BUYBACK OF SHARES

Buy Back ?

The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market.

Companies will buyback 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.

Sections
The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the Companies Act,1956. These were inserted (Amendment) Act,1999. by the Companies

The Securities and Exchange Board of India (SEBI) framed the SEBI (Buy Back of Securities) Regulations,1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy Back of Securities) rules,1999 pursuant to Section 77A(2)(f) and (g) respectively.

Objectives

Increase promoters holding Increase earning per share Rationalize the capital structure by writing off capital not represented by available assets. Support share value To thwart takeover bid To pay surplus cash not required by business In fact the best strategy to maintain the share price in a bear run is to buy back the shares from the open market at a premium over the prevailing market price.

Resources of Buy Back

A Company can purchase its own shares from
Free reserves; securities premium account; or 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.

Conditions
The buy-back is authorized by the Articles of association of the Company;
A special resolution has been passed in the general meeting of the company authorizing the buy-back. The buy-back is of less than twenty-five(25%) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back;

Conditions

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There has been no default in any of the following in repayment of deposit or interest payable thereon, redemption of debentures, or preference shares or payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or repayment of any term loan or interest payable thereon to any financial institution or bank; There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts; All the shares or other specified securities for buyback are fully paid-up;

Conditions

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The buy-back of the shares or other specified securities listed on any recognized stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and

The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.

Sources from where the shares will be purchased

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 or the open market through book building process; stock exchanges or

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; or purchasing the securities issued to employees of

Procedure
Where a company proposes to buy back its shares, it shall, after passing of the special/Board resolution make a public announcement at least one English National Daily, one Hindi National daily and Regional Language Daily at the place where the registered office of the company is situated.

The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.
A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.

Procedure

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A copy of the Board resolution authorizing the buy back shall be filed with the SEBI and stock exchanges. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date 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.

Penalty
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 two years, or with fine which may extend to fifty thousand rupees, or with both. The offences are, of course compoundable under Section 621A of the Companies Act,1956.

Issue of further shares after Buy back

Every buy-back shall be completed within twelve (12) months from the date of passing the special resolution or Board resolution as the case may be. A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue, rights issue up to six(6) months from the date of completion of buy back.

SHARE BUY-BACK: POSITIVE ASPECTS

It could enable a company to achieve its desired capital structure more quickly or facilitate a major restructuring. It could avert a hostile takeover bid by reducing the number of shares in circulation

 Market generally positive aspect

interprets

buy-back

as

Shareholders have a choice of deciding whether or not to receive the payout by selling or holding their shares, unlike a dividend payout. Returning excess cash by way of a share buyback gives a company greater flexibility with regard to its dividend policy

SHARE BUY-BACK: NEGATIVE ASPECTS

Re-purchase of its own shares may conversely have a negative signaling effect. Management may not seek to utilize any existing excess cash effectively

 Possible mismanagements may arise if Too high a price is paid for the re-purchased shares or if Cash resources are eroded to the level that could give rise to a risk of insolvency. A return of funds by way of a share buy-back is less certain than an annual dividend stream.

CASE STUDY : HINDUSTAN UNILEVER

INTRODUCTION OF HUL
Unilever set up its first Indian subsidiary, Hindustan Vanaspati Manufacturing Company(1931),followed by Lever Brothers India Limited (1933) and United Traders Limited (1935). These three companies merged to form HUL in November 1956;

Unilever holds 52.10% equity in the company. The rest of the shareholding is distributed among about 360,675 individual shareholders and financial institutions

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Hindustan Unilever Limited (HUL) is India's largest FMCG Company Two out of three Indians are using hul products with over 20 distinct categories these are..

Home & Personal Care Products

Foods & Beverages. The companys Turnover is Rs. 20, 239 crores (for the 15 month period January 2008 to March 31, 2009)

OBJECTIVE
We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life

Our deep roots in local cultures and markets around the

world give us our strong relationship with consumers and are the foundation for our future growth

THE OFFER AND PRICE

11 June 2010 -approved the proposal for buy-back of the Companys own fully equity shares of Rs. 280/(face value of 1/-) each.. Buy-back to the extent of or less than:
25% of the paid up equity capital and free reserves payable in cash for an aggregate amount not exceeding Rs 630 crores of the Company as per the Audited Balance Sheet as on March 31, 2010.

maximum number of shares = 3098333 equity shares aggregating=2.25 Crores which would translate into about 1% of the total equityof the total paid up equity shares as on 7 september 2010.

THE OFFER AND PRICE

The Buy-back was effected by the Company from the open market using the nationwide electronic trading facilities of BSE and NSE The Buy-back Offer was open from August 23, 2010 to March 28, 2011 and a notice of closure was issued to BSE and NSE on March 24, 2011. The Buy-back was effected by the Company from the open market using the nationwide electronic trading facilities of BSE and NSE

Details of Buy Back

The total number of shares bought back under the Buyback is 2,28,83,204 Equity Shares of face value of Re 1/each. The shares were bought back for an average price of Rs 273.26. The total amount utilised in the Buy-back is Rs 6,25,29,68,086 (excluding brokerage and other charges applicable to the purchase) being approximately 99.25% of the total Buy back Offer of Rs 630 crores. The Buy-back was made from open market through stock exchange and does not attract the provisions of Regulation 19(7) (iv) of Securities and Exchange Board of India (Buy Back of Securities) Regulations 1998. All Equity Shares bought back have been extinguished in accordance with Regulation 12(2) of the Buy-back Regulations.

The capital structure of the Company, Pre and Post Buy back
Authorised Share Capital
Rs 225,00.00 Lakhs comprising of 225,00,00,000 Equity Shares of Re 1/- each
Issued, Subscribed and Paid up Capital As on June 11, 2010 (being the date of Board Meeting) - Rs 218,16.87 lakhs comprising of 2,18,16,86,781 Equity shares of face value of Re 1/- each. As on August 11, 2010 (being the date of Public Announcement) - Rs 218,23.20 lakhs comprising of 2,18,23,19,802 Equity shares of face value of Re 1/- each. As on March 28, 2011 (being the date of Closure of Buy-back) - Rs 215,94.37 lakhs comprising of 2,15,94,36,598 Equity shares of face value of Re 1/- each.

IMPACT
The buy-back had not impaired the growth of the Company and also contributes to the overall enhancement of shareholder value.

Generated sufficient cash flows to meet the requirements of the present business and to its stakeholders. The debt equity = 1:5

CONCLUSION
Buybacks should be used as an opportunity to exit only when there is concern over a companys prospects or when the post-buyback free float is expected to shrink considerably. In most other cases, buybacks do offer the lure of an immediate benefitbut you might be better off as a residual shareholder, and gain from a hike in the share of assets and profits of the business.

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