• Most Attractive and Crucial Part of Company Transactions.• Genuine Interest in The Topic.
Introduction Objectives Conditions Prohibition Of Buy-Back In Few Circumstances Buy-Back From Whom? Sources Of Buy-Back Procedure Penalty Buy-Back: Positive & Negative Aspects
The repurchase of outstanding shares by acompany in order to reduce the number of shareson the market. Companies will buyback shareseither to increase the value of shares still available,or to eliminate any threats by shareholders whomay be looking for a controlling stake.
Example:-Mr. Anil Ambani (Reliance Energy)Bought 6,50,000 Eq.Shares of the Companyon Tuesday at Rs.1279.23/share, AggregatingRs. 831.5 million [Amounting Company’s 10%of Equity and Free Reserves].Result:- At Noon Friday, Shares of theCompany were trading at Rs. 1310 i.e. UP By28.20 from its Previous close at BSE.
Objectives To increase promoters holding. Increase earning per share(EPS). Rationalize the capital structure by writing off capital not represented by available assets. To pay surplus cash not required by business Tax Gains: Since dividends are taxed at higher rate than capital gains, companies prefer buyback to reward their Investors instead of distributing cash dividends, as capital gains tax is generally lower. At present, short-term capital gains are taxed at 10% and long-term capital gains are not taxed while DDT is 15%.
The buy-back should be authorized by the Articles of association of the Company; A Special Resolution have to be passed in the General Meeting of the company authorizing the buy-back. In the case of a listed company, this approval is required by means of a Postal Ballot. Exception: The buy back can be made by a Board Resolution If the quantity of buyback is or less than 10% of the Paid up Capital and Free Reserves; Condition: Similar Buyback i.e. by passing Board Resolution shall not be made in the next 365 days.
Limit on Buyback by passing SR: The buyback (by passing SR) shall not exceed 25% of aggregate of Paid-up Capital and Free Reserve Time limit for completion of buy-back: Buyback shall be completed within 12 months from passing of SR or Board Resolution , as the case may be. Debt-Equity Ratio: The ratio of the debt owed by the company is not more than twice the aggregate of capital and its free reserves after such buy-back; i.e. not more than 2:1.
Fully paid-up Shares All the shares for buyback must be fully paid-up i.e. partly paid-up shares not allowed. Declaration of Solvency: The company shall file with the Registrar a declaration of solvency stating it will not be rendered insolvent within next 1 year. Prohibition on further Issue of similar shares for the period of 6 months.
No company shall directly or indirectlyPurchase its own shares-i. Through any subsidiary co. including its own subsidiary company; orii. Through any Investment co. or group of Investment co.; oriii. If the company has not complied with the provisions of- * sec.159(filing of annual return) *sec.207(Payment of dividend within 30 days) *sec.211(Annual accounts to present True and Fair view)
iv. If any of the following defaults are subsisting: *Repayment of deposit or interest payable thereon; *Redemption of Debenture *Redemption of Preference Shares *Payment of dividend to any Shareholder *Repayment of any term loan or interest payable thereon to any Financial Institution or Bank.
The securities can be bought back from, Existing security-holders on a proportionate basis; Buyback of shares may be made by a tender offer through a letter of offer from the holders of shares of the company Open market Odd Lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange , is smaller than such marketable lot, as may be specified by the stock exchange. Purchasing the securities issued to employees of the company pursuant to a scheme of Stock option or Sweat equity.
A Company can purchase its own shares from Free Reserves: Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the Capital Redemption Reserve and details of such transfer shall be disclosed in the balance- sheet. Securities Premium Account Proceeds of any shares or other specified securities : A Company cannot buyback its shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares or specified securities.
Where the company proposes to buyback its own shares, it shall after passing the SR/Board Resolution make a public announcement in at least 1 English National Daily Newspaper and 1 Vernacular Newspaper at the place where the Registered office of the company is situated. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations. A copy of the Board resolution authorizing the buyback shall be filed with the SEBI and stock exchanges.
The date of opening of the offer shall not be earlier than 7 days or later than 30 days after the specified date i.e. the date which shall be given in public announcement . The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days. A company opting for buy back through the public offer or tender offer shall open an Escrow Account.
• If a company makes default in complying with the provisions the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years, or with fine which may extend to 50000 rupees, or with both.
It could enable a company to achieve its desired Capital Structure more quickly or facilitate a major restructuring. Market generally interprets buy-back as a positive aspect. Returning excess cash by way of a share buy-back gives a company greater flexibility with regard to its dividend policy.
Re-purchase of its own shares may conversely have a negative signalling effect. Possible mismanagements may arise if-i. Too high a price is paid for the re-purchased shares or ifii. Cash resources are eroded to the level that could give rise to a risk of insolvency.