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Definition of 'Buyback'
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.
Definition of 'Buyback'
The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.
Escape monitoring of accounts and legal controls- If a company wants to avoid the regulations of the market regulator by delisting. They avoid any public scrutiny of its books of accounts. Show rosier financials - 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. If the company earnings are identical before and after the buyback earnings per share (EPS) and the P/E ratio would look better even though earnings did not improve. Since investors carefully scrutinize only EPS and P/E figures, an improvement could jump-start the stock. Increase promoter's stake - stake Some companys 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..
3. Companies can buy shares on the open market over a long-term period subject to various regulatory guidelines like SEBI
Income Taxes-When excess cash is used to buyback company stock, in lieu of increasing or paying dividends, shareholders often have the opportunity to defer capital gains AND lower their tax bill if the stock price increases. Remember that dividends are taxed as ordinary income in the year they are received whereas the sale of appreciated stock is taxed when sold Price Support -Companies with buyback programs in place use market weakness to buy back shares more aggressively during market pullbacks. This reflects confidence that a company has in itself and alerts investors that the company believes that the stock is cheap. Frequently you will see a company announce a buyback after its stock has taken a hit, which is merely an overt action to take advantage of the discount on the shares. This lends support to the price of the stock and ultimately provides security for long-term investors during rough times
Potential Pitfalls
Manipulation of Earnings- estimates earnings using a higher number of outstanding shares existing before a buyback is executed. If the timing is right, companies could buy back shares and appear to beat consensus estimates that were based on a larger number of outstanding shares. Buyback Percentage- The higher the percentage of the buyback, the greater the potential for profits.
Execution of Buyback- There is a difference between announcing a buyback and actually purchasing the stock. A buyback announcement may initially boost the price of a stock, but this phenomenon (when it occurs) is usually short lived. High Stock Prices- A stock buyback can be used to manipulate less than desirable EPS expectations. One way of investigating this is to compare the P/E (Price/Earnings) ratio relative to other stocks in the sector or industry. If a higher than normal P/E ratio exists, then it doesn't make a whole lot of sense for a company to buy its stock at a premium unless there is something in the works that will add substantially to earnings.
6)Buyback of shares listed on any recognized 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
SEBI GUIDELINES
These regulations shall be applicable to buy-back of shares or other specified securities of a company listed on a stock exchange. notwithstanding anything contained in sub-regulation (1), a company listed on a stock exchange shall not buy-back its shares or other specified securities so as to delist its shares or other specified securities from the stock exchange.] A company may buy-back its [shares or other specified securities] by any one of the following methods: (a) From the existing [security-holders] on a proportionate basis through the tender offer; (b) From the open market through (i) book-building process, (ii) Stock exchange; (c) From odd-lot holders.
SEBI GUIDELINES
A company shall not buy-back its [shares or other specified securities] from any person through negotiated deals, whether on or of the stock exchange or through spot transactions or through any private arrangement. Any person or an insider shall not deal in securities of the company on the basis of unpublished information relating to buy-back of [shares or other specified securities] of the company A company making a buyback offer shall announce a record date for the purpose of determining the entitlement and the names of the security holders, who are eligible to participate in the proposed buyback offer. The letter of offer along with the tender form shall be dispatched to the security holders who are eligible to participate in the buyback offer, not later than five working days from the receipt of communication of comments from the Board.
SEBI GUIDELINES
The date of the opening of the offer shall be not later than five working days from the date of dispatch of letter of offer. The offer for buy back shall remain open for a period of ten working days. The company shall accept shares or other specified securities from the security holders on the basis of their entitlement as on record date. The shares proposed to be bought back shall be divided in to two categories; (a) Reserved category for small shareholders and (b) the general category for other shareholders, and the entitlement of a shareholder in each category shall be calculated accordingly. After accepting the shares or other specified securities tendered on the basis of entitlement, shares or other specified securities left to be bought back, if any in one category shall first be accepted, in proportion to the shares or other specified securities tendered over and above their entitlement in the offer by security holders in that category and thereafter from security holders who have tendered over and above their entitlement in other category.
