Final Buy Back

8/8/2019 Final Buy Back

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BUYBACK


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HISTORY

Prior to the amendment of the 1999 of the companies actthere was no way a company could buy its shares back from theshareholders without a prior sanction of the court (except for the

preferential shares).

Though there were ways by which a company could buyits shares back from the shareholders but it could not be donewithout the sanction of the court.

This was done to protect the rights of the creditors aswell as the shareholders. But the need of less complex ways ofbuying its shares back by the company was always felt.


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WHAT DOES BUYBACK MEAN?

Buyback is reverse of issue of shares by acompany where it offers to take back itsshares owned by the investors at a specified

price; this offer can be binding or optional tothe investors.

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


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SECTIONS

The provisions regulating buy back of shares arecontained in Section 77A, 77AA and 77B of theCompanies Act,1956.

These were inserted by the Companies(Amendment) Act,1999.

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 LimitedCompany and Unlisted Public company (BuyBack of Securities) rules,1999 pursuant toSection 77A(2)(f) and (g) respectively.


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PROCEDURE FOR BUY BACK

Where a company proposes to buy back its shares, it shall, afterpassing of the special/Board resolution make a public announcementat least one English National Daily, one Hindi National daily andRegional Language Daily at the place where the registered office ofthe company is situated.

The public announcement shall specify a date, which shall be"specified date" for the purpose of determining the names ofshareholders to whom the letter of offer has to be sent.

A public notice shall be given containing disclosures as specified inSchedule I of the SEBI regulations.

A draft letter of offer shall be filed with SEBI through a merchantBanker. The letter of offer shall then be dispatched to the members of

the company.


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Cont.

A copy of the Board resolution authorizing the buy backshall 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 notless than 15 days and not more than 30 days.

A company opting for buy back through the public offeror tender offer shall open an Escrow Account.


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BUY-BACK FROM WHOM ?

Buy-back is permitted only for the equity shares and preferenceshares, employees stock options and sweat equity shares, of acompany.

BUY-BACK FROM WHERE?

Existing security holders on a proportional basis

Open market

ESOP (Employee Stock Option)


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Reasons for Buyback

To prevent hostile take over bids

To return surpluscash to share holder

To increase the underlying sharevalue

To support theshare price during periods of

temporary weakness

To achieve or to maintain a target capital

structure To shrinkequity base, thereby injecting much

needed flexibility


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Why companies go for buyback?

Unused Cash

Tax Gains

Market perception

Exit option

Escape monitoring of accounts and legalcontrols

Show rosier financials

Increase promoter's stake


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SOURCES

Free Reserves.

Securities Premium Account.

Proceeds of any shares or other specified

securities like employee stock option.


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CONDITIONSa) The buy back is authorized by its articles.

b) A special resolution has been passed in general

meeting of the company authorizing buy back.

c) If buy back is 10% or less of the total paid up capitaland free reserves of the company, such buy back maybe made if authorized by board of directors atresolution passed at meeting.

d) The buy back does not exceed 25% of the total paid

up capital and free reserves of the company.


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e) Debt equity (including free reserves) ratio does not exceedto 2:1 after the proposal buy back.

f) All shares or other specified securities are fully paid up.

g) The buy back is in accordance with SEBI regulationsframed for this purpose.

h) The buy back of shares listed on stock exchange shouldbe in accordance with regulations made by SEBI.

i) Every buy back should be completed within 12 monthsfrom the date of passing the special resolution or board

resolution

CONTu.


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METHOD OF BUY BACK

Buyback through Open Market Operations

Buyback through Tender Offer.

Selective buy-backs


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Open Offer Purchase

In an open offer,acompany can buy itsshares

directly from thestockmarket through brokers.

Open-market purchasesare resorted to when thenumber ofshares to be bought back is relatively

small. Thecompany has to fixamaximum price

for an open market offer,stipulate the number of

shares it intends to purchase,and announced theclosing date of the offer.


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Tender Offer A tender offer ismade when the number ofshares to

be bought back is large. Such an offer isa fixed priceoffer, i.e., thecompany fixesa particular price for the

maximum number ofshares it is willing to purchase. Italso fixesan outer time limit for accepting the offer.The offer price is usually fixed at a premium in orderto encourageshareholders to surrender their shares.Thecompany accepts theshares on a proportionate

basis if the offer is over subscribed. But if offer isunder-subscribed, thecompany may either acceptwhatever is tendered or extend the time limit.


