BUYBACKOFSHARES

Definition 3 Buyback is reverse of issue of shares by a company where it offers to take back its shares owned by the investors at a specified price; this offer can be binding or optional to the investors Exmples Oracle, Microsoft etc. In India too there have been a lot of companies that have announced buybacks like Reliance Industries, GE Shipping, Bombay Dyeing, Raymond etc.

Section 77A, 77AA, and 77B of Companies Act 1956 The amendment of the Companies Act, 1956 came into force on 31st day of October, 1998. There was Insertion of new sections 77A, 77AA and 77B.

OBJECTIVEOFBUYBACKOFSHARES
Shares may be bought back by the company on account of one or more of the following reasons

UnusedCash: 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. 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 their shareholders. buyback shares as a reward for

TaxGains Since dividends are taxed at higher rate than capital gains companies prefer buyback to reward their investors instead of distributing 1

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. Marketpercetion By buying their shares at a price higher than prevailing market price company signals that its share valuation should be higher.

Exitoption If a company wants to exit a particular country or wants to close the company it can offer to buy back its shares that are trading in the market.

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.

Escapemonitoringofaccountsandlegalcontrols If a company wants to avoid the regulations of the market regulator by delisting. They avoid any public scrutiny of its books of accounts.

Showrosierfinancials 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.

Generally the intention for the buyback is a mix of any of the above reasons.

ADVANTAGESANDDISADVANTAGESOFBUYBACKOF SHARES
Increaseconfidenceinmanagement: It might enhance the confidence of its investors on the companys board of directors, as these investors know that the directors are ever willing to return surplus cash if its not able to earn above the companys alternative investment or cost of capital.

Enhancesshareholdersvalue: Generally, share buybacks are good for shareholders. The laws of supply and demand would suggest that with fewer shares on the market, the share price would tend to rise. Although the company will see a fall in profits because it will no longer receive interest on the cash, this is more than made up for by the reduction in the number of shares.

HigherSharePrice: Buying back stock means that the company earnings are now split among fewer shares, meaning higher earnings per share (EPS). Theoretically, higher earnings per share should command a higher stock price which is great.

Reducetakeoverchances: Buying back stock uses up excess cash. The returns on excess cash in money market accounts can drag down overall company performance. Cash rich companies are also very attractive takeover targets. Buying back stock allows the company to earn a better return on excess cash and keep itself from becoming a takeover target.

IncreaseROE: Buying back stock can increase the return on equity (ROE). This effect is greater the more undervalued the shares are when they are repurchased. If shares are undervalued, this may be the most profitable course of action for the company.

Psychological Effect: When a company purchases its own stock it is essentially telling the market that they think that the companys stock is undervalued. This can have a psychological effect on the market. Buying back stock allows a company to pass on extra cash to shareholders without raising the dividend.

ExcellentToolForFinancialReengineering: In the case of profit making, high dividend-paying companies whose share prices are languishing, buybacks can actually boost their bottom lines since dividends attract taxes. A buyback and the subsequent neutralisation of shares, can reduce dividend outflows, and if the opportunity cost of funds used is lower than the dividend savings, the company can laugh all the way to the bank.

TaxImplication: Exemption is available only if the shares are sold on a recognised stock exchange and if securities transaction tax (STT) on the sale has been paid. In a buyback scheme, neither does the sale take place on arecognised exchange nor is the STT paid. So, you will have to pay income tax on your long-term capital gain on the buyback after deducting the acquisition cost of your shares plus the benefit of indexation from the year of purchase to the year of buyback..

Stock buybacks also raise the demand for the stock on the open market. This point is rather self explanatory as the company is competing against other investors to purchase shares of its own stock.

DISADVANTAGES:
SendingNegativeSignals: A buyback announcement can send a negative signal

Backfire: Buybacks can also backfire for a company competing in a high-growth industry because they may be read as an admission that the company has few important new opportunities on which to otherwise spend its money. In such cases, long-term investors will respond to a buyback announcement by selling the companys shares. The share buyback scheme might become a big disadvantage to the company when it pays too much for its own shares. Indeed, it is foolish to buy in an overpriced market. Instead, the company should put the money into assets that can be easily converted back into cash. Strictly, a company should repurchase its shares only when its stock is trading below its expected value and when no better investment opportunities are available.