Legal framework
Conditions of Buy Back(a) The buy-back is authorised by the Articles of association of the Company; (b) A special resolution has been passed in the general meeting of the company authorising the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. Also, the shares for buy back should be free from lock in period/non transferability. The buyback can be made by a Board resolution If the quantity of buyback is or less than ten percent of the paid up capital and free reserves; (c) The buy-back is of less than twenty-five per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year; (d) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back;
(e) There has been no default in any of the following I. in repayment of deposit or interest payable thereon, ii. Redemption of debentures, or preference shares or iii. Payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or IV. Repayment of any term loan or interest payable thereon to any financial institution or bank; (f) There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts; (g) All the shares or other specified securities for buy-back are fully paid-up; (h) The buy-back of the shares or other specified securities listed on any recognised stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and (i) The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.
d. A copy of the Board resolution authorising the buyback shall be filed with the SEBI and stock exchanges. e. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date f. The buyback offer shall remain open for a period of not less than 15 days and not more than 30 days. g. A company opting for buy back through the public offer or tender offer shall open an escrow Account.
5. The company should not make any further issue of securities within 2 years, except bonus, conversion of warrants
Valuation of buyback:
average closing price (which is a weighted average for volume) for a period immediately before to the buyback announcement. shareholders are invited to sell some or all of their shares within a set price range.
Delisting
Definition
Delisting is totally the reverse of listing. To delist means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be trade able at that stock exchange
Kinds of delisting
(1) Voluntary delisting means delisting of equity shares of a company voluntarily on application of the company under Chapter III of these regulations. (2) Compulsory delisting means the delisting of equity shares of a company by a recognized stock exchange under Chapter V of these regulations. It states that a recognised stock exchange may, by order, delist any equity shares of a company on any ground prescribed in the rules made under section 21A of the Securities Contracts (Regulation) Act, 1956. This is a penalizing measure at the behest of the stock exchange for not making submissions/complies with various requirements set out in the Listing agreement within the time frames prescribed.
Voluntary Delisting Delisting of securities is not permitted in certain circumstances which are explained in Regulation 4. It states that a company cannot delist pursuant to a buy back of equity shares by the company; pursuant to a preferential allotment etc. It is also clarified that a company cannot delist its convertible securities.
Compulsory Delisting This is a penalizing measure at the behest of a recognised stock exchange for not making submissions/complies with various requirements set out in the Listing agreement within the time frames prescribed. Procedure for the same is detailed in Chapter V of the Regulations. This is different from voluntary delisting in many ways. For example, the stock exchange should appoint an independent valuer or values for determining the fair value of the delisted equity shares. Then the promoter of the company should acquire delisted equity shares from the public shareholders by paying them the value determined by the valuer, subject to their option of retaining their shares.
Process of a delisting
1. In case a delisting is initiated by the Exchange, often it will issue warnings to the company first. If the company does still not comply with the listing rules after a while, the exchange will proceed to announce a Delisting. 2. If a Company decides to delist itself it has to request approval from the exchange and complete the appropriate documentation. 3. The decision to delist the company has to be announced and made public. 4. All shareholders will be notified and given time to think on what they want to do with the shares. (Often delisting from an exchange is followed by removal from the security from the Central Securities Depository of a country and cross border settlement to another country has to be arranged). 5. On the effective day of the Delisting the shares will cease trading on the Exchange and they will be booked out of the accounts of custodians, banks and broker dealers.
Avoiding delisting
Review the continued listing requirements for the stock exchange on which your company is listed. Identify all unmet conditions and take steps to return to compliance. Examples of continued listing requirements for the New York Stock Exchange are shown below. 2Meet the minimum requirement for average closing price over a consecutive 30 trading-day period. 3Meet the minimum requirement for average global market capitalization over a consecutive 30-trading-day period. 4Meet the minimum requirement for total stockholders' equity. 5Meet the minimum requirement for total revenues for the most recent 12 months.
Advantages of delisting
Disadvantages of delisting
SEBI regulations