SHARE
REPURCHASES
INTRODUCTION
• Share repurchase or buyback of shares means companies purchase
their shares from the shareholders.
• It is an investment technique used by the companies to invest in
their shares.
• Repurchased shares may be either cancelled or kept in treasury for
further issue depending on the country’s rules and regulation.
MAJOR TYPE OF SHARE REPURCHASES
FIXED-PRICE TENDER
OFFERS(FTPs)
DUTCH AUCTIONS(Das)
OPEN-MARKET
REPURCHASES(OMRs)
FIXED-PRICE TENDER OFFERS
• The company discloses the total number of shares and the exact
price at which they wishes to purchase from shareholders.
• Shareholders must be whose names and addresses appear in the
Register of Members at a particular point of date.
• The company may fix the price at a premium to a maximum 20
per cent.
• The offer period is between 15-30 days.
Most fixed-price tender offers at least fully subscribed.
OVERSUBSCRIBED
The firm can
buy the shares
on pro rata basis
UNDERSUBSCRIBED
The firm may
extend the offer,
hoping to have
more shares
tendered over time
or may cancel the
offer or simply buy
the offer
INFOSYS
Buyback period 30 Nov to 14 Dec 2017
Buyback 11.30 Cr shares (4.9%)
Tender offer price Rs 1150
Current price was 900 per share
Face value was Rs 5
Share price rose to 1%
REASON: Leaving of CEO Vishal Sikka
DUTCH AUCTIONS
• The price setting is done by the shareholders through their
preferences for tendering various volumes.
• Under SEBI guidelines it is known as book building process.
• Shareholders are asked to inform the numbers of shares and price
they wish to sell their shares.
• Then the offer is open for period of 15-30 days.
• The maximum price arrived by the company after sorting the
responses, is higher than market price.
OPEN MARKET OPERATIONS
• It is the most popular methods of purchases of buy back of shares.
• The company should give a public notice of at least seven days prior to a buy
back.
• The company should disclose the total number of shares and the maximum
number, price at which the buy back will be made.
• Moreover, the promoters cannot sell their shares.
• This method is usually used when the number of shares is small.
• Since the purchases are made directly from the market, the company does not
offer any premium.
INFOSYS
Buyback offer amount is 8260 crores
Date of announcement 11 jan 2019
Buyback offer size 14.54% of capital
Buyback number of shares : 10.32 crore
Buyback price is 800 rs
Face value is 5
MOTIVES/OBJECTIVES
SIGNALLING HYPOTHESIS
CASH FLOW HYPOTHESIS
TAKEOVER DEFENSE
SUBSTITUTION
HYPOTHESIS
SIGNALLING HYPOTHESIS
Information possessed by the insiders are more than the outsiders.
So to maintain information symmetry companies take such decisions
like dividend or share purchases.
Two types of signals
• Undervaluation of the
shares.(when they sell at
huge premium)
• Future prospects growth of
the company.
CASH FLOW HYPOTHESIS
Firms are having the excess capital or cash flow than the profitable
investment opportunities likely to distribute the surplus cash
EXAMPLE : TCS
Type: tender offer
Buyback period 06 sep to 21 sep 2018
Buyback amount 16000 cr (1.99%)
Buyback price was 2100 per share
Face value was RS 1
Record date : 18 aug 2018
Buyback number of shares 76190476
REASON: the company had a large cash balance.
They had returned 60% of the total cash flows.
TAKEOVER DEFENSE HYPOTHESIS
Takeover hypothesis means that companies use share repurchase
as a defensive strategy to prevent hostile takeover.
When there is a threat from the competitor, firms immediately
increase their stake to prevent hostile takeover.
EXAMPLE: Australian brewer foster group in 2011 announced
that they are planning to return $525 million to shareholders
possibly through a share buyback, which was an attempt to fend
off a hostile takeover attempt by rival SABMiller
SUBSTITUTION HYPOTHESIS
• Substitution hypothesis means the preference for share buyback of shares
as a payout method to shareholders over the dividend.
• The main cause for substitution hypothesis is the taxable nature of
income from dividend paid and share buyback in the hands of
shareholders.
• The gain from share repurchase is taxed under either short term or long
term capital gain at the hands of shareholder and dividend paid by the
company is taxed as a regular income in the hands of shareholders.
• Unlike dividends, share repurchase does not promise cash flow in a
regular interval.
IMPACT OF REPURCHASE
• Share repurchases reduce a company’s outstanding shares
hence increases earning per share .
• Consistent repurchases have a magnified effect on
shareholder value, meaning that companies who consistently
buy back their shares can grow EPS substantially faster than
through operational improvements alone.
• Share repurchases not only reduce the cash holdings, and
consequently its total asset base, but is also shrinks
shareholders’ equity on the liabilities side by the same amount,
resulting in improved performance metrics related to return on
assets (ROA) and return on equity (ROE).
• That being said, share repurchases can have a significantly
positive impact on an investor’s portfolio as a share repurchase
indicates a company’s confidence in its future prospects.
DRAWACKS OF SHARE REPURCHASE
• A criticism of buybacks is that they are often ill-timed. A
company will buy back shares when it has plenty of cash or
during a period of financial health for the company and the stock
market.
• The stock price of a company is likely to be high at such times,
and the price might drop after a buyback.
• A drop in the stock price can imply that the company is not so
healthy after all.
• Also, a share repurchase can give investors the impression that
the corporation does not have other profitable opportunities for
growth, which is an issue for growth investors looking for
revenue and profit increases.