PROVISIONS/CONDITIONSRELATINGTOBUYBACK.
The restrictions were imposed to restrict the companies from using the stock markets as short term money provider apart from protecting interests of small investors. Sec 77A: Power of a company to purchase its own securities.

Section 77A was introduced by the Companies (Amendment) Act, 1999, pursuant
to the report of the working group which was set up to suggest reforms to the

Companies Act. Section 77A(2) of the Companies Act, 1956: 1) Authorised by Articles of Association and a Special Resolution 2) Buyback should be equal to or less than 25%of the total paid up capital and free reserves 3) Shares to be bought back should be fully paid up 4) Debt Equity ratio should not exceed 2:1 post buyback 5) Notice of meeting to the shareholders should have all the details necessary
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6) Buyback of shares listed on any recognised stock exchange should be in accordance with SEBI guidelines
7) Explanatory statement stating the following should be prepareda) 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 8) A declaration of solvency has to be filed with SEBI and Registrar Of Companies 9) Completion of the buyback should be within 12 months 10) The shares bought back should be extinguished and physically destroyed; 11) The company should not make any further issue of securities within 2 years, except bonus, conversion of warrants, etc.

FilingofreturnwiththeRegulator:
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 1) through any subsidiary company including its own subsidiary companies; or 2) through any investment company or group of investment companies; or According to it, a company limited by shares, and a company limited by guarantee and having a share capital, shall not have the power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 6

104 or of section 402. The section also prohibited giving of financial assistance to a person for purchasing shares in companies except in certain situations i.e. lending by a banking company, purchase of fully paid shares of its own or holding company if the purchase is by the trustees for the benefit of the employees of the company or the grant of loans to employees to enable them purchase shares in the company or its holding company. The main reason for this prohibition on trafficking in its own shares was ; to prevent the company from influencing the market price of its shares by reducing the floating stock to the prejudice of its creditors. Prior to introduction of section 77A the only exceptions to the general principle that the company cannot buy its own shares were
a)

purchase resulting in reduction of capital with the sanction of the court under sections 100 to 104;

b) c)

redemption of redeemable preference shares under section 80; purchase under an order of court in a scheme of arrangement or amalgamation under sections 391 to 394, subject to compliance with sections 100 to 104 and

d)

purchase under an order of Company Law Board to purchase shares of minority shareholders under section 402(b).

Thus the company could purchase its shares prior to introduction of section 77A provided the scheme or arrangement therefore had been sanctioned under sections 100 to 104. Section 100 does not prescribe the manner in which the reduction of capital is to be effected. Nor is there any limitation on the power of court to confirm the reduction except that it must be first satisfied that all the creditors entitled to object to the reduction have consented or have been paid or secured. { Punjab Distilling Industries Ltd. v. CIT [1965] 35 Comp Cas 541 (SC); Hindustan Commercial Bank Ltd. v. Hindustan General Electrical Corporation [1960] 30 Comp Cas 367 (Cal).

Registerofsecuritiesboughtback :
After completion of buyback, a company shall maintain a register of the securities/shares so bought and enter therein the following particulars a. b. the the consideration date paid of for the securities of bought-back, securities,

cancellation

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 buy-back.

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

Sec77B: Prohibition for buyback in certain circumstances.

Section 77B of the Companies Act, 1956 :

1. Through any subsidiary company. 2. Through any investment company or group of investment companies. 3. Company is in default in repayment of deposit or interest, or redemption of debenture or preference shares or 4. Company is in default in payment of dividend or repayment of any term loan including interest to banks and FIs.

