BUYBACK OF SHARES

Prepared by: Mandar Dhavle PG10043 Nayan Chhatbar PG10050 Pallavi Talathi PG10058 Piyush Shroff PG10060

Flow of presentation
Meaning History of buyback of shares Objectives Advantages Resources General procedure Obligations Accounting entries Methods Effects of buyback of shares Disadvantages Case study

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What is Buyback of shares?

The buyback of shares is the repurchase of its own shares by company It is the reverse of raising capital. Company (amendment) 1999, a company in India can now buyback its own shares

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Buyback of shares

Buyback is only allowed for reduction in share capital Cash outflow Different from redemption of share capital Different from delisting of shares
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History of buyback of shares in India

Prior to 98, Section 77 (1) of the Companies Act in India had strictly prohibited companies from buying back own shares.

Ordinance by Government of India (GOI) on October 31, 1998. Insertions of sections 77A,77AA,77B

Governed by the SEBI (Buy Back of Securities

Regulation), 1998, and SAST (Substantial Acquisition of Shares and Takeover Regulations,

1997), and the amended Companies Act 1956

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Provision relating to buyback

The provisions relating to buyback as per the Companies Amendment Act 1999 are as follows:

Sec 77A: Power of a company to purchase its own securities. Sec77B: Prohibition for buyback in certain circumstances.

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Prohibition of buyback

Through any subsidiary company. Through any investment company or group of investment companies. Company is in default in repayment of deposit or interest, or redemption of debenture or preference shares or Company is in default in payment of dividend or repayment of any term loan including interest to banks and FIs

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Objectives

To Increase promoter's stake Increase earning per share Rationalize the capital structure To prevent take over bid

Exit option
Unused cash
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Advantages

Tax Gains Higher share price

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Section 77 A
Resources
Free reserves
Securities premium account Proceeds of an earlier issue of shares or specified securities.

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Section 77A Contd

No company shall purchase its own shares or other specified securities unless(a) the buy-back is authorized by its AOA;

(b) a special resolution (10% - 25%); (c) the buy-back amount must be less than twentyfive per cent of the total paid-up capital and free reserves of the company.

Section 77A Contd

Further buyback after 365 days from the date of preceding offer of buyback D/E ratio should not be greater than 2:1 post buyback Shares are fully paid-up Procedure need to complete within 12 months of passing the special resolution
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Section 77A Contd

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Explanatory statement Full & complete disclosure of all material facts Necessity of buyback Class of security to be purchased Amount to be invested under d scheme Time limit for completion Method selected Extinguish & physically destroy within 7 days of last date of completion of bb Record of securities bought back Information to SEBI within 30 days of completion of buyback
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General procedure for buyback

Special Resolution The Explanatory Statement Appointment of Merchant Bankers Public announcement specifying the record date Compliance officer and an investor service center Filing of the offer document Fixing of prices

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Contents of Special Resolution

Date of Board meeting Rationale / Necessity Selected method Maximum amount Sources of funds to finance buy-back Auditors report about companys state of affairs Permissible capital for buy-back

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Public Announcement
English national daily Hindi national daily Regional language daily where reg.office is situated

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Letter of Offer
Letter of Offer shall contain the following:. Details of the offer Details of Escrow Account Likely Impact of Buy Back on companys earnings, public holdings, holdings of NRI/FIIs etc. Name of Compliance Officer & details of investors service centers

Merchant Banker
Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management

Obligation of merchant banker

The merchant banker shall ensure that: The company is able to implement the offer The public announcement and content of public announcement should be true The provision relating to escrow account

Obligation of merchant banker

Compliance of section 77A, 77B of the Companies Act Final report to the Board The public announcement and content of public announcement should be true Firm arrangements for monies for payment to fulfill the obligations under the offer are in place

Fee Structure
Size of the buy back offer Upto 5 cr. More than 5cr & upto 10 cr. More than 10cr & upto 50 cr. Proposed fee (Rs) 25,000 50,000 75,000

More than 50cr & upto 100cr. 1,00,000 More than 100cr & upto 500 cr. More than 500 cr. 2,00,000 5,00,000

Obligations

Offer letter Mode of payment for consideration Withdrawal of offer Restrictions on promoters No public announcement of buy back shall be made during the pendency of any scheme of amalgamation

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Accounting Entries
1)When investments are sold for buyback of shares
Bank A/C. Dr. Profit & Loss A/c.. Dr. (for loss on sale) To Investment A/c To Capital Reserve A/c ( for profit on sale)

