Buy Back of Shares

A PROJECT REPORT ON
BUY BACK OF SHARES
SUBMITTED TO
UNIVERSITY OF MUMBAI
BY
ADITYA SUNIL BAGARKA
T. Y. B.M.S.
YEAR 2005-2006
THROUGH
TOLANI COLLEGE OF COMMERCE
ANDHERI (EAST), MUMBAI – 400 093
CERTIFICATE
I, Mrs. Shalini Hemant, hereby certify that Mr. Aditya Bagarka of
Tolani College of Commerce, T.Y. B.M.S. (Semester V) has
completed his project titled BUY BACK OF SHARES in the
academic year 2005-2006. The information submitted herein is
true and original to the best of my knowledge.
Mrs. Shalini Hemant Dr. A. A. Rashid Dr. Sheela Purohit

(Project Guide) (BMS Co-ordinator) (Principal)
DECLARATION
I, Aditya Bagarka, of Tolani College of Commerce, T.Y. B.M.S.
(Semester V) hereby declare that I have completed my project
titled BUY BACK OF SHARES in the academic year 2005-2006.
The information submitted herein is true and original to the best of
my knowledge.
Place: MUMBAI Aditya Bagarka

Date:
Acknowledgement
At the onset, I would like to thank the almighty who gave me determination
and patience throughout the compilation of this project.
Further, I would like to thank Mrs. Shalini Hemant for her help and guidance
without which this project would not have reached this point.
There is one person who has been a constant source of encouragement and
help, Mrs. Akshata Kadam, I hereby acknowledge all her efforts.
My parents and family has been a great source of motivation for me always; I
am deeply indebted with all the help and facilities they provided me with.
I would like to extend my gratitude to all the people whom I contacted with,
during the process of collecting information, for their valuable time and efforts
in explaining me the concept of BUY BACK.
Lastly, I thank all my friends for their support in all the possible ways.
I sincerely hope that the project lives up to your expectations.

Objectives…
1. To analyse the process of buy back and motives behind

buyback
2. To analyse impact of buyback
3. To find out the sources and ways of buyback
4. To analyse the obligations of company resorting to

buyback
5. To analyse the pitfalls in buyback
6. To analyse the buyback modus-operandi in India with

the help of case study
Table of Contents
Sr. No. Topic Page No.

1. Introduction - The Indian Capital Market 1–2
2. Buy Back of Shares 3–5
3. Objectives 6–9
4. Sources 10 – 12
5. Methods 13 – 20
6. Public Announcements 21 – 23
7. Extinguishment of Certificate 24
8. Leveraged Buy Back 25 – 28
9. Pricing Buy Back 29 – 32
10. Tax Implications 33 – 35
11. General Obligations 36 – 37
12. Buy Back in India 38 – 42
13. Recommendations & Findings 43 – 48
14. Pitfalls 49
15. Case : Berger Paints 50 – 57
16. The Bottomline 58 – 60

— Buy Back of Shares
Introduction – The Indian Capital Market
Competitive forces with the unleashing of the liberalization policies have made
corporate restructuring a sine quo non-for survival and growth. Operational,
financial and managerial strategies are employed to maintain competitive
edge and turnaround a sickened performance.
Financial restructuring involves either internal or external restructuring (i.e.

Mergers and Acquisitions). In the internal restructuring an existing firm
undergoes through a series of changes in terms of composition of assets and
liabilities.
Section 100-105 of The Company's Act 1956 governs the internal

restructuring of a corporate entity in the form of capital reduction. Section 77A,
77B and 77AA now allow companies to buy back their shares following the
recommendations of committee on corporate restructuring, which was set up
by the government to propose various strategies to strengthen the
competitiveness of the banking and finance sector, companies are now
allowed to repurchase their own shares.
This will enable the companies to catch up with other developed markets as
part of the government's moves to liberalize the local market and hence
emerged the concept of SHARE BUY BACK in the Indian corporate scenario.
Over 300 companies, including the Tatas, the Birlas and Reliance, had
passed resolutions -- taken shareholders permission -- at their AGMs
during the year 1997-1998.
Sudden plethora…
Relative to the Indian context, the listing of various foreign players in the
earlier times on the Indian bourses was regulatory driven. They had adequate
funds in their kitty to pursue their own goals, both in terms of funding their
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expansion and an inherent ability to outsource and avail economic costs of

production.
Why then did they still go in for an Indian listing?

In the 1970’s period, if MNCs wanted to continue doing their business in India,
they could do so only by diluting their shareholding and getting listed on the
exchange. They were thus forced to go public. Now that the norms have been
altered and they are permitted to carry on their business without any such
compulsion, they would rather operate as wholly owned subsidiaries without
being listed on the bourses.
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Buy Back of Shares

Share buy back is a financial tool for financial re-engineering. It is
described as a procedure that enables a company to go back to its
shareholders and offers to purchase from them the shares they hold.
Buy back of equity shares is a capital restructuring process. It is a financial

strategy that allows a company to buy back its equity shares and other
securities. In a changing economic scenario corporate sector demands more
freedom in restructuring debt-equity mix in times of favorable business
environment.
So far it was possible to refund shareholders' money through capital reduction

process. A company could buy back own shares obtaining permission of the
Company Law Board under the old provisions of the Companies Act, 1956.
By virtue of the newly inserted section 77A to the Companies Act, 1956
through the Companies (Amendment) Ordinance, 1999, a new vista has been
opened for flexible capital structuring by companies as and when necessary
without involvement of any external regulatory mechanism.
Buy back is a financial strategy - it should be used accordingly. It is not for

improving controlling interest of the ruling shareholding group. However,
improvement of controlling interest occurs as a natural consequence of buy
back strategy.
In India, companies are lowly levered because of high incidence of debt cost.
But so long a company can earn above the effective debt cost it is
advantageous to create favorable leverage effect.
Creating shareholders' value should be the primary objective of corporate

management. It is difficult to service a large equity and add shareholders'
value. Slimming of capital structure should be an objective of buying back of
own shares by companies. Buy back offers a straight route for swapping
equity for debt. In a situation when equity appears to be costlier to debt, this
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would help to reduce overall cost of capital.
Prior to introduction of flexible buy back facility; once a particular equity

pattern is opted for it would become sacrosanct. To alter the skewed equity a
company has to build up the level of free reserves or to infuse more borrowed
funds. Infusion of more borrowed fund would be possible in a growth
situation.
In a no-growth situation changing the equity structure was very difficult. Buy
back option is expected to help to correct the positively skewed equity share
capital in the existing capital structure of a lowly levered company that earns
stable return.
If' a company cannot deploy the surplus cash in a growth process from which
it would be able to maintain average return on capital employed (ROCE) and
earnings per share (EPS), what should it do with the cash? Inter corporate
investments/loans although freed may not likely to improve average ROCE of
the company. Board of directors is the custodian of shareholder’s money. If it
cannot add better value or, even maintain the current rate of value addition, it
should refund the money to the shareholders. This will at the same time
create better value to the leftovers. Good corporate governance demands
proper utilization of shareholder’s money.
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Restrictions that have been lifted

Section 77(l) of the Companies Act, 1956 prohibited (i) a company limited by
shares, and (ii) a company limited by guarantee and having share capital to
buy its share.
Section 77(2) of the Companies Act, 1956 disallowed a public company or a

private company, which is a subsidiary of a public company to give any direct
or indirect financial assistance to any person in the form of purchase of its
own shares or of its holding company.
However, redemption of redeemable preference shares under Section 80 of

the Companies Act, 1956 were not subjected to this restriction.
Disadvantage of the capital reduction route

Capital reduction is possible for diminution of liability in respect of the unpaid
amount of share capital or payment to any shareholder of any paid-up share
capital. If repayment of a portion of share capital is the purpose; that can be
fulfilled through capital reduction.
However, it is not an easy route. It requires an order of court, which in turn

requires fulfillment of the following conditions:
• The existing creditors should not object to the capital reduction;
• All claims of the creditors who object to the capital reduction should be
settled; or their claims should be provided for;
• Contingent or unascertained claims as fixed by the court should be
provided for.
This route involves court process and is not flexible. It cannot be exercised as
a financial strategy. To the contrary, buy back is a flexible approach by which
a company can safeguard payment of outside liabilities before exercising buy
back.
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Objectives
The rationale behind buy back of shares is to boost demand by
reducing the supply, which in theory should push the price up. The
repurchase of shares reduces the number of shareholders, which in
turn enhances the earnings per share (EPS), and thus improves
investor sentiments.
A company may decide to buy back its shares for one of the following
reasons:
• To return surplus cash to shareholders as an alternative to a higher
dividend payment.
• The management may also like to return surplus cash to the shareholders
in the form of buy back when there are no proper investment opportunities
to maintain the rate of return.
• Adjust or change the company's capital structure quickly, say for those
companies seeking to increase its debt/equity ratio. Buyback facilitates
reduction of share capital without recourse to lengthy capital reduction
process.
• To increase earnings per share and net asset value per share as a
possible signal to the market place that management is of the view that the
prospects of the company justify a market price higher than that currently
accorded by the market.
• To improve the liquidity of the shares and other performance parameters
like EPS,DPS, operating cash flow per share, etc
• Initially many companies may opt for equity financing to avoid high
financial risk. At a later stage when the company becomes successful in
stabilizing its income, it may prefer to have a levered capital structure to
ensure better return on equity.
• Buyback can be used as a mechanism for maintaining shareholder’s value
in a situation of poor state of secondary market. Buyback announcement
may temporarily arrest the downtrend.
• It is a mechanism to balance equity after the conversion of debt or
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preference share capital.