Section 77AA:
Transfer of certain sums to capital redemption reserve account. The Securities and Exchange Board of India (Buy Back of Securities) Regulations, 1988 provide for the following: 1) Regulations cover only the listed securities of company. 2) Buy back is permitted through the tender offer mode from existing share holders on proportionate basis and from odd lot holders. Buy back through the book-building 9

mode and purchases through stock exchange are allowed for open market transactions. 3) In the purchases made through the stock exchange, the details of purchases under the buy back scheme shall be made available to the stock exchange on daily basis: the details in turn shall be made available to public regularly. 4) Extensive disclosures need to be made in the Explanatory Statement to be annexed for the notice for general meeting and the Letter of Offer. 5) Pre and post buy back holdings of promotors need to be disclosed carefully. 6) Buy back through negotiated deals, spot transactions or private arrangements is not permitted. 7) To ensure strict compliance with the provisions of SEBI Regulations, merchant banker has been made to be associated in every offer for buy back, wherein he has to give a due diligence certificate. 8) To ensure timely completion of buy back process, the Regulations provide for timebound steps in every mode. Thus, except in cases of purchases through stock exchange, an offer for buy back shall not remain open for more than 30 days. 9) To ensure security/safety, the company making the buy back offer has to open an escrow account on the same lines as provided in the Takeover Regulations.

The Companies (Amendment) Ordinance (October 31, 1998 and January 7, 1999) allows companies to buy back their own shares subject to regulations laid down by SEBI. The new Sections (77A and 77B) in the Ordinance lay down the provisions/restrictions concerning buy back of shares. 1) A company can finance its buy back out of (i) its free reserves or (ii) the securities premium account or (iii) proceeds of an earlier issue other than fresh issue of shares made specifically for buy back purposes. 2) A company is allowed buy back subject to the following conditions: (a) the buy back is authorised by its articles; (b) a special resolution has been passed in general meeting of the company authorising buy back; (c) the buy back does not exceed 25 per cent of the total paid up capital and free reserves of the company. 10

(d) debt-equity (including free reserves) ratio does not exceed to 2:1 after the proposed buy back; (e) all shares or other specified securities are fully paid- up; and (f) the buy back is in accordance with SEBI regulations framed for this purpose.

Tax Benefit
In many ways, a buyback is similar to a dividend because the company is distributing money to shareholders. Traditionally, a major advantage that buybacks had over dividends was that they were taxed at the lower capital-gains tax rate, whereas dividends are taxed at ordinary income tax rates. However, with the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003, the tax rate on dividends is now equivalent to the rate on capital gains.

Tax Implications of Buyback of Shares.

1) According to section 46A of income tax buyback of shares is treated as ordinary sale of shares by the shareholder.

2) The amount received less cost of acquisition is treated as capital gain in the year of sale by the shareholder.

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METHODSOFBUYBACK
There are a number of ways in which a company can return wealth to its shareholders. Although stock price appreciation and dividends are the two most common ways of doing this, there are other useful, and often overlooked, ways for companies to share their wealth with investors. Typically, the two ways of buyback are:

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.

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3. Book-building process.
Companies can also use the book building process to buy back shares. The book building process is a mechanism of price discovery which helps determine market price of securities. If the book building option is used, a draft prospectus has to be filed with SEBI. The prospectus should contain all the details of the offer, except the price at which the securities will be offered (a price band is specified). The copy of the draft prospectus is filed with SEBI and is circulated among institutional buyers by a leading merchant banker acting as the book runner. Institutional investors specify the price as well as the volume of shares they intend to buy. The book runner, on receiving the above information, determines the price at which the offer is to be made to the public. In both 1 & 3 promoters can participate in buyback and not in 2.

Other methods of buyback are

Employee-share purchases purchases of shares held by or for the benefit of current or former employees of a company, including salaried directors, according to the terms of an employee share scheme Odd-lot purchases purchases by listed companies of small parcels of shares which are not marketable on the stock exchange. Here 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 Selective buy-backs a buy-back that does not fall within any of the other categories, such as the purchase of a particular members shares.

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BUYBACKFORUNLISTEDCOMPANIES ND PRIVATE CO.

The buyback of securities by Private Limited Company and Unlisted Public Limited Company not listed on any recognized stock exchange comes under Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999. These were passed by the Central Government on 6th July1999.