2) For issue of debentures or other specified securities

Bank A/c... Dr To Debentures/Other Specified Securities A/c To Securities Premium A/c (if any)

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Accounting Entries Contd

3) For Cancellation of shares bought back
Equity Share capital. Dr( with nominal value) Free Reserves/Securities Premium A/c.. Dr To Shareholders A/c (with actual cost of BB)

4) For making the payment of buyback shares

Shareholders A/c To Bank A/c Dr

5) For Transfer of nominal value of shares bought back out of free reserves
Free Reserves A/c.. Dr To Capital Redemption Reserve A/c
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Accounting Entries Contd

6) For expenses incurred in buyback of shares
Buyback Expenses A/c.. Dr To Bank A/c

7) For transfer of buyback expenses

Profit & Loss A/c. Dr

To Buyback Expenses A/c

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Methods of buy-back
BUY-BACK

TENDER OFFER

OPEN MARKET

ODD LOTS

STOCK EXCHANGE

BOOK BUILDING

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Tender Offer Method

Freedom to the company to fix the price of shares for buyback.

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Buyback Through Tender Offer

From existing shareholders on proportionate basis Disclosures buyback Price, intention of promoter to tender shares Filling of offer document:
Authorization by Special Resolution Within 7 days of PA- file a Letter of offer to Board Dispatch letter of offer to shareholders after 21 days from its submission to the Board Specified date (30-42 days from PA) Declaration of solvency
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Buyback Through Tender Offer

Offer Procedure

Opening of offer should be after minimum 7 days but not exceeding 30 days from the specified date Offer should be open for between15-30 days Letter of offer to shareholders Conditions of acceptance per shareholder Complete verification of offers should be received within 15 days of the closure of offer 3/1/2014 Buyback of Shares 29

Buyback Through Tender Offer

Escrow Account

Consideration payable
25% of consideration 25% upto 100 Crores + 10% thereafter

< 100 Crores > 100 Crores

a) With schedule commercial bank, or b) Bank guarantee in favor of the merchant banker, or c) Deposit of acceptable securities with appropriate margin, with the merchant banker, or d) A combination of (a), (b) & (C) above
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Buyback Through Tender Offer

Payment to shareholders Within 7days of the time specified or

Return the share certificate to shareholder if not eligible

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FLOW CHART FOR TENDER OFFER

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Buyback through Odd-lot

The provisions pertaining to buy back through tender offer as specified earlier shall be applicable mutatis mutandis to odd lot.

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Buyback through Odd-lot

Participants - Individuals holding less than 100 shares Promoters of the co. is not allowed to participate Benefits of buying back
The no. of total shares & individual shareholders decline significantly Administration cost saving

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Open Market Method

Through Stock Exchange Book Building Process

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Buyback through Stock Exchange

Special Resolution Maximum Price Promoters or Persons in control are not allowed Appoint a merchant banker PA should be made minimum 7 days before commencement of Buyback Copy of PA to filed with Board within 2 days of announcement Order matching mechanism Identity of Co. as a purchaser shall appear on the electronicBuyback screen 3/1/2014 of Shares

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FLOW CHART FOR STOCK EXCHANGE

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Buyback through Book Building

It is a process used by a company for efficient price discovery

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Buyback through Book Building

Before PA Deposit in escrow a/c PA should be made minimum 7 days before buyback PA should contain Detailed methodology of process Manner of acceptance Details of book building centers No. of bidding center should be more than 30 with electronically linked terminals Offer remain open for 15 to 30 days Merchant banker & Co. shall determine price based on acceptances received
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FLOW CHART FOR BOOK BUILDING

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Effect on financials
Liabilities Equity Share Capital (FV Rs 10 per share) Reserves Debt PAT EPS Debt Equity Ratio Return on Equity Market Price P/E Ratio
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Before B/b 200 800 1200 250 12.50 1.2 25.00% 100* 8 times

After B/b 180 580 1200 250 13.89 1.58 32.89% 111.12 8 times*
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When company should buyback?

When they have excess debt capacity When theyre under-performing, in terms of profitability and sales growth rates A company, which does not, has a high capital expenditure requirements in future may go in for a share buyback

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Whats in it for shareholder?

