BUYBACK OF SHARES
It is a process of capital restructuring, A company can go for it after seeking or obtaining the permission of the Company law Board, under the Companies Act, 1956
By doing this co. reduces: The number of outstanding shares
Increased the companys Earning Per Share
Definition
Buy Back of share: reverse of issue of share by company, company buy its own shares from public, at a specified price, which can be binding or optional to the investors.
Purposes
To facilitate reduction of share capital,
To generate higher return on the left over equity shareholders, To return surplus cash in the form of buyback, when there is no proper investment opportunities, To maintain shareholders value in the situation of poor secondary market, To arrest downward trend in the value of shares.
Buyback of shares cant be made out of the proceeds of an earlier issue
Sources of Buy back
Free Reserves; Securities Premium Account; Capital Reserve; Statutory Reserve; and Proceeds of any share or other specified securities like ESOP
Eg: Company A has 100 shares issued and makes a profit of Rs. 50. This means a shareholder is getting a return of 50 paisa a share (Rs.50/100). This is the Earnings per Share or EPS. If the share sells on the stock exchange for 15 times its EPS, a share has a value of Rs.7.50. Suppose that the company buy back 25 shares. A shareholder who retains their shares now earns 67 paisa (Rs.50/75) on each share held. If the share sells on the stock exchange for 15 times its EPS, a share has a value of Rs.10.05
Regulatory Framework
Passing of Special Resolution in General Meeting of the Company Methods of Buy Back Appointment of Merchant Banker to the offer Make the Public Announcement Draft the Letter of offer Dispatch the Letter of offer to the shareholders Pay full and final consideration to shareholders who have accepted the offer File final report with SEBI & Public announcement Extinguishment of Share Certificate
Methods of Buy back
Tender Offer
Existing Shareholders on proportionate basis
Open Market
Stock Exchange Operations
Book Building
Dutch Auction
Odd Lot
The offer should be to the nearest marketable lot
SWEAT Equity
Stock for compensation services or equity
Is a term used to describe the contribution made to a project by people who contribute their time and effort
Tender Offer
It has to make public announcement in newspapers, which should contains data according to Schedule II of the SEBI Buy Back Regulation,
Announcement of specified date for the reference, which shall not be the earlier than 30 days to the public announcement or 42 days later form the public announcement
Eg: If public announcement is made on 30th November 2005, the specified date can be any date between 31st October 2006 and 11th January 2006.
A draft of offer letter need to file with SEBI along with the a declaration of solvency, within 7 days from the date of public announcement
Offer Procedure: Opening offer 7 to 30 after the specified date Remain open for min of 15 days & max upto 30 days Verification must be completed within 15 days from closure of offer Proportionate Basis is calculated as: No.of shares to shareholder Be bought back
No. of shares offered by a Total No. of shares offered
Eg: A Ltd makes offer of 5,00,000 shares for buy back. It received in all 6,00,000 shares from various shareholders. Mr. XYZ one of the shareholders offered 500 shares. Share to be bough back from XYZ = 500000 X 500/600000
= 416.67 shares
Verification of shares must be completed within 15 days from the date of closure, thereafter payment should be made within 7 days. Extinguishment must be done within 7 days from acceptance in presence
Open Market
Stock Exchange: Helps in preventing to fix the price - very high level Public announcement should be made 7 days prior Announcement should be filed within 2 days with SEBI Carried out in Exchanges having electronic trading
Verification of acceptances within 15 days from payment
Certificate should be extinguished within 7 days from closure Book Building: No. of centers not less then 30
Offer remains open not less than 15 days and not more than 30 days
Company & Merchant Banker decided the price on the basis of acceptance received Dutch Auction
SWEAT Equity
Activity
On 20th Jan, 2004
Minimum Maximum X+7 X+28 X+42 X+72 X+102
SUGGESTIONS
Minimum X X+21 Maximum X+7 X+28
Filing of Draft Letter of offer with SEBI Clearance by SEBI
X X+21
Specified Date
Opening of Offer Closing of Offer Acceptance/Dispatch of Consideration Extinguishment/Final Report
X+30
X+37 X+52 X+74
X
X+28 X+43 X+65
X
X+42 X+57 X+79
X+124 X+124
X+74
X+65
X+79
BANKING REQUIREMENTS
REQUIREMENTS FOR CREATING AN ESCROW A/C
ESCROW A/C IN CASE OF BANK GUARANTEE.