Methods
A company may buy-back its shares by either of the following methods: from the existing shareholders on a proportionate basis through private offers; By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Special resolution
A special resolution needs to be passed under sub-section (2) of section 77A of the Companies Act, 1956 and the explanatory statement is to be annexed to the notice for the general meeting containing all disclosures. The statement shall contain the date of the Board meeting at which the proposal for buy back was approved, the necessity for the buy-back; the class of security intended to be purchased under the buy-back; the method to be adopted for the buy-back; the basis of arriving at the buy back price; the time limit for the completion of buy-back; etc. It will also state that the BOD has checked that the company would be able to pay all its debts.

Letter of offer
The Company, authorized by a special resolution, shall file with the Registrar of Companies a draft letter of offer before the buy-back of shares. IT shall also declare solvency in Form No. 4A.

Contents of Letter of Offer

Details of the offer including the total number and percentage of the total paid up capital and free reserves proposed to be bought back and price; 14

the proposed time table from opening of the offer till the extinguishment of the certificates; disclosure of all material facts, The necessity for the buy back, process, brief information about the company; Audited Financial information for the last 3 years Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern; The capital structure including details of outstanding convertible instruments, if any, post buy-back; The letter of offer shall contain pre and post buy-back debt equity ratios etc.

Dispatch LoF
The letter of offer shall be dispatched immediately after filing with Registrar of Companies but not later than 21 days from its filing with Registrar of Companies

Buyback Period
The offer for buyback shall remain open to the members for a period not less than 15 days and not exceeding 30 days from the date of dispatch of letter of offer.

Shares tenders exceeds limit

In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the company, the acceptance per shareholder shall be on proportionate basis.

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Process Completion
The company shall complete the verifications of the offers received within 15 days from the date of closure of the offer and the shares lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the closure of the offer.

Payment to the shareholder

The Company shall immediately after the date of closure of the offer open a special bank account and deposit therein, which would make up the entire sum due and payable as consideration for the buy-back. After the 21 days the company shall within 7 days make payment of consideration in cash or bank draft/pay order to those shareholders whose offer has been accepted or return the share certificates to the shareholders forthwith.

General obligations of the company

The company shall ensure that: The letter of offer shall contain true, factual and material information i.e. no misleading information and state that the directors of the company accept the responsibility for the information contained in such document; The company shall not issue any shares including by way of bonus till the date of the closure of the offer under these rules; The company shall confirm in its offer the opening of separate bank account and pay the consideration only by way of cash or Bank draft/pay order; The company shall not withdraw the offer once the draft letter of offer has been filed with the Registrar of Companies; and The company shall not utilize any money borrowed from Banks/Financial Institutions for the purpose of buying back its shares.

Return to be filed with Registrar

A company, after the completion of the buy-back under these rules, shall file with the Registrar a return in the Form, the format of which is mentioned in the Rules. 16

Extinguishment of Certificate
The company shall extinguish and physically destroy the share certificates so bought back in the presence of the Company Secretary within 7 days from the date of acceptance of the shares. The company shall furnish a verified certificate to the ROC certifying compliance of these rules within 7 days of the extinguishment and destruction of the certificates. The record of share certificates needs to be maintained

Register of shares
The company shall maintain a Register of shares bought back by the Company in the Form mentioned in the Rules. After all the requirements are fulfilled and document submitted to ROC the company can proceed with the buyback. After the process is complete the company again has to file a form with the ROC and thus the process will be completed.

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BUYBACKFOR LISTEDCOMPANIES

The regulation is applicable to buyback of shares or other specified securities of a company listed on a Stock Exchange. The buyback of shares cant take place for delisting of shares from the Stock Exchange. When the company is buying back shares it cant buy back through negotiated deals with any person or through spot transactions or through any private arrangement.

