The repurchase of outstanding shares by a company in order to reduce the number of shares in the market is termed as buy-back of shares. Companies will buy-back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. INTRODUCTION
Share capital is a very essential part of a company, listed or unlisted. Share capital can be of two types, i.e. equity share capital or preferential share capital. The share capital of a company has to be subscribed by one or more persons. After the share of a company has been allotted to the subscribing members, the subscribers have no right over the money gone as proceeds of the shares subscribed. All that the shareholder has is the right to vote at the general meetings of the company or the right to receive dividends or right to such other benefits which may have been prescribed. The only option left with the shareholder in order to realise the price of the share is to transfer the share to some other person. But there are certain provisions in the companies act which allow the shareholders to sell their shares directly to the company and such provisions are termed as buy-back of shares. Buy-back of shares can be understood as the process by which a company buys its share back from its shareholder, or a resort a shareholder can take in order to sell the share back to the company. HISTORY
Prior to the amendment in 1999 of the Companies Act, there was no way a company could buy its shares back from the shareholders without a prior sanction of the court (except for preferential shares). The laws as to the buying of its share by the companies were very stringent. Some of the ways by which a company could buy its shares back were as follows:- (i) Reduction of share capital as given in Sections 100-104. (ii) Redemption of redeemable preferential shares under Section 80. (iii) Purchase of shares under an order of the court for scheme of arrangement under Section 391 in compliance with the provisions of Sections 100-104. (iv) Purchase of shares of minority shareholders under the order of the Company Law Board under Section 402(b). A company could buy its shares back from the shareholders only with the sanction of the court.
This was done to protect the rights of the creditors as well as the shareholders. But the need of less complex ways of buying its shares back by the company was always felt. The much needed change in the companies act was brought about by the Companies Amendment Act, 1999. Presently, the provisions regulating buy-back of shares are contained in Section 77A, 77AA and 77B of the Companies Act, 1956. These were inserted by the Companies (Amendment) Act, 1999. The SEBI (SEBI) framed the SEBI(Buy-back of Securities) Regulations, 1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy-back of Securities) Rules, 1999 pursuant to Section 77A(2)(f) and (g) respectively. COMPANY MANAGEMENT’S PERSPECTIVE ON BUY-BACK
In the words of the working group which recommended the introduction of buy-back in the Companies Act: “It is an erroneous belief that the sole reason for buy-back is to block hostile take-overs. In this connection it is relevant to list 5 reasons why the bank of England favoured the making of law to allow companies to repurchase their shares, of which blocking take-over was only one: (i) To return surplus cash to shareholders.
(ii) To increase the underlying share value, earnings per share. (iii) To support the share prices during temporary weakness. (iv) To achieve or maintain a target capital structure.
(v) To prevent or inhibit unwelcome take-over bids.”
Briefly a company resorting to the buy-back may have surplus cash, and it may not have found the right avenue to invest such surplus cash. During such period of dilemma the company may decide to return the surplus cash by buying back its shares, with a hope that at a later time when the company brings on an expansion the investors do not loose their faith in the company. Secondly, the company might as well think of buying its shares with a view to increase the value of the shares, which after the process of buy-back still remain in the market, as after the shares are bought back, the number of marketable shares become less and thus the prices increase.
