Buybacks and De listing

Investment Banking
 Share Re purchase or share buyback
The process of company buying its own shares
from its shareholders
It is the reverse of an issue of shares
Exit is provided to the shareholders
In the initial stage they need more cash for
growth
In maturity the requirement is modest and the
growth opportunities are less and the only
way to improve ROE is to buyback.
 Implications of share Repurchase
Correction of over capitalisation
Shoring up management stakes
Exit mechanism
Shareholder value management
 Regulatory framework for equity re
purchase
The general conditions applicable to all types of companies for buy back of
securities in terms of the provisions of sections 77A and 77B of the
Companies act are listed below
The buy back has to be financed from Reserves and surplus
Buy back can be made from the existing security holders on proportionate
basis , or from employees and directors out of the ESOP shares or sweat
equity shares through open market operations
A declaration of solvency to be filed with OC and the SEBI
All the securities bought back to be destroyed within seven days from the date
of conclusion of buy back programme
No company can make the public issue of the same bought back securities
within 6 months from the conclusion of the buy back programme
Two buy back programmes shall be separated by a period of 365 days
The buy back should be a direct purchase by the company and not an indirect
purchase through its subsidiaries or group investment companies
Buy back by unlisted public companies
and private companies
A company can buy back its shares by either of the following methods:
From the existing shareholders on a proportionate basis through private efforts
By purchasing the securities issued to employees of the company pursuant to a scheme of
stock option or sweat equity
The letter of offer sent to the shareholders for the buy back offer shall contain the
following details
The information on the proposed offer with elaborate details on capital structure,
shareholding pattern and the basis of arriving at the quantum and price of the proposed buy
back
All material facts relevant to the buy back offer
Audited financial information for the previous three years together with specified financial
ratios pre and post buy back
Management discussion and analysis on the likely impact of buy back on the companys
earnings, shareholding pattern and any change in management structure
The declaration of solvency
Auditors report addressed to the Board
 Buy back by listed companies
Fixed Price tender offer
Fixed price arrived by the company
Book building method
Shareholders are invited to put in bids for repurchase of their shares
The Board resolution on the maximum price of the securities is
declared on which the bids are invited
Open market purchases
Buy shares from the secondary market in the name of the company at
varied price based on the prevailing market price but subject to the
maximum price and quantity already approved
This method is transparent and company actually end up buying
shares at an average price which could be lower than the maximum
price approved
 Pricing of a Buy back offer
Numerical
 Fixing the quantum of buy back
numerical
 De listing of a listed company
Delisting is a process by which a company whose shares are listed
on a stock exchange is taken private once again by getting its
publicly held shares bought over by private shareholders and
terminating the listing agreement with the stock exchange
No public shareholding after delisting
Shares can not be traded in the stock exchange
Delisting is a process also known as going private
Going private is associated with LBOs in US
Delisting can be compulsory or voluntary
Compulsory de listing happens when the stock exchange penalises a
company through de listing its shares for non payment of listing fee,
violation of the listing agreement or for other statutory violations such
as non filing of accounts
Voluntary de listing is a process initiated by a promoter or an acquirer
or any other person other than the stock exchange
 Continues...
Delisting tends to deprive the capital markets
of depth if well performing companies opted
to de list
Dr. K.R. Chandratre Committee set up in 1977
prescribed criterion for de listing of loss
making companies and other provisions
And later SEBI Delisting of Securities
guidelines 2003 was framed
 Delisting in India
100% FDI in many sectors the MNCs are
preferring this route
 Case for de listing
Cost for a company to stay listed cost of public equity
Cost of regulatory compliance
Cost of equity which is higher than the cost of risk free
debt
This cost of public equity is compared to the return
demanded by private equity investors.
In good market conditions the cost of private equity is
higher than the cost of public equity so the company
should remain listed
In weak market conditions the cost of public equity
overtakes the cost of private equity so the company
should opt for de listing
Regulations requirements for Delisting
For compulsory or voluntary de listing
Voluntary de listing sought by the promoters of a company
Any scheme of arrangement consequent to which the public shareholding falls
below the minimum limit required for the company to stay listed
Promoters seeking to de list a company from some of the stock exchanges
Consolidation of holdings by a person in control of the management in a
manner in which the public shareholding falls below the minimum limit for the
company to stay listed
Compulsory de listing of companies by the stock exchange
Not included in the above are the following situations-
when a company makes a buy back of shares in such a way that the public
shareholding falls below the minimum limit required for the company to stay
listed
An open offer made by an acquirer pursuant to the Takeover Code due to
which the public shareholding falls below the minimum limit required for the
company to stay listed
Voluntary De listing