ACQUISITION OF SHARES

THROUGH BUYBACK

PRESENTED BY: PROF(DR. PARTHIBAN RAJAN)

AGENDA

CASE STUDY – HUL LTD

IMPROVEMENT IN THE FINANCIAL RATIOS

EFFECTS OF BUYBACK OF SHARES COMPANY SHAREHOLDERS

SEBI REGULATIONS, 1998

PROVISIONS UNDER THE COMPANIES ACT, 1956

OBJECTIVES OF BUYBACK

MEANING

Cancellation of share capital

Buyback is reverse of

issue of shares

Reduction in share capital

WHAT IS BUY BACK?

Unused Cash

Tax Gains

Market perception

Exit option

Increase promoter's stake

Show Rosier financials

OBJECTIVES OF BUYBACK

• BALANCE SHEET OF A COMPANY BEFORE BUYBACK:

EXAMPLE

Liabilities Amt. Assets Amt.Equity 1,00,000 Fixed Assets 6,00,000Reserves 1,00,000 Current Assets 3,00,000Long term debt 2,00,000 Cash 1,00,000Bank Loan 2,00,000Current Liabilities

4,00,000

TOTAL 10,00,000 TOTAL 10,00,000

Net Profit after tax (NPAT)= Rs. 10,00,000If the company buys back 50,000 shares through cash, cash as well as the outstanding equity will decrease by Rs. 50,000.

CHANGES IN KEY RATIOSBefore Buyback

• ROE= Net Profit After tax Shareholder’s equity

= 10,00,000 = 10 1,00,000

• ROA= Net Profit After tax Total Assets = 10,00,000 = 1

10,00,000

• EPS= NPAT- Preference dividend No. of equity shares = 10,00,000 = 10 1,00,000

After Buyback

• ROE= 10,00,000 = 20 50,000

• ROA= 10,00,000 = 1.05 9,50,000

• EPS = 10,00,000 = 20 50,000

Section 77A, 77AA and 77B of the

Companies Act,1956. These were inserted by the Companies (Amendment)

Act,1999.

The Securities and Exchange Board of India (SEBI) framed the SEBI(Buy Back

of Securities) Regulations,

1999

The Department of Company Affairs

framed the Private Limited Company and

Unlisted Public company (Buy Back

of Securities) rules,1999 pursuant to Section 77A(2)(f) and (g) respectively.

THE PROVISIONS REGULATING BUYBACK OF SHARES

PROVISIONS UNDER COMPANIES ACT, 1956

BUYBACK METHODS

Free Reserves

Securities Premium Account

Proceeds of any shares or

other Specified securities

SOURCES OF BUY-BACK SEC 77A (I)

a• The buy-back is authorized by the articles.

b• Special resolution

c• The buy back is less than 25% of total paid up equity capital and free

reserves.

d• Maintaining debt equity ratio: 2:1

e• All the shares or other specified securities for buy-back are fully paid-

up.

f• For listed shares as per guidelines issued by SEBI.

CONDITIONS FOR BUYBACK SEC 77A(2)

Full & complete disclosure of all material facts

Necessity for buy-back

Class of security of buy-back

Amount to be invested

Time limit for completion of buy-back

NOTICE OF THE MEETING SEC 77A(3)

Every Buy Back should be completed within 12

Months from the date of

passing of the special

resolution

BUY BACK PERIOD SEC 77 A(4)

MODES OF BUYBACK SEC 77A(5)

Declaration of solvency to be filed with the:

Registrar of company

SEBI (for listed co’s.

only)

DECLARATION OF SOLVENCY SEC 77A(6)

The company shall extinguish and

physically destroy the securities so

bought back within 7 days of

completion of buy-back. Since holding

Treasury stock is not allowed in

India by Buyback of shares.

DESTRUCTION OF THE SECURITIES SEC 77A(7)

On completion of buy-back of shares / securities, the company shall not make further issue of the same kind of shares /

securities within a period of 24 months except:

a. Bonus shares; or

b. Conversion of warrants,

or

c. Stock option

schemes or sweat

equity, or

d. Conversion

of preference shares or

debentures into equity

shares

FURTHER ISSUE OF SHARES SEC 77A(8)

Securities so bought,

Consideration paid

Dates of cancellation, extinguishing & physically destroying of the securities

Other particulars as prescribed

MAINTENANCE OF REGISTER SEC 77A(9)

Within 30 days of completion of Buyback

FILING A COMPLETION RETURN SEC 77A(10)

a. Imprisonment upto 2 years;

or

c. Both

PENALTIES SEC 77A(11)

When a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause (d) of the provision to

sub-section (1) of section 80 and details of such transfer shall be disclosed in the balance sheet.

TRANSFER TO CAPTIAL REDEMPTION RESERVE ACCOUNT SEC- 77AA

No company shall buy its own shares or specified securities

• a) Through any subsidiary company including its own subsidiary company.• b) Through any investment companies or group of investment companies.

No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with the provisions of sections 159, 207 and 211.

PROHIBITION OF BUY BACK UNDER CERTAIN CIRCUMSTANCES SEC 77B

Special resolution

Buyback should not exceed 25% of the total paid-up capital and free reserves.

Declaration of Solvency

The shares bought back should be extinguished and physically destroyed.

No further issue of similar securities within 2 years, except bonus, conversion of warrants, etc.

SEBI REGULATIONS, 1998

Public announcement in,• One National English Daily• One Hindi National Daily• One Regional Language Daily

Public announcement should specify Record Date

Buyback is not allowed through negotiated deals or spot transactions or private arrangements.

There is a freedom to fix the price of shares or other specified securities for buyback.

