Date post: | 15-Apr-2017 |
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Introduction
It was introduced by Companies Amendment Act,1999
Buy-back refers to purchase by a company of its own shares
It takes place at a specified price generally determined on the basis of average price of shares in past few months
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Reasons for buy-back of shares
Signaling Effect
Realign the capital structure
Avert hostile takeovers
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Disadvantages of buy-back of shares
It puts companies at a risk
Buy-back of shares sends out negative signals to the investors
If a company pays too much for its own shares, it might become a disadvantage
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Provisions governing Buy-back of shares under Companies
Act,2013
Power of company to purchase its own securities
Purchases can be made out of:• Free reserves• Securities premium account• Proceeds of any shares or other specified securities
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Preliminary conditions for buy-back:
• Must be authorized by its articles• A special resolution has been passed at a general meeting of the
company authorizing the buy-back• The buy-back is twenty-five per cent or less of the aggregate of
paid-up capital and free reserves of the company• All the shares or other specified securities for buy-back are fully
paid-up
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If shares or securities are listed, buy back will be in accordance with the regulations made by SEBI
The buy-back in respect of unlisted shares or other specified securities is in accordance Share Capital and Debentures Rules, 2014
No offer of buy-back shall be made within a period of one year from the date of the closure of the preceding offer of buy-back, if any
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The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement
Time Limit
Options for Buy-back
Solvency Declaration
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Extinguishment of Certificate
No further issue till 6 months
Register to be maintained
Return of Buy Back & a Declaration
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Punishment for any Default
Transfer of certain sums to capital redemption reserve account
Capital Redemption Reserve
Utilization of Capital Redemption Reserves
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Taxability
Unlisted Companies Tax payable on amount distributed to shareholders Distributed Income = Buy Price – Issue Price Loss cannot be setoff or carried forward For bonus shares, Issue Price = 0 Tax rate 20% + 10% Surcharge + 3% Educational Cess = 22.66%
Listed companies Long term capital gains exemption if done through listed stock
exchange Tax on Dividend payout to the company
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SEBI Guidelines
No offer of buy-back for 15% or more of paid up capital & free reserves of company shall be made from open market
Not make any offer of buy-back within a period of 1 year reckoned from date of closure of preceding offer of buy-back
Ensure that at least 50% of amount earmarked for buy-back is utilized for buying-back shares
Submit information regarding shares to stock exchange on a daily basis Upload information regarding shares bought-back on its website on daily basis buy-back offer shall open not later than 7 working days from date of public
announcement & shall close within 6 months from date of opening of offer
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Escrow Account Create an escrow account for performance of its obligations Deposit 25% of the amount earmarked for the buy-back Escrow Account may be in the form of
cash deposited with any scheduled commercial bank OR bank guarantee issued in favour of the merchant banker by any
scheduled commercial bank May be released for making payment to the shareholders subject
to at least 2.5% of the amount earmarked for buy-back
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In Cash Deposited Empower merchant banker to instruct bank to make payment of amounts
lying to credit of escrow account, to meet obligations arising out of buy-back
In bank guarantee In favour of the merchant banker Kept valid for a period of 30 days after closure of offer or till completion of all
obligations Shall not be returned by the merchant banker till completion of all obligations Deposit (cash) with a scheduled commercial bank at least 2.5% of total
amount
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Fulfilling obligation, amount & guarantee remaining in escrow account shall be released to company
Non-compliance - forfeit escrow account VWAMP of shares of company during buy-back period was higher than
buy-back price as certified by Merchant banker based on inputs provided by Stock Exchanges
Inadequate sell orders despite buy orders placed by company as certified by e Merchant banker based on inputs provided by Stock Exchanges
Circumstances which were beyond the control of company & in opinion of Board merit consideration
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Methods of Buyback of Listed Companies
Tender Offer
Method
Through Open
Market
Stock Exchange
Book Building Process
From Odd Lot
Holders
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Buy-back through tender offer Shareholders may be presented with a tender offer by the company to
submit, a portion or all of their shares within a time frame.
The size & price is fixed by the company (always at a premium to market price)
Basic entitlement of the shareholders
Excess tenders are not gauranteed to be bought back by the company
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The date of opening the offer shall not be earlier than 7 days or later than 30 days after the ‘specified date’.
