• 'Stock repurchase' or 'share repurchase’
commonly known as 'share buy back' refers to
the process of a company buying back its own
shares from its shareholders.
• In this sense, it is the reverse of an issue of
shares and is therefore also one of the ways in
which an 'exit' may be provided to a
Conceptual Justification for Share Repurchase
• Theoretically, it is said that shareholder wealth
maximization has to be the objective of every
• Therefore, if a company has a return on equity
(ROE) that is better than the opportunity cost
for the shareholder, his wealth is maximized
by redeploying the-profits back into the
• In other words, such a company should follow a
no-dividend policy. But if a company is
sufficiently mature and quite stable in its
there are two things that would happen—
(a) its annual growth rate reaches a more
(b) its investment needs become more modest.
• In such a company. there may not be a scope to
redeploy all the internal accruals since the
returns may not be as good as the opportunity
cost of the shareholder and/or
There is simply no requirement for so much extra
cash in the business.
• Such companies would therefore need to make
significant cash distributions as dividends or
resort to stock repurchases to keep the capital
employed in the business under control.
• In the US market, significant research was
done about corporate share repurchases in
the 1980s that led to the conclusion that the
market does not value a company for its
liquid cash balances or near to cash
• Mature companies should look for maximizing
share, value through a build up of book value,
earnings, dividends and return of surplus
capital through share repurchases.
• Share repurchases tend to keep a company
from becoming 'over capitalized' i.e. having
too much capital for the level of business
Particulars Company A Company B Company C
Sales 1,00,000 1,00,000 1,00,000
EBITA 24,000 24,000 24,000
EBITA % 24% 24% 24%
PAT 15,000 14,000 12,000
PAT % 15% 14% 12%
Share Capital (Rs 10/Share) 50,000 25,000 20,000
Reserves & Surplus
1,00,000 10,000 (15,000)
Secured Borrowings 0 25,000 35,000
(Share Cap.+ Res. + LTB)
1,50,000 60,000 40,000
Capital Turnover Ratio .66 1.67 2.50
16% 40% 60%
EPS 3 5.60 6
Debt- Equity Ratio 0 .71 7
• It may be observed from the above data that
though all the companies have the same EBITA,
the ROCE, EPS and debt-equity ratio vary widely.
• Looking at the ratios, it is possible to deduce
that Company A is over-capitalized since it has
large accumulated profits and a higher capital
employed' for the same level of operations as
the other two companies.
• Due to this reason it has the least ROCE. It also
has a higher share capital which has
depressed its EPS.
• Company B is more optimally capitalized both
in terms of total capital and the debt-equity
• Company C appears to be grossly under:
capitalized and is treading dangerously on a
very small net worth.
• Company A has to look at distribution of capital
back to its shareholders to improve its ROCE
• Company B does not have to do significant
distribution as of now since it has a healthy
ROCE of 40% and has growth requirements for
The shareholders would be happy to keep the
funds with the company as long as it shows a
healthy trend of growth that is better than
their opportunity cost.
• Company C requires immediate infusion of
equity to refinance its losses and substitute
debt as well so that bring down its debt-equity
ratio and look for nourishment.
• The prolonging of this situation could lead the
company into a very difficult situation or
eventually lead to bankruptcy.
Implications of Share Repurchase
1. Correction of over-capitalization
Well-performing companies that enjoy good
margins and high recovery rates from customers
are generally left with surplus liquid cash and
cash equivalent assets that are in excess of their
The pitfalls of having excess liquidity are many;
• It could be misdirected into ill-conceived
ventures and if not profitably employed, it
would reduce the return on capital (ROCE)
generated by the company.
• The fall in such return has serious
repercussions in terms of fall in the return on
networth (RONW) and consequent adverse
impact on the market price of the share.
• In order to correct a condition of over-capitalization
A company can resort to a repurchase of equity
shares (and preference shares too if the terms of
issue so permit)" for payment in cash from the
• Through this process, the company reduces its
capital and excess liquidity in its business.
As a result, the shareholders' funds are decreased
and the equity capital is trimmed of the excess flab.
• The reduction in capital has a positive impact
on the ROCE and RONW and the pruning
down of equity share capital has a positive
effect on the earnings per share (EPS).
