A PROJECT ON

A STUDY ON BUYBACK OF SHARES

SUBMITTED BY
ISHVENDRA J TIWARI
ROLL NO -50

TYBAF (Semester-VI)
*2019-2020*

UNDER THE GUIDANCE OF

PROF.PRIYANKA R DUBEY

SUBMITTED TO

UNIVERSITY OF MUMBAI

L N COLLEGE
Suman Education Society Campus, Plot No. 89,
Near General Kariappa Bridge, Rajendra Nagar,
Borivali (East), Mumbai - 400066.

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 DECLARATION

I, ISHVENDRA J TIWARI ROLLNO-50 of TYBAF(Semester VI) hereby declare that I have

completed the project on “A STUDY ON BUYBACK OF SHARES ” as a part of Examination in

the Course ACCOUNTING & FINANCE during the academic year 2019-2020.

The information submitted is true and original to the best of my knowledge. Wherever the matter is taken
from any published work, I have included that detail as ‘reference’.

……………………………. ………………………………...
DATE OF SUBMISSION: SIGNATURE OF STUDENT:

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 CERTIFICATE

This is to certify that the project titled as “A STUDY OF BUYBACK OF SHARES ” has been

completed by ISHVENDRA J TIWARI of TYBAF(Semester VI) as a part of Examination during

academic year 2019-2020.

………………………………… ………………………………………
PRINCIPAL: COURSE COORDINATOR:

(DR. SHARDA SHRIYAN) (PROF. PRIYANKA DUBEY )

……………………………………………. …………………………………............
PROJECT GUIDE:
(PROF. PRIYANKA DUBEY EXTERNAL EXAMINER

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 ACKNOWLEDGEMENT

I extend my gratitude to PROF. PRIYANKA R DUBEY or providing guidance and

support during the course of project. She has been a great help through the making of the
project. I thank L N COLLEGE for giving me the opportunity to work on such a relevant topic.

I also like to thank the Principal DR. SHARDA SHRIYAN, faculty members for their help and
others who are indirectly responsible for the completion of this project. In addition I would like to
take this opportunity to thank our BAF Coordinator PROF. PRIYANKA DUBEY for being there
always to guide me and for extending her full support.

Date-
Mumbai
………………………
Signature of Student

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 SUMMARY

In India, Buyback of shares was implemented to elevate recent economies. SEBI (Buyback of
Securities) Regulations, 1999 was the major governing law for companies announcing buyback in
stock market of India. After the announcement, number of companies had started repurchase their
own shares. Buyback of shares in companies has been increasing trend year by year. There are
many influencing factor that lead the company to participate in buyback of shares. Financial
manager of the company can used the factors as measuring tool before participating in the buyback
of shares. Many of the literature related to financial stated that the future planning and restructuring
has been important element for a company. This study also addressed the corporate restructuring
action of the company which buyback of shares was one of the restructuring tool in the corporate
action. This study focused on the buyback of shares in India. Companies participated in buyback of
shares for the purpose of restructure of the company. This study had revealed that the factor
influenced to buyback of shares in India. Samples were taken from Bombay Stock Exchange listed
companies in India. The study period was from 1998 to 2015.The sampling method was used
Judgment sampling. Samples were taken on companies that involved in buyback of shares since
1998 to 2015. There were 238 companies repurchased their own shares from 1998 to 2015.
Secondary data was used from different sources such as CMIE PROWESS Database, SEBI, BSE
etc. Statistical tools like Multiple Regression, Autocorrelation, GARCH Model and Augumented
Dickey Fuller Test were used in achieving the stated objectives. The study exposed that cash flow
and capital structure were the important factor to involve in the buyback of shares. Likewise Share
price was increased after the buyback announcement. Results of the GARCH Model determined
that there was less volatility in share price on buyback announcement. Companies have done
buyback of shares in companies for maintain the optimal capital structure of the firm. The study
revealed that Leverage and Capital Structure were the main factor to obtain buyback of shares
decision. Most of the companies that participated in buyback of shares for maintain optimal capital
structure. Free cash flow was the other factor to obtain buyback of shares decision in company.
Some of the factors had influenced the buyback of share announcement negatively. i.e. total assets,
current assets, EPS and ROCE. The impact of share price on buyback of shares announcement was
highly validate for five trading day, before and after the buyback announcement date. The research
study has shown the determinants of the company going for the stock market activities.

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 OBJECTIVE OF THE STUDY

THE MAIN PURPOSE OF BUYBACK OF SHARES

1. Unused Cash: The Company has huge cash reserves with not many new profitable projects to invest in
and if the company think the market price of its shares is undervalued .However companies in emerging
markets like India have growth opportunities.
2. 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.
3. Market perception: By buying their shares at a higher price than previling market price company
signals that its share valuation should higher.
4. Exit Option :If a company wants to exits a particular country or wants to close the company it can offer
to buy back its shares that are trading in the market.
5. Increase Promoter stake : some companies buyback stock to maintain the dilution in promoter holding,
EPS(earning per share) and reduction in prices arising out of the exercise of ESOPS issued to
employees.