Special Regulation
Incase the Offer size is greater than 25% of its Equity share capital & free reserves, the company can go ahead with the buy back only if a special resolution is passed at the general meeting. When the notice is being sent to the shareholders an Explanatory Statement must be annexed to the notice containing various disclosures The company can also company can go ahead with the buy back only if a special resolution is through the postal ballot route as per The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001. Postal Ballot includes voting by share holders by postal or electronic mode instead of voting personally by presenting for transacting businesses in a general meeting of the company, Method for sending notice: (a) The company may issue notices either,(i) Under Registered Post Acknowledgement Due; or (ii) Under certificate of posting; and (b) With an advertisement published in a leading English Newspaper and in one vernacular Newspaper circulating in the State in which the registered office of the company is situated, about having despatched the ballot papers.

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Explanatory Statement
The company needs to make the following disclosures in the statement 1. The date of the Board meeting at which the proposal for buy back was approved by the BOD. 2. The necessity for the buy back 3. The company may specify one reason to be adopted for buy-back so that the shareholders authorize the BOD for the same. 4. The maximum amount required under the buy back and the sources of funds from which the buy back would be financed. 5. The basis of arriving at the buy-back price. 6. The number of securities that the company proposes to buy back. 7. a. The aggregate shareholding of the promoter and of the directors of the promoters, as on the date of the notice convening the General Meeting. b. Aggregate number of shares purchased or sold by such persons during a period of six months preceding the date of the Board Meeting c. The maximum and minimum price at which purchases and sales were made along with the relevant dates. 8. Intention of the promoters and persons in control of the company to tender their shares for buy-back indicating the number of shares and details of acquisition with dates and price. 9. A confirmation that there are no defaults subsisting in repayment of deposits, redemption of debentures or preference shares or repayment of term loans to any financial institutions or banks. 10. A confirmation that the BOD has made a full enquiry into the affairs and prospects of the company and are of the opinion-

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a. that there will be no grounds on which the company could be found unable to pay its debts; b. The company during that year, the company will be able to meet its liabilities as and when they fall due and will not be rendered insolvent within a period of one year from that General Meeting date ; and c. In forming their opinion for the above purposes, the directors have taken into account the liabilities as if the company were being wound up under the provisions of the Companies Act, 1956 11. A report addressed to the BOD by the Companys auditors stating thata. They have inquired into the companys state of affairs; b. The amount of the permissible capital payment for the securities is in their view properly determined; and, c. The Board of Directors have formed the opinion on reasonable grounds and that the company will not be rendered insolvent within a period of one-year from that date. After the special resolution (requiring 2/3rd Majority) is passed the company can go ahead with the buyback. This resolution needs to be filed with SEBI and the Stock Exchanges where the shares/ securities are listed with seven days of passing such resolution.

Board Resolution
The Board will pass a resolution to buy back its shares. Before making the Public Announcement the company shall give a public notice in at least one English national daily, one Hindi national daily and a regional language daily, at the place where the registered office of the company is situated. The Board of Directors shall give such public notice, within 2 days of the passing of the resolution. The public notice shall contain the disclosures as specified in the Explanatory Statement

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A copy of the resolution, passed by the Board of Directors at its meeting authorizing buy back of its shares shall be filed with SEBI and the stock exchanges, where the shares of the company are listed, within two days of the date of the passing of the resolution. The Board of Directors can now proceed ahead with the buy-back programme.

METHODSOFBUYBACKOFSHARESUNDERSEBI REGULATIONS
A company may buyback its securities by any one of the following methods: 1. From the existing Share and other specified securities on a proportionate basis through the Tender offer; 2. From Open Market. 3. From Odd-Lot holders

TENDER OFFER

A tender offer is an invitation by the company, to its existing shareholder, to buy back its securities. In a buyback by the Tender Offer method, the price and the size of the offer i.e. the number of shares to be bought back, is pre- decided & fixed. The company makes an open offer to all its shareholders to buy back its shares at a given price, usually a premium to the current market price. A company may buyback its securities from its shareholders on a proportionate basis.

Additional Disclosure
The Company is required to submit the following Additional Disclosures in the Explanatory Statement annexed to the notice of the general meeting if its wants to proceed with a tender offer. The maximum price at which the buy-back of shares/securities shall be made. Board of Directors of the company are being authorised at the general meeting to determine the specific price at which the buy-back may be made at the appropriate time 21

If the promoter intends to offer their specified securities , if yes , The quantum of shares proposed to be tendered; The details of their transactions and their holdings for the last six-months prior to the passing of the special resolution for buy-back including information of number of shares acquired, the price and the date of acquisition.