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Referenceslide

The fundamental difference between an open

offer and a tender offer depends on the price

at which thesharesare repurchased. In a

tender offer,acompany is forced to pay the

price that it had fixed for the repurchase,

whereas in an open offer, thecompany only

fixesamaximum price, but the repurchase ismadeat the prevailing market price.


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THE FUNDAMENTAL DIFFERENCE

BETWEEN

Open Offer

A company only fixes amaximum price, but therepurchase is made at theprevailing market price.

Tender Offer

A company is forced topay the price that it hadfixed for the repurchase


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Reference Slide

Selective buy-backs In broad terms,aselective buy-back is one in which identical

offersare not made to every shareholder, for example, if offersaremade to only some of theshareholders in thecompany. Theschememust first beapproved by all shareholders, or by aspecial resolution (requiring a 75% majority) of themembers inwhich no vote iscast by selling shareholders or their associates.Selling shareholdersmay not vote in favour ofaspecialresolution to approveaselective buy-back. The notice toshareholdersconvening themeeting to vote on aselective buy-backmust includeastatement setting out all material

information that is relevant to the proposal,although it is notnecessary for thecompany to provide information alreadydisclosed to theshareholders, if that would be unreasonable


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Selective buy-backs

Identical offersare not made to every

shareholder


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ESOP


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"ESOP" is an acronym that stands for Employee Stock

Option Plan.

Employee benefit plan.

The purpose of an ESOP is to enable employees to

acquire beneficial ownership in their Company without

having to invest their own money.

What isan ESOP?


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DEFINITIONS

Section 2(15A): Employee Stock Option means the option given to the whole time

directors, officers or employees ofa company, which gives such directors, officers

or employees the benefit or right to purchase or subscribe at a future date, the

securities offeredbythe company at a pre determined price.

The Section 81 read with various SEBI Guidelines speaks about ESOP; Securities

Exchange Board of India framed the SEBI (Employee Stock Option Scheme and

Employees Stock Purchase Scheme) Guidelines, 1999 and has been amended

thereafter from time to time;


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OBJECTIVES OF ESOP

Attracting critical skills

Employee feeling of ownership and commitment

Creating additional wealth for employees

A method to supplement social security benefits

To retain employees or groups apprehended of high turnover

To introduce a performance management system without incurring full

cash out flow

As a possible hedge against hostile controlling interest

To enforce corporate governance


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Salient Features ofESOP

An option is given to employees to acquire equity shares (or other convertiblesecurities) in the company after a future date but the price is fixed in advance;

The employee has the choice to decide whether to acquire the shares/convertible

securities or not;

In case the employee opts for the shares, he has to exercise an option and pay the

agreed price; After the lock-in period (ifany) the employee can sell the shares in the market and

realize the gain;

The employees holding stock options do not have the right to receive dividend or

vote or enjoy any other privileges ofa shareholder till the shares are actually issued

on exercise of option, after the completion ofvesting period; The options granted to the employees are not transferrable to any other person.

The option granted to the employee cannot be pledged, hypothecated, mortgaged

or otherwise alienated in any other manner


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Types of ESOPTypes of ESOP

Employee StockOption Scheme (ESOS):

the company grants an option to its employees to acquire shares at a future date at apre-determined price. Eligible employees are free to acquire shares on vesting within

the exercise period. Employees are free to dispose of the shares subject to lock-in-

period ifany. Generally exercise price is lower than the prevalent market price.

Employee Stock Purchase Plan (ESPP):

This is generally used in listed companies, wherein the employees are given the right toacquire shares of the company immediately, not at a future date as in ESOS, at a price

lower than the prevailing market price. Shares issued by listed companies under ESPP

will be subject to lock-in-period, as a result, the employee cannot sell the shares and/or

the employee has to continue with the employer for a certain number of years. The

company offers shares to employees as part ofa public issue .

Share Appreciation Rights (SAR)/ Phantom Shares:

Under this scheme, no shares are offered or allotted to the employee. The employee

is given the appreciation in the value of shares between two specified dates as an

incentive or performance bonus, that is linked to the performance of the company as a

whole, as reflected in its share value.


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TheESOP will enable the Company to buy out

thecurrent owners, using tax-deductible

Company contributions.