• To thwart the attempts of a hostile takeover. The maximum limit of shares
that a company can buy back in a financial year is 25% of the total equity
and the fund exposure is limited to 25% of the net worth or 100% of the
free reserves, whichever is more. Pricing for buyback has been left to the
discretion of the company.
A company may buy back equity shares through proportionate basis (tender
route) or from the open market. Buyback is reckoned as an important tool to
defeat buy-back of shares since the bought back shares are cancelled and a
promoter is in a position to consolidate and strengthen his position. For
example, a company X, which has the following shareholding pattern is facing
a hostile takeover bid:
Promoters : 30%
FIs : 25%
Public : 45%
If the company proposes to buyback 25% of the total equity, then the post
buyback holding of the promoters would be straight away consolidating their
position to 40%. With the support of financial institutions the acquirer could be
made to beat a hasty retreat.
What’s in it for the shareholders?

Dividend income received by the shareholders is liable for taxation at the
normal income tax rate, depending upon the category to which the
shareholder belongs. However, when buyback proceeds are received by the
shareholders, they are treated as Capital Gains and are liable for Capital
Gains Tax. As is common knowledge, the capital gains taxation rate is much
lower then the income tax rate.
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The Law of Demand states that with an increase in demand, if supply does
not increase, the commodity can command a higher price. The same will be
true for shares too. With an increase in demand for the stock and a
corresponding decline in the available free float, the value of the stock will
tend to rise.
After the buyback has been effected, the proportional share of the existing
shareholders increases and thereby gives them a higher say and holding in
the company affairs.
What’s in it for the company?

With a dearth of investment opportunities and uncertainty looming over the
entire gamut of industries, most of the companies currently have a very strong
cash book position. If the company uses its cash to repurchase its outstanding
stock, it will enjoy a double credence:
• The company effectively funnels in the ‘Accretion Effect’. It can decrease
its floating stock in the market and at the same time increase the EPS. The
growth in EPS will thus be compounded.
• With the growth in EPS and a stable Price Earning (PE) multiple, this will
ultimately raise the Price of the stock in the market, since
Stock Price = EPS * PE
High cash balance reflecting in the balance sheet, will tend to drag down a
few return ratios, like the Return on Assets (ROA), Return on Equity (ROE),
and so on. Freeing up the cash reserves will push these ratios to a higher
level, thereby reflecting a sound financial management practice.
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Example 1
Let us now take a small example to understand the impact of buyback:
A company XYZ Ltd has an issued share capital of 1,000 shares of Rs. 100
each. XYZ Ltd is evaluating a buyback of 100 shares of Rs. 150 each, which
is priced at a slight premium to the current market price of Rs. 140 per share.
ABC group of shareholders holds all the 1,000 shares.
Under such a scenario, XYZ Ltd uses its cash reserve of Rs. 15,000 to buy
back 100 shares. The likely impact on XYZ Ltd would be:
• The EPS should increase as the earnings stream remains unaffected
except for the loss of interest on Rs. 15,000, but the number of shares has
reduced to 900.
• Demand for XYZ Ltd's shares should increase with now only 900 shares in
circulation, against 1000 shares before the buyback.
• Net assets of XYZ Ltd will decrease by Rs. 15,000, thus increasing the
gearing, but net assets per share should remain the same.
These factors should lead to an increase in the share price in one to two
years.
The successful implementation of buyback depends upon two critical factors

Firstly, the cost of buyback, that is, the market price of XYZ Ltd's shares. For
example, HLL Ltd, with its cash reserves could do a buyback but with the
current market price hovering around Rs. 1,700, this could be expensive.
Secondly, the impact of buyback on the company's average cost of capital.

Ideally, a buyback should drive down the average cost of capital. This may be
possible only for companies with high credit rating, high cash flow interest
cover and a reputed management team, which could then counter the impact
of higher gearing. Contrary to common perception, buybacks may not be
suitable for excessively geared companies.
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Sources of Buy Back
A company can buy back its own shares or other specified securities out of
three sources:
• Free reserves
• Securities premium account
• Proceeds of an earlier issue of shares or other specified securities
[Section 77A(l)]
Buy back of any kind of shares is not allowed out of the proceeds of any
earlier issue of the same kinds of shares.
Free reserve
Meaning of Free Reserves
The term free reserve has been defined to carry same meaning as has been
assigned in clause (b) of Explanation to section 372A. For the purpose of
section 372A the term 'free reserve' has been defined as those reserves
which as per the latest audited balance sheet are free for distribution as
dividend and it includes balance of securities premium account. Free reserve
means the balance in the share premium account, capital and debenture
redemption reserves shown or published in the balance sheet of the company
and created by appropriation out of the profits of the company.
Securities Premium Account

Securities Premium Account is a broader term than Share Premium Account.
Share Premium account represents only premium on issue of equity and
preference shares, whereas securities premium account represents premium
on issue of debentures, bonds and other financial instruments.
Proceeds of an earlier issue

Buy back of shares of any kind is not allowed out of fresh issue of shares of
the same kind. If it were so, it would frustrate the very purpose of buy back.
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Fresh issue of equity shares for buying equity makes no financial sense.
However, financial logic of buy back could very well be served if preference
shares are issued and proceeds are used for buying back equity shares.
Preference shares carry fixed rate of dividend. Also they are easy to market.
Preference shares may give better yield to the investor than after tax yield on
loan or debentures. At the same time it is possible to lever the capital
structure by slimming the dividend paying equity.
That apart, buy back of shares is allowed utilizing proceeds of an earlier

issue. Proceeds of an earlier issue, is an unqualified term. Any issue means
any issue of hybrid instruments, debentures, bonds, secured and unsecured
loans etc. Thus buy back of equity shares is allowed by issue of any pure or
hybrid debt instruments.
Then appropriate source of buy back should be the following if the intention is
to swap equity for debt or fixed income bearing instruments:
Issue of debentures;
Issue of loans
Buy Back sourcing caution

While approving the buy back resolution the following points should be
carefully scrutinized as regards cash flow linkage of free reserve and
securities premium account as they are not necessarily represented by free
cash:
• How much of the free reserve and securities premium account are readily
available in the form of free cash?
• Whether owned investments in current assets are released for buy back?
If so, its impact on current ratio
• Whether non-trade investments will be disposed to generate free cash? If
yes, what is the possible profit/loss?
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• If trade investments are proposed to be sold, what is the possible adverse

impact on operating activities?
• If any fixed assets are sold, whether it has been intended to reduce the
scale of operation of the company
Buyback Conditions
Section 77A (2) of the Companies Act, 1956 requires that buy back should be
carried out if:
• Authorized by its articles.
• A special resolution has been passed in the general meeting of the
company authorizing the buy back.
• The buy back does not exceed twenty-five per cent of the paid u capital
and free reserves of the company; also a company cannot buy back more
than twenty-five per cent of its paid-up equity capital in any financial year;
• The ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buy back;
• All the shares or other specified securities are fully paid up;
• Buy back of shares or other securities listed on any recognized stock
exchange should be carried out in accordance with the Regulations made
by the Securities and Exchange Board of India in this behalf;
• Buy back of shares or other securities other than those specified in the
clause above should be carried out in accordance with the Guidelines as
may be prescribed.
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Methods
A company shall not buy back its shares from any person through negotiated
deals, whether on or off the stock exchange or through spot transactions or
through any private arrangement.
Buy back is not allowed through negotiated deals on or off the stock
exchange. It is possible to negotiate the price and number of shares and then
to complete the deal in the stock exchange. This does not give equal
opportunity to other shareholders who could have also preferred to tender
their shares at the same price.
Negotiated deals although mean purchase of shares at negotiated price

outside the stock exchange, scope of the negotiated deals has been
increased to cover such transactions, which are negotiated off market and
then transacted in the stock exchange. Such transactions cannot be
classified as open market buyback.
This will help to check privately settled buy back deals. However, it is equally
difficult to trace the off market origin of a market settled transactions. Buy
back is not allowed through spot transactions or through any private
arrangement.
Any person or an insider shall not deal in securities of the company on the
basis of unpublished information relating to buy-back of shares of the
company.
Insider trading in buyback, prohibited - Regulation 4(3) prohibits any person or

insider to deal in buy back transactions on the basis of unpublished price
sensitive information. There is no specific prohibition for promoters to
participate in buy back. Only insiders are prohibited to participate in buy back
transactions except in buy back through stock exchange operation. So if a
promoter is not an insider, he can participate in buy back.
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In case the company opts for tender offer route for buy back, all the
shareholders whose names appear in the Register of Shareholders on the
specified date should be offered to tender their shares.
Special Resolution:
(I) For the purposes of passing a special resolution under sub-section (2) of
section 77A of the Companies Act, the explanatory statement to be
annexed to the notice for the general meeting pursuant to section 173 of
the Companies Act shall contain disclosures as specified in schedule I.
(II) A copy of the resolution passed at the general meeting under sub-section
(2) of section 77A of the Companies Act, shall be filed with the Board and
the stock exchanges where the shares of the company are listed, within
seven days from the date of passing of the resolution.
A company may buyback its shares by any one of the following

methods –
a. From open market;
b. From the existing shares on a proportionate basis through the tender
offer
BUY-BACK FROM THE OPEN MARKET

A company intending to buy-back its shares from the open market shall do so
in accordance with the provisions stated as under-
1. The buy-back of shares from the open market may be in any one of the
following methods:
• Through stock exchange
• Book Building process
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Through stock exchange

• A company shall buy-back its shares through the stock exchange as
provided hereunder- Maximum price at which the buy-back shall be made
has to be specified by a special resolution.
• The buy-back of the shares shall not be made from the promoters or
persons in control of the company.
• The company shall appoint a merchant banker and make a public
announcement in respect of the same.
• The public announcement shall be made at least seven days prior to the
commencement of buy-back.
• A copy of the public announcement shall be filed with the Board within two
days of such announcement along with the fees as specified in the
provisions
• The public announcement shall also contain disclosures regarding details
of the brokers and stock exchanges through which the buy-back of shares
would be made.
• The buy-back shall be made only on stock exchanges with electronic
trading facility.
• The buy-back of shares shall be made only through the order matching
mechanism except ‘all or none’ order matching system
• The company and the merchant banker shall give the information to the
stock exchange on a daily basis regarding the shares purchased for buy-
back and the same shall be published in a national daily;
• The identity of the company as a purchaser shall appear on the electronic
screen when the order is placed.
• The company shall complete the verification of acceptances within fifteen
days of the pay-out.
Buy-back through book building