Public Announcements
The company which has shall before buyback of shares make a public announcement in at least one English National Daily, one Hindi National Daily and a Regional language newspaper.

Details of PA
Disclaimer clause as may be prescribed by SEBI. Details of the offer including the total number and percentage of the total paid up capital and free reserves proposed to be bought back and price. The proposed time table from opening of the offer till the extinguishment of the certificates. The Specified date: This shall be the `specified date for the purpose of determining the names of the shareholders to whom the letter of offer shall be sent. The specified date shall not be earlier than thirty days and not later than forty-two days from the date of the public announcement Authority for the offer of buy back. A full and complete disclosure of all material facts including the contents of the explanatory statement The necessity for the buy back The process and methodology to be adopted for the buy back The maximum amount to be invested under the buy back The minimum and the maximum number of securities that the company proposes to buy back sources of funds from which the buy back would be made and the cost of financing the buy back. Brief information about the company.

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Audited Financial information for the last 3 years Details of escrow account opened and the amount deposited therein. Listing details and stock market data; High, Low and average market prices of the securities of the company proposed to be bought back, during the preceding three years; i. ii. Monthly high and low prices for the six months preceding the date of the PA; The Volume on the days when the high and low prices were recorded on the relevant stock exchanges during the above period, iii. The stock market data referred to above shall be shown separately for periods marked by a change in capital structure from the date whne such changes take place , (e.g. when the securities have become ex-rights or ex-bonus); iv. The market price immediately after the date of the resolution of the Board of directors approving the buy back; and v. The volume of securities traded in each month during the six months preceding the date of PA. Along with high, low and average prices of securities of the company, details relating to volume of business transacted should also be stated for respective periods. Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern. The capital structure including details of outstanding convertible instruments, if any post buy back. The aggregate shareholding of the promoter group and of the directors of the promoters, where the promoter is a company shareholding of persons who are in control of the company. The aggregate number of shares purchased or sold by such persons during a period of twelve months preceding the date of the PA; the maximum and minimum price at which purchases and sales referred were made along with the relevant dates.

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Management discussion and analysis on the likely impact of buy back on the companys earnings, public holdings, holdings of NRIs/FIIs etc., promoters holdings and any change in management structure. The details of statutory approvals obtained. Collection and bidding centres. Name of Compliance officer and details of investors service centres. Other disclosures as may be specified by SEBI from time to time by way of guidelines. The PA shall be dated and signed on behalf of the Board of Directors of the company by its manager or secretary, if any, and by at least two directors of the company one of whom shall be a managing director.

Filing draft-letter of offer

The Company within seven working days of the public announcement shall file with SEBI a draft-letter of offer containing disclosures as specified in the regulations through a merchant banker who is not associated with the company.

Disclosures of Letter of offer

Disclaimer Clause prescribed by the board Details of the offer including the total number and percentage of the total paid up capital and free reserves proposed to be bought back and price The proposed time table from opening of the offer till the extinguishment of the certificates Specified Date Authority for the offer of buy-back A full and complete disclosure of all material facts including the contents of the explanatory statement The necessity for the buy back

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The process to be adopted for the buy back. The maximum amount to be invested under Buy-Back The minimum and the maximum number of securities that the company proposes cost of financing the buy-back Brief information about the company

Audited Financial information for the last 3 years and the company and its Directors shall ensure that the particulars (audited statement and un-audited statement) contained therein shall not be more than 6 months old from the date of the offer document together with financial ratios as may be specified by the Board. Details of escrow account opened and the amount deposited therein. Listing details and stock market data; o High, Low and average market prices of the securities of the company proposed to be bought back, during the preceding three years; o Monthly high and low prices for the six months preceding the date of filing the draft letter of offer with the Board which shall be updated till the date of the letter of offer. o The number of securities traded on the days when the high and low prices were recorded on the relevant stock exchanges during the period stated above. o The stock market data referred to above shall be shown separately for periods marked by a change in capital structure, with such period commencing from the date the concerned stock exchange recognises the change in the capital structure. (e.g. when the securities have become exrights or ex-bonus) ; o the market price immediately after the date on which the resolution of the Board of directors approving the buy back; and o The volume of securities traded in each month during the six months preceding the date of the offer document . Along with high, low and