Thirdly, at times there is a slump in the share market due to no fault of the company. Though the slouch may be temporary it may have continued far too long .The management then may decide to give value to the shareholders and buy-back their shares at a price higher than the market price. This is generally done to instill faith in the minds of the shareholders. Saving a company from hostile take-over has always been seen as a major force behind bringing about this amendment, the company may use the surplus cash available in buying back its shares and bringing the number of floating shares down, resulting in the suitor not finding it a worthy investment or a profitable acquisition. These could be certain reasons why a company may resort to buy-back of its shares. DETAILS OF COMPANIES PROPOSING TO BUY-BACK THEIR SHARES
i)Listed companies are required to intimate the stock exchange of general meetings and resolutions passed thereof. Hence, information on companies proposing to buy-back shares may be obtained from the stock exchanges. ii)When buy-back offer document or public announcement is filed with SEBI, SEBI issues a press release and the offer document is put on the SEBI website under primary market page under the head “buy-back”. CONDITIONS OF BUY-BACK
(a) The buy-back is authorized by the Articles of association of the Company. (b) A special resolution has been passed in the general meeting of the company authorizing the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. Also, the shares for buy-back should be free from lock in period/non transferability. The buy-back can be made by a Board resolution if the quantity of buy-back is or less than 10% of the paid up capital and free reserves. (c) The buy-back is of less than 25% of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed 25% of its total paid-up equity capital in that financial year. (d) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back. (e) There has been no default in any of the following :
(i) Repayment of deposit or interest payable thereon,
(ii) Redemption of debentures or preference shares,
(iii) Payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend, (iv) Repayment of any term loan or interest payable thereon to any financial institution or bank. (f) There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts. (g) All the shares or other specified securities for buy-back are fully paid-up. (h) The buy-back of the shares or other specified securities listed on any recognised stock exchange shall be in accordance with the regulations made by the SEBI(SEBI) in this behalf. (i) The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed. RESOURCES OF BUY-BACK
The Companies Amendment Act, 1999 under section 77A prescribes for the sources of buying back of shares or other specified securities by a company, which are as follows-: i) Free reserves – A company may buy-back out of its free reserves, but a sum equal to the nominal value of the shares so purchased must be deposited in the capital redemption reserves account. ii) Securities premium account.
iii) The proceeds of any shares or specified securities.
No buy-back of any shares or securities shall be made out of the proceeds of an earlier issue of the same kind of shares or of same kind of securities. SOURCES OF BUY-BACK OF SHARES
The securities can be bought back from:
(a) Existing security-holders on a proportionate basis: Buy-back of shares may be made by a tender offer through a letter of offer from the holders of shares of the company. (b) The open market through :
(i) Book building process
(ii) Stock exchanges
(iii) Odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange. (c) Purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. DISCLOSURE IN THE EXPLANATORY
The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating – (a) A full and complete disclosure of all material facts. (b) The necessity for the buy-back.
(c) Class of securities intended to be bought back under the buy-back. (d) The amount to be invested under the buy-back.
(e) The time-limit for completion of buy-back.
FILING OF DECLARATION OF SOLVENCY
Where a company has passed a special resolution under clause b of sub-section (2) or a Board Resolution has been passed under some circumstances to buy-back its own shares or other specified securities, it shall before making such buy-back, file with the registrar and SEBI, a declaration of solvency in Form 4A. The declaration must be verified by an affidavit, to the effect that the board has made a full enquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period one year of the date of declaration adopted by the board, and signed by at least 2 directors of the company, 1 of whom shall be the managing director, if any. No declaration of solvency shall be filed with SEBI by a company whose shares are not listed on any recognized stock exchange. REGISTER OF SECURITIES BOUGHT BACK
After completion of buy-back, a company shall maintain a register of the securities/shares so bought. Section 77A (9) prescribes for the manner in which a register shall be maintained a register of shares so bought back and enter therein the following particulars:- i) The consideration paid for the securities bought-back. ii) The date of cancellation of securities.
iii) The date of extinguishing and physically destroying of securities. iv) Other particulars as may be prescribed.
Where a company buys-back its own securities, the shares or the securities so bought back shall be physically destroyed within 7 days from the last date
of completion of such buy-back. FILING OF RETURN WITH THE REGULATOR
A Company shall, after the completion of the buy-back file with the Registrar and SEBI, a return in Form 4C, containing such particulars relating to the buy-back within 30 days of such completion. No return shall be filed with SEBI by an unlisted company.
