A repurchase of outstanding shares from investors, by a company using its surplus cash within a stipulated time frame at their prevailing market prices is termed as Buy Back in corporate terminology.
Buy back is usually resorted to due to following reasons:
a. Return surplus cash to the shareholders
b. Support share price during periods of temporary weakness
c. Increase the underlying share value
d. Improves the financial ratios of the company
e. Increases promoter holding in the company and eliminates a takeover threat from major shareholders
A company can buy back its shares through two methods - from the existing shareholders on a proportionate basis through the tender offer, through the open market and from employees holding shares under ESOP schemes.
Recently SEBI has issued a discussion paper on proposal to modify existing open market mode of buy back. Public views are invited by 25th of January, 2013. Listed below is a snapshot of the proposal in the background of the Companies Bill 2012 dealing with similar situation.
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PROVISIONS FOR BUY BACK IN COMPANIES BILL 2012 |
Proposed modifications to the existing framework for buy back through open market purchase |
Rationale for modifications |
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Minimum buy back quantity |
No such limit of minimum quantity |
50% as the minimum quantity |
Even after keeping the buyback offer open for 12 months companies failed to achieve the minimum buyback quantity. Many companies took shareholders/board approval for buyback proposals but did not take a single step to buy the shares. |
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Maximum period to complete the buy back |
12 months |
3 months with mandatory 25% of the maximum amount proposed for buy back to be put in an escrow account |
So that only serious Companies undertake this initiative |
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Post buy back obligations |
Any Company will not make a further issue of the same kind of shares /securities , allot new shares within a period of six months other than (a) Bonus issue or (b)Discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or (c) Conversion of preference shares or debentures into equity shares. |
Listed companies restrained from raising further capital for a period of two years |
Companies usually launch buyback programs when they have idle cash resources and there are no attractive investment opportunities in the foreseeable future. |
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Disincentive for not completing the buyback program successfully |
Proviso to Clause 68 (2)(g) disallows a buy back within a period of one year from closure of previous buy back |
Companies not able to buy back 100% of the proposed amount not allowed to come with another buyback for a period of atleast one year |
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Rationalisation of ongoing disclosure requirements: |
No such daily, monthly or quarterly reporting. |
Daily basis- a. No.s shares purchased & amount utilized b. Why the proportionate quantity was not bought during the month, wherever applicable Monthly basis & quarterly and annual results – a. Total number of shares proposed to be bought back b.Cumulative number of shares bought back till the end of previous reporting period and amount utilised c. Number of shares bought back during the current reporting period and amount ised d.Cumulative number of shares bought back till the end of the current reporting period and amount utilised for the same (b+c). e. Number of shares yet to be bought back and amount yet to be utilised. f. Cumulative number of shares extinguished and destroyed till the end of previous reporting period. g. Number of shares extinguished and destroyed during the current reporting period h. Cumulative number of shares extinguished and destroyed till the end of the current reporting period (f+g). |
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Limit for open market method |
Not applicable |
15% or more of (paid up capital + free reserves) only by way of a tender offer method. |
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Removal of restriction on issuance of shares pursuant to Employee Stock Option (ESOP) schemes during the buy-back offer: |
Allowed during the buy-back period without any restrictions. |
Allowed during the buy-back period subject to the following- a) the shares are not allotted to directors and key managerial personnel of the company. b) there is no acceleration in the vesting period. |
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Extinguishment of shares in buyback process: |
within seven days of the last date of completion of buy-back |
The companies shall extinguish/destroy shares bought back during the month, on or before fifteenth day of the succeeding month subject to the companies destroying the bought back shares in the last month within seven days of the completion of the offer. |
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Dealing in shares or other specified securities in the stock exchange during the period of buy back |
No such restrictions |
It is proposed to extend this restriction to dealing in the securities of the company in off –market as well. |
Has been imposed as the promoters, being part of the management of the company, are generally in a position to influence the time and price in placing the orders during the buyback period. |
DISCLIAMER:
The synopsis has been compiled with a view to highlight certain important proposals by SEBI. The compilation must not be taken as an exhaustive coverage nor should it be used in place of professional advice. Although it has been endeavored to provide accurate information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. It is purely to be treated as reference material and not an expression of opinion.
CS Amitava Banerjee
CAclubindia