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average prices of securities of the company, details relating to volume of business transacted should also be stated for respective periods. Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern The capital structure including details of outstanding convertible instruments, if any, post buy-back The aggregate shareholding of the promoter group and of the directors of the promoters, where the promoter is a company and of persons who are in control of the company. The aggregate number of equity shares purchased or sold by such persons during a period of twelve months preceding the date of the PA and from the date of PA to the date of the letter of offer; the maximum and minimum price at which purchases and sales referred to above were made along with the relevant date. Management discussion and analysis on the likely impact of buy back on the company's earnings, public holdings, holdings of Non Resident Indians/Foreign Institutional Investors, etc., promoters holdings and any change in management structure. Details of statutory approvals obtained; Collection and Bidding centers Name of Compliance officer and details of investors service centres. (1) A declaration to be signed by at least two whole time directors that there are no defaults subsisting in repayment of deposit. Redemption of debentures or preference shares or repayment of a term loans to any financial institutions or banks; (2) A declaration to be signed by at least two whole time directors, one of whom shall be the managing director stating that the Board of Directors has made a full enquiry into the affairs and prospects of the company and that they have formed the opinion-

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(i)

As regards its prospects for the year immediately following the date of the letter of offer that, having regard to their intentions with respect to the management of the company's business during the year and to the amount and character of the financial resources which will in their view be available to the company during that year, the company will be able to meet its liabilities and will not be rendered insolvent within a period of one year from the date;

(ii)

In forming their opinion for the above purposes, the directors shall take into account the liabilities as if the company were being wound up under the provisions of the Companies Act, 1956 (including prospective and contingent liabilities) .

The declaration must in addition have annexed to it a report addressed to the directors by the company's auditors stating thato They have inquired into the company's state of affairs, and o The amount of permissible capital payment for the securities in question is in their view properly determined; and o They are not aware of anything to indicate that the opinion expressed by the directors in the declaration as to any of the matters mentioned in the declaration is unreasonable in all the circumstances.

Such other disclosures as may be prescribed by SEBI from time to time. The offer document shall be dated and signed on behalf of Board of Directors of the company by its manager or secretary, if any, and by alteast two directors (one of whom is the managing director).

The draft letter of offer shall be accompanied with fees specified in the Regulations. The Company shall also file a declaration of solvency in the form as may be prescribed, and verified by an affidavit signed by at least two directors of the company, one of whom is the Managing Director

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modification of LoF
Within twenty-one days from the date of submission of the draft letter of offer, SEBI specifies modifications, if any, in the draft letter of offer. The merchant banker and the company shall carry out such modifications before the letter of offer is dispatched to the shareholders.

Dispatch of Lof
The letter of offer shall be dispatched not earlier than twenty-one days from its submission to the Board provided that if.

Offer Procedure
The offer for buy back shall remain open to the members for a period not less than fifteen days and not exceeding thirty days. The date of the opening of the offer shall not be earlier than seven days or later than thirty days after the specified date. The letter of offer shall be sent to shareholders so as to reach them before the opening of the offer. In case the number of shares offered by the share holders is more than the total number of shares to be bought back by the company, the acceptances per share holder shall be equal to the acceptances tendered by the share holders divided by the total acceptances received and multiplied by the total number of shares to be bought back. The company shall complete the verifications of the offers received within fifteen days of the closure of the offer and the shares lodged shall be deemed to be accepted unless a communication of rejection is made within fifteen days from the closure of the offer.

Escrow Account
An Escrow account is the mechanism put in by SEBI to protect the share-holders and give them security. The Company shall by way of security for performance of its obligations, on or before the opening of the offer, deposit in an escrow account a sum as specified below. 28

The escrow amount shall be payable in the following manner: If the consideration payable does not exceed Rs.100 crores - 25% of the consideration payable; If the consideration payable exceeds Rs. 100 crores 25% up to Rs. 100 crores and 10% thereafter.