• A corporation is not obligated to repurchase shares due to
changes in the marketplace or economy.
• Repurchasing shares puts a business in a precarious situation if
the economy takes a downturn or the corporation faces financial
obligations that it cannot meet.
FINANCING ASPECT OF BUY
BACKS
General reserve
Reserve fund
Dividend equalization fund
Insurance fund
Workmen’s compensation
fund
Profits and loss account
INTERNAL
Short term funds through
banks
Issue of public deposits
Issue of commercial paper
Issuing fresh shares
EXTERNAL
LEGAL ASPECT UNDER COMPANIES ACT
1956,2013
• In 1999 an amendment to the Companies Act allowed Indian
companies to repurchase their shares with retrospective effect from
October 1998.
• This enactment introduced three sections(77A,77AA & 77B) to the
existing Companies Act to allow repurchase of shares.
• Before this amendment, the company is restricted to repurchase their
shares under section 77 of Companies Act 1956.
• Companies are only allowed to repurchase their shares under section
100 and 402 of Companies Act 1956.
PROHIBITION FOR BUY BACK OF
SHARES AND SECURITIES(70)
• A company is prohibited from repurchasing shares directly or
indirectly through a subsidiary or an investment company.
• A company cannot repurchase shares if it is in default of
payment of interest or dividend to debentures and preference
share holder respectively.
• If a company is in default of interest payment to financial
institutions then also it is debarred from buying its shares.
POWER OF COMPANY TO PURCHASE ITS
OWN SECURITIES(68)
1. . Purchase can be made out of:
• its free reserves;
• the securities premium account; or
• the proceeds of the issue of any shares or other
specified securities.
2. Preliminary Conditions:
•
• must be authorized by its articles;
• a special resolution has been passed at a general
meeting of the company authorizing the buy-back,
but the same is not required when:
i. The buy-back is 10% or less of the total paid-up
equity capital and free reserves of the company; and
ii.such buy-back has been authorized by the Board
by means of a resolution passed at its meeting
3. Time
Limit:
Every buy-back shall be completed within a period of one
year from the date of passing of the special resolution, or as
the case may be, the resolution passed by the Board.
4. Options for Buy back:
The buy-back can be from:
• from the existing shareholders or security holders
on a proportionate basis;
• from the open market;
• by purchasing the securities issued to employees of
the company pursuant to a scheme of stock option
or sweat equity.
5. Extinguishment of Certificate:
Company shall extinguish and physically destroy the shares or
securities so bought back within seven days of the last date of
completion of buy-back.
6. No further issue till 6 months:
Where a company completes a buy-back of its shares or other
specified securities, it shall not make a further issue of the same
kind of shares or other securities including allotment of new
shares or other specified securities within a period of six months
except by way of:
a bonus issue or, in the discharge of subsisting obligations such
as conversion of warrants, stock option schemes, sweat equity or
conversion of preference shares or debentures into equity shares.
7. Register to be maintained:
Company shall maintain a register in Form No. SH.10 of the
shares or securities so bought, the consideration paid for the
shares or securities bought back, the date of cancellation of
shares or securities, the date of extinguishing and physically
destroying the shares or securities
8.Punishment for any Default:
If a company makes any default in complying with the provisions
of this section, the company shall be punishable with fine which
shall not be less than one lakh rupees but which may extend to
three lakh rupees
TRANSFER OF CERTAIN SUMS TO CAPITAL
REDEMPTION RESERVE ACCOUNT(69)
1. Capital Redemption Reserve:
Where a company purchases its own shares out of free reserves or
securities premium account, a sum equal to the nominal value
shall be transferred to the capital redemption reserve account and
details of such transfer shall be disclosed in the balance sheet.
2. Utilization of Capital Redemption Reserves:
The capital redemption reserve account may be applied by the
company, in paying up unissued shares of the company to be
issued to members of the company as fully paid bonus shares.
WIPRO
Type : Tender offer
Buyback period :14 aug to 28 aug 2019
Buyback amt 10500 cr (5.35%)
Buyback price was 325 per share
Face value was RS 2
Buyback number of shares 323076923
IMPACT : it climes 4% on the BSE the very next day, eps rises by
5%
REASON : insufficient increase in share price, despite of
improvement in growth, also the government removal of 20% tax
HCL
Type: Tender offer
Buyback period: 18 sep to 03 oct 2018
Buyback amt 4000 cr (2.61%)
Buyback price was 1100 per share
Face value was RS 2
It is at a premium of 9.4 % of their closing price on july 12
Buyback number of shares 36363636
REASON : as a strategy to return more than 50% of its net income
to shareholders.
IMPACT: it results in price down by 2%
PC JEWELLERS
Company in may 2018 has announced buy back of rs 424
crores.
However they have withdrawer because of the non-receipt of
the requisite NOC from the company’s bankers.
The effect of this news was that the shares of the company
have fallen over 40%.
REFERENCES
1. Mergers and acquisitions by fred Weston & Samuel weaver
2. Mergers and acquisitions of companies by P Mohana Rao
3. Mergers, Restructuring and Corporate Control by Weston, Chung,
Hoag
4. Takeovers, restructuring, Corporate Governance by Weston, juan A
Siu, johnson
5. Mergers, Acquisition and Corporate Restructuring by Prasad G.
Godbole.
6. https://taxguru.in/company-law/provisions-governing-buy-sharescompanies-act-2013.html
7. https://www.freepressjournal.in/business/tax-aspects-of-sharebuybacks