buyback and delisting of shares

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    Click to edit Master subtitle style8/30/12

    BUYBACKS AND DE-LISTING

    By Group 1

    Garvit Agarwal

    Gyan PrakashKaran GuptaRanveer DesaiRavikumar SoniSahil Singla

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    Introduction

    Share buyback refers to the process of a companybuying back its own shares from its shareholders

    Research in the US shows that the market doesnot value a company for its liquid cash balancesand near cash investments

    Therefore Companies should look for maximizingshare value through a build up of book value,earnings, dividends and return of surplus capital

    through share repurchases Share repurchases tend to keep a company from

    being over-capitalised

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    Implication of ShareRepurchase

    Correction of over capitalisation

    Excess liquidity can lead to reductionin ROCE which can in turn lead to fallin ROE.

    Repurchase of equity shares: this will

    reduce capital and excess liquiditytherefore reducing shareholdersfund.

    It leads to improved perception in

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    Contd

    Exit mechanism

    Buyback is an investor-friendly measure intimes of depressed market as the investor

    gets a respectable exit from the shares.

    Shareholder value management

    Buyback is required in times whencompany is not able to generate return onsurplus capital to offset the opportunitycost to shareholders which leads to low

    shareholder value

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    Equity Repurchases inIndia

    Till 1998, companies were notallowed to buyback equity sharesfrom their shareholders or from the

    secondary market.Selling in secondary market was only

    exit route.

    As per Companies Act, companieswere allowed to buyback their sharessubject to a lot of statutory

    restriction.

    R

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    Regu atory ramewor orEquity Repurchase

    Introduced in October,1998

    Sec 77A and 77B of Companies Act

    Financed out of free reserves orsecurity premium accounts

    Completion of buy back process in12 months from the date of therelevant resolution

    From existing shareholder, fromemployees and directors out of

    ESOPs and Sweat equity

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    Cant make public issue of same kindsecurities within six months

    Two buy back programmes separatedby 365 days period

    Only direct company can purchase.

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    Public Companies and

    Private companiesNo pricing guidelines- Board or the company free to fix.

    Letter of Offer sent to shareholdercontains-

    All material facts

    Audited financial information for theprevious three years together withspecified financial ratios pre and postbuyback.

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    Impact of buy back on companies earning,shareholding pattern, managementstructure

    Auditors report

    The Declaration of Solvency

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    Procedure for Buyback

    Kept open for not less than 15 daysand not more than 30 days

    Offer accepted in proportionate basis

    Verification by company within 15days

    Open special bank account

    Make payment by 7 days

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    Buyback by ListedCompanies

    Companies act, SEBI (Buy-back ofsecurities, 1998), provisions of listing

    agreement.Appoint merchant banker mandatory

    to prepare the Letter of Offer and

    manage the buyback offer.No price mechanism

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    Methods

    Fixed price tender offer

    Book-building method

    Open market purchase

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    Fixed price tender offer

    Shareholders are invited to tender theirshare for re-purchase by the company ata fixed price arrived at by the company.

    This method may not realise the bestprice for the shareholders.

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    Book-building method

    For purchases from the open market

    Shareholders are invited to put in bids forre-purchase of their shares

    Company specifies the maximum price atwhich the securities shall be bought backby the company

    Company fixes the buy-back price basedon the highest price bid received fromthe shareholders.

    Bidders who bid low, will also receive the

    highest price therefore being beneficial

    O k t

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    Open marketpurchase

    Company buys back the shares directly from thesecondary market

    Hence, company buys the shares at varying priceson prevailing market prices, and therefore buyingat average price which maybe less than themaximum price approved

    This is a more transparent method

    This method is suitable when promoters wish toconsolidate their stakes

    Drawback of this system is that promoters cannotsell their own shares and company may not enjoya good free float therefore not getting sufficient

    quantities for buy-back

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    Determining Buy-backPrice

    q Price to be fixed at a premium overcurrent market price.

    Lower the current P/E, higher thecompany can pay.

    Price should not be lower than issueprice

    If company doesnt have too longhistory of listing it is better to workout IRR.

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    Determinants forBuyback premium

    Present ROE before buyback.

    Current P/E ratio.

    Premium

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    Quantum of buyback

    q Buy back in value terms of sharesshall not exceed 25% of total paid upcapital and free reserves.

    Debt equity ratio shall not exceed2:1 after buyback.

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    Case Of a SuccessfulBuyback

    GLAXOSMITHKLINE ConsumerHealthcare Ltd.

    Sellers of Horlicks, Boost, Crocin, Iodex andmany others

    Made an open offer to buyback during March2005

    Offered to buy 3.3 Mn shares. At Rs 370/Share, not exceeding 123 Cr in value

    Represented 23.24% of free reserves

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    Reasons for Buyback

    Promoters holding would increase from 39.99% to43.16%

    Had excess reserves with no major expansionplans

    Wanted to use its reserves instead of keeping itidle

    Felt share was undervalued

    FMCG industry in that period had limited growthplans

    Thus Britannia, Godrej and HUL all came withbuyback plans

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    Success of Buyback

    Received more than double the required offers(7.8 Mn)

    Bought back using Proportional AcceptanceMethod. Pre Buy back Dec 04 Post Buy back Dec 05

    Net Worth(Rs Lacs) 59,935.17 47,511.18Return on Equity 13.82% 22.55%

    Earning Per share(Rs) 16.12 25.48

    Book value Per

    share(Rs)

    116.65 96.62

    P/E 20.50 24

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    Case Of an UnsuccessfulBuyback