PROHIBITION ON FURTHER ISSUE OF SHARES AFTER BUY-BACK
Every buy-back shall be completed within 12 months from the date of passing the special resolution or the board resolution as the case may be. After the buy-back is completed the company is not allowed to issue the bought back shares for the period of 6 months, by any means including further issue of shares under section 81(1)(a) of the Companies Act, 1956. It may however issue bonus shares or discharge its subsisting obligation of converting preference shares or other specified securities into equity shares. PROHIBITION OF BUY-BACK IN CERTAIN CIRCUMSTANCES
Section 77B holds the restrictions on the companies to buy-back its shares. No company shall not directly or indirectly purchase or buy its own shares or other specified securities – a) Through any subsidiary company including its own subsidiary company. b) Through any investment companies or group of investment companies.
PROCEDURE FOR BUY-BACK
a.) Where a company proposes to buy-back its shares, it shall, after passing of the special/Board resolution make a public announcement at least one English National Daily, one Hindi National daily and Regional Language Daily at the place where the registered office of the company is situated. b.) The public announcement shall specify a date, which shall be “specified date” for the purpose of determining the names of shareholders to whom the letter of offer has to be sent. c.) A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations. d.) A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company. e.) A copy of the Board resolution authorizing the buy-back shall be filed with the SEBI and stock exchanges. f.) The date of opening of the offer shall not be earlier than 7 days or later than 30 days after the specified date. g.) The buy-back offer shall remain open for a period of not less than 15 days and not more than 30 days. h.) A company opting for buy-back through the public offer or tender offer shall open an Escrow Account. PENALTY ON VIOLATION OF LAW
* For violation of provisions of the Companies Act:
If a company makes default in complying with the provisions, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years, or with a fine which may extend to Rs. 50,000 or with both. The offences are compoundable under section 621A of the Companies Act, 1956.
* For violation of provisions of the Listing Agreement:
For non compliance of clause 19 of listing agreement, person contravening the provision is liable u/s 23(1)(c) of SCRA to fine upto Rs.25,00,00,000 or imprisonment upto 10 years or both; for non compliance of clause 40A of listing agreement, company is liable u/s 23E to a fine upto Rs.25,00,00,000 and for non compliance of clause 20 of listing agreement, person contravening the provision is liable u/s 23H of SCRA to fine upto Rs.1,00,00,000. * For violation of provisions of the SEBI Act and Regulations made there under: Liability may vary. For instance, for not filing with SEBI, any return or document or information within prescribed time or not maintaining records or failure to redress investors grievance, penalty (u/s 15A and 15C) could be Rs.100,000 per day of Rs.100,00,000 whichever is less. For defaults under insider trading regulations or under the takeover regulations, penalty (u/s15G and 15H) could be upto Rs.25,00,00,000 or 3 times of profit made, whichever is higher. Further SEBI may issue directions thereby prohibiting access to securities market, disgorgement of ill gotten gains, and prohibition from dealing in securities as well as criminal prosecution under section 24 of SEBI Act. BENEFITS OF STOCK BUY-BACKS
1)Increased Shareholder Value – There are many ways to value a profitable company but the most common measurement is Earnings Per Share (EPS). If earnings are flat but the number of outstanding shares decreases. . Voila! . . A magical increase in EPS will result. 2)Higher Stock Prices – An increase in EPS will often alert investors that a stock is undervalued or has the potential for increasing in value. The most common result is an increase in demand and an upward movement in the price of a stock. 3)Increased Float – As the number of outstanding shares decreases, the shares remaining represent a larger percentage of the float. If demand increases and there is less supply, then fuel is added to a potential upward movement in the price of a stock. 4)Excess Cash – Companies usually buy-back their stock with excess cash. If a company has excess cash, then at a minimum you can bank that it doesn’t have a cash flow problem.