A company may buy-back its shares through the book-building process as
provided here under:
• The maximum price at which the buy-back shall be made should be
specified by a special resolution as in the case of buy-back through stock
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exchange.
• The company shall appoint a merchant banker and make a public
announcement in reference to the same.
• The public announcement shall be made at least seven days prior to the
commencement of buy-back.
• The deposit in the escrow account shall be made before the date of the
public announcement. (ii) The amount to be deposited in the escrow
account shall be determined with reference to the maximum price as
specified in public announcement.
• A copy of the public announcement shall be filed with the Board within two
days of such announcement along with the fees as specified in the
regulations.
• The public announcement shall also contain the detailed methodology of
the book-building process, the manner of acceptance, the format of
acceptance to be sent by the shareholders pursuant to the public
announcement and the details of bidding centers.
• The book building process shall be made through an electronically linked
transparent facility.
• The number of bidding centers shall not be less than thirty and there shall
be at least one electronically linked computer terminal at all the bidding
centers.
• The offer for buy back shall remain open to the shareholders for a period
not less than fifteen days and not exceeding thirty days.
• The merchant banker and the company shall determine the buy-back price
based on the acceptances received.
• The final buy-back price, which shall be the highest price accepted should
be paid to all holders whose shares have been accepted for buy-back.
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BUY-BACK THROUGH TENDER OFFER

A company can buy back its shares from the existing shareholders on
proportionate basis.
The explanatory statement annexed to the notice under section 173 of the
Companies Act, shall contain the disclosures mentioned in regulation 5 and
also the following disclosures;
a. The price at which the buy-back of shares shall be made;
b. If the promoter intends to offer their shares,
• The quantum of shares proposed to be tendered, and

• The details of their transactions and their holdings for the last six-months
prior to the passing of the special resolution for buy-back including
information of number of shares acquired, the price and the date of
acquisition.
Filing of offer document

1. The company which has been authorized by a special resolution shall
before buy back of shares make a public announcement in at least one
English National Daily, one Hindi National Daily and a Regional language
daily all with wide circulation at the place where the Registered office of
the company is situated and shall contain all the material information as
specified in schedule II.
2. The public announcement shall specify a date, which shall be the
`specified date’ for the purpose of determining the names of the
shareholders to whom the letter of offer shall be sent.
3. The specified date shall not be earlier than thirty days and not later than
forty-two days from the date of the public announcement.
4. The Company shall within seven working days of the public announcement
shall file with the Board a draft-letter of offer containing disclosures as
specified in schedule III through a merchant banker who is not associated
with the company.
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5. The draft letter of offer referred to in sub regulation (4) shall be

accompanied with fees specified in schedule IV.
6. The letter of offer shall be dispatched not earlier than twenty-one days
from its submission to the Board under sub-regulation (4).
7. Provided that if, within twenty-one days from the date of submission of the
draft letter of offer, the Board specifies modifications, if any, in the draft
letter of offer, (without being under any obligation to do so) the merchant
banker and the company shall carry out such modifications before the
letter of offer is despatched to the shareholders.
8. The company shall file along with the draft letter of offer, a declaration of
solvency in the prescribed form and in a manner prescribed in sub-section
(6) of section 77A of the Companies Act .
Offer procedure
1. The offer for buy back shall remain open to the members for a period not
less than fifteen days and not exceeding thirty days.
2. The date of the opening of the offer shall not be earlier than seven days or
later than thirty days after the specified date.
3. The letter of offer shall be sent to the shareholders so as to reach the
shareholders before the opening of the offer.
4. In case the number of shares offered by the shareholders is more than the
total number of shares to be bought back by the company, the
acceptances per shareholder shall be equal to the acceptances tendered
by the shareholders divided by the total acceptances received and
multiplied by the total number of shares to be bought back.
5. The company shall complete the verifications of the offers received within
fifteen days of the closure of the offer and the shares lodged shall be
deemed to be accepted unless a communication of rejection is made
within fifteen days from the closure of the offer.
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ESCROW ACCOUNT
1. The company shall as and by way of security for performance of its
obligations under the regulations, on or before the opening of the offer
deposit in an escrow account such sum as specified in sub-regulation (2).
2. The escrow amount shall be payable in the following manner-
• If the consideration payable does not exceed Rs.100 crores - 25% of
the consideration payable;
• If the consideration payable exceeds Rs. 100 crores – 25% upto Rs.
100 crores and 10% thereafter.
3. The escrow account referred in sub-regulation (1) shall consist of
• 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
• A combination of all of above.
4. Where the escrow account consists of deposit with a scheduled
commercial bank, the company shall, while opening the account, empower
the merchant banker to instruct the bank to issue a banker’s cheque or
demand draft for the amount lying to the credit of the escrow account, as
provided in the regulations.
5. Where the escrow account consists of bank guarantee, such bank
guarantee shall be in favour of the merchant banker and shall be valid until
thirty days after the closure of the offer.
6. The company shall, in case the escrow account consists of securities,
empower the merchant banker to realise the value of such escrow account
by sale or otherwise and if there is any deficit on realisation of the value of
the securities, the merchant banker shall be liable to make good any such
deficit.
7. In case the escrow account consists of bank guarantee or approved
securities, these shall not be returned by the merchant banker till
completion of all obligations under the regulations.
8. Where the escrow account consists of bank guarantee or deposit of
approved securities, the company shall also deposit with the bank in cash
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a sum of at least one-percent of the total consideration payable, as and by

way of security for fulfillment of the obligations under the regulations by the
company.
9. On payment of consideration to all the shareholders who have accepted
the offer and after completion of all formalities of buy back, the amount,
guarantee and securities in the escrow, if any, shall be released to the
company.
10. The Board in the interest of the shareholders may in case of non-fulfillment
of obligations under the regulations by the company forfeit the escrow
account either in full or in part.
11. The amount forfeited under sub-regulation (10) may be distributed pro rata
amongst the shareholders who accepted the offer and balance, if any,
shall be utilised for investor protection.
Payment to shareholders
1. The company shall immediately after the date of closure of the offer open
a special account with a Bankers to an Issue registered with the Board and
deposit therein, such sum as would, together with the amount lying in the
escrow account make-up the entire sum due and payable as consideration
for buy-back in terms of these regulations and for this purpose, may
transfer the funds from the escrow account.
2. The company shall within seven days of the time specified in sub-
regulation (5) of regulation 9 make payment of consideration in cash to
those shareholders whose offer has been accepted or return the share
certificates to the shareholders.
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Public Announcements
Public announcement is an important communication to the shareholders

detailing out the buy back. Although buy back is approved by special
resolution in the general meeting, it is expected that shareholders are aware
of the buy back proposal of the company through explanatory statement
attached to the notice of the meeting, but there is no requirement to ensure
that the resolution should be informed to the shareholders.
Thus public announcement is the formal communication about the approved

buy back proposal of the company. It has been discussed in Chapter Three
that as per SEBI Regulations a company should not withdraw from buy back
offer once public announcement is made or draft offer letter is filed with the
SEBI.
In case of tender offer, public announcement precedes submission of draft

offer letter to the SEBI. Draft offer letter is required to be submitted within
seven days from date of public announcement. The same course should be
followed in case of buy back of odd lots. In case of buy back through stock
exchange operation, copy of the public announcement is submitted to the
SEBI and it should be made at least seven days prior to the buy back.
The same process is to be followed for buy back through book building
process except that a copy of the public announcement should be submitted
to the SEBI within two days from the date of announcement.
The contents of the public announcement should cover the items mentioned
in Schedule H to the SEBI Buy Back Regulations, 1998. The merchant banker
appointed for buy back is responsible for ensuring that contents of the public
announcement are true, fair and not misleading.
Information content of the public announcement provides advance information

to the shareholders about the buyback. This information is also incorporated
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in the draft offer letter.
Disclosures to be made in the Letter of Offer

The letter of offer shall, inter-alia, contain the following:
1. Details of the offer including the total number and percentage of the total
paid up capital and free reserves proposed to be bought back and price.
2. The proposed time table from opening of the offer till the extinguishment of
the certificate
3. Authority for the offer of buy-back.
4. A full and complete disclosure of all material facts including the contents of
the explanatory statement annexed to the notice for the general meeting at
which the special resolution approving the buy back was passed.
5. The necessity for the buy back.
6. The process to be adopted for the buy back.
7. The minimum and the maximum number of securities that the company
proposes to buy-back, sources of funds from which the buy-back would be
made and the cost of financing the buy-back.
8. Brief information about the company.
9. Audited Financial information for the last 3 years and the company and its
Directors shall ensure that the particulars (audited statement and un-
audited statement) contained therein shall not be more than 6 months old
from the date of the offer document together with financial ratios as may
be specified by the Central Government (as per the amendment effective
from March 2000).
10. Present capital structure (including the number of fully paid and partly paid
securities) and shareholding pattern.
11. The capital structure including details of outstanding convertible
instruments, if any, post buy-back.
12. The aggregate shareholding of the promoter group and of the directors of
the promoters, where the promoter is a company and of persons who are
in control of the company.
13. The aggregate number of equity shares purchased or sold by persons
..22..
mentioned in clause (xii) above during a period of twelve months

preceding the date of the public announcement and from the date of public
announcement to the date of the letter of offer; the maximum and
minimum price at which purchases and sales referred to above were made
alongwith the relevant date.
14. Management discussion and analysis on the likely impact of buy back on
the company's earnings, public holdings, holdings of Non Resident
Indians/Foreign Institutional Investors, etc., promoters holdings and any
change in management structure.
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Extinguishment of Certificate
• The company shall extinguish and physically destroy the share certificates
so bought back in the presence of a Registrar or the Merchant Banker,
and the Statutory Auditor within seven days from the date of acceptance of
the shares.
• The shares offered for buy-back if already dematerialized shall be
extinguished and destroyed in the manner specified under Securities and
Exchange Board of India (Depositories and Participants) Regulations,
1996 and the bye-laws framed there under.
• The company shall furnish a certificate to the Board duly verified by
⇒ The registrar and whenever there is no registrar through the merchant
banker.
⇒ Two whole-time Directors including the Managing Director and,
⇒ The statutory auditor of the company, and certifying compliance as
specified in sub-regulation (1), within seven days of extinguishment
and destruction of the certificates.
• The particulars of the share certificates extinguished and destroyed under
sub-regulation (1) shall be furnished to the stock exchanges where the
shares of the company are listed within seven days of extinguishment and
destruction of the certificates.
• The company shall maintain a record of share certificates which have
been cancelled and destroyed as prescribed in sub-section (9) of section
77A of the Companies Act,
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Leveraged Buy Back
Skewed Equity Structure