TheESOP will enable theemployees to share

in thecurrent and futureeconomic rewards of

ownership.

An ESOP will bea better incentive plan for

employees than other alternatives.

Why must thecompany adopt??


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SWE

ATEQ

UITY


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Meaning

Sweat equity is a term used to describe the

contribution made to a project by people who

contribute their time and effort. It can be contrastedwith financial equity which is the money contributed

towards the project. It is used to refer to a form of

compensation by businesses to their owners or

employees.


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Cont

Sweat Equity Shares are shares given to the employees of theCompany for the efforts and work they put in.

In India, theconcept of SWEATEQUITY SHARES was first started byInfosys.

Sweat Equity Shares are given to the employees at a discountedrate ofmarket value.

The whole idea behind giving Sweat Equity is to make theemployee

feel that he/she isa part owner in thecompany.

When employees feel their company has their own funds investedin it, they get better motivated and work more earnestly towardscompany's progress.


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TO WHOM SWEATEQUITY COULD BE

ISSUED

Sweat equity shares by definition could be issued only tothe employees or directors of the company incorporatedunder the Companies Act, 1956.

It could also be issued to the directors or employees of the

foreign subsidiary of an Indian incorporated company aforeign subsidiary is incorporated outside India and can atbest be covered by the definition of body corporate andnot a company under the Companies Act, 1956, thesection has made a fiction of including such a bodycorporate as a company for the purposes of issue ofsweat

equity shares. While the section mentions only employees or directors

the SEBI regulations also mentions issue ofsweat equity topromoters.


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The Consideration for Issue of Sweat Equity The allotment of sweat equity should be at a discount or

consideration otherwise than cash. Sweat equity could be issued in

consideration of providing know-how or making available rights in the

nature of intellectual property or for value addition contributed by

such employee or director.

CLASS OF SHARES WHICH COULD BE ISSUED AS SWEAT

EQUITY

Sweat equity shares can issued only ofa class of shares already issued

it must be only an equity shares and not a preference share.


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ISSUING OF SWEATEQUITY SHARES

GENERAL PRINCIPLES INISSUE OF SWEATEQUITY

The issue shall be authorized by a special resolution.

The issue of sweat equity shares by a listed company shall be in

accordance with the SEBI (Issue of Sweat Equity shares) Regulations,

2002.

In case of an unlisted company, issue of sweat equity shares shall be

subject to Unlisted Companies (Issue of Sweat Equity shares) Rules,2003.

Sweat equity shares is treated as any ordinary equity shares issued by

the company in all respects except in certain cases the issue is for

consideration other than cash. The voting rights and rights as to

dividend etc. will be pari pasu with the existing class ofequity shares.

In terms fsection 77A (5) (d) it is possible for the company to buy back

sweat equity issued to employees of the company pursuant, inter alia,

to a scheme ofsweat equity.


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ADVANTAGES AND DISADVANTAGES OF SWEATEQUITY

Advantages of Sweat Equity Shares

Highly efficacious in extracting the employees efficiency

Promotional i n nature as it a means of receiving shares without spending money

Cost efficient for company as it can save on the employees to be given salary

Receiving ofsweat equity is a long term investment

More income to the employees

Receiving the right to participate in the companys management for employees

Disadvantages of Sweat Equity Shares

More of dilution of power as share is being issued

Can lead to inefficiency ofemployees when the feeling of being in power creeps in

Can also lead to irregularity in income for the employees

Consideration in the nature ofshare can be heavy on otherwise low income employees

During recession or liquidation, the sweat equity share holders may face larger troubles as

their effort go non-benefitted to them.

Excessive issue of sweat equity shares can also lead to overcapitalisation which in turn

would be heavy for the company


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A COMPARATIVE STUDY OF ESOP AND SWEATEQUITY

ESOPS

Types of ESOPS:

Direct allotment of shares

Option to acquire the shares

Stock Appreciation Rights

Issued when the company is well

established

It is issued as a motivation tactic.

Can be issued only to directors &

employees of the company

Sweat Equity

No options available for Sweat Equityholders

Issued at the outset of a newly formed

company or when the company is

starting a new line of business

It is issued to attract the best & most

sought after people in the industry

Can be issued to promoters, directors &

employees


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Final Buy Back

Documents

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