• This would lead to improved perception in the
stock market and a consequent increase in
• However, buyback of equity is not advised for
companies that have high growth rates and market
• In such companies it would be advisable to retain
the capital in business and reduce borrowings so as
to bring down the current cost of capital and
improve profitability and liquidity.
• Similarly, in companies that have high debt-equity
ratios, excess capital should be used initially to
repay existing borrowings rather than to buy back
• Lastly, share buyback is also not
recommended for companies with reasonable
debt-equity ratios but with a long cash cycle
or with unpredictable cash flow patterns.
• Such companies would do well to retain
excess capital in liquid assets to meet
contingencies or to retire debts and reduce
2. Shoring up management stakes
• Equity buy back can also be used as an effective
measure for increase of promoter stakes in a
• Company managements normally look out for
such opportunities during times of depressed
market conditions during which, buy back of
shares from the public shareholders could be
made at attractive price by the promoters.
This would be a cost effective way of
consolidation of promoter interest in a company.
3. Exit mechanism
Equity buy back is an investor-friendly
measure in times of depressed markets
wherein the retail investor is locked in the
share due to its low market price.
If the company can support a buyback with
enough liquidity, the investor gets a
respectable exit from the share during such
4. Shareholder value management
• Equity buyback would be required in times when
the company is not able to generate enough
return on the surplus capital in its businesses to
offset the opportunity cost to shareholders.
• If it continues to keep such funds in the business,
it would destroy shareholder value.
• Therefore, a buyback at such times helps in
unlocking the excess capital and the shareholders
would be free to deploy such funds elsewhere.
EQUITY REPURCHASE IN INDIA
• Exit offer is a new concept in the Indian context.
Till 1998, Indian companies were not allowed to
buyback equity shares from their shareholders or
from the secondary market.
• So the only exit option for the common investor
was to sell through the secondary market.
With the amendments to the Companies Act,
companies were allowed to buyback their shares
subject to a lot of statutory restrictions.
• The basic framework of a share repurchase
mechanism in India is to allow it as a step to
be implemented from time
to time by companies.
• Buy backs are being discussed in the context of
investment banking since statutory regulations are
• It says that appointment of a merchant banker as a
manager to the offer is mandatory for listed
companies intending to make a buyback offer to
• In such offers, the merchant banker plays a very
significant role not only in pricing the issue but in
ensuring compliance with law and in advising the
company at every stage.
REGULATORY FRAMEWORK FOR
• Equity repurchase by a company was not allowed
under the Indian law until the Companies Act was
amended to provide for limited repurchase of its
shares incompliance with section 77 A that was
newly-introduced with effect from October 1998.
• This section applies to all types of companies
intending to all types of companies and all types of
shares and other securities that may be bought
back as specified from time to time by the
• In addition to section 11 A, which has
universal application across companies,
unlisted companies have to comply with the
regulations issued by the Ministry of Company
• Similarly, listed companies intending a buy
back of shares need to comply with the SEBI
guidelines on the subject.
• General Conditions
• The general conditions applicable to all types of
companies for buy-back of securities in terms of the
provisions of sections 11A and 77B of the
Companies Act are listed below:
1. The buy-back by the company has to be financed
out of free reserves or securities premium account
or from proceeds of earlier issue of dissimilar
shares or other securities.
2. The maximum time allowed for the completion of
the buy-back process is 12 months from the date
of the relevant resolution.
3. Buy-back can be made from existing security
holders on proportionate basis, or from
employees and directors out of the ESOP shares
or sweat equity shares or through open market
4. A declaration of solvency has to be filed with the
ROC and the SEBI (where applicable) with a
verification through an affidavit by the Board of
Directors of the company that they believe that
the company would remain solvent for a period
of 12 months from the date of such declaration.
5. All securities that are bought back have to be
destroyed within seven days from the date of
conclusion of the buy-back programme.
6. No company shall make a public issue of the
same kind of securities that have been bought
back within a period of six months from the
conclusion of the buy-back programme
7. Only except through issue of bonus shares or
through conversion of outstanding convertible
8. Two buy-back programmes shall be
separated by a period 'of 365 days even if
they are for dissimilar securities.
