final buy back
TRANSCRIPT
-
8/8/2019 Final Buy Back
1/35
BUYBACK
-
8/8/2019 Final Buy Back
2/35
HISTORY
Prior to the amendment of the 1999 of the companies actthere was no way a company could buy its shares back from theshareholders without a prior sanction of the court (except for the
preferential shares).
Though there were ways by which a company could buyits shares back from the shareholders but it could not be donewithout the sanction of the court.
This was done to protect the rights of the creditors aswell as the shareholders. But the need of less complex ways ofbuying its shares back by the company was always felt.
-
8/8/2019 Final Buy Back
3/35
WHAT DOES BUYBACK MEAN?
Buyback is reverse of issue of shares by acompany where it offers to take back itsshares owned by the investors at a specified
price; this offer can be binding or optional tothe investors.
The repurchase of outstanding shares(repurchase) by a company in order to reducethe number of shares on the market.
-
8/8/2019 Final Buy Back
4/35
SECTIONS
The provisions regulating buy back of shares arecontained in Section 77A, 77AA and 77B of theCompanies Act,1956.
These were inserted by the Companies(Amendment) Act,1999.
The Securities and Exchange Board of India(SEBI) framed the SEBI (Buy Back of Securities)
Regulations,1999 and the Department of Company Affairs framed the Private LimitedCompany and Unlisted Public company (BuyBack of Securities) rules,1999 pursuant toSection 77A(2)(f) and (g) respectively.
-
8/8/2019 Final Buy Back
5/35
PROCEDURE FOR BUY BACK
Where a company proposes to buy back its shares, it shall, afterpassing of the special/Board resolution make a public announcementat least one English National Daily, one Hindi National daily andRegional Language Daily at the place where the registered office ofthe company is situated.
The public announcement shall specify a date, which shall be"specified date" for the purpose of determining the names ofshareholders to whom the letter of offer has to be sent.
A public notice shall be given containing disclosures as specified inSchedule I of the SEBI regulations.
A draft letter of offer shall be filed with SEBI through a merchantBanker. The letter of offer shall then be dispatched to the members of
the company.
-
8/8/2019 Final Buy Back
6/35
Cont.
A copy of the Board resolution authorizing the buy backshall be filed with the SEBI and stock exchanges.
The date of opening of the offer shall not be earlier than
seven days or later than 30 days after the specified date
The buy back offer shall remain open for a period of notless than 15 days and not more than 30 days.
A company opting for buy back through the public offeror tender offer shall open an Escrow Account.
-
8/8/2019 Final Buy Back
7/35
BUY-BACK FROM WHOM ?
Buy-back is permitted only for the equity shares and preferenceshares, employees stock options and sweat equity shares, of acompany.
BUY-BACK FROM WHERE?
Existing security holders on a proportional basis
Open market
ESOP (Employee Stock Option)
-
8/8/2019 Final Buy Back
8/35
Reasons for Buyback
To prevent hostile take over bids
To return surpluscash to share holder
To increase the underlying sharevalue
To support theshare price during periods of
temporary weakness
To achieve or to maintain a target capital
structure To shrinkequity base, thereby injecting much
needed flexibility
-
8/8/2019 Final Buy Back
9/35
Why companies go for buyback?
Unused Cash
Tax Gains
Market perception
Exit option
Escape monitoring of accounts and legalcontrols
Show rosier financials
Increase promoter's stake
-
8/8/2019 Final Buy Back
10/35
SOURCES
Free Reserves.
Securities Premium Account.
Proceeds of any shares or other specified
securities like employee stock option.
-
8/8/2019 Final Buy Back
11/35
CONDITIONSa) The buy back is authorized by its articles.
b) A special resolution has been passed in general
meeting of the company authorizing buy back.
c) If buy back is 10% or less of the total paid up capitaland free reserves of the company, such buy back maybe made if authorized by board of directors atresolution passed at meeting.
d) The buy back does not exceed 25% of the total paid
up capital and free reserves of the company.
-
8/8/2019 Final Buy Back
12/35
e) Debt equity (including free reserves) ratio does not exceedto 2:1 after the proposal buy back.
f) All shares or other specified securities are fully paid up.
g) The buy back is in accordance with SEBI regulationsframed for this purpose.
h) The buy back of shares listed on stock exchange shouldbe in accordance with regulations made by SEBI.
i) Every buy back should be completed within 12 monthsfrom the date of passing the special resolution or board
resolution
CONTu.
-
8/8/2019 Final Buy Back
13/35
METHOD OF BUY BACK
Buyback through Open Market Operations
Buyback through Tender Offer.
Selective buy-backs
-
8/8/2019 Final Buy Back
14/35
Open Offer Purchase
In an open offer,acompany can buy itsshares
directly from thestockmarket through brokers.
Open-market purchasesare resorted to when thenumber ofshares to be bought back is relatively
small. Thecompany has to fixamaximum price
for an open market offer,stipulate the number of
shares it intends to purchase,and announced theclosing date of the offer.
