Buy BACK OF SHARESCreative MembersDhairya Mehta 28

Mehul Nagda 36

Pooja Shah 51

Dipika Vora 59

AGENDA

• INTRODUCTION• MEANING• OBJECTIVES OF BUYBACK• PROVISIONS UNDER THE COMPANIES ACT, 1956• SEBI GUIDELINES • EFFECTS OF BUYBACK OF SHARES ON

Company Shareholders

• IMPROVEMENT IN THE FINANCIAL RATIOS• CASE STUDIES – HUL ltd

INTRODUCTION

RESTRICTION ON PURCHASE OF ITS OWN SHARES BY A COMPANY

Section 77(1) of the Company’s Act provides that a company limited by shares or a company limited by guarantee having a share capital cannot buy its own shares.

MEANING OF BUYBACK OF SHARES

• Cancellation of share capital

• Buyback is reverse of issue of shares

• Reduction in share capital

• To prevent hostile take over bids

• To return surplus cash to share holder

• To increase the underlying share value

• To support the share price

• To achieve or to maintain a target capital structure

• To shrink equity base

OBJECTIVES OF BUYBACK

PROVISION FOR BUYBACK

NOW PERMITTED BY:

The Company’s (Amendment) Act, 1999 (vide sections 77A, 77AA and 77B) effective from 31-10-1998 and as amended by Company’s ( Amendment ) Act, 2002. (Effective from 23-10-2001)

GUIDELINES ISSUED BY

• SEBI, and• Dept. of company affairs

Buy back can be done either of :

• Free reserves.

• Securities premium account.

• Proceeds of any shares or other Specified securities.

PROVISIONS UNDER COMPANIES ACT 1956

SOURCES OF BUY-BACK- Sec77A (I)

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

CONDITIONS FOR BUY-BACK- Sec 77A(2)

Explanatory statements stating:

• Necessity for buy-back

• Class of security of buy-back

• Amount to be invested

• Time limit for completion of buy-back

NOTICE OF THE MEETING - Sec 77A(3)

BUY BACK WITHIN 1 YEAR - Sec 77A(4)

Every Buy Back should be completed within 12 Months from the date of passing of the special resolution

The buy-back may be:

a. From the existing security holders on a proportionate basis: or

b. From the open market; orc. From odd lots ; ord. By purchasing the securities issued to employees

of the co. Pursuant to a scheme of stock option or sweat equity.

SOURCES OF BUY-BACK- Sec 77A(5)

DECLARATION OF SOLVENCY – Sec 77A(6)

Declaration of solvency to be filed with the -

a. Registrar of company ; andb. SEBI (for listed co’s. only)

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.

The company shall extinguish and physically destroy the securities so bought back within 7 days of completion of buy-back

DESTRUCTION OF THE SECURITIES – Sec 77A(7)

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. stock option schemes or sweat equity, or d. 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, andd. 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 co’s.)

For default:

a. Imprisonment upto 2 years; orb. Fine upto Rs. 50,000; orc. Both

PENALTIES- Sec 77A(11)

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

METHODS OF BUYBACK OF SHARES

• From existing shareholders through tender offer

• From open market through– Book building process– Stock exchange

• Odd-lot holders

EFFECTS OF BUYBACK OF SHARESThis can be broadly divided into two parts:

a) Effects on the Company:SHAREHOLDING PATTERN CHANGESCompany: A Ltd • Total no of shares 150• Face Value 10• Equity Capital 1500 • Buyback of equity shares 25 • Max offer price 15

Particulars Pre buy back Post buy back

Promoters 50 50 42

Non promoters 100 75 83

Particulars Pre buy back Post buy back

Promoters 33.33 40 33.33

Non promoters 66.67 60 66.67

SHAREHOLDING PATTERN IN %TERM

IMPROVEMENT IN THE FINANCIAL RATIOS

Particulars Pre buy back Post buy back

Cash

Assets

Earnings

Outstanding shares

Equity shares

Reserves

Shareholders equity

MPS

1000

10000

1500

150

1500

200

1700

10

625

9625

1500

125

1250

75

1325

15

FINANCIAL RATIO

ROA

ROE

EPS

P/E ratio

0.15

0.88

10

1

0.16

1.13

12

1.25

EFFECTS OF BUYBACK OF SHARES (Contd….)

b) Effects on Shareholders:

•Tax Benefits

•Higher Proportion of shares

•Higher share price

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 : Rs 280

• Maximum Amount : 630 crore

• Equity and reserves : Rs 2583 Crore

• Cash and bank balance : Rs 1892 crore

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 218.17 174.536Reserves & Surplus 2450.76 1864.394

2668.93 2038.932.Minority Interest 10.46 10.463.Loan Funds (a)Secured Loan 10.49 10.49(b)Unsecured Loan 0.35 10.84 0.35TOTAL OF (A) 2690.23 2060.23 (B) Applications of Funds Net block 2214.36 2214.36capital work-in progress 279.98 279.98Investment 1224.42 1224.42Deffred Tax 248.2 248.2 Current Assets, Loans and AdvancesInventories 2,226.41 2,226.41Sundry debtors 691.67 691.67Cash and bank balances 2,012.38 1382.38Other current assets 19.29 19.29Loans and advances 589.53 589.53 5,539.28 4,909.28Current Liablities and Provision -6,816.01 -6816.01Net Current Assets -1,276.73 -1906.73TOTAL OF (B) 2690.23 2060.23

DATA 2010 (Rs. in Crs) 2011 (E) (Rs. in Crs)

Total assetsNet WorthNo. of shareMarket price of sharePAT

2690.232668.93

218.17265

2,156.63

2060.232038.93

174.54280

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

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