Promoters can sell their shares through tender offer & also through purchase offer of odd lots.

Merchant bankers will have to be appointed

A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges.

Consideration will be paid in cash

Special resolution has to be filed with SEBI & stock exchanges within 7 days from date of passing the

resolution.

Once the offer is filed with SEBI or Public announcement is made, Buyback cannot be withdrawn.

No public announcement is permitted during the scheme of amalgamation, compromise or arrangement.

Appointment of Compliance officer & investor service center.

Locked-in or non-transferable shares are not allowed.

Destroying the share certificates in presence of merchant banker & auditors within 15days.

Buyback through the public offer or tender offer shall open an Escrow Account.

Advertisement within 2 days of Completion Buyback.

• This can be broadly divided into two parts:

a) Effects on the Company:SHAREHOLDING PATTERN CHANGESCompany: A Ltd • Total no of shares 150• Face Value 10• Equity Capital 1500 • Buyback of equity shares 25 • Max offer price 15

Particulars Pre buy back Post buy back

Promoters 50 50

Non promoters 100 75

Particulars Pre buy back Post buy back

Promoters 33.33 40

Non promoters 66.67 60

SHAREHOLDING PATTERN IN % TERM

EFFECTS OF BUYBACK OF SHARES

Particulars Pre buy back Post buy back

CashAssetsEarnings Outstanding sharesEquity sharesReservesShareholders equityMP

10001000015001501500200170010

62596251500125125075132515

FINANCIAL RATIO ROAROEEPSP/E ratio

0.150.88101

0.161.13121.25

IMPROVEMENT IN THE FINANCIAL RATIOS

Tax Benefits

Higher Proportion of shares

Higher Share Price

Reduction in

investors

interest

EFFECTS OF BUYBACK ON SHAREHOLDERS

• Net assets available to Equity ShareholdersNumber of outstanding Equity Shares

Asset backing

value

•PECV is given by discounted value of profit available to the equity shareholders.

Profit Earning capacity value

•It is valued at the prevailing market price of that script.

Market value

PRICING BUYBACK

VALUATION OF BUYBACK OF SHARES

Average Closing Price

Inviting Shareholders to sell the share

Debt-equity ratio

Track record

Look at ROCE/RONW

Take note of Irrationality

Take a long-term perspective

Dispose off volatile shares

Selling off for profit

WHAT SHOULD YOU LOOK AT BEFORE PARTICIPATING IN BUYBACKS?

BUYING DECISIONS

EPS

Book Value

Promoter Stake

SEBI PULLS PLUG ON “HOLLOW BUYBACKS”

Buy back of shares

CASE STUDY

ABOUT THE COMPANY

1. Beginning2. Corporate History3. Listing4. Parentage5. Turnover6. Employment

Era of FMCGSunlight Soap -1888Lifebuoy – 1895LuxVim….

Hindustan Vanaspati Manufacturing Company -1931Lever Brothers India Limited -1933United Traders Limited -1935 Hindustan Lever Limited -1956Hindustan Unilever Limited -2007

Listed on Kolkata, Madras & Bombay – 195610% equity - Indian Shareholders

Part of €40 billion Unilever Group

Rs.17,523 Cr Audited results for April 1, 2009 to March 3, 2010

>15000 direct employees

SHAREHOLDING OF HUL

• Offered price : Rs 280/share

• Maximum buyback of Shares: 2.25 crore

• Maximum Amount : 630 crore(25% of equity share capital)

• Equity and reserves : 218+2450cr

• Cash and bank balance : Rs 1,976.79cr

• Buyback from BSE & NSE through open market purchase

BUYBACK OFFER

• Effective utilization of surplus cash• Smaller equity base

REASONS FOR BUYBACK

EPS MPSMPS

MOVEMENT IN HUL SHARE PRICE

Balance Sheet of HUL Ltd. As on 31-3-2010 (Rupees in crs)

Particulars 31-3-2010 31-3-2011(E)(A) Sources of Funds 1.Shareholder`s Fund Capital 218.17 174.536Reserves & Surplus 2,365.35 1,864.394

2,583.52 2,038.932.Loan Funds

(a)Secured Loan

(b)Unsecured LoanTOTAL OF (A) 2,583.52 2,038.93 (B) Applications of Funds Net block 2,162.11 2,247.52capital work-in progress 273.96 273.96Investment 1,264.08 1,264.08Deferred Tax 248.82 248.82 Current Assets, Loans and AdvancesInventories 2,179.93 2,179.93Sundry debtors 678.44 678.44Cash and bank balances 1,892.21 1,262.21Other current assets 16.62 16.62Loans and advances 600.56 600.56 5,367.76 4,737.76

Current Liabilities and Provision -6,733.21 -6,733.21Net Current Assets -1,365.45 -1,995.45TOTAL OF (B) 2,583.52 2,038.93

DATA 2010 (Rs. in Crs)

2011 (E) (Rs. in Crs)

PATMarket price of share

No. of sharesTotal assets/ Net Worth

2,202.03239

218.172,583.52

2,202.03280

174.542038.93

Assuming PAT to remain same in the year 2010-11

Particulars 2010 2011(E)

Return on assets 0.85 1.08

Return on equity 0.85 1.08

Earning per share 10.09 12.62

Price earning ratio 23.68 22.18

Key Financial Ratio (31st March)

• Current Price: Rs.314/share - Implications

PRESENT SCENARIO

Date BSE NSE

31 Aug 2010 42921 57079

23 Aug 2010 50060 49940

Total 92981 107019

Buyback taken place

2,00,000

Thank you

09:49:32 AM