A

PROJECT REPORT

OF

LEGAL ASPECTS OF BUSINESS

ON

RELIANCE INFRASTRUCTURE LIMITED

BUY BACK OF SHARES

Submitted to: Prof. Suryakant Solanki

SUBMITTED BY:

Reena Ahuja (08061)

Jayraj Bhuptani (08067)

Leena Kanjani (08080)

Sulabh Mehta (08084)

Anita Paryani (08096)

Amin Pattani (08100)

Mehul Rakholiya (08101)

Nikhil Samani (08104)

Bhavna Thacker (08112)

Krishna Vyas (08118)

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INTRODUCTION

A stock buyback, also known as a "share repurchase", is a company's buying back its

shares from the marketplace. You can think of a buyback as a company investing in

itself, or using its cash to buy its own shares. The idea is simple: because a company

can’t act as its own shareholder, repurchased shares are absorbed by the company, and

the number of outstanding shares on the market is reduced. When this happens, the

relative ownership stake of each investor increases because there are fewer shares, or

claims, on the earnings of the company.

Why companies buy back?

Support share value: 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. As number of shares decreases the market price of the

shares will be increases.

To avoid takeover bid: Because of buy-back the total number of outstanding shares

decreases and automatically the promoters’ stake is increase and as a result the

company can avoid the takeover bid from any outsiders.

Unused Cash: If they have huge cash reserves with not many new profitable projects

to invest in and if the company thinks the market price of its share is undervalued. Eg.

Bajaj Auto went on a massive buy back in 2000 and Reliance's recent buyback.

However, companies in emerging markets like India have growth opportunities.

Therefore applying this argument to these companies is not logical. This argument is

valid for MNCs, which already have adequate R&D budget and presence across

markets. Since their incremental growth potential limited, they can buyback shares as

a reward for their shareholders.

Tax Gains: Since dividends are taxed at higher rate than capital gains companies

prefer buyback to reward their investors instead of distributing cash dividends, as

capital gains tax is generally lower. At present, short-term capital gains are taxed at

10% and long-term capital gains are not taxed.

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Market perception: By buying their shares at a price higher than prevailing market

price company signals that its share valuation should be higher. Eg: In October 1987

stock prices in US started crashing. Expecting further fall many companies like

Citigroup, IBM et al have come out with buyback offers worth billions of dollars at

prices higher than the prevailing rates thus stemming the fall.

Recently the prices of RIL and REL have not fallen, as expected, despite the spat

between the promoters. This is mainly attributed to the buyback offer made at higher

prices.

Exit option If a company wants to exit a particular country or wants to close the

company buy-back is a good way to do that.

Escape monitoring of accounts and legal controls If a company wants to avoid the

regulations of the market regulator by delisting. They avoid any public scrutiny of its

books of accounts.

Show rosier financials Companies try to use buyback method to show better

financial ratios. For eg. When a company uses its cash to buy stock, it reduces

outstanding shares and also the assets on the balance sheet (because cash is an asset).

Thus, return on assets (ROA) actually increases with reduction in assets, and return

on equity (ROE) increases as there is less outstanding equity. If the company earnings

are identical before and after the buyback earnings per share (EPS) and the P/E ratio

would look better even though earnings did not improve. Since investors carefully

scrutinize only EPS and P/E figures, an improvement could jump-start the stock. For

this strategy to work in the long term, the stock should truly be undervalued.

Increase promoter's stake Some companies buyback stock to contain the dilution in

promoter holding, EPS and reduction in prices arising out of the exercise of ESOPs

issued to employees. Any such exercising leads to increase in outstanding shares and

to drop in prices. This also gives scope to takeover bids as the share of promoters

dilutes. Eg. Technology companies which have issued ESOPs during dot-com boom

in 2000-01 have to buyback after exercise of the same. However the logic of buying

back stock to protect from hostile takeovers seem not logical. It may be noted that one

of the risks of public listing is welcoming hostile takeovers. This is one method of

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market disciplining the management. Though this type of buyback is touted as

protecting over-all interests of the shareholders, it is true only when management is

considered as efficient and working in the interests of the shareholders.

Checklist for investors before accepting the company's buyback offer:

Take a look at the share price movement immediately before the buyback. If there

was a significant rise, the prima facie assumption is that the promoters have been up

to tricks.

Debt-equity ratio: The companies are hugely under debts are unlikely to have free

cash.

Companies that have just come to the capital markets to raise money are unlikely to

be good candidates for buyback.

When the management has passed special resolutions, with a lot of publicity,

empowering the Board to buy back whenever allowed, there is enough scope for

suspicion. Anybody with the genuine intention of buying back to enhance

shareholders' wealth would try to do so with minimum publicity so that the share

price does not flare up due to speculators.