-
8/8/2019 Final Buy Back
15/35
Tender Offer A tender offer ismade when the number ofshares to
be bought back is large. Such an offer isa fixed priceoffer, i.e., thecompany fixesa particular price for the
maximum number ofshares it is willing to purchase. Italso fixesan outer time limit for accepting the offer.The offer price is usually fixed at a premium in orderto encourageshareholders to surrender their shares.Thecompany accepts theshares on a proportionate
basis if the offer is over subscribed. But if offer isunder-subscribed, thecompany may either acceptwhatever is tendered or extend the time limit.
-
8/8/2019 Final Buy Back
16/35
Referenceslide
The fundamental difference between an open
offer and a tender offer depends on the price
at which thesharesare repurchased. In a
tender offer,acompany is forced to pay the
price that it had fixed for the repurchase,
whereas in an open offer, thecompany only
fixesamaximum price, but the repurchase ismadeat the prevailing market price.
-
8/8/2019 Final Buy Back
17/35
THE FUNDAMENTAL DIFFERENCE
BETWEEN
Open Offer
A company only fixes amaximum price, but therepurchase is made at theprevailing market price.
Tender Offer
A company is forced topay the price that it hadfixed for the repurchase
-
8/8/2019 Final Buy Back
18/35
Reference Slide
Selective buy-backs In broad terms,aselective buy-back is one in which identical
offersare not made to every shareholder, for example, if offersaremade to only some of theshareholders in thecompany. Theschememust first beapproved by all shareholders, or by aspecial resolution (requiring a 75% majority) of themembers inwhich no vote iscast by selling shareholders or their associates.Selling shareholdersmay not vote in favour ofaspecialresolution to approveaselective buy-back. The notice toshareholdersconvening themeeting to vote on aselective buy-backmust includeastatement setting out all material
information that is relevant to the proposal,although it is notnecessary for thecompany to provide information alreadydisclosed to theshareholders, if that would be unreasonable
-
8/8/2019 Final Buy Back
19/35
Selective buy-backs
Identical offersare not made to every
shareholder
-
8/8/2019 Final Buy Back
20/35
ESOP
-
8/8/2019 Final Buy Back
21/35
"ESOP" is an acronym that stands for Employee Stock
Option Plan.
Employee benefit plan.
The purpose of an ESOP is to enable employees to
acquire beneficial ownership in their Company without
having to invest their own money.
What isan ESOP?
-
8/8/2019 Final Buy Back
22/35
DEFINITIONS
Section 2(15A): Employee Stock Option means the option given to the whole time
directors, officers or employees ofa company, which gives such directors, officers
or employees the benefit or right to purchase or subscribe at a future date, the
securities offeredbythe company at a pre determined price.
The Section 81 read with various SEBI Guidelines speaks about ESOP; Securities
Exchange Board of India framed the SEBI (Employee Stock Option Scheme and
Employees Stock Purchase Scheme) Guidelines, 1999 and has been amended
thereafter from time to time;
-
8/8/2019 Final Buy Back
23/35
OBJECTIVES OF ESOP
Attracting critical skills
Employee feeling of ownership and commitment
Creating additional wealth for employees
A method to supplement social security benefits
To retain employees or groups apprehended of high turnover
To introduce a performance management system without incurring full
cash out flow
As a possible hedge against hostile controlling interest
To enforce corporate governance
-
8/8/2019 Final Buy Back
24/35
Salient Features ofESOP
An option is given to employees to acquire equity shares (or other convertiblesecurities) in the company after a future date but the price is fixed in advance;
The employee has the choice to decide whether to acquire the shares/convertible
securities or not;
In case the employee opts for the shares, he has to exercise an option and pay the
agreed price; After the lock-in period (ifany) the employee can sell the shares in the market and
realize the gain;
The employees holding stock options do not have the right to receive dividend or
vote or enjoy any other privileges ofa shareholder till the shares are actually issued
on exercise of option, after the completion ofvesting period; The options granted to the employees are not transferrable to any other person.
The option granted to the employee cannot be pledged, hypothecated, mortgaged
or otherwise alienated in any other manner
-
8/8/2019 Final Buy Back
25/35
Types of ESOPTypes of ESOP
Employee StockOption Scheme (ESOS):
the company grants an option to its employees to acquire shares at a future date at apre-determined price. Eligible employees are free to acquire shares on vesting within
the exercise period. Employees are free to dispose of the shares subject to lock-in-
period ifany. Generally exercise price is lower than the prevalent market price.
Employee Stock Purchase Plan (ESPP):
This is generally used in listed companies, wherein the employees are given the right toacquire shares of the company immediately, not at a future date as in ESOS, at a price
lower than the prevailing market price. Shares issued by listed companies under ESPP
will be subject to lock-in-period, as a result, the employee cannot sell the shares and/or
the employee has to continue with the employer for a certain number of years. The
company offers shares to employees as part ofa public issue .
