BUY BACK AND DELISTING

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.

What Is A Stock Buyback?

• When a corporation buys its own stock on the open stock market, it is considered a "stock buyback" and the shares purchased are re-titled "treasury stock." Before examining some of the potential benefits and pitfalls of a stock buyback, let's first review a couple of terms that will be used in this discussion:

What Is A Stock Buyback?

• Authorized Shares :- the number of shares of stock a corporation is "authorized" to issue per their articles of incorporation. Additional shares can be "authorized" by the Board of Directors with approval of shareholders.

• Outstanding Shares:- the number of shares of stock that are held by investors

• Treasury Shares :- the number of shares of previously outstanding stock that has been repurchased by the corporation. Treasury stock can later be sold or retired based on a shareholder vote.

Why of Stock Buybacks

• If a company is sitting on a large sum of cash and must decide how to invest it, one of the options is to distribute part of it to shareholders.

• If a company’s stock is suffering from low financial ratios, buying back stock can give some of the ratios a temporary boost.

• Another reason companies buy back stock is to cover large employee stock option programs.

• Some companies buy back shares as protection against unfriendly takeovers from other companies.

Objectives of Buy Back:

i. To increase promoters holdingii. Increase earnings per shareiii. Rationalise the capital structure by writing off capital not represented by available assets. iv. Support share valuev. To thwart takeover bidVI. To pay surplus cash not required by business

Resources of Buy Back

• (i) free reserves; • (ii) securities premium account• (iii) proceeds of any shares or other specified

securities

Why companies buyback? • Unused Cash:- If they have huge cash reserves with not many new profitable projects

to invest in and if the company thinks the market price of its share is undervalued. Eg.

Bajaj Auto went on a massive buy back in 2000 and Reliance's recent buyback.

•  Tax Gains- Since dividends are taxed at higher rate than capital gains companies prefer

buyback to reward their investors instead of distributing cash dividends, as capital gains

tax is generally lower.  

•  Market perception- By buying their shares at a price higher than prevailing market

price company signals that its share valuation should be higher. Eg: In October 1987

stock prices in US started crashing

•  Exit option- If a company wants to exit a particular country or wants to close the

company. 

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• 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 company’s 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..

The methods in which buyback can happen

1. Shareholders are presented with a tender offer where they have the option to submit a portion of or all of their shares within a certain time period and at usually a price higher than the current market value.

2. through book-building process.

3. Companies can buy shares on the open market over a long-term period subject to various regulatory guidelines like SEBI

Benefits of Stock Buybacks

• Increased Shareholder Value-There are many ways to value a profitable company but the most common measurement is Earnings per Share (EPS).

• Higher Stock Prices-An increase in EPS will often alert investors that a stock is undervalued or has the potential for increasing in value. The most common result is an increase in demand and an upward movement in the price of a stock.

• Increased Float-As the number of outstanding shares decreases, the shares remaining represents a larger percentage of the float. If demand increases and there is less supply, then fuel is added to a potential upward movement in the price of a stock.

• Excess cash-Companies usually buy back their stock with excess cash. If a company has excess cash, then at a minimum you can bank that it doesn't have a cash flow problem. More importantly, it signals that executives feel that cash re-invested in the corporation will get a better return than alternative investments.

• 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.

Advantages of Buy back on company perspective:

• Buy back enables companies to get rid of their surplus unwanted share capital without recourse to reduction of share capital through high court route under sections 100 to 104 of the companies act.

• Higher EPS results in the higher market value of shares which improves shareholders value in the long run.

• Quit often buy back may be resorted to as a tool to pop up the stock prices whenever the company feels that its shares are undervalued in the stock market.

Advantages of Buy back on investors perspective:-

Checklist for investors before accepting the company's buyback offer

* Take a look at the share price movement immediately before the buyback. If there was a significant rise, the prima facie assumption is that the promoters have been up to tricks.

* Debt-equity ratio: The companies are hugely under debts are unlikely to have free cash

* Companies that have just come to the capital markets to raise money are unlikely to be good candidates for buyback.

PROVISIONS / CONDITIONS RELATING TO BUYBACK

• The restrictions were imposed to restrict the companies from using the stock

markets as short term money provider apart from protecting interests of small investors.

• Sec 77A: Power of a company to purchase its own securities.• Section 77A was introduced by the Companies (Amendment) Act, 1999, pursuant to

the report of the working group which was set up to suggest reforms to the Companies Act.