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Methods of Buybacks

1. Tender Offer

Shareholders may be presented with a tender offer by the company to submit, or tender, a

portion or all of their shares within a certain time frame. The tender offer will stipulate

both the number of shares the company is looking to repurchase and the price range they

are willing to pay (almost always at a premium to the market price). When investors take

up the offer, they will state the number of shares they want to tender along with the price

they are willing to accept. Once the company has received all of the offers, it will find the

right mix to buy the shares at the lowest cost.

2. Open Market

The second alternative a company has is to buy shares on the open market, just like an

individual investor would, at the market price. It is important to note, however, that when

a company announces a buyback it is usually perceived by the market as a positive thing,

which often causes the share price to shoot up.

Through book-building process

Like a book building process is used to determine an effective price for raising funds,

a reverse book building process is used to determine an exit price for de-listing.

Generally, when a person (seller) wants to exit, he doesn't know the intention of

buyer. Reverse book building gives the seller a right to decide the price at which he

wishes to exit, and the buyer, the option to decide whether he wants to accept or reject

the same. The acquirer would determine the average price of 26 weeks before the date

of announcement of public announcement, and the shareholders are allowed to tender

at/ or above this floor price. The process of price discovery is undertaken as in normal

book building process, and the cut off price /final price is the one at which maximum

shares are tendered. If the acquirer accepts the price, the shares are tendered to all

those who have bid lower than that, and if the acquirer rejects the price, then the

shares are returned to the shareholders. This is likely to be implemented in some time.

Some views are that it would result in improved transparency, and better price

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discovery. While others feel that there could be increased manipulation because of the

lesser participation as opposed to book building process which attract increased

participation.

Stock exchanges

The company can also buy its shares through stock exchanges as the investors. 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

3. From employees & others

The company can purchase the securities issued to employees of the company pursuant to

a scheme of stock option or sweat equity.

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BUY BACK OF SHARES UNDER THE COMPANIES ACT, 1956

The provisions regulating buy back of shares are contained in Section 77A, 77AA and

77B of the Companies 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 Limited Company and Unlisted Public company (Buy Back of Securities)

rules,1999 pursuant to Section 77A(2)(f) and (g) respectively.

Resources of Buy Back

A Company can purchase its own shares from: 

Free reserves: Where a company purchases its own shares out of free reserves, then a

sum equal to the nominal value of the share so purchased shall be transferred to the

capital redemption reserve and details of such transfer shall be disclosed in the

balance-sheet.

Securities premium account: Where the premium on shares has been transferred.

Proceeds of any shares or other specified securities: A Company cannot buy -back its

shares or other specified securities out of the proceeds of an earlier issue of the same

kind of shares or specified securities.

Conditions of Buy Back

1. The buy-back is authorised by the Articles of association of the Company;

2. A special resolution has been passed in the general meeting of the company

authorising the buy-back. In the case of a listed company, this approval is required by

means of a postal ballot. Also, the shares for buy back should be free from lock in

period/non transferability. The buy-back can be made by a Board resolution If the

quantity of buyback is or less than ten percent of the paid up capital and free reserves;

3. The buy-back is of less than twenty-five per cent of the total paid-up capital and fee

reserves of the company and that the buy-back of equity shares in any financial year

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shall not exceed twenty-five per cent of its total paid-up equity capital in that

financial year;

4. The ratio of the debt owed by the company is not more than twice the capital and its

free reserves after such buy-back;

5. There has been no default in any of the following

a. in repayment of deposit or interest payable thereon,

b. redemption of debentures, or preference shares or

c. payment of dividend, if declared, to all shareholders within the stipulated

time of 30 days from the date of declaration of dividend or

d. repayment of any term loan or interest payable thereon to any financial

institution or bank;

6. 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;

7. All the shares or other specified securities for buy-back are fully paid-up;

8. The buy-back of the shares or other specified securities listed on any recognised

stock exchange shall be in accordance with the regulations made by the Securities and

Exchange Board of India in this behalf; and

9. 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.

Disclosures in the explanatory statement

The notice of the meeting at which special resolution is proposed to be passed shall be

accompanied by an explanatory statement stating - 

(a) a full and complete disclosure of all material facts; 

(b) the necessity for the buy-back; 

(c) the class of security intended to be purchased under the buy-back; 

(d) the amount to be invested under the buy-back; and 

(e) the time-limit for completion of buy-back

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Filing of Declaration of solvency

After the passing of resolution but before making buy-back, file with the Registrar and

the Securities and Exchange Board of India a declaration of solvency in form 4A. The

declaration must be verified by an affidavit to the effect that the Board has made a full

inquiry into the affairs of the company as a result of which they have formed an opinion

that it is capable of meeting its liabilities and will not be rendered insolvent within a

period of one year of the date of declaration adopted by the Board, and signed by at least

two directors of the company, one of whom shall be the managing director, if any: 

No declaration of solvency shall be filed with the Securities and Exchange Board of India

by a company whose shares are not listed on any recognized stock exchange.

