy-back would be financed.

4. The basis of arriving at the buy-back price.5. The number of securities that the company

proposes to buy-back.

7. a) The aggregate security holding of the promoter and of the director of the promoter.

b) Aggregate number of equity purchased or sold by people.

8. A confirmation that there are no defaults in repayment of deposits, redemption of debentures or pref shares or repayment of term loans to any financial institution(s) or bank(s).

9.A report addressed to the board of Directors by the company's auditor.

Instances where Buyback should not be effected

A company shall not buy back its specified securities from any person through negotiated deals, whether on or of the stock exchange or through spot transactions or through any private arrangement. (Clause 4.2)

Any person or an insider shall not deal in securities of the company on the basis of unpublished information relating to buy-back of specified securities of the company. (Clause 4.3)

Methods of Buy Back

Purchasing form existing security holders on a proportionate basis (Tender Offer Method)

Purchasing from open market (Through Stock Market)

Purchasing from odd lot holders

To employees under Scheme of stock Option or Sweat Equity

Buy Back Through Tender Offer

Offer Procedure: Time Period for offer: 10 Working Days Letter of offer to security holders as on Record Date Verification of offer: within 7 working days

Escrow Account If the consideration payable dos not exceed Rs.100crores-25% of

the consideration payable; If the consideration payable exceeds Rs.100 crores-25% up to

Rs.100 corers and 10% thereafter.

Payment to security holders Company should make payment to security holders within seven

days.

Document Required

Public announcement in English National Daily and Hindi National Daily

Draft letter of offer needs to be submitted to Board within 5 Working days of the pubic announcement

Declaration of solvency along with letter draft letter

Extinguishment of Certificate

Company shall extinguish and physically destroy the security certificate within the seven days from the date of acceptance

The particulars of the security certificates extinguished and destroy shall be furnished to the stock exchange where the specified securities of the company are listed within seven days of such act.

Company should maintain a record of security certificate which have been cancelled and destroyed.

Buy-Back from the

open market

Through Stock

Exchange

Book-building Process

Buy Back Through Stock Exchange

Special Resolution in the Board meeting

It should not be made from the promoters of the company

Appoint Merchant Banker and make public announcement

Public announcement should be made at least seven days before the buy back

A copy of announcement should be filled with Board within 2 days along with specified fees

Contd…...

Public announcement should also contain disclosures regarding details of brokers and stock exchange

It should be done with electronic trading facility

Information regarding securities purchased and published same in a national daily

Identity of company shall appear on the electronic screen


(1) Extinguishment of certificates shall be applicable mutatis mutandis.

(2) The company shall complete

the verification of acceptances within fifteen days of the pay-out.

Buy-Back Through Book Building

Special resolution in board meeting stating the maximum price for the buy-back

Company shall appoint a merchant banker and make a public announcement

And it should be made at least 7 days prior to buy back procedure

Specific amount shall deposit in escrow account

A copy of announcement should filed with board along with the fees

Contd…

Book building process shall be made though an electronically linked transparent facility

The number of bidding center should not be less than thirty

The offer for buy back shall remain open for notless than 15 days and not more than 30 days

Merchant banker and company will decide the price based on acceptances received

The final buy back price would be the highest price accepted shall be paid.


Extinguishment of certificates shall be applicable mutatis mutandis.

Source :-Business Standard Data dated :- 9th Nov 2011

SHARE BUY-BACK: POSITIE ASPECTS

1. It could enable a company to achieve its desired capital structure more quickly or facilitate a major restructuring.

2. It could avert a hostile takeover bid by reducing the number of shares in circulation

3. Market generally interprets buy-back as a positive aspect.

4. Shareholders have a choice of deciding whether or not to receive the payout by selling or holding their shares, unlike a dividend payout.

5. 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: POSITIE ASPECTS

POSITIVE

SHARE BUY-BACK: NEGATIVE ASPECTS

1. Re-purchase of it’s own shares may conversely have a negative signaling effect.

2. Management may not seek to utilize any existing excess cash effectively

3. 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.

4. A return of funds by way of a share buy-back is less certain than an annual dividend stream.

THANK YOU