BUYBACKS AND DELISTING

By Group 1 Garvit Agarwal Gyan Prakash Karan Gupta Ranveer Desai Ravikumar Soni Sahil Singla 8/30/12

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Introduction

Share buyback refers to the process of a company buying back its own shares from its shareholders Research in the US shows that the market does not value a company for its liquid cash balances and near cash investments Therefore Companies should look for maximizing share value through a build up of book value, earnings, dividends and return of surplus capital through share repurchases Share repurchases tend to keep a company from being over-capitalised
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Implication of Share Repurchase

Correction of over capitalisation Excess liquidity can lead to reduction in ROCE which can in turn lead to fall in ROE. Repurchase of equity shares: this will reduce capital and excess liquidity therefore reducing shareholders fund. 8/30/12 It leads to improved perception in

Contd
Exit mechanism Buyback is an investor-friendly measure in times of depressed market as the investor gets a respectable exit from the shares.

Shareholder value management Buyback is required in times when company is not able to generate return on surplus capital to offset the opportunity cost to shareholders which leads to low shareholder value 8/30/12

Equity Repurchases in India

Till 1998, companies were not allowed to buyback equity shares from their shareholders or from the secondary market. Selling in secondary market was only exit route. As per Companies Act, companies were allowed to buyback their shares subject to a lot of statutory restriction. 8/30/12

Regulatory framework for Equity Repurchase

Introduced in October,1998 Sec 77A and 77B of Companies Act Financed out of free reserves or security premium accounts Completion of buy back process in 12 months from the date of the relevant resolution From existing shareholder, from employees and directors out of ESOPs and Sweat equity 8/30/12

Cant make public issue of same kind securities within six months Two buy back programmes separated by 365 days period Only direct company can purchase.

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No pricing guidelines Board or the company free to fix.

Buyback by Unlisted Public Companies and Private companies

Letter of Offer sent to shareholder containsAll material facts Audited financial information for the previous three years together with specified financial ratios pre and post buyback.

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 Impact

of buy back on companies earning, shareholding pattern, management structure Auditors report The Declaration of Solvency

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Procedure for Buyback

Kept open for not less than 15 days and not more than 30 days Offer accepted in proportionate basis Verification by company within 15 days Open special bank account Make payment by 7 days

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Buyback by Listed Companies

Companies act, SEBI (Buy-back of securities, 1998), provisions of listing agreement. Appoint merchant banker mandatory to prepare the Letter of Offer and manage the buyback offer. No price mechanism

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Methods
Fixed price tender offer Book-building method Open market purchase

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Fixed price tender offer

Shareholders are invited to tender their share for re-purchase by the company at a fixed price arrived at by the company. This method may not realise the best price for the shareholders.

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Book-building method

For purchases from the open market Shareholders are invited to put in bids for re-purchase of their shares Company specifies the maximum price at which the securities shall be bought back by the company Company fixes the buy-back price based on the highest price bid received from the shareholders. Bidders who bid low, will also receive the highest price therefore being8/30/12 beneficial

Open market purchase

Company buys back the shares directly from the secondary market Hence, company buys the shares at varying prices on prevailing market prices, and therefore buying at average price which maybe less than the maximum price approved This is a more transparent method This method is suitable when promoters wish to consolidate their stakes Drawback of this system is that promoters cannot sell their own shares and company may not enjoy a good free float therefore not getting sufficient 8/30/12 quantities for buy-back

Determining Buy-back Price

Price to be fixed at a premium over current market price. Lower the current P/E, higher the company can pay. Price should not be lower than issue price If company doesnt have too long history of listing it is better to work out IRR.
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Determinants for Buyback premium

Present ROE before buyback. Current P/E ratio.

Premium<= {(1/(ROE*(P/E)))-1} The Lower the ROE or P/E, higher the premium they can give and higher is the necessity for a buyback.
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Quantum of buyback
Buy back in value terms of shares shall not exceed 25% of total paid up capital and free reserves. Debt equity ratio shall not exceed 2:1 after buyback.
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Case Of a Successful Buyback

GLAXOSMITHKLINE Consumer Healthcare Ltd.

Sellers of Horlicks, Boost, Crocin, Iodex and many others Made an open offer to buyback during March 2005 Offered to buy 3.3 Mn shares. At Rs 370/Share, not exceeding 123 Cr in value Represented 23.24% of free reserves
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Reasons for Buyback

Promoters holding would increase from 39.99% to 43.16% Had excess reserves with no major expansion plans Wanted to use its reserves instead of keeping it idle Felt share was undervalued FMCG industry in that period had limited growth plans Thus Britannia, Godrej and HUL all came with buyback plans
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Success of Buyback

Received more than double the required offers (7.8 Mn) Bought back using Proportional Acceptance Method. Pre Buy back Dec 04 Post Buy back Dec 05
59,935.17 13.82% 16.12 116.65 20.50 47,511.18 22.55% 25.48 96.62 24 8/30/12

Net Worth(Rs Lacs) Return on Equity Earning Per share(Rs) Book value Per share(Rs) P/E

Case Of an Unsuccessful Buyback

INDIAN RAYON

Is into the garment business, it is an AV Birla Group Company Announced buyback in September 1999 Buyback of 25% equity share capital Price offered was in the range Rs 75-85 Intended cash outflow Rs 127-144 Cr

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Reasons for Buyback

To increase promoters stake from 21.5% to 28.7% Working at below capacity and no major Capex planned Wanted to add value to share holders by returning capital to them Their Cement business was hived off to Grasim Buyback would give investors an exit route