An important buy back objective is to swap equity for debt. Initially a company
may opt for high equity structure to avoid financial risk when its capacity
utilization is not very high. The next phase is stabilization phase when it
should try to rationalize its equity structure through proper debt-equity mix.
The debt-equity ratio pattern of many Indian companies is lop-sided. This

situation prevails because of a wrong appreciation about the cost of equity. If
dividend is considered as cost of servicing shareholders' funds, in many cases
equity seems to be cheaper source of finance. In fact this approach turns the
shareholders away from the company.
In India, the debt equity ratio is greater than one for few companies and is
greater than two for even fewer companies. This is mostly guided by the f act
that cost of equity servicing is cheaper to cost of debt.
Why to go for Leveraged Buy back

Many strategists like more debt in the capital structure. There are many
reasons for preferring levered capital structure -
• Debt has tax saving effect whereas in equity servicing distribution tax has
to be paid on dividend payment. If the target is to achieve shareholders'
value added (SVA) replacing equity at its market price by debt does not
matter. It is inappropriate to consider that more money is pumped in to
replace equity. Equity should be looked into always at its market value.
That will facilitate equity servicing. When a company's equity is not even
cheaper taking dividend cost, it is better to replace it using debt. Debt will
bring tax benefit, reduce overall cost of capital and increase economic
value added (EVA) –
• Debt cures reinvestment risk. The management of an equity finance
company is often faced with the reinvestment challenges. They
..25..
desperately search for reinvestment alternatives. The management of

many of the may face a problem of surplus cash. Equity grew over the
years. Where to park the money? Often the money is locked in many
unremunerative projects. For ensuring increase in the share price to give
commensurate return to the shareholders, free cash flow should be
reinvested judiciously. One important advantage of having debt is its
servicing pressure. The level of free cash flow is reduced - repayment of
debt becomes a constraint. The management can source fund for growth
which it has to service at competitive market rate. This keeps the
management alert in the market front.
• Debt creates motivational effect to earn competitive rate of return.
Managing a company with the so-called cheap equity fund may not create
adequate motivational effect to earn better. Compulsion of debt servicing
creates an urge to improve performance and earn better.
• Debt compels spin off. The pressure of debt servicing compels the
management to rethink about the under performing assets. The division
which cannot generate adequate cash flow for debt servicing may not be
liked. Whereas if it was financed by free reserve it might not be so
alarming. Debt stops the management from cross-subsidizing the under
performing units. In the liberalized environment of inter-corporate loans
and investments, the persons in control of the company may attempt to
cross-subsidize the inefficient units, which may eventually prove costly
even for the parent company.
Driving equity out by debt

The traditional attitude of borrowing to finance only new projects or
modemisation or working capital has its limitation. The company should
borrow to its full capacity of borrowing. If the target debt ratio is set befitting
with the debt servicing capacity of the company, it is possible to reduce cost
of capital using cheaper debt. Cash flow generated through, debt if used for
retiring equity, future free cash flow can be used to retire debt at a cheaper
rate. This will improve value of equity of the non-tendering shareholders.
..26..
Conditions for Leveraged Buy Back

Since equity is costlier to debt, the management may think for buy back equity
through issue of debt instrument. What should be the precondition of
leveraged buy back?
− Debt servicing coverage of the company should be good;
− Free cash flow to debt coverage is good;
− Business risk is moderate.
Debt service coverage ratio is given by –

Cash flow available for debt servicing
Debt Installment + Interest
Cash flow available for debt servicing is determined by operating cash flow
net of tax payment plus income from investment and other income included in
the Cash Flow from Investment Activities. Cash flow from operating activities
is determined before charging depreciation and other non-cash expenses and
losses.
A successful leveraged buy back is dependent on many factors
• Pre-buy back market price - If market price of equity share is high,

premium component will be high and dividend-paying equity cannot be
driven out cheaply. A higher premium could reduce EPS.
• Interest rate cut may bring opportunity for cheaper debt financing. Even if
old debt cannot be repaid because of high premium claimed by Financial
Institutions on premature redemption, infusion of new debt would reduce
the cost of capital. Then a company may need to adopt leveraged buy
back for reduction of cost capital for capital restructuring.
• Business risk is stable; acceptance of higher debt ratio should not
increase the total risk to a great extent.
• ESOP - If it becomes necessary to buy shares held by ESOP to provide it
liquidity while discharging liability to a retiring employee in cash rather than
by way of proportionate shares, often the management finds finance
..27..
through borrowing.
• Dividend pay out ratio - When a company has reached a very high level
of dividend pay out ratio, which becomes unsustainable, it can cut the
dividend rate to reduce the market price and then it may adopt leveraged
buy back. A dividend cut will bring down equity cost and in the process of
leveraged buy back it can find a favourable drive out premium. This will
improve value of the non-tendering shareholders.
• Saving in dividend also reduces the cash flow matching problem for debt
servicing effectively.
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Pricing Buy Back
Relevance of pricing
Buy back pricing has many facets depending on the method deployed for buy
back. In tender offer, a company announces fixed price at which shares to be
tendered. There is no choice left to the tendering shareholders. Of course, to
be successful the buy back offer price should be better than the comparative
market price.
What constitutes comparable better price? What maximum price should a

company offer for buy back? In open market operation through stock
exchange operations, a company has to pay market price. But the impact cost
in stock exchange operation may push up the company's cost ending up with
lower buy back quantity.
So stock exchange operation may not necessarily produce finest result. In

book building process the company offers a price cap and the current stock
market price offers the automatic floor. Tendering shareholders have to
choose a price within that range. The company's job is to appreciate the
market price impact of buy back and value impact before putting price cap.
Valuation approaches
Valuation of share is an important aspect of buy back pricing. A company
should have complete knowledge about the intrinsic value or fair value of
share. Intrinsic value of share is the weighted average of –
− Asset backing value;
− Profit Earning, Capacity Value
− Market value.
Weights are chosen in accordance with financial position and profit-ability of

the company.
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Although buy back essentially and implicitly emphasizes on going concerned

basis, so relevance of asset backing value may be questioned. But there are
circumstances when shares of many blue chip companies are traded at less
than their book values. One important objective of back is to pay proper price
to the shareholders in the distressed market. It is not for buying back the
shares cheaply. Rather it offers premium exit route in the distressed market,
which makes stock market attractive.
A company that cares for its shareholders always comes out to protect the
market price. This is one of the purposes of allowing buy back in India. So one
cannot ignore the asset backing value while pricing buy back.
Asset Backing Value

Asset backing value is given by net assets value available to the shareholders
divided by number of shares outstanding:
Net assets available to the equity shareholders

Number of outstanding equity shares
Steps to be followed in determining net assets available to the equity

shareholders are –
• Determination of the, value of the various assets - Tangible fixed assets,
Capital Work in progress, Investments, Current assets, Loans and
Advances, Miscellaneous expenditure and losses which are fictitious
assets should not be counted.
• Valuation of goodwill - It includes valuation of all intangibles like brand,
patent right, franchise, know-how, etc. Whatever the company has spent
on intangibles that has value only if it can generate additional operating
profit.
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For deriving Asset backing value the following steps are followed:
• Current costs of assets are determined.
• Value of goodwill is added to total current cost of tangible assets.
• AU liabilities and provisions are deducted.
• Preference share capital is deducted.
• Adequate provision is made against contingent liabilities and deducted
from current cost of assets.
• Net current cost of assets are worked out which represent current cost of
equity.
• Net current cost of assets is divided by number of outstanding equity
shares.
The business is a going concern in the context of buy back. The following
valuation norm may be followed for valuation of assets
• Fixed assets are valued at lower of the current entry price and current exit
price.
• Capital Work-in-progress are yet mature as revenue generating assets, so
they should be valued at cost.
• Quoted investments are valued at market price.
• Unquoted investments are valued at their asset backing value in case
asset-backing value is not available, book value can be used for this
purpose.
• Current assets are valued at lower of the net realizable value and cost.
For comparing cost and market price of inventories item by item
comparison should be carried as required in Accounting Standard-2.
Similarly, for other items of current assets like debtors, loans and
advances item by item comparison should be made. This will make
automatic provisioning of current assets.
• Miscellaneous expenditure and losses should be excluded.
• All liabilities should be taken at the redemption value.
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Price Earning Capacity Value

PECV is given by the discounted value of profit available to the equity
shareholders. A 1 0 - year time frame may be considered for the future
maintainable profit. Weighted Average Cost of Capital (WACC) of the
company is used as discounting factor. Underlying principle of the PECV is
that Future Maintainable Profit can be earned in the next 10 years. Thereafter
the realisable value of the net asset is taken as cash flow.
Steps to be followed are as follows:

