INTRODUCTION:
Buy back of shares is the financial tool for re-engineering. It is described as a procedure that enables a company to go back to its share holders and offers to purchase from them the shares they hold.
The rationale behind buy back of shares is to boost demand by reducing the supply, which in theory should push the price up. The repurchase of shares reduces the no of equity shareholders, which in turn enhance the earning per share (eps), and thus improve investor’s sentiments.
FEASIBLE SITUATION FOR BUY BACK OF SHARES:
1) High net cash position
2) High dividend position
3) Low debt/equity ratio
4) Low capital expenditure requirement
OBJECTIVE:
a) to return surplus cash to share holders as an alternative to a higher dividend payment or investing the surplus cash in existing or new option.
b) Adjust or change the company capital structure quickly, say for those companies seeking to increase its debt/equity ratio.
c) To increase earning per share, dividend per share, operating cash flow per share.
d) To improve the attempts of a hostile take over.
SHARE BUY BACK POSITIVE ASPECTS:
a) The market as positive signal generally interprets share buy-backs.
b) Shareholders have a choice of deciding weather or not to receive the payout by selling or holding their shares, unlike a dividend payout.
c) Returning excess cash by way of a share buy-back gives a company greater flexibility with regards to its dividend policy.
d) It gives company to achieve its desirable structure more quickly or facilitate a major restructuring.
e) A share buy-back could avert a hostile takeover bid by reducing the number of shares in circulation.
SHARE BUY-BACK NEGATIVE ASPECTS:
a) the repurchasing of its own shares may conversely have a negative signaling effects as the market place may think that the company has fewer growth opportunities after a share buy-back, due to erosion of cash resources.
b) Management may not seek to utilize any existing excess cash effectively by acquiring new investments or developing profitable markets.
c) Possible mismanagement may arise if too a high price is paid for the re-purchased shares, to the determent of remaining shareholders, or if cash resources are eroded to the level that could give rise of cash resources are eroded to the level that could give rise to a risk of insolvency at the expense of its creditors.
d) A return of funds by way of a share buy-back is less certain that an annual stream of dividend.
REGULATION BY COMPANY ACT:
a) A company can buy-back 10 % of its shares annually with board resolution. For a buy-back exceeding 10 % in a year, a special resolution of shareholders is required.
b) The post buy-back debt equity ratio of the company should not exceed 2:1
c) The company should not exceed 25% of the total paid up capital and free reserves of the company.
d) After completing buy-back programmed, a company should not make a further issue of equity securities within a period of 26 months except by way of a bonus issue or in discharge of a subsiding obligation.
SEBI GUIDELINES:
a) The buy-back can be done through an open offer route, reserve book-building, reserve rights, or through stock market purchases. Promoters, however, are barred from offering their shares if stock market purchases are made.
b) The buy-back can not be done through negotiated deals.
c) The process has to be handled by a merchant banker duly appointed by the company. The merchant bankers will be held responsible for due diligence, pro-rata acceptance of shares and so on.
BUY-BACK CAN BE FUNDED BY THE FOLLOWING MEANS:
FREE RESERVES
SHARE PREMIUM
CASH GENERATED FROM DISPOSIBLE OF ASSETS
A PUBLIC ISSUE MADE ONLY FOR THAT PURPOSE
A DEBENTURE ISSUE
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