9. The buy-back should be a direct purchase by
the company and not an indirect purchase
through its subsidiaries or group investment
BUYBACK BY UNLISTED PUBLIC COMPANIES AND
• Unlisted companies that are either private or
public companies are governed (apart from the
provisions of the Companies Act 1956,)
By the Private Limited Companies and Unlisted
Public Companies' (Buy-back of Securities) Rules
A company may buy-back its shares by either of
the following methods:
1. From the existing shareholders on a
proportionate basis through private offers.
2. By purchasing the securities issued to
employees of the company pursuant to a
scheme of stock option or sweat equity.
• There are no specified pricing guidelines and
the Board or the company is free to fix the
price as found appropriate.
• The Letter of Offer (L of O) sent to shareholders
for the buyback offer shall contain specifically
the following details:
The information on the proposed offer with
elaborate details on capital structure,
shareholding pattern and the basis of arriving at
the quantum and price of the proposed buy-
All material facts relevant to the buy-back offer.
Audited financial information for the previous
three years together with specified financial
ratios pre and post buy-back.
Management discussion and analysis on the
likely impact of buy back on the company's
earnings, shareholding pattern and any
change in management structure.
The Declaration of Solvency
Auditors' Report addressed to the Board.
The buy-back offer has to be kept open for members
not less than 15 days and not more than 30 days from
the date of dispatch of the L of O.
The buy-back offer has to be accepted on proportionate
basis in case of over-subscription by the shareholders.
The company shall complete the verifications of the
offers received within 15 days from the date of closure
of the offer.
The Company shall immediately after the date of
closure of the offer, open a special bank account and
deposit therein, such sum as would make up the entire
sum due and payable as consideration for the buy-back
in terms of the Rules.
The company shall within seven days of the
specified time, make payment of consideration in
cash or bank draft/pay order to those
shareholders whose offer has been accepted or
return the share certificates to the shareholders
The company shall extinguish and physically
destroy the share certificates so bought back
within seven days from the date of acceptance.
BUYBACK BY LISTED COMPANIES
• Listed companies are governed in addition, to
the provisions of the Companies Act, by the
SEBI (Buy-back of Securities) Regulations,
1998 and the provisions of the Listing
Agreement with the stock exchange.
• Under the SEBI buyback Regulations, it is
mandatory to engage a merchant banker to
prepare the L of O and manage the buy-back
• The Regulations also do not fix any pricing
mechanism, which has been left free to the
Board or the company
Under the Regulations, a company can buy-back
securities under the methods described below:
Fixed Price Tender Offer
• Under this method, the shareholders on record of the
company as of a record date are invited to tender their
shares for re-purchase by the company at a fixed price
arrived at by the company and disclosed in the notice,
public announcement and the L of O.
• This method is simpler to understand but may not
realize the best price for the shareholders.
• This method prescribes a reverse book building to
be applied for purchases from the open market
whereby shareholders are invited to put in bids
for re-purchase of their shares.
• The board resolution or the special resolution as
the case may be, shall specify the maximum price
at which the securities shall be bought back by
• The company would make a public
announcement based which shall specify the
method by which shareholders can put in bids
for their securities to be bought back by the
• The company fixes the buy-back price based on
the highest price bid received from the
shareholders. The bidders who bid at lower
prices would also be eligible to receive the
• Therefore,- this method is beneficial to the
shareholder since it allows the highest bid price
to be received by them instead of a price fixed
by the company as in the Tender Offer method.
• However, as far as the company is concerned, it
helps in making a more efficient pricing as
compared to the Tender Offer since this
method allows for price discovery.
Open Market Purchase
• In this method, the company buys back the shares
directly from the secondary market using the
electronic trading system and placing buy orders in
its own name.
• Therefore, within a specified period, the company
buys the shares from the market at varying prices
based on the prevailing market price but subject to
the maximum price and quantity already approved.
• This method is transparent and the company may
actually end up buying the shares at an average
price, which could be lesser than the maximum
• This method is suitable when promoters wish to
consolidate their stakes by letting the company
to mop up shares for buy-back from the
• The drawbacks of this system are that the
promoters cannot sell their own shares since
the system is transparent. Secondly, if the
company does not enjoy a good free float, the
company may not be able to get sufficient
quantities for buy-back.