Register of securities bought back

After completion of buyback, a company shall maintain a register of the securities/shares

so bought and enter therein the following particulars

a. the consideration paid for the securities bought-back,

b. the date of cancellation of securities,

c. the date of extinguishing and physically destroying of securities and 

d. such other particulars as may be prescribed

Where a company buys-back its own securities, it shall extinguish and physically destroy

the securities so bought-back within seven days of the last date of completion of buyback.

Issue of further shares after Buy-back

Every buy-back shall be completed within twelve 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

months from the date of completion of buy back.

Filing of return with the Regulator

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A Company shall, after the completion of the buy-back file with the Registrar and the

Securities and Exchange Board of India, a return in form 4 C containing such

particulars relating to the buy-back within thirty days of such completion. 

No return shall be filed with the Securities and Exchange Board of India by an

unlisted company.

Prohibition of Buy-back

A company shall not directly or indirectly purchase its own shares or other specified

securities:

(a) Through any subsidiary company including its own subsidiary companies; or 

(b) Through any investment company or group of investment companies.

Procedure for buy back

a. 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.

b. 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.

c. A public notice shall be given containing disclosures as specified in Schedule I of

the SEBI regulations.

d. 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.

e. A copy of the Board resolution authorising the buy back shall be filed with the

SEBI and stock exchanges.

f. The date of opening of the offer shall not be earlier than seven days or later than

30 days after the specified date.

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g. The buy-back offer shall remain open for a period of not less than 15 days and not

more than 30 days.

h. A company opting for buy back through the public offer or tender offer shall

open an escrow Account.

Restrictions on buyback by Indian companies:

Some of the features in government regulation for buyback of shares are:

1. A special resolution has to be passed in general meeting of the shareholders

2. Buyback should not exceed 25% of the total paid-up capital and free reserves

3. A declaration of solvency has to be filed with SEBI and Registrar Of Companies

4. The shares bought back should be extinguished and physically destroyed;

5. The company should not make any further issue of securities within 2 years, except

bonus, conversion of warrants, etc.

These restrictions were imposed to restrict the companies from using the stock markets as

short term money provider apart from protecting interests of small investors. 

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.

RELIANCE INFRASTRUCTURE LIMITED

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Reliance Infrastructure Limited (Reliance Infra) was formerly known as Reliance Energy

Limited. Reliance Infra is a part of the Reliance Anil Dhirubhai Ambani Group, India's

second largest business house.

Reliance Infrastructure Ltd is not only India’s largest private sector enterprise in power

utility but also the largest private sector player in many other infrastructure sectors of

India. Reliance infrastructure is involved in generation, transmission, distribution and

trading of electricity and constructing power plants as EPC partners. In the infrastructure

space the company is focused on roads, urban infrastructure which includes MRTS,

Sealink and Airports, Specialty Real Estate which includes business districts, trade

towers, convention centre and SEZ which includes IT & ITES SEZ and non IT SEZ as

well as free trade zones.

Reliance Infrastructure distributes more than 28 billion units of electricity to cover 25

million consumers across different parts of the country including Mumbai and Delhi in an

area that spans over 1, 24,300 sq. kms. It is also executing the first 100% private sector

power transmission project for western grid with an investment worth Rs 2,250 crores.

It is also executing the first 100% private sector power transmission project for western

grid with an investment worth Rs 2,250 crores. It is also ranked among top 5 players in

power trading in the country with 1,050 MU’s traded.

Reliance Power Transmission has been selected through competitive bidding, as the joint

venture partner for setting up the transmission lines, over 300 kms long for Parbati and

Koldam projects in Himachal Pradesh.

It has a business presence that extends to over 20,000 towns and 4.5 lakhs villages in

India, and 5 continents across the world. ADAG has a customer base of over 100 million,

the largest in India, and a shareholder base of over 12 million, among the largest in the

world.

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Reliance Anil Dhirubhai Ambani Group currently has a market capitalisation of over

Rs.3,00,000 crore, net worth in excess of Rs. 55,000 crore, cash flow of Rs. 11,000 crore,

net profit of Rs. 7,000 crore and zero net debt.

Reliance Infrastructure is ranked amongst India’s top 20 listed private companies in terms

of all major financial parameters, including assets, sales, net worth, profits and market

capitalization.

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Method used by Reliance Infrastructure for buy-back

The Proposed Buy-back will be implemented by the Company by way of open market

purchases through the BSE and the NSE. The Company shall not buy back its Equity

Shares from any person through negotiated deal whether on or off the Stock Exchanges

or through spot transactions or through any private arrangement in the implementation of

the Proposed Buy-back.

