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Procedure for buy back

Buy-Back of Shares MMS Finance (20092011)

A company going for buy back shall open an Escrow

Account.

The company shall within 7 days from the completion of said 15

days make payment of consideration

The company shall extinguish and physically destroy theshare certificates so bought back

A company, after the completion of the buy-back shallfile with the Registrar within 30 days a return in the Formno. 4C


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Sources of Buyback and Prohibitions


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Sources of Buy-Back


Sources of Buyback

Free Reserves

Securities premium

account

Proceeds of issue of any*Shares or Specified Securities


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Prohibition on Buyback - Sec 77B


A company cannot buyback its shares or other specifiedsecurities -

Through any subsidiary company including its own subsidiary OR Through an investment company or a group of investment companies

OR If the company has made a default, as inIn case such company has not complied with the following provisions

u/s 159u/s 207u/s 211


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Penalty


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Benefits and Pitfalls of Buyback


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Benefits of Buyback


Increased Shareholder Value

Higher EPS Higher Stock PricesIncreased Float

Income Tax Dividend taxed as ordinary inc, but if BBraises stock price s/h to pay less if shares held for longertime

Price Support

Excess Cash Better utilization of funds

Protection against Potential Takeover

Increase in ROE The more undervalued, the better

Psychological Effect on Market


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Benefits of Buyback


Extra cash passed to S/H w/o dividends advantage when cash is of temporary nature

Examples of Buyback for various reasons

U nused Cash & U ndervalued stock price - H U LTax Gains - Mro-Tek

Escape monitoring of account & legal controls - Kodak India

Increase Promoters stake - Nestle India Improving Financial Ratios - Essar Shipping


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Benefits of Buyback

Particulars Before Buyback After Buyback Cash 20,00,000 5,00,000

Asset 50,00,000 35,00,000

Earnings 2,00,000 2,00,000

Outstanding Shares

10,00,000 9,00,000

ROA 4% (2L/50L) 5.71% (2L/35L)

ROE 20% 22.22%

EPS 0.20 0.22

P/E 75 (=15/0.20) 68 (=15/0.22)


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W hy Companies Prefer Buyback..andnot dividend


Upper management receive compensation tied tocompany stock price .

Compensation in form of stock options, rights etc.

Allows management to see the most immediate results totheir compensationDividend cut gives bad publicity when business isperforming poorly.

Temporary coverage of unbeneficial financial ratios -EPS, P/E


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Potential Pitfalls


Manipulation of EarningsTemporary coverage of unbeneficial financial ratios - EPS, P/E

Case: Real Estate Developer DLF announces BB on 5 th

June 08Core operations continue to lose cash

FY 08 - Negative cash flow >Rs 2,000 crore from its operations.

FY 08 - Has total debt of around Rs 12,600 crore.

Sustaining operations through IPO money, fresh borrowing and

selling equity in various SPVs. The best way to demonstrate our belief in the company and theindustry is to support our share. This will send out a signal that wehave excess cash flow.

We want to show that we are generating cash flow.


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Potential Pitfalls


Execution of Buyback

Many announced buybacks are not executed in full.

Case:

Apollo Tyres planned to buy back equity shares worth Rs122 crore at a maximum price of Rs 25/share

Could not buy back any shares - spurt in the market priceimmediately after start of buyback program.

Buyback Percentage

Higher the percent, greater the potential of profits


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Some Distinct Cases in Buyback



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Sterlite Industries Ltd


Scheme of Arrangement in 2002Objectives behind buy-back

No. of shares & its pricing

Bypassing of buy-back route as stipulated in Sec 77A of IndianCompanies Act, 1956

Instead filing an application under Sec 100 and Sec 391

Approval by Court and DCA

Controversy due to its manner and pricing Complaint filed by Investors Grievances Forum

Filing of Case by SEBI in Bombay High Court

Court Judgement & its consequences


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Bajaj Auto


Objective: To clear up cross holdings

Bajaj AutoBajaj

Tempo

9% Holding

23% Holding

Contentious Issues

Result


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Cadbury India


Video to be added


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Latest Announcements in Buyback



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Buyback by CRISIL


Buy-back upto Rs. 80 crores of its equity shares at a price not

exceeding Rs. 6500/share (9th

September 2010)Maximum price is at a premium of 14% over the average closing

price in the last three months

Buy-back through open market purchases

Objectives for buy-back:

To increase payout to shareholders

To provide a tax efficient mechanism to return money to shareholders

To make efficient use of its cash reserves


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Buyback by H U L


Companys board and shareholders approved buy-back of 25% of

companys equity share capital (July 2010)Total Amount: Rs. 630 crores

Buy-back through open market purchases @ Rs. 280/share

Buy-back at a premium of 20% over the average closing price in thelast three months prior to approval

Reasons behind Buy-Back:

Good show in the personal products segment

47% climb in profit for the quarter ended March 31, 2010

To effectively utilize surplus cash

Buy-back will increase promoters (i.e. Anglo-Dutch parent U nilevers) holding which currently stands at 52.02% of H U Ls equity

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