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2 It refers to the process of a company, buying
back its own shares from its shareholders.
2 It is the reverse of an issue of shares and is
therefore, also one of the exit route for the
shareholders.(Except promoter͛s stock)
 ¦hy buy back of share?
Conceptual Justification for buy back of shares:
 It balances over capitalization in the company
 It enhances the faith in the mind of the
shareholders about company reputation.
 Increases EPS.
 Motivates better use of reserve & past earnings.
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 †indings
2 Company A is over capitalized, since it has large accumulated profits &
higher level of capital employed than other two companies for the
same level of operation.

2 The Least Return on Capital Employed out of three companies.

2 It also has a higher share capital which reduced its EPS.

2 Company B is optimally capitalized in terms of total capital employed &

debt equity ratio.

2 Company C is undercapitalized & trading dangerously at a small net

worth.
 å
2 Company A has to take higher distribution of capital
back to shareholders to improve its ROCE and EPS.
2 Company B should maintain its financial health.
2 Company C requires immediate inclusion of equity to
refinance its losses & to substitute debts.
2 If company C continues with the same performance it
may lead to bankruptcy in long run.
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2 Correction of Overcapitalization
2 Shoring up Management Stake
2 Exit Mechanism
2 Shareholder Value Management
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2 Till 1998, Indian companies were not allowed to buy back equity
shares from shareholders or from secondary market.
2 Buy back of share became possible after enforcement of Section
77A of Indian Companies act (with effect from October 1998) with
certain restrictions.
2 In addition to this   companies must comply with the
regulations issued by the  

 .
2   companies need to comply with a| guidelines on the
subject.
 ùeneral Conditions
2 The buyback should be financed through
 †ree reserve
 Securities premium account
 Proceeds of earlier issues of dissimilar shares
 Other securities

2 Maximum time for completion of buy-back is 12 months from the date of

passing resolution.
2 Buy back can be made on proportionate basis from
 Existing share holders
 Employees or Directors (issued as ESOP or sweat equity)
2 A declaration of solvency has to be filed with ROC and SEBI, stating that company will

remain solvent for next 12 months

2 All securities bought back must be destroyed within 7 days from the conclusion of

buyback programme.

2 No public issues of same types of securities with six month of buy back except issue of

bonus shares or conversion of convertible instruments.

2 Two buyback must have the gap of at least 364 days even for dissimilar securities.

2 The buyback should be direct purchase not through its subsidiaries or group

investment companies.
 Process of Buy Back
2 †or unlisted Companies
2 †or listed Companies
 nlisted Companies
2 To send the Letter of Offer (L of O) to shareholders
 Details of capital structure
 Shareholding pattern
 Basis of arriving at quantum & price
 Relevant facts to the buy back offers
 Audited financial information for the previous three years
 Specified financial ratios pre-post buy back
 Company͛s opinion about the impact of buy of share on company͛s earnings,
shareholding pattern and any change in management structure
 The declaration of solvency
 Auditors report addressed to the Board.
2 The buyback has to be kept open for members not less than 15 days and not more
than 30 days from the date dispatch of Offer.

2 Proportionate in case of oversubscription

2 Verification of offers within 15 days from the date of closer of offer

2 To open a bank account & deposit the sufficient money to pay all dues of buy back.

2 To make payment to eligible investors within 7 days from the date of verification

2 Company will physically destroy the share within & days after closer of the buy back.
 † 
2 In addition to the companies act, listed companies are
governed through SEBI (Buy Back of Securities)
Regulations, 1998 and the provisions of listing
agreement with the stock exchange.
2 Its mandatory to engage a merchant banker to prepare
the letter of offer & manage buy back offer.
2 To fix the price of the buy through following methods
 †ixed price tender offer

 Book building offer

2 Board decides the maximum price of the buy back

 Open Market purchase

2 Buying directly from secondary market at a price prevailing on that date up to the
approved quantity.

2 Other provisions:
 The buyback of share can to be more than 25% of total paid up capital,
including preference shares.

 In case on equity alone, it cannot be more than 10%.

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2 Pricing of Buyback offer
2 †ixing the Quantum of Buyback
2 Offer strategy
 Pricing Strategy
 Offer methodology
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2 The following are the general principles that
would be useful in deterring the price of Buy
Back.
 Price to be fixed at a premium over the current
market price.
 Lower the current P/E, the higher will the
premium
 Lower the future return on Net worth (RON¦),
higher can be the premium.
 Price should not be less than original issue price.
2 Therefore, It can summarized that there is
direct correlation among RON¦, PER & EPS.
†rom the following formula the maximum
amount of premium can be calculated.
Pч { [1/(RON¦ x PER)]-1}1
P = Premium that can be paid over the market
price.
 Example
2 If the current EPS is Rs. 5 per share and the
current PE is 8 times. The current price would
be Rs. 40. The present RON¦ is 10%, the
premium that can be paid would be
2 P = { [1/(.10 x 8]-1} = 25%.
2 So, if the premium can be paid at least 25%
i.e. Rs. 10 (25% of Rs. 40, the market price of
the share).
2 It can be concluded that if the RON¦ & PE are
good enough, the amount of premium will be
lower.
2 Since both variables are compensatory in the
nature to calculate the amount of premium so
decline in any variable of offset other.
2 †or example, in the above case is RON¦ goes
at 20% & per goes down at 4, there will be no
effect on premium amount.
2 ¦e should also consider the impact of
buyback pricing on post buy back P/E. if the
shareholders find that the loss of returns is
more than offset by the reduction in capital
base, the post buy back P/E would increase.
 Example
2 Current P/E = 5, Current EPS = Rs. 10, RON¦ = 10%,
Capital employed = 1000 lakhs, Paid up capital 100
lakhs (10 lakhs share of Rs. 10 each).
2 The company proposes to buy back its 25% of paid up
capital. †ind out the maximum premium can offered to
this buy back.
2 ¦hat will post buy back price of share if RON¦ is
2 Constant i.e. 10%
2 Increased i.e. 12%
2 Decreased .i.e. 8%
2 P/E is 5 .
2 Analyses the above results if Buy back is Rs.
50, Rs, 75, & Rs. 100.
2 Does it make any difference on post buy back
share price if P/E changes from 5 to 4 or 6.
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 †ixing the quantum of Buy back
2 The quantum of securities that a company can buy
back is governed by the provisions of section 77A of
the Companies Act.
2 There are essential conditions determining the
quantum of buy back.
 The buy back value in terms of shares or securities shall
not exceed 25% of the total paid up capital and free
reserve of the company.
 Buy back of equity shares shall not exceed 25% of the paid
up equity capital in any given financial year.
 The residual debt- equity ratio shall not exceed 2:1 after
the buy back. Equity includes paid up capital + free
reserve.
 Example:
A company has the following financials as per the recent audited balance sheet.

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2 The company͛s current EPS is Rs. 20 and the
market price is Rs. 40. The company earned a
profit after tax of Rs. 4 lakhs for the relevant
financial year.
2 On the basis of above information find out the
minimum & maximum quantity & price range
for buy back of shares.

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 Cases for discussion
2 Sterlite Industries
2 Indian Rayon
2 Bajaj Auto
2 Reliance Industries
2 ONùC
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