The Law of Demand states that with an increase in demand, if supply does not increase, the commodity can command a higher price For a short-term investor, it offers an exit route For the long-term investor, it provides a higher valuation

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Disadvantages

Signal of low growth opportunities Post Buy-back Debt Equity ratio not to exceed 2:1 Reduces cash surpluses Large transaction cost

CASE STUDY: PIRAMAL HEALTHCARE LTD.

Buyback offer (Section 77A(2)(c))

Buyback of 41,802,629 fully paid-up equity shares of face value Rs. 2/each share. Buyback price Rs. 600/- per share. Buyback size Rs.25,081,577,400/ Promoters of the Company have the option to participate in the Buyback.

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Time table
Activity Initial Board Meeting approving the Buyback Date October 22, 2010

Special Resolution of Shareholders approving the Buyback

Public announcement of the Buyback Specified date Buyback opens on Last date of withdrawal Buyback closes on Last date of verification

December 6, 2010
December 9, 2010 January 8, 2011 January 17, 2011 February 2, 2011 February 7, 2011 February 17, 2011

Last date of intimation regarding Acceptance/NonFebruary 21, acceptance and Dispatch of Consideration/Share 2011 3/1/2014 Buyback of Shares

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Specified date

The Letter of Offer (LOF), is mailed to all shareholders of the company whose names appear on the register of members of the Company whose beneficial owners of the Shares as per the records are made available to the Company by National Securities Depository Limited (NSDL)/Central Depository Services (India) Limited (CDSL) as on specified date
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Explanatory Statement for Special Resolution

The company has completed the sale of its Domestic Formulations Business to Abott Healthcare Pvt. Ltd. The company has also completed sale of its shareholding in Piramal Diagnostic Services Pvt. Ltd. to Super Religare Laboratories Ltd. With objective of rewarding shareholders pursuant to sale of business and shareholding, the Board at its meeting on 22nd October 2010 has approved the proposal recommending the buyback of equity shares 3/1/2014 Buyback of Shares 49

Rationale/Necessity for the Buyback

Shareholders reward from the Buyback would be (16.609%) more than Dividend which would involve payment of Dividend Distribution Tax Improving Return On Equity by reduction in equity base, thereby leading to long term increase in shareholder value The buyback price of Rs.600/- per share represents a premium of 19% over the average share price for 3 months preceding the date of Board meeting

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SEBI (Buy-back of securities) Act, 1988 Section 77A(2)(c)

Provision: Funds deployed for buyback cannot exceed 25% of the total paid-up capital and free reserves of the company. Company proposed maximum amount of Rs.2,508.16 Crores for buyback which is 17.76% of companys aggregate paid up capital and free reserves which is Rs.14,120.5 Crores as on September 30, 2010. Company proposes to buyback up to 4,18,02,629 equity shares which is 20% of the companys shares which are 209,013,145 equity shares as on 51 September 30, 2010 3/1/2014 Buyback of Shares

Post buyback

Shares Accepted (No.) : 41,802,629 Buyback Consideration (Rs.) : 25,081,577,400

Share price of Piramal healthcare

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Effects of Buy back

Parameters Net worth/Equity(Rs.In Lacs) Return on Net worth/ Equity(%) Earning Per shares- Basic (Rs)(Face value of Rs 2 Per Share) Pre Buy -Back 1,413,752 89.39 604.6 Post- Buy _Back 1,162,936 108.12 752.0

P/E based on PAT as per the latest financial results

0.8

0.8

Debt Equity Ratio

0.02

0.03

Effects of Buy back

Particulars Pre buy back(%) Post Buy back(%)

Promoter Group

53.32

53.91

Public*

46.68

46.09

Total

100

100

*Public includes all NRI/FII, Indian Financial intuitions & Public

CASE STUDY: SIEMENSE

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Cash offer of equity shares from shareholders

Acquirer: Siemense AG (Germany) Target company: Siemense ltd. (India)

Open offer announced by parent Siemens AG, to buy back up to 67 million shares of target company, comprising 19.8% of its present equity capital The intent is to increase the parent shareholding from the present 55% to about 75%.

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Cash offer of equity shares from shareholders

Offered price: Rs. 930

Open offer price, which reflects a premium of 27.83%
OPENING OF OFFER CLOSING OF OFFER 25th March, 2011 13th April, 2011

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Reasons for offer

Siemens AG wants to expand its current operations and investments in India in connection with its business strategy To this extent, Siemens AG wishes to increase its stake in Siemens Ltd. In order to develop the business effectively

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Thank You

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