Buyback of shares

Sona Nair
Ankita Alwe
 Synopsis
Introduction
Meaning
Objectives of Buyback
Provisions under the Companies Act ,1956
SEBI Guidelines
Effect of Buyback of Shares
Effect on the Financial Ratios
Case Study-HUL
What is buy back ??
 FUNDING OF BUY BACK

Out of:
(i) Free reserves; or
(ii) Share premium account ; or
(iii) Proceeds of fresh issue
A Company cannot buyback its shares out of
the proceeds of an earlier issue of the same
kind of shares.
 Reasons for buy back

Unused cash

Tax Gains

Market perception

Financial ratios
 Benefits of buy back

Higher Share Price

Reduce takeover chances

Enhances financial ratios

Creation of goodwill
 Methods of buy back

Tender Offer

Open Market

Book-building process
 E.g. with hypothetical data
Current market price : Rs 45/share

Max no. of shares to be bought back :1,00,000

Price band : 48-51

Buy back price in Total no. of shares Cumulative no. of
ascending order offered at each shares offered for
price buyback
48 20000 20000

49 50000 70000

50 30000 100000

45000 145000
51
 Introduction
RESTRICTION ON PURCHASE OF ITS OWN
SHARES BY A COMPANY

Section 77 (1) of the Companies Act provides that a

company limited by shares or a company limited by
Guarantee having a share capital cannot buy its own
shares.
What do you mean by share buyback?
Cancellation of Share Capital
Buyback is reverse of Issue of Shares
Reduction in Share Capital
 OBJECTIVES OF BUYBACK
To increase promoters holding
Increase EPS
To thwart takeover bids
To increase promoters holding
To shrink equity base
To increase the underlying share value
 PROVISIONS UNDER THE COMPANIES ACT-
1956
 Sec 77 A 1
RESOURCES OF BUYBACK

The free reserves

Securities Premium Account
Proceeds of any shares or other specified
securities
 Sec 77 a (2)
Conditions of Buyback
No company shall purchase its own shares / securities unless:

a. The buy-back is authorized by its articles

b. A special resolution

c. The buy back is less than 25% of total paid up equity capital and
free reserves

d. Maintaining debt equity ratio: 2:1

e. For listed shares as per guidelines issued by SEBI

 Sec 77 A (3)
Notice of the meeting
Explanatory statements stating:

Necessity for buy-back

Class of security of buy-back

Amount to be invested

Time limit for completion of buy-back

 Sec 77 a (4)
Maximum Period
Every Buy Back should be completed within 12
Months from the date of passing of the special
resolution
 Sec 77 A (5)
Sources of Buyback
Existing Shareholders
Open Market
Odd Lots
Employees
 Sec 77 A (6)
Declaration of Solvency
Declaration to be filed with
SEBI
Register of Companies
That it is capable of meeting its liabilities and will not
be rendered insolvent within one year of the date of
declaration adopted by the board.

Note : This declaration is to be signed by at least two directors

of the co. one of whom shall be M.D. If any.
 DESTRUCTION OF THE SECURITIES
Sec 77A(7)
The company shall extinguish and physically destroy the securities
so bought back within 7 days of completion of buy-back

FURTHER ISSUE OF SHARES Sec 77A(8)

On completion of buy-back of shares / securities, the company shall
not make further issue of the same kind of shares / securities within
a period of six months except:

a. bonus shares; or
b. conversion of warrants, or
c. conversion of preference shares or debentures into equity
shares
 MAINTENANCE OF REGISTER Sec 77A(9)
Company shall maintain a register of the :

a. Securities so bought,
b. Consideration paid,
c. Dates of cancellation, extinguishing and physically destroying of
the securities, and
d. Other particulars as prescribed.

FILING A COMPLETION RETURN Sec 77A(10)

A company shall file a completion return within 30 days of
completion of buy-back of with ROC and SEBI (for listed
companies.)
 PENALTIES- Sec 77A(11)

For default:

a. Imprisonment upto 2 years; or

b. Fine upto ` 50,000; or
c. Both
 TRANSFER TO CRR Sec 77AA

Where company purchases its own shares out of free

reserves, then a company is required to transfer a
sum equal to the nominal value of the shares so
bought to CAPITAL REDEMPION RESERVE
ACCOUNT from free reserves.
 SEBI GUIDELINES
Company is required to make Public
announcement in,
One NATIONAL English Daily
One Hindi National Daily
One Regional Language Daily

Public announcement should specify

Specified Date
 SEBI GUIDELINES (Contd..)
Company should inform SEBI within 7 days

Offer shall remain open at least for 15 days

Company shall complete verification with in 15 days from the

date of closure
CASE STUDY HINDUSTAN
UNILEVER Ltd. (HUL)
 HUL at Glance
Incorporation: 1933

Turnover: Rs.17,523 Cr Audited results for April 1,

2009 to March 3, 2010

Employment: More than 15000 direct employees

including more than 1400 managers

Parentage: HUL is a part of the 40 billion

Unilever Group
 Buyback offer

Maximum buyback of Share : ` 545.4 million

Offered price : ` 280

Maximum Amount : `630 crores

Equity and reserves : ` 2583 Crores

Cash and bank balance : ` 1892 crores

 Reasons For Buyback

Effective utilization of surplus cash

Market Price of the Shares are under perform

 Shareholders pattern of HUL
Promoters 52.01%

FII/NRI 16.17%

Institutions: 10.44%

Private Corp (mutual fund n corporate): 6.19%

Public: 15.19%
 Balance Sheet of HUL Ltd. As on 31-3-2010 (Rupees in crs)
Particulars 31-3-2010 31-3-2011(E)
(A) Sources of Funds
1.Shareholder`s Fund
Capital 218.17 174.536
Reserves & Surplus 2450.76 1864.394
2668.93 2038.93
2.Minority Interest 10.46 10.46
3.Loan Funds
(a)Secured Loan 10.49 10.49
(b)Unsecured Loan 0.35 10.84 0.35
TOTAL OF (A) 2690.23 2060.23

(B) Applications of Funds

Net block 2214.36 2214.36
capital work-in progress 279.98 279.98
Investment 1224.42 1224.42
Deffered Tax 248.2 248.2

Current Assets, Loans and Advances

Inventories 2,226.41 2,226.41
Sundry debtors 691.67 691.67
Cash and bank balances 2,012.38 1382.38
Other current assets 19.29 19.29
Loans and advances 589.53 589.53
5,539.28 4,909.28
Current Liabilities and Provision -6,816.01 -6816.01
Net Current Assets -1,276.73 -1906.73
TOTAL OF (B) 2690.23 2060.23
DATA 2010 (Rs. in Crs) 2011 (E) (Rs. in Crs)

Total assets 2690.23 2060.23

Net Worth 2668.93 2038.93
No. of share 218.17 174.54
Market price of share 265 280
PAT 2,156.63 2,156.63

Assuming PAT to remain same in the year 2010-11

KEY FINANCIAL RATIO (31st March)

Particulars 2010 2011(E)
Return on assets 0.80 1.04
Return on equity 0.81 1.06
Earning per share 9.88 12.35
Price earning ratio 26.82 22.67