• Find out average maintainable profit. Depreciation is deducted because it
is an item of economic expense.
Find out weighted average cost of capital (WACC)
• Deduct preference dividend including distribution of tax from future
maintainable profit to arrive at profit available to equity shareholders;
Assume that profit for a period of ten years and discount it using WACC;
Find out realizable value fixed assets - this is given by depreciated value
of fixed assets;
Take the realizable value of investments and current assets at par.
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Tax Implications of Buy Back
Buybacks are now imminent, but there seems to be lot of confusion as to the
tax implications and the buyback code and regulations. The ministry of
finance has not yet clarified the position, but the likely tax consequences
could be derived from first principles.
Lets take an example to understand this well

A company XYZ Ltd has an issued share capital of 1,000 shares of Rs 100
each. XYZ Ltd is evaluating a buyback of 100 shares of Rs 150 each, which is
priced at a slight premium to the current market price of Rs 140 per share.
ABC group of shareholders holds all the 1,000 shares.
We assume that XYZ Ltd's company rate of income tax is 35 per cent and the
capital-gains tax rate is 20 per cent.
As to the impact on XYZ Ltd, there are three alternatives - to treat it as a

revenue expense or capital expense or as a distribution. If XYZ Ltd is able to
deduct Rs 15,000 as revenue expense, it saves tax @ 35 per cent of Rs
5,250, thus reducing the effective cost of buyback to Rs 9,250. This would
make a buyback significantly cheaper with an equivalent loss of revenue to
the exchequer.
But this expense though wholly and exclusively for business would not qualify
as "necessarily" for business.
Secondly, in substance, it remains an equity transaction with owners of the

company, for example, the ABC group, and not an expense for conducting the
business of XYZ Ltd.
Alternatively, XYZ Ltd could treat it as capital loss of Rs 50 per share -

purchase price of Rs 150 less Rs 100 face value. XYZ Ltd could then offset
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such losses against other gains. This is far-fetched as XYZ Ltd has not sold
any asset whether fixed or current nor extinguished any liability. Again, it
looks like an equity transaction with the owners, which is distinct from buying
or selling an asset.
The third option is to treat it as a special dividend. This amount of Rs 15,000

represents excess accumulated return on capital over the past year, which
has now been paid out in one installment. XYZ Ltd will then have to pay tax of
10 per cent on Rs 15,000 as it would for any interim or final dividend.
Therefore, XYZ Ltd bears the tax burden for distributing its net assets of Rs
15,000 to its owners ABC. This is the treatment adopted worldwide. Thus the
special dividend treatment reflects the substance of a buyback, which is
distribution of excess profits. The buyback code could then require a transfer
of Rs 15,000 from distributable reserves of XYZ Ltd to undistributable
reserves to protect the creditor's buffer and ensure consistency with dividend
treatment.
As to the impact on XYZ Ltd's shareholders, there are two alternatives. ABC
can treat Rs 15,000as capital receipt or dividend receipt. Under section 2 (47)
(ii) of the Income Tax Act, shares are deemed to have been sold if there has
been a change in shareholders' right to vote or right to receive dividend or
right to receive excess capital on liquidation.
In our example, though ABC now owns only 900 shares, ABC can still
exercise the same proportion of votes, that is, 100 per cent and has the right
to receive 100 per cent of XYZ Ltd's dividend.
Therefore, Rs 15,000 in such circumstances is likely to be treated as dividend

receipt. As dividends are tax-free, the net receipt to ABC is Rs 15,000, which
is only fair if XYZ Ltd has already borne the tax burden. This will be so when
XYZ Ltd treats Rs 15,000 as dividend payment and not as revenue or capital
expense.
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Thus shareholders should also treat most of the buybacks as dividend

receipts, assuming that the company makes a proportionate offer of buyback
to all shareholders in the same class. This would be a legal necessity under
the buyback of preference shares. Say XYZ Ltd wants to buy back all its 100
15 per cent voting preference shares at Rs 150 each (face value of Rs 100).
Here the preference shareholders have lost the right to cast those 100 votes
and the right to receive Rs 15 of annual dividend. Therefore, they will be
deemed to have sold the shares and the net gain of Rs 5,000 will become
taxable (Rs 15,000 proceeds less Rs 10,000 cost). This net gain will be
taxable at the rate of 20 per cent, reducing the net receipt to Rs 14,000. This
capital receipt treatment will be relevant only in such exceptional
circumstances of a buyback.
Thus the accounting principles dictate that companies and shareholders treat
buybacks as a special dividend payment. If buybacks are treated as a
revenue or capital expense, then this would result in significant inconsistency
between Indian business standards and tax practices and those of rest of the
world. More importantly, the revenue or capital treatment would lead to
government tax subsidies on buyback payments made by profitable
companies to their enriched shareholders.
Even capitalist countries like the US and UK do not subsidize such

distributions and, therefore, to subsidize such transactions in a country like
India would lead to a unfair and unjust taxation system. Minority shareholders
also need to be protected and, therefore, the buyback code should
incorporate two safeguards: The buyback offer should be made to all
shareholders and it cannot be priced below the market price.
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General obligations of a company resorting

to Buy Back
The following are the general obligations of company, which has resorted to
buy back:
• Letter of offer, public information and other publicity material should
contain true and factual information. There should not be any misleading
information.
• Company should not issue any shares including bonus shares till the
closure of the offer. It may be mentioned that a company will not be
entitled to issue shares on closure of the offer excepting issue of bonus
shares, in discharge of subsisting conversion liability, sweat equity and
issue of shares to ESOP.
• The prohibition period should be earlier of the specified date or public
announcement. This is because although special resolution is passed, a
company may eventually put off the buy back decision.
• Buy back consideration should be discharged only by way of cash.
• No withdrawal from the buy back is allowed after the draft letter of offer is
filed with the SEBI or public announcement is made. This is to prevent
creating market confusion through futile buy back offer.
• The promoters or persons in control of the company should not deal in
shares of the company in the stock exchange during the buy back offer
period. The promoters and persons having controlling interest cannot
participate in the buy back through stock exchange operation.
However, they are allowed to participate in tender offer or buy back
through book building. This is targeted to prevent the possibility of insider
trading. However, this may not be able to prevent any attempt to pull
down the price by creating selling pressure during the book building
process.
• Public announcement for buy back cannot be made during the pendency
of any scheme of amalgamation or compromise or arrangement. No
purpose can be served by this restriction, in normal Course; a company
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has been prevented during the period of offer and during cooling period to
issue shares. So if buyback starts the company will not be in a position to
discharge equity swapped amalgamation.
• As a means of investors' protection Regulation 19(3) requires nomination
of a Compliance officer by the company who will ensure compliance with
the legal aspects of the buy back. This could be the responsibility of the
merchant banker.
• Buy back of shares which are in the lock-in period is not allowed till the
pendency of lock-in period and until the shares become transferable.
Publication of buy back information

The company is required to make public announcement by way of
advertisement in a national daily within two days from the date of completion
of the buyback inter alia disclosing:
− Number of shares bought back;
− Price at which shares are bought back;
− Total amount invested in the buy back;
− Details of the shareholders from whom more than 1% of the shares are
bought back;
− Consequential changes in the capital structure and shareholding
pattern before and after buy back.
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Buyback in India
Buyback is essentially meant to be a financial tool in the hands of the

corporate to acquire the required flexibility in their capital structure & financial
position, keeping in view the needs of the business as well as a tool to defend
the co. from takeovers.
Internationally, it has been observed that companies have opted for Buyback
in times when they believed that shares were undervalued in the market or
when they had surplus cash in their treasury. E.g. In 1997, Coca-Cola opted
for Buyback of 8.3% of their equity that raised the price of the scrip by a
whopping 42% in the NYSE. Major global companies that have opted for
buyback in the last couple of years include IBM, HP, Washington Post, Nestle,
etc.
In India the Buyback clause comes with certain clauses

The main objective of these clauses is to prevent Promoters from malpractice.
For example with Buyback a company might be able to improve its EPS &
improve the Market value of the scrip (assuming at constant P/E) & thereafter
come up with an IPO at a higher premium to shore up the Share Premium
Account.
Or that a promoter might be able to corner a substantial number of shares

through open market purchases (not triggering the Takeover code, however)
& force the company to buy back these shares at a higher price, making a
clean profit in the process.
..38..
Only multinational companies, which are keen to hike their stakes in

Indian ventures and promoters with low equity holding will seriously
think about buyback (as promoters are not allowed to participate in
buyback, their stake will increase once the company buys back shares
from other shareholders).
In India though many specified group companies qualify for Buyback, at

current prices, not many of them will be able to utilize their cash flow to buy
back their shares, as it will directly affect their cash requirements for normal
operations. Cash rich companies like Reliance Industries, Bajaj Auto, TISCO,
TELCO, HLL, etc. will have to shell out huge amounts to buy back even a
fraction of their Equity at prevailing prices, which are obviously higher than the
BV of the shares.
The other problem is that most of the Indian companies have a Debt-Equity
ratio greater than one. Buyback would definitely increase this ratio & reduce
the leveraging capacity of the company. This is specially applicable to
companies having a high proportion of fixed assets, like TISCO & TELCO.
Coupled with the fact that the company will not be able to issue new shares
for at least one year, this implies that the company will not be able to go in for
any expansion for the next one year or so, this would be definitely a big
dampener to the whole concept of Buyback.
It has been argued that in India Buyback will be used predominantly to ward-
away hostile takeover bids. However the utility of Buyback as a tool of
defense In India is questionable under the existing regulations. For example in
the US, companies are allowed to borrow to buy back their shares in case of a
takeover bid.
However in India a company is not allowed to undertake fresh borrowings for

the purpose of Buyback. This means that weaker companies which are
inevitably takeover targets cannot resort to Buyback as a defense
mechanism.
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The lacunae in the buyback guidelines need to be addressed like the