• Section 77A(2) of the Companies Act, 1956: 1)Authorised by Articles of Association and a Special Resolution 2)Buyback should be equal to or less than 25%of the total paid up

capital and free reserves 3)Shares to be bought back should be fully paid up 4)Debt Equity ratio should not exceed 2:1 post buyback 5)Notice of meeting to the shareholders should have all the details necessary

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 prepared-a)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; ande)The time limit for completion of buy-back 8)A declaration of solvency has to be filed with SEBI and Registrar Of Companies9)Completion of the buyback should be within 12 months10)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 followingI. in repayment of deposit or interest payable thereon,ii. Redemption of debentures, or preference shares oriii. Payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend orIV. 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.

Sources from where the shares will be purchased

(a) existing security-holders on a proportionate basis;Buyback of shares may be made by a tender offer through a letter of offer from the holders of shares of the company or (b) the open market through(i). book building process;(ii) stock exchanges or(c) odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or(d) purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Register of securities bought back

a. the consideration paid for the securities bought-back,b. the date of cancellation of securities,c. the date of extinguishing and physically destroying of securities and d. such other particulars as may be prescribedWhere a company buys-back its own securities, it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back.

Issue of further shares after Buy back

every buy-back shall be completed within twelve months from the date of passing the special resolution or Board resolution as the case may be.A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue, rights issue up to six months from the date of completion of buy back.

Filing of return with the Regulator

A Company shall, after the completion of the buy-back file with the Registrar and the Securities and Exchange Board of India, a return in form 4 C containing such particulars relating to the buy-back within thirty days of such completion. No return shall be filed with the Securities and Exchange Board of India by an unlisted company.

Prohibition of Buy Back

A company shall not directly or indirectly purchase its own shares

(a) through any subsidiary company including its own subsidiary companies; or (b) through any investment company or group of investment companies

Procedure for buy back

a. The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.b. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations.c. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.

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 datef. 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.

Restrictions on buyback by Indian companies:

1. A special resolution has to be passed in general meeting of the shareholders

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

3. A declaration of solvency has to be filed with SEBI and Registrar Of Companies

4. The shares bought back should be extinguished and physically destroyed;

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.

Two types of voluntary delisting• Delisting where no exit opportunity is required. These are cases where even after the

delisting from any one or more recognised stock exchanges, the equity shares would remain listed on any recognised stock exchange which has nationwide trading terminals. In this scenario exit opportunity should not be given to all the public shareholders with Chapter IV. Procedure to be followed is mentioned in regulation 7. Delisting where exit opportunity is required. This can happen in two cases, Firstly in cases where the company delists its equity shares from all recognised stock exchanges and secondly in cases after the proposed delisting, the equity shares would not remain listed on any recognised stock exchange having nation wide trading terminals. In these scenarios exit opportunity should be given to all the public shareholders with Chapter IV. . Procedure to be followed is mentioned in regulation 8. The procedure for providing exit opportunity is detailed in Chapter IV of the Regulations. It includes public announcement, opening of an escrow account, dispatching letter of offer, price determination through book building process etc. There is also a prescribed minimum number of equity shares to be acquired while providing this exit opportunity.

• Compulsory DelistingThis 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.

Reasons for Delisting

1) The Company no longer complies with the Listing Requirements of the Exchange (see for more info below)

2) The Company becomes a private company (the company might get bought by private equity buyers or the company might want to omit the additional bureaucratic procedures that come with being listed on a stock exchange like publication and disclosure requirements)

3) Trading volumes on the exchange it whishes to delist are not sufficient to justify the listing fees (A company could have listed its shares on for example 7 exchanges. This means it has to pay 7 times the listing fees. If volumes on one of the exchanges don't merit those fees, the company might want to chose to delist itself.

4)The company (usually the legal entity) is being liquidated (for example the owners of a subsidiary company that is listed independently on an exchange might chose to liquidate the subsidiary and bring all the assets into the parent company and have only the parent company listed on the exchange).

5)The company declares a Bankruptcy (for example a company can default on paying their debt and file for bankruptcy protection).

Impact of Being Delisted

• Many times when a company is delisted, it faces punishment from its creditors, making it more difficult to raise capital for operations and growth.

• For example, when a company is delisted, its creditors can sometimes withdraw lines of credit and ratings agencies can downgrade its credit score, making it more expensive to borrow money.

• A company can survive delisting, but typically, being delisted is a signal to investors that the company is in trouble.

Delist from stock exchange

• Delisting from the stock exchange can save a company a considerable amount of money and reduce paperwork.

• falling stock prices • failure to meet capitalization rules • A delisted company no longer needs to file

financial reports with the Securities and Exchange Commission, which oversees companies listed on the stock exchanges.

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