Introduction to De-listing
• De-listing is a process by which a company whose
shares are listed on a stock exchange is taken
private once again by getting its publicly held
shares bought over by private shareholders and
terminating the listing agreement with the stock
• As a result, there can be no public shareholding
after de-listing and the shares cannot be traded on
a stock exchange. Therefore, de-listing is a process
also known as 'going private'.
• The subject of de-listing in the Indian context,
can either be compulsory or voluntary.
1. Compulsory de-listing happens when, the
stock exchange penalizes a company through
de-listing its shares for non-payment of listing
fee, violation of the listing 'agreement or for
other statutory violations such as non-filing
of accounts etc.
2. Voluntary de-listing is a process initialed by a
promoter or an acquirer or any other person
other than the stock exchange.
• Capital market depth is in danger if well-
performing companies opted to de-list.
• There is no provision in the Companies Act or
the SCRA that provides for de-listing by
The Dr. K.R. Chandratre Committee set up in
1997 prescribed criteria for de-listing of loss-
making companies and other provisions.
• Later on, further examination was made of this
issue, which led to the framing of the SEBI (De-
listing of Securities) Guidelines 2003.
• The current thinking is to allow de-listing as a
natural process since the listing agreement is
primarily a contractual relationship between the
issuer and the stock exchange.
• Therefore, it should have an exit option subject to
the interests of the investors being protected.
• De-listing also offers a right balance for companies
to look at the capital market as a source of capital
as and when necessary and not as an obligation
that becomes counter-productive in times of
depressed market conditions.
• Secondly, companies need to protect themselves
from time to time from unwanted intrusions
through the secondary market route, especially
when their market capitalization is unduly
depressed. In such times, voluntary de-listing offers
a strategic alternative.
• De-listings in India
• De-listing has become a common occurrence
in India. Most multinational companies,
which prefer 100% subsidiaries to listed
companies, have been active in de-listing
their Indian subsidiaries.
• Till recently, government policies prevented
this route but with the opening up of 100%
FDI in many sectors, they are now preferring
• Examples are Carrier Aircon, Otis India, Philips
India, Castrol India, ITW Signode, and Wartsila
India which have all been delisted in 2000-01.
In the USA, 66 companies went private in
2002 as compared to 35 in 1999 according to
• There, have been many delisting in recent
years despite strong market conditions.
• The validity of the concept of de-listing has
to be examined on the same grounds on
which the company went for listing.
• If the cost of remaining listed outweighs the
benefits sought to be received, it would not
make sense to the company to remain listed.
• According to a study conducted by Scott Larson, a
professor at National-Louis University in Chicago
(as reported in the 'Economist'), there are two
components of cost for a company to stay listed
(a) the cost of regulatory compliance,
(b) the cost of equity which is higher than the
cost of risk-free debt.
• Together, these two elements constitute the cost
of public equity. In order to decide on de-listing,
this cost of public equity should be compared to
the return demanded by private equity investors.
• In good market conditions, private equity investors
have to shell out more to acquire stakes in
companies which constrains spread of their
portfolio for a given size of the fund.
• Since the same fund has to be allocated to less
number of portfolio companies, their risk
concentration is higher.
This in turn increases their return expectation.
Secondly, private equity is illiquid which also
increases return expectations.
• However, the return expected by public equity
investors would be lower since it entails
To-sum up, in a good market, cost of private
equity is higher than that of public equity and
therefore, the company should remain listed.
• However, in a weak market, the argument is
• The return expectations of public equity
increase due to the absence of an exit route
in the secondary market.
• In addition, if the cost of regulatory
compliance increases, it adds to the increased
cost of servicing public equity.
• On the other hand, the return expectations of
private equity investors get moderated since
they can acquire good stakes in larger number
of portfolio companies at attractive
• Secondly they would also be privy to inside
information and decision making which can
guide them on their investments.
• For example, if the company has been
approached for a strategic merger or a stake,
the private equity investors by virtue of being
on the board, would participate in the
• Therefore, in a weak and highly regulated
market, the cost of public equity overtakes
that of private equity.