applicability of SEBI’s takeover code. A company buying back to a certain
percentage, will it necessarily have to comply with the SEBI Takeover Code
regulations. For, on dilution, the proportion of shares held by the promoters
would increase and set off a trigger under Regulation 10 of the SEBI
Takeover Code.
Further, the takeover code gets triggered when shares beyond a specified
threshold limit are acquired. This entitles the acquirer to exercise a certain
percentage of voting power. In case of buybacks, there is no increased
entitlement to voting rights. For, under Section 77 A (7) of the Companies Act,
1956, a company buying back its shares is not entitled to hold the same but
has to statutorily cancel them. Hence, a share buyback may not entail
triggering of the takeover code. Also as per the provisions of the Indian Stamp
Act 1899, share transfers attract stamp duty and require the company to
register the shares bought back in its name. In case of buybacks, these
shares have to be statutorily extinguished. Hence, they do not get registered
in the acquirer’s name. The names of the shareholders have to be struck off
from the register of members too. Hence stamp duty would not become
payable in a share buyback.
Further, in the case of foreign JV, where the government has permitted a fixed
ratio of investment, the Indian company has to maintain the same percentage
in case of a buyback. Recently, there have been reports that the government
is proposing to exempt multinational joint ventures from extinguishing shares
bought back, provided the foreign equity holding in the company is equal to
sectoral caps post-buyback. This has not been brought into effect as yet.
Given these pitfalls, Buyback as a concept & as a tool cannot make much
headway into the Indian corporate financial handbook. There have to be
modifications in the existing legal framework to make this concept work in
India.
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Buy Back of PSU's Shares
The Central Government is reportedly planning to adopt buy back route for
mopping up Rs. 10,000 crore. Reportedly buy back route may be adopted by
big PSUs including Indian Oil Corporation, Bharat Heavy Electricals Ltd., Oil
and Natural Gas Corporation, Bharat Petroleum Corporation Ltd., Gas
Authority of India Ltd. and NALCO.
In view of the prolonged bearish spell in the capital market the Central
Government has failed to achieve targeted disinvestments in the PSU shares.
Buy back route seems to be better than disinvestments because in this the
Central Government can fix the price as per prudential valuation. Reportedly
the core group of secretaries has identified four cash rich oil PSUs, namely,
IOC, BPCL, ONGC and GAIL, for the first trench of buy back. The PSUs have
huge accumulated reserves to satisfy the upper ceiling of buy back. A few
other cash rich PSUs, namely, BHEL and NALCO, might be considered as a
buy back candidate in the second trench.
Under the buy back route the PSUs may launch buy back applying book
building process. In case the quote of the Central Government is lowest it
may be able to sell the desired shares, which it targeted in the disinvestments
route. However, in the buy back route the PSUs have to buy back shares of
ordinary shareholders also on the basis of competitive quote.
In case tender offer route is opted for fixing up a fixed price, the likelihood of
other shareholders participating in the buy back cannot be eliminated.
Reportedly, the buy back may be financed by the financial institutions. This
means IOC, ONGC, BHEL, etc. should swap equity for debt.
Reportedly, the basic telecom service provides MTNL plans to buy back its
share. Present Government holding in MTNL 57.16% is expected to come
down to 54.94 % because of the proposed issue of equity shares to the
..41..
employees to the extent of 2.22%. So to maintain Government holding at

51%, the MTNL can buy back about 16.75% of its present equity share
capital.
Buybacks done by companies
Foreign companies
(Rs. Crores)
Company Buy Back Month Amount
Spent
Reckitt Benckiser March 2002 400.0
Cadbury India Ltd. January 2002 874.9
CG Glass Ltd. (Philips) September 2001 13.1
Otis Elevator Co. (I) Ltd. July 2001 109.2
Carrier Aircon Ltd. July 2001 114.8
International Best Foods (HLL) November 2000 24.9
Philips India Ltd. November 2000 234.3
Detergents India Ltd. (Henkel) December 1999 1.1
Indian Companies
Company Buy Back Total No. Buy Back

Date of Shares Price
Exide Indutries 7-Jan-02 263,586 70
Bombay Dyeing 20-Aug-02 1,826,954 60
Balarampur Chinni Mills Ltd. 21-Jan-02 NA 100
Hindalco 30-Jan-02 5,807 826
Reliance Industries Ltd. 31-Jul-01 NA 303
Jayshree Tea & Industries Ltd. 24-May-01 402,034 75
John Fowler 25-Nov-01 129,990 62.5
GE Shipping 23-Aug-01 13,336,499 42
Kesoram Industries 9-Oct-01 4,590,635 40
Bhagyanagar Metals Ltd. 1-Oct-01 349,089 65
Godrej Consumer Products Ltd. 21-Jan-02 748,482 4
Blue Star Ltd. 15-Feb-02 625,105 75
Heritage Foods 24-Jan-02 66,701 30
Siemens 25-Jun-01 2,355,794 250
Finolex Industries 26-Apr-01 19,992,840 40
..42..
Recommendations & Findings
What should you look at before participating in buybacks?
Ever since the buyback of shares was allowed in India, there has been a lot of
confusion among shareholders; as whether to sell-off their stake in the
company or to retain it. To opt for a particular option is not as easy as it
appears. The perception of the shareholders about the future of the company
is the most important factor that influences their decision.
However, that decision may not be accurate since they might not have
complete access to the internal and external strategies of the company. A lot
of careful thought has to be given before a final decision is taken. Here’s a
way on how to go about it.
9 Debt-equity ratio is an important criterion. The companies having high

debt burden are unlikely to have free cash. They should prefer
redeeming their debt first, to buying back equity. MNCs having
subsidiaries in India are unlikely to have any motive of rigging up the
share price and their buyback offer is likely to be genuine.
9 Track record of raising capital in the past. Companies that have

frequented the capital markets to raise money are unlikely to be good
candidates for buyback.
9 Look at ROCE/RONW - The companies with consistently high

ROCE/RONW are more likely to have free cash than others.
9 Checkout the previous price pattern of the share Companies

generally tend to buyback shares at a higher premium over the market
price if they feel that their shares are under-priced. This decision to
buyback often leads to an increase in share price. At this stage, you
have to analyse the fluctuation in the price of the scrip for a specific
..43..
time period (say one year) and if you find that the scrip moved a band
lower than the offer price, selling of the scrip would be a better option.
9 Take note of Irrationality A buyback offer with a huge premium may

appear very attractive. Investigate and ensure that any temporary
negatives do not affect the share price. If you feel that the share prices
of the company are presently undervalued, refrain from selling, since a
company buying back its shares is indirectly conveying that its shares
are undervalued.
9 Take a long-term perspective It would be difficult to envisage whether

a company would issue bonus or split shares or make an acquisition.
But these factors can be sidelined if the fundamentals of the company
are strong and you expect the company to perform well in the future.
Therefore, in the long-term perspective, the scripts of such companies
should not be sold.
9 Dispose off volatile shares Despite strong fundamentals, the shares

of a few companies are highly volatile and exhibit wild oscillation in
prices. If you want to play it safe and avoid volatility, selling out would
be a better option.
9 Selling off for profit The first question that comes to mind once you
decide to sell your scrip is whether to opt for a buyback or to sell it in
the market. Even after buyback is announced, the purchase price need
not necessarily be the highest if a price band is given. Further, there is
no guarantee that all the shares offered for buyback would be bought.
Companies mostly buy about 10% of the equity in buybacks. In such
cases it would be wiser to sell your stake in the market at a time when
prices of your scrip are trading at a price equivalent to the highest in
the offer band.
Finally, one should keep one thing in mind, that buyback has no impact on the
fundamentals of the company or on the economy. The only thing is that one
..44..
should be cautious of unscrupulous promoters' traps and do not fall prey to

them.
The provision to allow buyback can be a booty for long-term investors who
want to stick on in good companies, but it can be a terrible bait in many
others.
Caution is advised in the following types of companies:

• Where the management talks about buyback, as market has not valued
their shares fully. To my mind, a good management will never bother
about its share price and valuation as done by the market. It would
know that if it continues to perform well, the market has to take notice
in the long term.
• Where the management has passed, with a lot of publicity, special

resolutions empowering the Board to buy back whenever allowed.
Anybody with the genuine intention of buying back to enhance
shareholders' wealth would try to do so with minimum publicity so that
the share price does not flare up.
To sell or not to sell!

When confronted with a buyback offer, one shouldn’t just be guided by the
offer price in relation to the prevailing market price. Yes, if you were looking to
exit the stock anyway, that’s perhaps all you need to look at. However, if you
are a medium to long - term investor in the company, you also need to weigh
the implications of the buyback on the company and its stock – and, therefore,
your investment.
..45..
Earnings per share (EPS)

Post-buyback, the EPS of a company is bound to increase due to a reduction
in equity. However, going forward, the EPS could fall if the performance of the
company deteriorates, or if the funds used for the buyback earned significant
additional income for the company.
Hence, future prospects of the company ought to be your biggest

consideration while evaluating its buyback offer. If the company is expected to
record healthy growth, it pays to stay invested in it. However, if it is expected
to founder, exiting might be a better option. This fact is borne out by the
contrasting post-buyback numbers of two companies that have bought back
stock in recent times, Bajaj Auto and GE Shipping.
Adjusted for the buyback, Bajaj Auto’s EPS increased from Rs 51.4 to Rs
60.7. However, soon after, for the financial year ended March 2001, its EPS
fell to Rs 25.9 due to a decline in two-wheeler sales from 1.43 million units to
1.2 million units.
Book value
This is the per-share value of the company’s assets as valued in its books.
Other things remaining constant, you stand to gain by exiting if the buyback
price paid by the company is above its book value. However, if the price paid
by the company to buy back its stock is less than its book value, you gain by
staying on.
Bajaj Auto made its tender offer at Rs 400 per share, a premium of almost 50
per cent to its pre-buyback book value of Rs 268 per share. As a result, post-
buyback, the company’s book value dropped 3 per cent to Rs 260 per share.
Since the premium came from its existing reserves, residual shareholders
actually ended up sharing the cost of the premium paid.
..46..
Return on Equity (RoE)