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Deposit in an escrow account.
Make payment to the shareholders, whose offer for buy back has been accepted .
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Special Resolution
7 days
File with SE & SEBI
Public Announcement
7 days
File draft LoF
Specified Date/Dispatch LoF
21 days
+ 7 to 30 days
Opening Day
+ 15 to 30 days
Closing Day
Verification of shares / Acceptance Rejection of Offer
15 days
Payment of consideration / Extinguishment of shares
7 days
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Buy back shall be made only on stock exchanges with electronic trading facility through order matching mechanism.
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Complete verification of acceptances & File the particulars of share certificates that are extinguished with stock exchanges.
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Public Announcement
File copy with SEBI
Commencement of Buy Back
2 days 7 days
Purchase of Shares
15 days
Verification of Acceptances
Closure Date
Extinguishment of shares
7 days
Special / BOD Resolution
File Copy with SEBI
7 days
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Buy-back from open market through book building
Special Resolution
Declaration Of Solvency
Appointment of Merchant
Banker
Opening of Escrow Account
Verification of the offers received
Closing of offer for buy-
back
Opening of offer for Buy-
back
Public Announceme
nt
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Price Determination The final offer price shall be determined as the price at which the maximum
number of shares has been offered.
If the acquirers accept final price, they have to accept offers up to and including the final price i.e. 480 shares (i.e. 100+164+216 shares) at the final price of Rs. 260/-.
Offer Quantity (in nos.)
Offer Price (Rs)
Remarks
100 240 Floor Price is Rs. 240 as fixed by the company.
164 250216 260 Final Price is Rs. 260 –
Maximum Quantity54 27010 280
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15 to 30 days
Public Announcement
File copy with SEBI
Commencement of Buy Back
2 days 7 days
Completion of Buy Back
Verification of shares / Acceptance Rejection of Offer
15 days
Payment of consideration / Extinguishment/ Return of Shares
7 days
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Odd lot holders An odd-lot buyback occurs when a company offers to purchase
shares of its stock back from people who hold less than 100 shares.
A popular method that companies use to buy back stocks is called a Dutch auction
This type of offer makes it less expensive both for the company and for the shareholders
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Buy-back for unlisted companies Method
From the existing shareholders on proportionate basis By purchasing the securities issued to employees of the company
Special Resolution
Filing Letter Of Offer along with declaration of solvency with the registrar of companies.
Offer Procedure Dispatch the offer letter immediately Buy back shall remain open from a period not less than 15 days & not exceeding 30 days Acceptance is on a proportionate basis Deemed acceptance
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Payment to Shareholders Open a special bank account Make payment within 7 days of acceptance
General Obligations Of the Company The letter of offer shall contain true, factual and material information. the company shall not issue any shares including by way of bonus The company shall testify the availability of funds Company shall not withdraw the offer once the draft letter of offer has been filed The company shall not utilise any money borrowed from Banks/Financial
instituitions
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Returns to be filed with Registrar
Extinguishment of Certificate Extinguish & physically destroy Furnish a certificate to the registrar of companies duly verified by: i. Two whole time directorsii. Company secretary Maintain records of cancelled shares
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Difference between buy-back ,dividends & bonus share
Buyback of Shares Dividend Bonus Share
Share buybacks represent cash distributed to existing shareholders in exchange for company’s outstanding equity.
Dividends are the portion of corporate profits paid out to stockholders in the form of cash.
Bonus Share is an increase in the amount of shares of the company with the new shares given to share holders.
Share buybacks there's a total flexibility for the company
Dividend payments require a commitment from the company. -
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Buyback of Shares Dividend Bonus Share
Stock buybacks are tax efficient way for companies to return cash to shareholders
On Dividend - dividend payout tax is paid.
Share holders do not have to pay taxes on value of dividend.
Buying back shares is a common technique to increase the ratios. (EPS & RONW)
No Effect EPS will decrease.
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Bayer Cropscience Limited It is an Agri Care Company.
Announced buy back on September 18, 2013
Total shares for buy back 28,79,746
Representing 7.29% of total paid up capital
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Total buy back size is Rs. 454,99,98,680.
Buy back price Rs. 1,580.
Premium of 18.3% over the average closing prices of the Equity Shares on BSE for 3 months.