More importantly, it signals that executives feel that cash re-invested in the corporation will get a better return than alternative investments. 5)Income Taxes – When excess cash is used to buy-back company stock, in lieu of increasing or paying dividends, shareholders often have the opportunity to defer capital gains and lower their tax bill if the stock price increases. Remember that dividends are taxed as ordinary income in the year they are received whereas the sale of appreciated stock is taxed when sold. Also, if the stock is held for more than one year the gain will be subject to lower capital gain rates. 6)Price Support – Companies with buy-back programs in place use market weakness to buy-back shares more aggressively during market pullbacks. This reflects confidence that a company has in itself and alerts investors that the company believes that the stock is cheap. Frequently you will see a company announce a buy-back after its stock has taken a hit, which is merely an overt action to take advantage of the discount on the shares. This lends support to the price of the stock and ultimately provides security for long-term investors during rough times. DISADVANTAGES OF BUY-BACK OF SHARES
1)Manipulation of Earnings – Analysts rate stocks on many factors, but one of the most important numbers is the Earnings Per Share. Assume that an analyst estimates earnings using a higher number of outstanding shares existing before a buy-back is executed. If the timing is right, companies could buy-back shares and appear to beat consensus estimates that were based on a larger number of outstanding shares. So, watch out for announcements just prior to earnings. 2)Buy-back Percentage – The higher the percentage of the buy-back, the greater the potential for profits. Unfortunately, the buy-back percentage is not typically part of an announcement so in order to determine if there is any significance to the announcement you’ll need to do some research. Don’t assume that a large number of shares is necessarily a large percentage. 3)Execution of Buy-back – There is a difference between announcing a buy-back and actually purchasing the stock.
A buy-back announcement may initially boost the price of a stock, but this phenomenon is usually short lived. Don’t be fooled into believing that all announcements are implemented. A good portion of announced buy-backs are not executed in full. 4)High Stock Prices – Beware of a buy-back program announced when a stock is at or nearing an all-time high. A stock buy-back can be used to manipulate less than desirable EPS expectations. One way of investigating this is to compare the P/E Ratio relative to other stocks in the sector or industry. If a higher than normal P/E ratio exists, then it doesn’t make a whole lot of sense for a company to buy its stock at a premium unless there is something in the works that will add substantially to earnings. COMPANIES WHICH HAVE GONE FOR BUY-BACK SCHEME
* Reliance Industries Ltd Buy-back Offer (January 30, 2012) Citigroup Global Markets India Pvt Ltd & DSP Merrill Lynch Ltd (“Managers to the Buy-back”) on behalf of Reliance Industries Ltd (“Target Company”) has issued this Public Announcement to the Shareholders / Beneficial Owners of the equity shares of the Target Company, pursuant to the provisions of Regulation 8(1) read with Regulation 15(c) and in compliance with the SEBI (Buy-back of Securities) Regulations, 1998, as amended and contains disclosures as specified in Schedule II to these Regulations. The Target Company proposes to Buy-back its fully paid-up equity shares of face value of Rs. 10 each from the existing shareholders/ beneficial owners other than the promoters/ persons who are in control of the Company from the open market, upto 12 Crore Equity Shares at a price not exceeding Rs. 870 per Equity Share payable in cash, for an aggregate amount up to but not exceeding Rs. 10,440 Crore which represents approximately 7.22% of the Company’s total paid-up equity capital and free reserves as on March 31, 2011.
The Buy-back will be implemented by the Company by way of open market purchases through the BSE Ltd (BSE) and the National Stock Exchange of India Ltd (NSE), using their electronic trading facilities. The Company shall 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 arrangements in the implementation of the Buy-back. The Equity Shares of the Company are listed on BSE and NSE. The Global Depository Receipts of the Company are listed at The Luxembourg Stock Exchange, Luxembourg.
* Intel Authorizes $14.2 Billion for Share Repurchases (January 24, 2011) Intel Corporation’s Board of Directors have declared an overall outstanding buy-back authorization of $14.2 billion. “In 2010, Intel achieved its best and most profitable year ever,” said Paul Otellini, Intel president and CEO. “Today’s announcement signals confidence in our fundamental business strategies both today and looking forward, allowing us to return more cash to shareholders.” Since the company’s stock buy-back program began in 1990, Intel has repurchased approximately 3.4 billion shares at a cost of approximately $70 billion. Taken together since their inception, Intel’s dividends and stock buy-back program have returned approximately $91 billion to shareholders.