Share Appreciation Rights (SAR)/ Phantom Shares:
Under this scheme, no shares are offered or allotted to the employee. The employee
is given the appreciation in the value of shares between two specified dates as an
incentive or performance bonus, that is linked to the performance of the company as a
whole, as reflected in its share value.
-
8/8/2019 Final Buy Back
26/35
TheESOP will enable the Company to buy out
thecurrent owners, using tax-deductible
Company contributions.
TheESOP will enable theemployees to share
in thecurrent and futureeconomic rewards of
ownership.
An ESOP will bea better incentive plan for
employees than other alternatives.
Why must thecompany adopt??
-
8/8/2019 Final Buy Back
27/35
SWE
ATEQ
UITY
-
8/8/2019 Final Buy Back
28/35
Meaning
Sweat equity is a term used to describe the
contribution made to a project by people who
contribute their time and effort. It can be contrastedwith financial equity which is the money contributed
towards the project. It is used to refer to a form of
compensation by businesses to their owners or
employees.
-
8/8/2019 Final Buy Back
29/35
Cont
Sweat Equity Shares are shares given to the employees of theCompany for the efforts and work they put in.
In India, theconcept of SWEATEQUITY SHARES was first started byInfosys.
Sweat Equity Shares are given to the employees at a discountedrate ofmarket value.
The whole idea behind giving Sweat Equity is to make theemployee
feel that he/she isa part owner in thecompany.
When employees feel their company has their own funds investedin it, they get better motivated and work more earnestly towardscompany's progress.
-
8/8/2019 Final Buy Back
30/35
TO WHOM SWEATEQUITY COULD BE
ISSUED
Sweat equity shares by definition could be issued only tothe employees or directors of the company incorporatedunder the Companies Act, 1956.
It could also be issued to the directors or employees of the
foreign subsidiary of an Indian incorporated company aforeign subsidiary is incorporated outside India and can atbest be covered by the definition of body corporate andnot a company under the Companies Act, 1956, thesection has made a fiction of including such a bodycorporate as a company for the purposes of issue ofsweat
equity shares. While the section mentions only employees or directors
the SEBI regulations also mentions issue ofsweat equity topromoters.
-
8/8/2019 Final Buy Back
31/35
The Consideration for Issue of Sweat Equity The allotment of sweat equity should be at a discount or
consideration otherwise than cash. Sweat equity could be issued in
consideration of providing know-how or making available rights in the
nature of intellectual property or for value addition contributed by
such employee or director.
CLASS OF SHARES WHICH COULD BE ISSUED AS SWEAT
EQUITY
Sweat equity shares can issued only ofa class of shares already issued
it must be only an equity shares and not a preference share.
-
8/8/2019 Final Buy Back
32/35
ISSUING OF SWEATEQUITY SHARES
GENERAL PRINCIPLES INISSUE OF SWEATEQUITY
The issue shall be authorized by a special resolution.
The issue of sweat equity shares by a listed company shall be in
accordance with the SEBI (Issue of Sweat Equity shares) Regulations,
2002.
In case of an unlisted company, issue of sweat equity shares shall be
subject to Unlisted Companies (Issue of Sweat Equity shares) Rules,2003.
Sweat equity shares is treated as any ordinary equity shares issued by
the company in all respects except in certain cases the issue is for
consideration other than cash. The voting rights and rights as to
dividend etc. will be pari pasu with the existing class ofequity shares.
In terms fsection 77A (5) (d) it is possible for the company to buy back
sweat equity issued to employees of the company pursuant, inter alia,
to a scheme ofsweat equity.
-
8/8/2019 Final Buy Back
33/35
ADVANTAGES AND DISADVANTAGES OF SWEATEQUITY
Advantages of Sweat Equity Shares
Highly efficacious in extracting the employees efficiency
Promotional i n nature as it a means of receiving shares without spending money
Cost efficient for company as it can save on the employees to be given salary
Receiving ofsweat equity is a long term investment
More income to the employees
Receiving the right to participate in the companys management for employees
Disadvantages of Sweat Equity Shares
More of dilution of power as share is being issued
Can lead to inefficiency ofemployees when the feeling of being in power creeps in
Can also lead to irregularity in income for the employees
Consideration in the nature ofshare can be heavy on otherwise low income employees
During recession or liquidation, the sweat equity share holders may face larger troubles as
their effort go non-benefitted to them.
Excessive issue of sweat equity shares can also lead to overcapitalisation which in turn
would be heavy for the company
-
8/8/2019 Final Buy Back
34/35
A COMPARATIVE STUDY OF ESOP AND SWEATEQUITY
ESOPS
Types of ESOPS:
Direct allotment of shares
Option to acquire the shares
Stock Appreciation Rights
Issued when the company is well
established
It is issued as a motivation tactic.
Can be issued only to directors &
employees of the company
Sweat Equity
No options available for Sweat Equityholders
Issued at the outset of a newly formed
company or when the company is
starting a new line of business
It is issued to attract the best & most
sought after people in the industry
Can be issued to promoters, directors &
employees
-
8/8/2019 Final Buy Back
35/35