• The company should also consider the fact that
due to the weak market conditions, it may not be
able to raise further funds through issues in the
• Due to the prevailing low market cap, the
company may even find it difficult to raise private
equity on reasonable terms.
• In such situations, de-listing could be the way
out. There is always an option for the company to
come back to the market when conditions
The regulatory framework for de-listing is now
prescribed under the
SEBI (De-listing of Securities) Guidelines
The main change that has been brought about
is that hereafter companies cannot de-list
using the fixed price buy-back route. Instead,
they need to go through a process of price
• Regulatory Requirements for De-listing
1. Voluntary de-listing must be sought by the
promoters of a company.
2. Any scheme of arrangement consequent to
which the public shareholding falls below the
minimum limit required for the company to
3. Promoters seeking to de-list a company from
some of the stock exchanges.
4. Compulsory de-listing of companies must be by
the stock exchange.
CAN’T GO FOR DE-LISTING BY THIS METHOD
1. In a buy-back of shares if public shareholding falls below
the minimum limit required for the company to stay
2. An open offer made by an acquirer pursuant to the
Takeover Code due to which the public shareholding falls
below the minimum limit required for/the company to stay
• In both the above cases, the company would not be
allowed to use these routes in order to de-list the company.
• Similarly, a fixed price open offer under the Takeover Code
cannot also be used to de-list a company because the
objective of the de-listing guidelines is to provide the
shareholders a fair exit opportunity.
• A company would be allowed to de-list
voluntarily provided it has been listed for at least
3 years prior to that date on any stock exchange.
• Such de-listing would be permitted by obtaining
approval of the shareholders in general meeting
and making a public announcement of a de-
• Before making the public announcement, a
merchant banker who is unrelated to the
promoter shall be appointed to administer the
buy-back of shares from the public for the
purpose of de-listing through a public offer.
• The purpose is to maintain transparency and
fair dealing in Delisting transaction.
Pricing a Voluntary De-listing
• De-listing could also be an expensive affair since
the retail investors would want to make the best
of an exit opportunity that comes their way
after a long time.
• According to Prof. Larson's study, US companies
that de-listed in 2003 had to pay on an average
about 40% to 80% premium on the prevailing
market prices of their shares to buy them back.
• In another empirical study by Lowenstein (1985)
of all the 28 MBO proposals that happened
during 1979 to 1984 revealed an average
premium to prevailing market price of 56%.
• However, on a larger scale it has been found in
various studies that companies taken private
pursuant to a buy out deal in the US markets
prior to 1990 paid on an average a premium of
around 35% to the prevailing market price.
• Unlike in the US market, in India de-listing is
more of a voluntary mechanism. Hence, the
price can neither be too aggressive nor too low
since it has to elicit investor response.
• Moreover, the retail investor needs to be a part
of the price determination for an exit.
Therefore, the de-listing guidelines provide for
the mechanism of 'reverse book building' in case
of de-listing offers.
• For the purpose of the reverse book building,
the public announcement made for the de-
listing offer has to specify a ‘floor price'.
• The 'floor price" of the offer has to be
determined as the average of 26 weeks traded
price quoted on the stock exchange where the
shares of the company are most frequently
traded during such period.
• There would be no maximum price or 'cap' for
In the case of infrequently traded shares, the
floor price shall be arrived at as provided in the
Takeover Code and this may require independent
certification by a merchant banker if SEBI requires
• The final price of the offer would be discovered
through a reverse book building process as the
price at which the maximum number of shares
have been offered by the shareholders for sale.
• The promoters or acquirers shall have the
option to accept the price or not.
If the final price is accepted, the promoter or
acquirer shall be bound to accept all the offers
up to and including the final price but may not
accept the higher priced offers if so desired.
• If the final price is not accepted, no de-listing
application should be made.
Other Process Requirements for Voluntary Delisting
• The public announcement for de-listing shall
contain information as follows:
on the floor price,
the trading centers and
trading members for the purpose of putting in
the time table of the bidding process,
the stock exchanges from where de-listing is
complete details of all material facts and
other necessary details as prescribed.