Post-buyback, the net worth the company must service decreases. Even if the
company does not expand its bottom line considerably, this would result in an
improved RoE for residual shareholders.
But an increase in RoE that results from a reduction in the net worth, as
opposed to an increase in earnings, may just end up being a one-time
improvement. Hence, look at the company’s track record on RoE and also
assess its future earnings potential before choosing to stay on as a residual
shareholder in it.
Promoter’s stake
A buyback increases the promoter’s stake in his company. When a buyback is
announced, look at the stake of the promoter and his associates in the
company, before and after the buyback (assuming the offer is fully
subscribed).
Cash-rich companies where the promoters have a low holding and are keen
to increase their stake could well make further buyback offers at a later date–
often, at a higher price. There are many old economy companies that fit this
profile. A good example is GE Shipping. In January 2001, the company
announced a Rs 150 crore buyback from the market at a maximum price of
Rs 42 per share. It completed the buyback at an average price of Rs 35 per
share, and the Sheths hiked their stake from 17 per cent to 21 per cent. GE
Shipping is currently in the midst of its second buyback exercise. It has
earmarked Rs 100 crore to buy back equity at a maximum price of Rs 42 per
share. At that price, the Sheths’ holding in the company will rise to 25.8 per
cent.
However, given the weak stock market and the recent downturn in the
shipping industry, the stock is languishing near Rs 23, and the company might
well complete the buyback paying less than Rs 100 crore. In better times,
..47..
though, the same buyback could have been closer to the offer price.
However, when a company makes a buyback with the prime intention to

increase its promoters’ stake, it’s dipping into its net worth without necessarily
meaning to increase shareholder wealth. Therefore, you need to evaluate the
impact the outflow of funds would have on the company’s operations and
whether this could be detrimental to future growth.
Price and liquidity

A buyback rouses interest in a scrip. When done through open market
purchases, it creates a cap or floor for the stock. In a bullish market, the
buyback price creates a floor for the scrip in the secondary market. When
Reliance offered to buy back its shares in June 2000 at Rs 303 per share, this
effectively became the floor price for the stock. The stock traded below that
level for just 11 days over the next 264 trading days, as market players
anticipated that Reliance would step in and make purchases if it dipped below
Rs 303.
In a bearish market, though, this is reversed–the maximum buyback price

becomes a ceiling price for the scrip. Reliance never did pick any stock till
June 2001 (when the initial buyback approval lapsed). It took fresh approval,
on the same terms. Post-September 11, the scrip hasn’t breached Rs 303. In
this bearish market, investors are not inclined to pay more than what the
management perceives to be a fair value for the stock.
A buyback has greater implications for investors in illiquid stocks, as it offers

them a much-needed exit route. However, post-buyback, liquidity in such
stocks is likely to decline further due to a drop in their free float. It’s not a good
idea to hold an illiquid stock–low liquidity results in poor price determination.
In extreme cases, where a promoter’s holding crosses 90 per cent, the
company has to delist. So, always keep in mind the promoter’s stake and the
stock’s free float in the market.
..48..
Pitfalls
Share buybacks, if handled badly or in an imprudent manner can exacerbate

a sinister situation. The recent spates of buybacks at a torrid pace are leading
to a flight of capital from the stock markets. Buybacks coupled with mergers
and acquisitions are gnawing at the free float available to the investors.
The utilization of a company’s cash reserve to fund it’s re purchase plans, if

viewed in entirety also leads to reduced ploughing back of funds for fuelling
operations and a higher debt perspective on the balance sheet.
Many companies have in fact initiated borrowing to finance their buyback

programs. This might bestow upon the company various tax advantages but
at the same time it amounts to replacing equity with debt.
Dividend yield may eventually lose importance as more and more companies
substitute their dividend plans with buyback plans. The company gets highly
leveraged and changes the shareholders perception of the company from
being an income stock to a growth stock.
..49..
Berger Paints
Introduction
The Company was incorporated on 17 December, 1923, in the state of West

Bengal as Hadfields (India) Limited. The name of the Company was changed
to British Paints (India) Ltd. on acquisition of the Company by British Paints
(Holdings), U.K in 1947. The foreign shareholding in the Company changed
hands and finally rested with Berger Jenson Nicholson Limited, U.K. In 1976,
the foreign shareholding in the Company was diluted to below 40% by sale of
a portion of the shares to the UB Group. On and from 31 December, 1983 the
name of the Company was changed to Berger Paints India Limited. In 1991,
the stake of the UB Group in the Company was purchased by the present
promoters. The promoters, viz. Shri K S Dhingra, Shri G S Dhingra , their
relatives and companies controlled by them, currently hold 73.53% of the
paid-up capital of the Company.
The Company is an existing profit making company having an uninterrupted

dividend record since 1981. The Company is presently engaged in the
manufacture and sale of paints, varnishes and enamels and powder coatings.
The erstwhile Rajdoot Paints Limited was merged with the Company effective
1 October, 1998 and the erstwhile Berger Auto & Industrial Coatings Limited
was merged with the Company effective 1 April, 2004. The Company has an
extensive distribution network consisting of depots located all over the country
and over 10000 dealers.
The Company also supplies a wide range of products to both the industrial
and the architectural segments. The Company has a number of technology
tie-ups for various high technology paint ranges.
..50..
The brief audited financial information of the Company for the last three
financial years and unaudited financial information of the Company for the
nine months ended 31 December, 2004 are given below:
(Rs. In Lakhs)
Particulars Year Year Year Nine
ended ended ended Months
31/03/2002 31/03/2003 31/03/2004 ended
(audited) (audited) (audited) 31/12/2004
(un-
audited)
Gross Turnover 60165 66842 77030 69994
Net Turnover 52912 58643 67582 61006
Total Income 53221 58900 68100 61287
Profit before Interest, Depreciation,

5429 6225 7280 6507
Exceptional Item and Tax
Profit After Tax 3139 3342 4403 3648
Equity Dividend 1329 1594 2126
Paid-up Equity Share Capital 2657 2657 2657 3986
Reserves & Surplus 12600 14129 16120
Networth 14971 16499 18534
Key Ratios
Earning Per Share (EPS) Rs. 1.58 1.68 2.21 1.83
Book Value Per Share (Rs.) 7.51 8.28 9.30
Debt/Equity Ratio 0.50:1 0.23:1 0.21:1
RONW (%) 20.97 20.26 23.76
..51..
Necessity for Buy Back
The Company has substantial reserves deployed in various assets and it is

expected to keep generating sufficient cash flows to meet the requirements of
present business while assuring adequate return to its stakeholders.
Accordingly, an offer for buy-back of shares, which will provide an exit
opportunity to those shareholders who so desire, in a manner that does not
substantially impact the market price of the Company’s shares, has been
made. This is expected to enhance the Earning Per Share (EPS) of the
Company in future and create long-term share value.
Disclosures Contained in the public notice issued after the Board

Meeting held on 29 April, 2005
1. The Board of Directors of Berger Paints India Limited at its meeting held
on 29 April, 2005 approved the proposal for buy-back of the Company’s
own fully equity shares of Rs. 2/- each in accordance with the provisions
contained in the Articles of Association of the Company, Sections 77A,
77B and other applicable provisions of the Companies Act, 1956 and the
provisions contained in the Buy-Back Regulations.
2. The Board had proposed the buy-back to the extent of or less than 10% of
the paid up equity capital and free reserves of the Company which shall,
however, not exceed 25% of the paid up equity capital of the Company, at
a price not exceeding Rs. 60/- per equity share and the total amount of
consideration not exceeding Rs. 1859 lakhs.
3. The Article 3A of the Articles of Association of the Company permits the
Company to buy-back its own shares.
4. An offer for buy-back of shares, which will provide an exit opportunity to
those shareholders who so desire, in a manner that does not substantially
impact the market price of the Company’s shares, has been made. This
will enhance the Earning Per Share (EPS) of the Company in future and
create long term share value.
5. The buy-back was proposed to be implemented by the Company by way
of open market purchases through the National Stock Exchange of India
..52..
Limited (NSE). The Company had not buy-back its equity shares from any
person through negotiated deals whether on or off the Stock Exchange(s)
or through spot transactions or through any private arrangement in the
implementation of the buyback.
6. The maximum amount required by the Company for the said buy-back
aggregating Rs. 1859 lakhs was met out of the free reserves and/or the
share premium account of the Company.
7. The maximum offer price was arrived after taking into consideration
various factors including,, Earning Per Share in the last three years,
Industry average price earning ratio, book value, average of share prices
in the preceding weeks and other relevant factors. The maximum buy-back
price as proposed above will not impair the growth of the Company and
also contribute to the overall enhancement of shareholder value.
8. The number of equity shares bought back would depend upon the average
price paid for the equity shares bought back and the aggregate
consideration paid for such equity shares bought back. As an illustration,
at the proposed maximum offer price of Rs. 60/- per equity share and for
an aggregate consideration amount of Rs.1859 lakhs, the maximum
number of equity shares that can be bought back would be 3098333 equity
shares aggregating approximately 1.56% of the total paid up equity shares
as on 29 April 2005.
9. The aggregate shareholding of the promoters as on 29 April 2005 is
146543273 equity shares constituting 73.53 % of the listed share capital of
the Company.
10. The promoters of the Company have neither purchased nor sold any
shares during the period of six months preceding 29 April, 2005 being the
date of the Board Meeting at which the buy-back was approved except the
following:
9 Share purchased - 1009924 equity shares including inter se
transactions among promoters. The maximum purchase price was Rs.
37.00 on 2 February, 2005 and the minimum purchase price was Rs.
30.75 on 9 November, 2004
9 Shares Sold - 89620 equity shares representing inter se sale among
promoters only. The sale price was Rs. 37.00 on 2 February, 2005.
..53..
11. The debt equity ratio of the Company after the buy-back was within the
limit of 2:1 as prescribed under the Companies Act, 1956.
Present Capital Structure and Shareholding Pattern