The escrow account shall consist of Cash deposited with a scheduled commercial bank or; Bank guarantee in favor of the merchant banker; or Deposit of acceptable securities with appropriate margin, with the merchant banker, or A combination of above mentioned three points. The bank guarantee is in favour of the merchant banker and in case of commercial bank he has the power to instruct the bank to issue a bankers cheque or demand draft for the amount lying to credit of the escrow account. The Board in the interest of the shareholders may in case of non-fulfilment of obligations under the regulations by the company forfeit the escrow account either in full or in part. The amount forfeited may be distributed pro rata amongst the share holders who accepted the offer and balance, if any, shall be utilised for investor protection.

Payment to Shareholders
The company shall immediately after the date of closure of the offer open a special account with a bankers and deposit therein, such sum as would, together with the amount lying in the escrow account make-up the entire sum due and payable as consideration for buyback and for this purpose, may transfer the funds from the escrow account.

The company shall within seven days of time make payment of consideration in cash to those Shareholders whose offer has been accepted or return the Share certificates to the security holders. 29

Extinguishments of Certificate
The company shall extinguish and physically destroy the security certificates so bought back in the presence of a Registrar or the Merchant Banker, and the Statutory Auditor within seven days from the date of acceptance of the securities.

The securities offered for buyback if already dematerialized shall be extinguished and destroyed in the manner specified under Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 and the byelaws framed there under.

The company shall furnish a certificate to the Board duly verified by The registrar and whenever there is no registrar through the merchant banker; Two whole-time Directors including the Managing Director and; The statutory auditor of the company, and certifying compliance within seven days of extinguishment and destruction of the certificates.

The particulars of the Share certificates extinguished and destroyed shall be furnished to the stock exchanges where the shares of the company are listed, within seven days of extinguishments and destruction of the certificates.

The company shall maintain a record of the Share certificates, which have been cancelled and destroyed.

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SOURCES OF BUY BACK

A company can buy back its own shares or other specified securities out of three sources:

Free reserves Securities premium account Proceeds of an earlier issue of shares or other specified securities. [Section 77A(l)].

Buy back of any kind of shares is not allowed out of the proceeds of any earlier issue of the same kinds of shares.

Free reserve
Meaning of Free Reserves

The term free reserve has been defined to carry same meaning as has been assigned in clause (b) of Explanation to section 372A. For the purpose of section 372A the term 'free reserve' has been defined as those reserves which as per the latest audited balance sheet are free for distribution as dividend and it includes balance of securities premium account. Free reserve means the balance in the share premium account, capital and debenture redemption reserves shown or published in the balance sheet of the company and created by appropriation out of the profits of the company.

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Securities premium Account

Securities Premium Account is a broader term than Share Premium Account. Share Premium account represents only premium on issue of equity and preference shares, whereas securities premium account represents premium on issue of debentures, bonds and other financial instruments.

Proceeds of an earlier issue

Buy back of shares of any kind is not allowed out of fresh issue of shares of the same kind. If it were so, it would frustrate the very purpose of buy back. Fresh issue of equity shares for buying equity makes no financial sense. However, financial logic of buy back could very well be served if preference shares are issued and proceeds are used for buying back equity shares.

Preference shares carry fixed rate of dividend. Also they are easy to market. Preference shares may give better yield to the investor than after tax yield on loan or debentures. At the same time it is possible to lever the capital structure by slimming the dividend paying equity.

That apart buy back of shares is allowed utilizing proceeds of an earlier issue. Proceeds of an earlier issue is an unqualified term. Any issue means any issue of hybrid instruments, debentures, bonds, secured and unsecured loans etc. Thus buy back of equity shares is allowed byissue of any pure or hybrid debt instruments.

Then appropriate source of buy back should be the following if the intention is to swap equity for debt or fixed income bearing instruments: Issue of debentures; Issue of loans.

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