• The promoter or acquirer should also open an escrow
account and deposit therein 100% of the amount
required to purchase the full quantity of shares
required under the de-listing offer calculated at the
• The shareholders who wish to put in their bids should
do so through the trading members for placing the
offers on the screen based on-line electronic system.
• The bidding period should last for at least three days
and the bidders have the option to revise their bids
before the bidding period closes.
• After the de-listing offer is closed, a second public
announcement has to be made within two days of
the final price being discovered by the book building
process and whether or not, the promoter or
acquirer has accepted the price and the same
should be communicated to the stock exchange.
• If the final price is accepted, the promoter or
acquirer has to then make a de-listing application to
the concerned stock exchange(s) along with all the
necessary details and seek the approval of such
exchange(s) for de-listing subject to terms and
conditions that are imposed by such exchange(s).
• If the quantity eligible for acquiring shares at the
final price does not result in public shareholding
falling below the required level for continuous
listing, the company shall continue to remain listed.
• Therefore, under these guidelines, there can be two
instances when the offer can fail and the company
(a) if the promoter or acquirer does not accept the
final price and
(b) if the required minimum quantity of bids are not
put in by the public.
• The guidelines provide that wherein the
second situation is fulfilled, the promoter or
acquirer shall not acquire any shares and the
offer should be cancelled.
• In case the de-listing offer is cancelled as
above or the promoters or acquirers opt out
of it as the case may be, the public
shareholding has to be brought up to the
required minimum within six months.
• The consideration shall be settled in cash for all the
bids accepted and the offer formalities should be
• However, the acquirer shall allow a further period
of 6 months for any of the remaining shareholder
to tender the securities at the same price.
• Where a company has any convertibles
outstanding, de-listing shall not be permitted
unless the conversion process is completed or the
exercise period of the conversion option has
`Case on Voluntary De-listing
• In the first ever case of voluntary de-listing under
the reverse book building guidelines. Digital Global
Soft India was de-listed using the reverse book
building under the de-listing guidelines.
• Digital India, which began in 1988 as a joint venture
between Digital Equipment Corporation of USA
(DEC) and Hinditron, later became a subsidiary of
Compaq when the latter acquired DEC in a global
• After Hewlett Packard (HP) took over Compaq,
Digital India (renamed Digital Global Soft)
became the subsidiary of HP.
• HP announced a voluntary de-listing so that
Digital India could become a 100% subsidiary
of the parent company.
• The de-listing offer was made at a price of Rs
750 per share, which nearly worked out to a 50%
premium on the 26-week average price formula.
• The reverse book-building offer opened in the
month of January 2004.
• The response from the investors was good but
the most number of offers were received at Rs
850 a share which amounted to almost 21% of
the total shareholding in the company.
• This meant that HP had to increase its offer price
to Rs 850 thereby incurring an additional cost.
• Stock exchanges may de-list companies which
have been suspended for a minimum period of
six months for non-compliance with the listing
• At the same time, the stock exchanges may
assess the need for compulsory de-listing based
on the stipulated norms, which are listed in
annexure III of the de-listing guidelines.
• The stock exchange shall serve a show cause
notice on the company with a fifteen-day period
for filing replies.
• The de-listing decision shall be taken by a specially
constituted panel of the stock exchange and notice of
the termination of the listing agreement needs to be
given to the company.
The de-listing should also be publicized and displayed
on the trading systems.
• Where a company has been compulsorily de-listed, the
promoters of such company shall buy back the shares
from the public at their option, at the fair price.
• The consideration for the shares should be settled in
DE-LISTING PURSUANT TO A RIGHT ISSUE
• In the case of a rights issue, promoters or persons
in control of management are allowed to subscribe
to the unsubscribed part of the rights issue
or to the rights renunciation even if such a step
results in the public shareholding falling below the
required minimum, if such an intention was
disclosed in the letter of offer.
• In such an event, such promoters have to buy out
the balance shareholders also at the rights price
and apply for de-listing.
• If de-listing is not contemplated, such
promoters have to make an offer for sale to
the public to bring the public shareholding up
to the required minimum.
• Re-listing of securities can be permitted by a
stock exchange after a cooling period of two
• However, re-listing shall be as per the terms
and conditions applicable at the time of re-
listing and further subject to the clearance
from the relevant stock exchange.
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