Normally in bear phase of stock markets, the promoters used to purchase shares in order to tighten up their hold on company’s control and to gain benefit when Bull phase returns. Tata sons purchased Tata steel with the same aim recently.
The Main objectives of buy back of shares:
- To increase EPS.
- To increase promoters share holdings.
- To avoid take over bid.
- To use surplus cash not required by business and using it for enhancing share value.
In the present days of bear phase, to stabilize the share price is to buy back the shares from the open market at a premium over the prevailing market price.
- From securities premium account or Surplus cash
- From free reserves. If this route is used, then a sum equal to the value of the shares so purchased from the market should be transferred to the capital redemption reserve and a note to this effect is to be made in the balance sheet for that particular year.
- Amount collected from any proceeds of shares and specified securities. (except out of the proceeds of an earlier issue of the same kind of shares/securities.The conditions for buy back of shares:
- The shares to be purchased should be free from any lock in period or non-transferability clause. Buy back should be authorised in the Articles of Association of the company.
- Board resolution is enough if buy back quantity value is only less than 10% of paid up capital and free reserves.
- Special resolution is necessary and it is to be passed in AGM if the quantity is excess of 10%.
- In one financial year, buy back value should be no more than 25% of total paid up equity capital and free reserves
- The ratio of the debt owed by the company is not more than capital and free reserves after buy back.
- There is no default in repayment of any loans, deposits.
- Shares that are to be purchased are to be fully paid only and buy back formalities should be as per SEBI.Who can participate:The companies offer buy back in two modes for shareholders:
- Open market offer.
- Tender offer.
Open market offer
The maximum price is fixed and shares can be purchased within one year upto the open market price. Most companies prefer this route. The sellers will be subjected to short term or Long term capital gain tax if the price is higher than their purchase price.
The company fixes a specific price for purchase of certain definite quantity of shares directly from shareholders. This program can go upto one month only. This routes treats all share holders equal whether they are major or minor shareholders and every one gets benefit. But this is not followed much. The seller will have to treat thisprofit if any under other sources only as there is no STT in this and hence short/long term gains will not be applicable.
But most of the companies , after getting green signal for buy back, hardly completes even 25% of buy back. So shareholders are not benefited. Now SEBI has intervened and compelled all companies to buy back atleast 25% of buy back offer.The lame excuse some companies say that share holders are not interested to purchase as per offer price in tender. But the offer price in tender was not informed to SEBI. If it is more than the market price by atleast 20%, then there will be definitely good offer from shareholders. So SEBI should order all companies who want buy back shares to quote minimum number of share purchase to the extent of 50% atleast so that real intention of companies are revealed in buy back offer. This should be discussed in various forums like all money channels like NDTV profit, Zeebusiness, CNBC, Bloomberg. The buy back affairs should be transparent so that investing public can believe the intentions of management to enhance the value of share value. Otherwise this will give rise to investor complaints to SEBI that these buy back offers are just announcements aimed at boosing the share prices artificially. SEBI should try to bring fair practice in this sphere.
For more details , visit my following site also.
C.R. Venkata Ramani