Benefit of buy back of share to Reliance Infrastructure Limited

Reduction in the outstanding number of equity shares, and consequently, an increase

in earnings per share (EPS);

Improvement in Return on Net Worth and other financial ratios;

Reduction in floating stock, contributing to higher valuations, and enhancing long

term price performance;

Reduction in volatility in the Company's stock price, leading to reduction in the cost

of equity, and weighted average cost of capital (WACC);

No impact on leverage ratios, as the Company is debt free at a net level;

Positive impact on the Company's stock price, contributing to maximization of

overall shareholder value.

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SPECIAL RESOLUTION PASSED BY RELIANCE

INFRASTRUCTURE LIMITED

To consider and, if thought fit, to pass the following resolution as a Special Resolution:

I. RESOLVED THAT pursuant to the provisions of Article 7a of the Articles of

Association of the Company and in accordance with the provisions of Sections 77A,

77AA, 77B and all other applicable provisions, if any, of the Companies Act, 1956

('the Act') and the provisions of the Securities and Exchange Board of India (Buy-

back of Securities) Regulations, 1998 ('the Buy-back Regulations'), including any

statutory modification(s) or re-enactment of the Act or the Buy-back Regulations

for the time being in force, and also subject to the approvals, permissions and

sanctions of Securities and Exchange Board of India, Reserve Bank of India,

Government of India and other authorities, institutions or bodies ('the appropriate

authorities') as may be necessary and subject to such conditions and modification(s)

as may be prescribed or imposed by them while granting such approvals,

permissions and sanctions, which the board of directors of the Company

(hereinafter referred to as 'the board' which term shall be deemed to include any

committee which the board may constitute to exercise its powers, including the

powers conferred by this resolution) is empowered to accept, the consent of the

Company be and is hereby accorded to the board to buy-back from the shareholders

of the Company, equity shares of Rs.10 each of the Company not exceeding

5,91,32,565 equity shares, being 25% of the total existing paid-up equity share

capital of Rs.236,53,02,620 comprising of 23,65,30,262 equity shares at a price not

exceeding Rs. 1,600.00 per equity share to be financed out of the Securities

Premium Account and/or Free Reserves such that the aggregate consideration for

the shares to be bought-back does not exceed Rs.2,000.14 crore (as reduced by the

amount, if any, used for buy-back of shares in terms of the offer of buy-back in

pursuance of the resolution passed by the board of directors of the Company at its

meeting held on March 5, 2008), being an amount not exceeding 25% of the paid-

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up equity share capital and Free Reserves (including Securities Premium) of the

Company (hereinafter referred to as 'buy-back').

II. RESOLVED FURTHER THAT the board be and is hereby authorised to

implement the buy-back within a period of 12 months from the date hereof (or such

extended period as may be permitted under the Act or the Buy-back Regulations or

by the appropriate authorities), in one or more tranches, from the Open Market

through Stock Exchanges.

III. RESOLVED FURTHER THAT subject to the limits laid as aforesaid, the board be

and is hereby authorized to determine from time to time the exact amount to be

utilized towards the buy-back and exact number of equity shares to be bought-back.

IV. RESOLVED FURTHER THAT nothing contained hereinabove shall confer any

right on the part of any shareholder to offer and/or any obligation on the part of the

Company or the board to buy-back any shares and/or impair any power of the

Company or the board to terminate any process in relation to buyback, if so

permissible by law.

V. RESOLVED FURTHER THAT buy-back of shares from Non-resident

Shareholders, Shareholders of foreign nationality, etc. shall be subject to such

further approvals from the concerned authorities as may be required including

approvals from Reserve Bank of India under the Foreign Exchange Management

Act,1999.

VI. RESOLVED FURTHER THAT the board be and is hereby authorised to do all such

acts, deeds, matters and things as it may, in its absolute discretion, deem necessary,

expedient, usual or proper with regard to the implementation of the buy-back in

accordance with the prescribed regulations including appointment of merchant

banker, brokers and other intermediaries, obtaining necessary approvals,

preparation and issue of Public Announcement and all other documents required to

be filed in the above connection and that all acts already done by the board in this

regard till date be and are hereby ratified.

VII. RESOLVED FURTHER THAT for the purpose of giving effect to the above

resolution, the board be and is hereby authorised to give such directions as may be

necessary / desirable and to settle such questions/difficulties whatsoever including

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questions / difficulties in connection with any deceased or insolvent Shareholder or

a Shareholder suffering from any disability or in respect of any shares which are or

may be subject to restraint by any court or other authority, as the case may be.

VIII. RESOLVED FURTHER THAT the board be and is hereby authorised to sub-

delegate all or any of the authorities conferred, as above, as it may in its absolute

discretion deem fit, to any director(s)/ officer(s)/ authorised representative(s) of the

Company in order to give effect to the aforesaid resolution."

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