    INDIAN RAYON

    Is into the garment business, it is an AV Birla

    Group Company Announced buyback in September 1999

    Buyback of 25% equity share capital

    Price offered was in the range Rs 75-85

    Intended cash outflow Rs 127-144 Cr

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    Reasons for Buyback

    To increase promoters stake from 21.5% to 28.7%

    Working at below capacity and no major Capexplanned

    Wanted to add value to share holders by returningcapital to them

    Their Cement business was hived off to Grasim

    Buyback would give investors an exit route

    i i d S f

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    Limited Success ofBuyback

    Could purchase only 11% of its outstanding sharesas against the 25% offered

    Hiked the price on offer to Rs. 85

    The Market cap fell from 1397 Cr in 1999 to 455 Crin 2004

    The share price plunged from Rs. 207 to Rs. 67

    Launched at wrong time-

    Company was not doing well and Markets wereCrashing

    Market was not happy over the transfer of the Cementdivision of Indian Rayon to Grasim

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    Effects of Buyback KamaHoldings (Dec 2006)

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    Key Findings- KamaHoldings

    Since the P/E multiple in 2005 reached a very high levelof 28.68 compared to the industry average, the Companydecided to buyback shares worth Rs. 3.39 crores at Rs. 21in Dec 2006

    This buyback resulted in increase in EPS, ROE, ROA anddecrease in P/E in 2007

    However the Company could not leverage on this benefitas in 2008 it reported loss due to increase in raw materialand other manufacturing expenses

    In 2009, Company did extremely well as its EPS, ROE andROA had increased significantly and also its P/E multiplewas in check

    There was a major increase in promoters shareholdingfrom 67% to around 74%

    This buyback was successful

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    Effects of Buybacks RelianceInfrastructure (Jun 05)

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    Key Findings- RelianceInfrastructure

    As the P/E multiple of the company had increasedsignificantly in 2004, the company went forBuyback

    This helped the Company in reducing its P/E ratio

    and increase its EPS, ROA and ROE There was a significant increase in the Promoters

    Shareholding from around 50% to 53%

    Thus the buyback was Successful

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    Conclusion: Buybacks

    Not all buybacks are successful

    Companies use buybacks to change theshareholding pattern, improve financial ratiosor/and increase price of the share

    The timing of the buyback is very crucial. Ifcompany is not doing well then the buyback mightnot succeed

    It is a means of returning excess funds to the

    shareholders Gives the market a signal that promoters believe

    in the company

    D li i Of A Li d

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    Delisting Of A ListedCompany

    Delisting is a process by which

    A company whose shares are listedon the stock exchange is taken

    private once againIt is done getting its publicly held

    shares bought over by private

    shareholder andTerminating the listing agreement

    with the stock exchange.

    It is also known as Going Private

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    Reasons for Delisting

    Stock exchange penalizes companyfor

    Non payment of listing feesViolation of listing agreement

    Statutory violation as non filing of

    accountsVoluntary delisting (Listed at least 3

    years prior to date of delisting)

    Amalgamation

    Wh i f

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    Why companies go forDelisting?

    Capital markets should not becomean obligation for the company intimes of depressed market conditions

    .Safety from unwanted intrusions

    through secondary market route.

    Wh i f

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    Why companies go forDelisting?

    Cost for companies to stay listed

    Cost of regulatory compliance.

    Cost of Equity which is higher than cost of

    debt.

    If Cost of remaining listed outweighs thebenefit sought to be received then de-

    listing is a valid decision.

    Pricing a Voluntary

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    Pricing a VoluntaryDelisting

    Reverse book building processfollowed Public announcement for floor price

    Floor price determined as average of26 weeks traded quotes

    No cap prices

    The price at which the quantityoffered is maximum is selected as

    the final price.

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    New SEBI norm

    SEBI mandating all listed companies toincrease public shareholding to aminimum 25% by August 2013

    Companies have to take a call whetherto reduce promoter holding or go fordelisting mechanism;

    There are 181 non-PSUs, which are yetnot compliant with these regulations.

    If the PSUs are also taken underconsideration, then shares worth nearly

    Rs 40,000 crore will have to be sold by

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    Alfa Laval (India) Limited

    Promoters holding: 88.77%

    Floor Price: Rs. 2,045/-

    Indicative Offer Price: Rs. 2,850/-

    No of shares: 10.2 lakhs

    Bid opened on February 15, 2012 andclosed on February 22, 2012

    Manager to the offer: JM FinancialConsultants Private Limited

    Discovered Price/Exit Price: Rs. 4,000

    Status: Successful

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    Patni Computer Systems

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    Patni Computer SystemsLimited

    Promoters holding: 80.74%

    Floor Price: Rs. 356.74/-

    Indicative Offer Price: Rs. 385.4/-

    No of shares: 26.8 mn Bid opened on March 28, 2012 and

    closed on March 30, 2012

    Manager to the offer: Kotak MahindraCapital Company Limited

    Discovered Price/Exit Price: Rs. 520

    Status: successful

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    Goodyear India Ltd.

    Promoters holding: 74%

    Floor Price: Rs. 194/-

    Indicative Offer Price: Rs. 245/-

    No of shares: 59.97 mn Bid opened on May 28, 2010 and closed

    on June 3, 2010

    Manager to the offer: Citigroup GlobalMarkets India Private Limited

    Discovered Price/Exit Price: Rs. 340

    Status: failed

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    Buyback versus Delisting

    Share Buyback Delisting Offer

    Applies to equity shares,preference shares and other

    specified securities

    Applies to equity shares,preference shares and other

    specified securities

    Governed by section 77A/77Band respective guidelines by

    SEBI

    Applicable for listedcompanies alone. Governed

    by de-listing guidelines of

    SEBIPricing determined by the

    company as Fixed Price/Book-Built Price/Open Market Price

    Price to be determined onlythrough reverse book buildingusing Dutch Auction process