2. • Most Attractive and Crucial Part of Company
Transactions.
• Genuine Interest in The Topic.
3. Introduction
Objectives
Conditions
Prohibition Of Buy-Back In Few Circumstances
Buy-Back From Whom?
Sources Of Buy-Back
Procedure
Penalty
Buy-Back: Positive & Negative Aspects
4. The repurchase of outstanding shares 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,
or to eliminate any threats by shareholders who
may be looking for a controlling stake.
5. Example:-
Mr. Anil Ambani (Reliance Energy)
Bought 6,50,000 Eq.Shares of the Company
at Rs.1279.23/share, Aggregating Rs. 831.5
million [Amounting Company’s 10% of
Equity and Free Reserves].
Result:- Shares of the Company were
trading at Rs. 1310 i.e. UP By 28.20 from its
Previous close at BSE.
6. Objectives
To increase promoters holding.
Increase earning per share(EPS).
Rationalize the capital structure by writing off capital
not represented by available assets.
To pay surplus cash not required by business
Tax Gains: Since dividends are taxed at higher rate
than capital gains, companies prefer buyback to
reward their Investors instead of distributing cash
dividends, as capital gains tax is generally lower. At
present, short-term capital gains are taxed at 10%
and long-term capital gains are not taxed while DDT
is 15%.
7. The buy-back should be authorized by the Articles of
association of the Company;
A Special Resolution have to be 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.
Exception:
The buy back can be made by a Board Resolution If the
quantity of buyback is or less than 10% of the Paid up
Capital and Free Reserves;
Condition:
Similar Buyback i.e. by passing Board Resolution shall
not be made in the next 365 days.
8. Limit on Buyback by passing SR:
The buyback (by passing SR) shall not
exceed 25% of aggregate of Paid-up
Capital and Free Reserve
Time limit for completion of buy-back:
Buyback shall be completed within 12
months from passing of SR or Board
Resolution , as the case may be.
Debt-Equity Ratio:
The ratio of the debt owed by the company is
not more than twice the aggregate of capital
and its free reserves after such buy-back;
i.e. not more than 2:1.
9. Fully paid-up Shares
All the shares for buyback must be fully
paid-up i.e. partly paid-up shares not
allowed.
Declaration of Solvency:
The company shall file with the Registrar
a declaration of solvency stating it will not
be rendered insolvent within next 1 year.
Prohibition on further Issue of similar
shares for the period of 6 months.
10. No company shall directly or indirectly
Purchase its own shares-
i. Through any subsidiary co. including its own subsidiary
company; or
ii. Through any Investment co. or group of Investment co.;
or
iii. If the company has not complied with the provisions of-
* sec.159(filing of annual return)
*sec.207(Payment of dividend within 30 days)
*sec.211(Annual accounts to present True and Fair view)
11. iv. If any of the following defaults are subsisting:
*Repayment of deposit or interest payable
thereon;
*Redemption of Debenture
*Redemption of Preference Shares
*Payment of dividend to any Shareholder
*Repayment of any term loan or interest
payable thereon to any Financial
Institution or Bank.
12. 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
Open market
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.
Purchasing the securities issued to employees of the
company pursuant to a scheme of Stock option or
Sweat equity.
13. 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.
Securities Premium Account
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.
14. Where the company proposes to buyback its
own shares, it shall after passing the
SR/Board Resolution make a public
announcement in at least 1 English National
Daily Newspaper and 1 Vernacular
Newspaper at the place where the
Registered office of the company is situated.
A public notice shall be given containing
disclosures as specified in Schedule I of the
SEBI regulations.
A copy of the Board resolution authorizing the
buyback shall be filed with the SEBI and
stock exchanges.
15. The date of opening of the offer shall not
be earlier than 7 days or later than 30
days after the specified date i.e. the date
which shall be given in public
announcement .
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.
16. • 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 2 years, or with fine
which may extend to 50000 rupees, or with
both.
17. It could enable a company to achieve its desired
Capital Structure more quickly or facilitate a major
restructuring.
Market generally interprets buy-back as a positive
aspect.
Returning excess cash by way of a share buy-back gives
a company greater flexibility with regard to its
dividend policy.
18. Re-purchase of its own shares may conversely have a
negative signalling effect.
Possible mismanagements may arise if-
i. Too high a price is paid for the re-purchased shares or
if
ii. Cash resources are eroded to the level that could give
rise to a risk of insolvency.