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Limited Success of Buyback

Could purchase only 11% of its outstanding shares as against the 25% offered Hiked the price on offer to Rs. 85 The Market cap fell from 1397 Cr in 1999 to 455 Cr in 2004 The share price plunged from Rs. 207 to Rs. 67 Launched at wrong time

Company was not doing well and Markets were Crashing Market was not happy over the transfer of the Cement division of Indian Rayon to Grasim
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Effects of Buyback Kama Holdings (Dec 2006)

P/E KAMA
12 10 8 6 4 2 0 12 10 8 6 4 2 0

ROE OF KAMA

EPS OF KAMA
12 10 8 6 4 2 0 12 10 8 6 4 2 0

ROA OF KAMA

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Key Findings- Kama Holdings

Since the P/E multiple in 2005 reached a very high level of 28.68 compared to the industry average, the Company decided to buyback shares worth Rs. 3.39 crores at Rs. 21 in Dec 2006 This buyback resulted in increase in EPS, ROE, ROA and decrease in P/E in 2007 However the Company could not leverage on this benefit as in 2008 it reported loss due to increase in raw material and other manufacturing expenses In 2009, Company did extremely well as its EPS, ROE and ROA had increased significantly and also its P/E multiple was in check There was a major increase in promoters shareholding from 67% to around 74% 8/30/12 This buyback was successful

Effects of Buybacks Reliance Infrastructure (Jun 05)

P/E Of REL INFRA
12 10 8 6 4 2 0 12 10 8 6 4 2 0

ROE REL INFRA

EPS REL INFRA

12 10 8 6 4 2 0 12 10 8 6 4 2 0

ROA REL INFRA

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Key Findings- Reliance Infrastructure

As the P/E multiple of the company had increased significantly in 2004, the company went for Buyback This helped the Company in reducing its P/E ratio and increase its EPS, ROA and ROE There was a significant increase in the Promoters Shareholding from around 50% to 53% Thus the buyback was Successful

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Conclusion: Buybacks

Not all buybacks are successful Companies use buybacks to change the shareholding pattern, improve financial ratios or/and increase price of the share The timing of the buyback is very crucial. If company is not doing well then the buyback might not succeed It is a means of returning excess funds to the shareholders Gives the market a signal that promoters believe in the company
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Delisting Of A Listed Company

Delisting is a process by which A company whose shares are listed on the stock exchange is taken private once again It is done getting its publicly held shares bought over by private shareholder and Terminating the listing agreement with the stock exchange. It is also known as Going 8/30/12 Private

Reasons for Delisting

Stock exchange penalizes company for

Non payment of listing fees Violation of listing agreement Statutory violation as non filing of accounts

Voluntary delisting (Listed at least 3 years prior to date of delisting) 8/30/12 Amalgamation

Why companies go for Delisting?

Capital markets should not become an obligation for the company in times of depressed market conditions . Safety from unwanted intrusions through secondary market route.

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Why companies go for Delisting?

Cost for companies to stay listed

Cost of regulatory compliance. Cost of Equity which is higher than cost of debt.

If Cost of remaining listed outweighs the benefit sought to be received then delisting is a valid decision.

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Pricing a Voluntary Delisting

Reverse followed

book

building

process

Public announcement for floor price Floor price determined as average of 26 weeks traded quotes No cap prices

The price at which the quantity offered is maximum is selected as 8/30/12 the final price.

New SEBI norm

SEBI mandating all listed companies to increase public shareholding to a minimum 25% by August 2013 Companies have to take a call whether to reduce promoter holding or go for delisting mechanism; There are 181 non-PSUs, which are yet not compliant with these regulations. If the PSUs are also taken under consideration, then shares worth nearly Rs 40,000 crore will have to 8/30/12 be sold by

Alfa Laval (India) Limited

Promoters holding: 88.77% Floor Price: Rs. 2,045/ Indicative Offer Price: Rs. 2,850/ No of shares: 10.2 lakhs Bid opened on February 15, 2012 and closed on February 22, 2012 Manager to the offer: JM Financial Consultants Private Limited Discovered Price/Exit Price: Rs. 4,000 Status: Successful 8/30/12

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Patni Computer Systems Limited

Promoters holding: 80.74% Floor Price: Rs. 356.74/ Indicative Offer Price: Rs. 385.4/ No of shares: 26.8 mn Bid opened on March 28, 2012 and closed on March 30, 2012 Manager to the offer: Kotak Mahindra Capital Company Limited Discovered Price/Exit Price: Rs. 520 Status: successful 8/30/12

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Goodyear India Ltd.

Promoters holding: 74% Floor Price: Rs. 194/ Indicative Offer Price: Rs. 245/ No of shares: 59.97 mn Bid opened on May 28, 2010 and closed on June 3, 2010 Manager to the offer: Citigroup Global Markets India Private Limited Discovered Price/Exit Price: Rs. 340 Status: failed 8/30/12

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Buyback versus Delisting

Share Buyback Applies to equity shares, preference shares and other specified securities Delisting Offer Applies to equity shares, preference shares and other specified securities

Governed by section 77A/77B Applicable for listed and respective guidelines by companies alone. Governed SEBI by de-listing guidelines of SEBI Pricing determined by the Price to be determined only company as Fixed Price/Book- through reverse book building Built Price/Open Market Price using Dutch Auction process Quantum of Buyback Quantum of shares bought
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