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Market perception By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher. Eg: In October 1987 stock prices in US started crashing. Expecting further fall many companies like Citigroup, IBM et al have come out with buyback offers worth billions of dollars at prices higher than the prevailing rates thus stemming the fall.
Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.Companies buy back shares on the open market over an extended period of time
(i) a full and complete disclosure of all material facts;(ii) reasons for the necessity for the buy-back; (iii) the class of security intended to be purchased under the buy-back;(iv) the amount to be invested under the buy-back; and(v) the time limit for completion of buy-back (not exceeding 12 months from the date of passing of the special resolution).
Buy back of shares
Buy Back of Shares<br />Concept<br />VINEESH KUMAR<br />PGDM09,DCSMAt Vagamon, Kerala<br />
Buy back……..Concept<br />What Does Buyback Mean?The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. 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 <br />
Ways of Buyback<br />Book building method<br />Open market <br />Dutch method<br />
Legal aspects<br />Indian Companies Act 1956, Section 77A, SEBI (Buy Back of Securities) Regulations, 1998 are applicable<br />A special resolution has to be passed in general meeting of the shareholders If the buyback is more than 10% of the total paid up capital <br />Buyback should not exceed 25% of the total paid-up capital and free reserves<br />A declaration of solvency has to be filed with SEBI and Registrar Of Companies <br />The company should not make any further issue of securities within 2 years, except bonus, conversion of warrants <br />
Procedures for Buyback<br />Modes of Buy Back<br />Letter of Offer <br />Offer Procedure <br />Payment Procedure <br />Extinguishment of Share Certificate <br />A return on buy-back of securities has to be filed by the company with the ROC in a form specified in Annex- A to the Rules within 30 days of completion.<br />The company has to maintain a Register on shares bought back in a form supplied in Annex- B of the rules.<br />
Modes of Buy Back<br /> (a) From the existing shareholders on a proportionate basis through private offers;(b) By purchasing the securities issued to employed of the company pursuant to a scheme of stock option or sweat equity<br />special resolution is proposed to be passed has to be accompanied by<br /> (i) a full and complete disclosure of all material facts;(ii) reasons for the necessity for the buy-back; (iii) the class of security intended to be purchased under <br /> the buy-back(iv) the amount to be invested under the buy-back; and(v) the time limit for completion of buy-back (not exceeding 12 months from the date of passing of the special resolution).<br />
Letter of Offer <br />A draft letter of offer containing particulars specified in Schedule- II of the rules has to be filed with the Registrar of Companies (ROC)<br /> A declaration of solvency has to be filed in form No. 4A has to be filed with the ROC along with the letter of offer<br />Declaration states the company iscapable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration and has to be signed by at least two directors<br />
Offer Procedure <br />Letter of offer to be dispatched within 21 days from the date of its filing with ROC<br />Offer to remain open from 15 to 30 days from date of dispatch of letter of offer<br />Acceptance to be on a proportionate basis if shares offered by members are more than the total number of shares to be bought back<br />Offers lodged deemed to be accepted unless rejection is communicated within 21 days of date of closure.<br />
Payment Procedure <br />Immediately after conclusion of the date of offer, the company has to open a special account and deposit the entire amount to be paid as consideration for the buy-back<br />
Extinguishment of Share Certificate <br />The share certificates bought back have to be physically destroyed in the presence of the Company Secretary in whole time practice within 7 days from the date of completion of buyback<br />The company has to furnish to the ROC a certificate duly verified by two directors including the managing director and the whole time Company Secretary regarding compliance with the abovementioned rule<br />
Valuation of buy back<br /> Average closing price (which is a weighted average for volume) for a period immediately before to the buyback announcement <br />In the 2nd, shareholders are invited to sell some or all of their shares within a set price range<br />Generally, the price is fixed at a mark up over and above the average price of the last 12-18 months<br />
Post debt equity ratio<br />Post debt equity ratio should not exceed more than 2:1<br />It should also be mentioned in the letter of offer<br />If any of the companies Debt-equity ratio will become more than 2:1 after the buy back, the company won’t be entitled to go for a buy back <br />
Effect of buy back on stock exchanges<br />In most of the cases the stock exchange won’t positively reply to the Buy back <br />Buyback may leads to abnormal increase of prices <br />lead to reduction in investor interest in the market particularly with de-listing of good share Eg: PHILIPS, P&G India etc…<br />
Checklist for investors before accepting the company's buyback offer<br />Take a look at the share price movement immediately before the buyback. If there was a significant rise, the prima facie assumption is that the promoters have been up to tricks <br />Debt-equity ratio: The companies are hugely under debts are unlikely to have free cash <br />Companies that have just come to the capital markets to raise money are unlikely to be good candidates for buyback <br />Passing the resolution with lot of publicity , Empowering the board to buyback whenever allowed , there is enough scope for suspecting<br />