The stock buy-back is at the discretion of Intel’s board of directors, and plans for future stock buy-backs may be revised by the board. Intel’s stock buy-back programs could be affected by changes in Intel’s operating results, its capital spending programs, changes in its cash flows and changes in the tax laws, as well as by the level and timing of acquisition and investment activity. * Zee Entertain – Buy Back Offer (April 13, 2012) Enam Securities Pvt Ltd (“Manager to the Buy-back”) on behalf of Zee Entertainment Enterprises Ltd (“Target Company”) has informed this Public Announcement to the Equity Shareholders / Beneficial Owners of the equity shares of the Target Company, pursuant to the provisions of Regulation 15 (d) read with Regulation 15 (c) of, and is in compliance with, the SEBI (Buy-back of Securities) Regulations, 1998 as amended from time to time and contains the disclosures as specified in Schedule II to the Buy-back Regulations. The Board of Directors of the Target Company have approved the proposal for buy-back of its fully paid-up equity shares of the face value of Rs. 1 each from the existing owners of equity shares of the Company other than promoters/ persons who are in control of the Company and its associates from the open market using the electronic trading facilities of NSE and BSE or any other stock exchange where the Company’s shares are listed during the Buy-back period, at a price not exceeding Rs. 140 per Equity Share, subject further to the condition that the aggregate amount to be paid by the Company for the said buy-back (excluding brokerage, transactional charges and taxes, if any) shall not exceed Rs 2,800 million, i.e. within 10% of paid up capital & free reserves of the Company based on the Audited Financials of the Company as at March 31, 2011.
The Company had made a Public Announcement on July 14, 2011 for buy-back of its equity shares at a maximum buy-back price of Rs. 126 upto a maximum buy-back size of Rs. 7,000 million, based on approval of shareholders. Under the said buy-back, the Company had bought back 19,372,853 Equity Shares at an aggregate cost of Rs. 2,319.2 million against the maximum buy-back size of Rs. 7,000 million. The Company proposes to buy-back a minimum of 5,000,000 equity shares. The maximum number of equity shares that can be bought back would be 20,000,000 equity shares, representing 2.09% of the pre-Buy-back outstanding fully paid up equity shares of the Company as on date of the Board Meeting. The Buy-back is proposed to be implemented by the Company from the Open Market purchases through the BSE Ltd and NSE Ltd. * JK Lakshmi Cement Ltd. – Buy Back of Equity Shares ( June 21, 2012) JM Financial Consultants Pvt Ltd and JK Lakshmi Cement Ltd informed the Stock Exchange regarding the buy-back of equity shares of JK Lakshmi Cement Ltd as on June 20, 2012. Total Number of shares bought back on June 20, 2012 : 13,840 Equity shares. The company has launched a buy-back for upto Rs 97.5 Crore. Buy-back forms 9.95% of paid up capital.
Max buy-back price of Rs 70 per share. Wholetime director of JK Lakshmi Cements, Shailendra Chouksey says that the board has priced the share buy-back at an upper limit of Rs 70 per share. “We have allotted Rs 97.5 crore for the buy-back, and that will not be a problem for us because we have Rs 600 crore on our books”, he said, adding that they will deploy the cash in 2 years. * Borosil Glass rallies 6% on commencement of buy-back offer (December 19, 2011) Borosil Glass Works has rallied 6% to Rs 820 on the commencement of buy-back offer today. The company proposed to buy-back its own shares at a price not exceeding Rs 850 a share payable in cash for an aggregate amount not exceeding Rs 81.93 Crore. The maximum buy-back size is within 25% of the aggregate of the company’s paid-up equity capital and free reserves of Rs 667 Crores as on March 31, 2011. The last date for the proposed buy-back would be November 10, 2012 or when the company completes the buy-back to the extent of 0.96 million equity shares, whichever is earlier, the company added. The stock opened at Rs 793 and touched a high of Rs 824 on the Bombay Stock Exchange (BSE). Around 1,915 shares have changed hands on the counter on the BSE. STATISTICS