ACTION IN CASE OF NON-FULFILLMENT OF OBLIGATIONS OPENING OF A SPECIAL A/C
BANKING FACILITIES
1.
Issuance of Financial Guarantees Cash Deposits in Escrow accounts Escrow depository account facility:
2.
3.
Pledge functionality Irrevocable instruction Maintain a custody a/c of the registrar third party
4.
Depository Account Custody Services Disbursement account and facilities
5.
BANKING FACILITIES
Company Shareholders
Escrow A/c
Disbursement A/c
Custody Services Escrow A/c Issue Guarantee
Merchant Banker Company
Shareholder
COMPONENTS
cash deposited with a scheduled commercial bank or; bank guarantee in favour of the merchant banker; or deposit of acceptable securities with appropriate margin, with the merchant banker, or
PAYABLE TO
CONSIDERATION < 100 CRS 25% OF CONSIDERATION
CONSIDERATION > 100 CRS 25% upto Rs. 100 crores and 10% thereafter.
Accounting of Buy Back
Calculate the sources of buyback Sources of Buyback = Free Reserves + Securities Premium Account
Compute the Limit of Buyback
Limit = 25%(Eq.Share Cap. + Pref. Share Cap. + Free Res. + Sec. Prem.) Calculate Debt Equity Ratio after Buyback
Calculate the limit 25% of Equity Share Capital
Max Nominal value of Eq. Share = 25% of paid up Eq. Share Capital Maximum Number of share that can be bought Max. No. of Eq. Share bought = Max. Nominal value of Eq.share that can be bought back Nominal value per share
Accounting of Buy Back
Calculate the sources of buyback Sources of Buyback = Free Reserves + Securities Premium Account
Compute the Limit of Buyback
Limit = 25%(Eq.Share Cap. + Pref. Share Cap. + Free Res. + Sec. Prem.) Select the lowest of the above two
Maximum Number of share that can be bought
Max. No. of Eq. Share bought = 25% of paid up Equity Share Capital Nominal value per share
Calculate Maximum Possible Offer price
Offer Price = Lowest amount from first 2 steps Max. No. of share as per above step
VALUATIONS
Average Closing Price
Weighted average volume for a period immediately before buy back announcement. Based on trend price is determined
Within a set of price range
Low point discount & High point premium
Freedom to investors as compared to former
Price is fixed above the mark up or above the average price of the last 12 18 months
Eg. X Ltd. Has furnished the following information: Paid up capital Rs. 5,000/-
Free Reserve
No. of Share Face value per share
Rs. 12,000/500 shares Rs. 10/-
Price settled per share
Rs. 50/Rs. 17,000/Rs. 4,250/Rs. 1,250/125 Shares
Paid up capital & Free Reserves 25% of paid up capital & free reserves 25% of paid up equity capital Max. No. of shares to be bought back = 1250/10
No. of shares to be bought back = 4250/50 Nominal value of share bought back = 85 x 10
85 Shares Rs. 850/-
Premium paid on buy back = 85 x 40
Amount on buyback
Rs. 3,400/Rs. 4,250/-
Checklist for investors before accepting offer
Take a look at the share price movement immediately before the buyback Debt-equity ratio: The companies are hugely under debts are unlikely to have free cash Companies that have just come to the capital markets to raise money are unlikely to be good candidates for buyback. Share price speculators. does not flare up due to
EFFECTS ON STOCK EXCHANGE
Leads to abnormal increased in prices
Posing heavy risk Reduction in interest of investors particularly with de-listing of good shares
Eg: It was feared in 2001-03 that de-listing by many MNCs may drop the money flow to stock exchanges.