The Share Capital of the Company as on 29 April, is as follows:
CAPITAL Equity Share Capital Rs. ‘000

Authorized:
200,000,000 Equity Shares of Rs 2/- each 400,000
Issued:
199,345,230 Equity Shares of Rs. 2/- each 398,690
Subscribed:
199,293,990 Equity Shares of Rs. 2/- each 398,588
Fully paid-up
Less: Calls unpaid 27
398,561
..54..
The present shareholding pattern of the Company at opening of business

hours on 2 May, 2005 is as shown below:
Particulars No. of equity % of No. of % holding
shares existing shares post buy-
Equity post buyback
Capital back
Promoters and/or 146543273 73.53 146543273 74.69
persons who are in
control and/or
Persons acting in
concert with them
Institutional 14489925 7.27 14489925 7.39
Investors (Banks,
Mutual Funds, FIs,
FIIs)
Others (Private 38260792 19.20 35162459 17.92
Corporate Bodies,
Indian Public,
NRIs/OCBs)
Total 199293990 100 196195657 100
..55..
Process & methodology adopted for Buy Back
a. The buy-back was open to all equity shareholders of the Company both
registered and unregistered holding shares either in physical and / or
electronic form, except promoters.
b. As per the Buy-Back Regulations, a company intending to purchase its

shares from the open market, shall do so only on the Stock Exchange(s)
having nationwide trading terminals. Accordingly, the buy-back was
implemented by the Company by way of open market purchases through
NSE using its nationwide electronic trading terminals.
c. For the aforesaid buy-back of equity shares, the Company has appointed
the following registered broker (“Broker to the Offer”) through whom the
purchases and settlement on account of buy-back would be made
ARK Securities Private Limited

73, Khan Market, Ist Floor,
New Delhi – 110 003
..56..
Impact of the Buy Back on the Company
The buy-back had caused any material impact on the profitability of the
Company. The buy-back had not impaired the growth of the Company and
also contributes to the overall enhancement of shareholder value.
The Company is capable of generating sufficient cash flows to meet the

requirements of the present business as well as assuring adequate return to
its stakeholders. The Company may also continue to avail financial assistance
from banks/financial institutions for meeting its business requirements.
Pursuant to Regulation 15(b) of the Buy-Back Regulations, the promoters and

persons in control are not entitled to offer equity shares held by them under
the buy-back. Post buy-back, the holding of the promoters and persons in
control would be 74.69% of the total equity capital assuming that the entire
amount of Rs. 1859 lakhs is utilized for the buy-back and the equity shares
are bought back at the maximum price of Rs. 60/- per share. The buy-back
had not affected the existing management structure.
Post buy-back, the debt equity ratio of the Company will be within the limit of
2:1 as prescribed under the Companies Act.
..57..
The Bottomline
Buybacks should be used as an opportunity to exit only when there is

concern over a company’s prospects or when the post-buyback free
float is expected to shrink considerably. In most other cases, buybacks
do offer the lure of an immediate benefit–but you might be better off as
a residual shareholder, and gain from a hike in the share of assets and
profits of the business.
While scrutinizing a buyback offer, attention must be paid to the size of the
buyback relative to the company’s free float and with the newly granted stock
options. The buyback announcements are a mere statement of the company’s
intentions and need not necessarily be effected in actuality. However, if the
announcement is backed by a tender offer, the possibility of the fulfillment of
buyback promise does exist.
Will Buybacks Backfire??

Finance theory suggests three main motives for a firm to use a share
buyback:
• Tax motives
• A signaling motive or
• A takeover deterrent motive.
It is through these lenses that the framing of buyback norms should be

viewed. There has been some theoretical research on the use of share
repurchases as a signaling device. Some of the conclusions worth restating
are:
• The offer premium, the target percentage of shares sought and the
percentage of insider holdings have been perceived as signal devices –
the higher each of these parameters, the more positive is the signal
..58..
• When there is a small disparity between intrinsic worth of a firm and its
market price, dividends are the preferred distribution mechanism. If the
price disparity is large, a smaller cash outlay on share buyback can
convey the same information as a relatively larger dividend
• Information asymmetry between managers, investors with larger holdings
and small investors means that the smallest distributions should be paid
with dividends, larger distributions should take the form of open market
repurchases and tender offers should be used for the largest distributions.
The yardstick for deciding the size of a signaling buyback is its materiality
level, a number that measures how much impact the buyback will have on the
wealth of shareholders who keep their shares. The materiality level for any
given number of shares the company may buyback depends on the degree to
which the market undervalues the company. But all too many companies
routinely underestimate how many shares they need to buy to send a credible
signal to the markets. While buybacks are typically sized in the 5-10 percent
range, they typically need to be closer to 20 percent to have a material signal.
Buybacks are a more tax efficient form of cash distribution to the firm than
dividends (the firm saves on dividend tax). Furthermore, they create value
through changes in capital structure (the tax shield of debt increases firm
value). However, there are some concerns that need to be addressed in the
currently uncertain economic climate in India. Taxable income in India can be
highly cyclical if the economy continues to nosedive.
Given the current short cooling off period (period in which no fresh issue of
shares is permitted after the buyback) of 6 months, will the change in capital
structure be perceived by the market to be permanent? In the absence of
clear answers, a case for increased valuation due to changes in capital
structure on account of buybacks remain tenuous.
It is suggested that managers repurchase shares to prevent takeovers, but

only if the cost of doing so is not too high. The recent success of attempts at
..59..
"greenmail" in India and UTI’s disastrous finances and attempts to increase

value of under performers in its portfolio through change in management is
causing many mid-cap companies to consider buybacks. It is also causing
many multinational subsidiaries to indirectly increase their parent companies
stakes using corporate cash with an eventual objective to delist.
This is probably not in the interest of financial institutions like UTI. Delisting by
multinationals is not in the interest of India’s capital markets. Thus one can
say that buybacks increasingly look less of a boon.
Some of the leading merchant bankers have prepared lists of potential

companies with good reserves, but inquiries reveal that only less than a
dozen of out of 300 companies will really pursue the buyback move in
right earnest.
..60..
Bibliography
Websites:
• www.blonnet.com
• www.vckgroup.com
• www.advanishares.com
• www.indiainfoline.com
• www.rediff.com
• www.indiaheadlines.com
• www.indiainfo.com
Newspapers:
• The Times of India
• Business Standard
• Financial Express
• Business Line
Books:
• Buyback of Shares – Ghosh
• Inter – CA module II
• Financial Management- Prasanna Chandra
• Financial Management- Khan & Jain

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A PROJECT REPORT ON

BUY BACK OF SHARES

I, Mrs. Shalini Hemant, hereby certify that Mr. Aditya Bagarka of

Tolani College of Commerce, T.Y. B.M.S. (Semester V) has

completed his project titled BUY BACK OF SHARES in the

academic year 2005-2006. The information submitted herein is

true and original to the best of my knowledge.

Mrs. Shalini Hemant Dr. A. A. Rashid Dr. Sheela Purohit

I, Aditya Bagarka, of Tolani College of Commerce, T.Y. B.M.S.

(Semester V) hereby declare that I have completed my project

titled BUY BACK OF SHARES in the academic year 2005-2006.

The information submitted herein is true and original to the best of

Place: MUMBAI Aditya Bagarka

I sincerely hope that the project lives up to your expectations.

1. To analyse the process of buy back and motives behind

2. To analyse impact of buyback

3. To find out the sources and ways of buyback

4. To analyse the obligations of company resorting to

5. To analyse the pitfalls in buyback

6. To analyse the buyback modus-operandi in India with

Sr. No. Topic Page No.

2. Buy Back of Shares 3–5

8. Leveraged Buy Back 25 – 28

9. Pricing Buy Back 29 – 32

10. Tax Implications 33 – 35

11. General Obligations 36 – 37

12. Buy Back in India 38 – 42

13. Recommendations & Findings 43 – 48

15. Case : Berger Paints 50 – 57

16. The Bottomline 58 – 60

Introduction – The Indian Capital Market

Financial restructuring involves either internal or external restructuring (i.e.

Section 100-105 of The Company's Act 1956 governs the internal

expansion and an inherent ability to outsource and avail economic costs of

Why then did they still go in for an Indian listing?

Buy Back of Shares

Buy back of equity shares is a capital restructuring process. It is a financial

So far it was possible to refund shareholders' money through capital reduction

Buy back is a financial strategy - it should be used accordingly. It is not for

Creating shareholders' value should be the primary objective of corporate

would help to reduce overall cost of capital.

Prior to introduction of flexible buy back facility; once a particular equity

Restrictions that have been lifted

Section 77(2) of the Companies Act, 1956 disallowed a public company or a

However, redemption of redeemable preference shares under Section 80 of

Disadvantage of the capital reduction route

However, it is not an easy route. It requires an order of court, which in turn

preference share capital.

What’s in it for the shareholders?

What’s in it for the company?

Stock Price = EPS * PE

The successful implementation of buyback depends upon two critical factors

Secondly, the impact of buyback on the company's average cost of capital.

Sources of Buy Back

Securities Premium Account

Proceeds of an earlier issue

That apart, buy back of shares is allowed utilizing proceeds of an earlier

Buy Back sourcing caution

• If trade investments are proposed to be sold, what is the possible adverse

Negotiated deals although mean purchase of shares at negotiated price

Insider trading in buyback, prohibited - Regulation 4(3) prohibits any person or

A company may buyback its shares by any one of the following

BUY-BACK FROM THE OPEN MARKET

Through stock exchange