SHARE REPURCHASE / SHARE BUYBACK

Concept

Implication of Share Repurchase:

Correction of over pricingShoring up management stakeExit mechanismShareholder value management

Equity Repurchases in India:

Till 1998, companies not allowedSelling in secondary market was only exit

routeAs per companies act, lot of statutory

restrictionOnly for strategic objective

Regulatory framework for Equity Repurchase:

Introduced in October,1998Sec 77A and 77B of Companies ActFinanced out of free reserves and security

premiumCompletion of bay back in 12 months From existing shareholder, from employees

and directors out of ESOPs and Sweat equity

Cant make public issue of same kind securities within six months

Two buy back programmes separated by 365 days period

Only direct company can purchase.

Buyback by Unlisted public companies and Private companies:

No pricing guidelines - Board or the company free to fix.

L of O sent to shareholder contains-- All material facts- Audited financial reports

- Impact of buy back on companies earning, shareholding pattern, management structure

- Declaration of solvency- Auditor’s report

Procedure:

Kept open for not less than 15 days and more than 30 days

Offer accepted in proportionate basisVerification by company within 15 daysOpen special bank accountMake payment by 7 days

Buyback by Listed Companies:

Companies act, SEBI(Buy-back of securities, 1998), provisions of listing agreement.

Appoint merchant banker mandatoryNo price mechanism

Methods:

Fixed price tender offer

Book-building method

Open market purchase

Pricing a share buy-back:

Price to be fixed at a premium over current market price

Lower the p/e, higher the company can payPrice should not be lower than issue priceIf company doesn’t have too long history of

listing it is better to work out IRR.

Quantum of buyback:

Buy back in value terms of shares shall not exceed 25% of total paid up capital and free reserves

Buy back of equity shares shall not exceed 25% of paid up capital.

Debt equity ratio shall not exceed 2:1 after buyback.

DELISTING OF A LISTED COMPANY:

Concept- Delisting is a process by which a company

whose shares are listed on the stock exchange is taken private once again by getting its publicly held shares bought over by private shareholder and terminating the listing agreement with the stock exchange.

De-listing: Either compulsory or voluntary

Reasons-Stock exchange penalizes companyNon payment of listing feesViolation of listing agreementStatutory violation as non filing of accounts

De-listing in India:

De-listing related with strategical, financial and investment banking consideration.

If Cost of remaining listed outweighs the benefit sought to be received then de-listing is valid decision.

Private equity considered better in terms of returns.

In Weak market condition the cost of regulatory compliances increase cost of servicing public equity.

Regulatory requirement for de-listing SEBI(De-listing of Securities), 2003.

Voluntary sought by promotersAny scheme of arrangement consequent to

which shareholding fall below limit requiredCompulsory de-listing by stock exchangesConsolidation of holding by a person in a

manner in which public holding falls below requirement

When a company makes a buy back of shares in such a way that the public shareholding falls below the minimum limit required.

An open offer made by an acquirer pursuant to Takeover code due to which public shareholding falls below required limit.

Voluntary De-listing:

Listed at least 3 years prior to date of delistingObtain approval from shareholder in general

meetingMerchant banker should be appointed to

administer the buy-back for de-listing.

Pricing a Voluntary De-listing:

Reverse book building process followedPublic announcement for floor priceFloor price determined as average of 26

weeks traded quotes No cap prices

Process requirement:

Announcement for de-listing contain information of floor price, trading center, trading process, stock exchanges.

Promoter opens escrow account and deposit 100% of the amount required

Bids put by on line electronic systems through trading members

Bidding period last for 3 days.

After 2 days of closing final price announced

Conditions-If any convertibles outstanding, de-listing not

permittedDelisting need not be given where securities

continues to be listed in NSE and BSE.

Compulsory de-listing

De-listing pursuant to a right issue

Re-listing