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 INDEX

SR.NO CHAPTERS PAGE

NO
1 INTRODUCTION OF BUY-BACK OF 9-11

SHARES
1.1 Meaning 12-13

1.2 Definition 14

1.3 Objective 15

1.4 History 16-17

1.5 Reasons 18-20

1.6 Advantages and Disadvantages 21-23

2 Role of Merchant Banking in Buy Back 24-25

of Shares
3 RESEARCH AND METHODOLOGY
3.1 Introduction 26-31

3.2 Types 32-55

3.3 Accounting Entry 56-57

4 DATA ANALYSIS OF Hindustan

Unilever Ltd
4.1 Introduction 58-60

4.2 Diagrams 61-66

5 CONCLUSION 67-68

6 BIBLOGRAPHY AND WEBLOGRPHY 69

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CHAPTER 1

INTRODUCTIONOF BUY-BACKOFSHARE

Financial restructuring is a decision involving use of business acumen & knowledge of all
possible financial strategies. Corporate financial strategy involves either paying out excess cash
or retaining the earnings. An important financial decision involves choosing between retention
and payout. Companies pay out their excess cash in many different ways, either by paying dividends
or by buying back shares. The decision to buyback shares rather than using any other method
involves different considerations embarking upon the short term& long term profitability of the
concern. Their increased usage over the last few years has triggered increasing debate over their
relevance and effective usage by Indian companies.

The significance of buyback as a vital tool for financial restructuring focuses upon
understanding the major motivations underlying their usage. Various authors have highlighted
diverse motivations for corporates buying back their own shares since the first study which was
undertaken to compare usage of buyback vis-a-vis issuance of dividends (Woods et al., 1996).
Namely, the major forces motivating corporates have been the presence of “free cash flows” which
the corporates wish to utilise in the absence of any suitable reinvestment options or to substitute
dividends or to achieve a “desired leverage ratio” so as to balance out the debt equity mix as per
shareholders’ expectations or to use it as “takeover deterrence strategy” or to use it simply as an
effective“ market signaling mechanism” countering undervaluation of shares in the market some
mechanism to create “managerial opportunism” or just to cover the impact of “issuance.

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 The short term success of any financial decision depends largely upon its adoptability by
various interest groups and stakeholders. Buyback announcements as made by companies
supposedly carry strong signals to such stakeholders specially the shareholders. Their perceived
valuations (undervaluation or overvaluation) result in strong reactions based on differential of
current market price and the buyback price announced by the company. Such reactions may
translate into abnormal returns, high liquidity values and excessive volatility for the announcing
stocks, thereby making buyback a strategic financial instrument unfolding short term
repercussions. Expectedly, the premium offered through buyback to existing shareholders provides
the much needed support in case of perceived undervaluation besides offering an exit window
opportunity to shareholders with perceived overvaluations. Thus, it plays a balancing act which
creates strong sentiment benefitting both holding and exercising shareholders in such scenario. In
fact, the level of reactions is an effective parameter to be utilized for testing the level of efficiency
of markets in handling such news or announcements.

The viability of any financial decision gets reflected through the changes that are brought
into respective financial statements in following years on medium term basis. The basic
parameters for performance measurement, as employed mainly by analysts, include measurement
of the resulting effect on cumulative earnings during that financial year and on net worth
employed. To capture these effects on uniform basis, variables like Earnings Per Share(EPS )
ratioand Book Value to Market Value(BVMV)ratios are employed. With the reduction in total
outstanding capital post buyback, both these variables are expected to improve.

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 However, sustaining such improvements over longer time periods is absolutely necessary to
reap the benefits of buyback. Analysts considering “free cash flow” hypothesis look into the merits
of utilization of excess cash flow to buyback shares if and only if the above benefits are realized.
Besides, achieving a particular leverage ratio leading to improvement in cost of capital are the
other desired effects to be produced by corporate undergoing buyback.

Immortality is a basic assumption underlying formation of a public limited company.

Majority of individual investors buying stake in a company are interested in holding shares rather
than exercising buyback options (Jain, 2007). The ultimate lit mustes t for financial restructuring
decisions liesin understanding long term value addition to shareholders’ wealth. . For the
shareholders who opt to hold ratherthanexercise the buyback option,supporting “undervaluation
hypothesis” ,market corrections occurring over longer terms are expected to add future value.
Thus, market efficiency plays a major role in allowing such resurgences. With markets following a
particular form of efficiency, the direct impact of buyback decisions becomes complex to
comprehend.
The basic premise driving analysis of companies opting for particular financial decision lies in some level of
differentiation regarding financial and nonfinancial parameters. Understanding and identifying the underlying
motivations for any type of financial decision is dependent upon related financial characteristics. Besides, any
such differentiation provides rational basis for such decisions, thereby preparing a checklist for
identification of such companies in the future.

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1.1 MEANING

Buy-back is a procedure that enables a company to purchase its shares from its existing
shareholders, usually at a price near to or higher than the prevailing market price. When a company
buys back, it reduces its outstanding shares in the market, which increases the percentage
shareholding for the remaining shareholders. In a buy-back, the company generally offers its
shareholders an option to tender a portion of their shares within a certain time frame and at a
specified price (maybe at a premium to the current market price). This price compensates the
shareholders for tendering their shares rather than holding on tothem.
Sometimes, companies buy back shares on the open market over an
extended period of time.

Buy-back of shares is a method of financial engineering. It can be described as a procedure which

enables a company to go back to the holders of its shares and offer to purchase the shares held by
them.

Buy-back helps a company by giving a better use for its funds than reinvesting these funds in the
same business at below average rates or going in for unnecessary diversification or buying growth
through costly acquisitions.

When a company has substantial cash resources, it may like to buy its own shares from the market
particularly when the prevailing rate of its shares in the market is much lower than the book value
or what the company perceives to be its true value.

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This mode of purchase is also called ‘Shares Repurchase’. A company can utilize its reserves to buy-
back equity shares for the purpose of extinguishing these or treasure operations. The former option
results in reduction of the paid up capital, and consequently higher earnings and book value per
share. Naturally, the market price of equity goes up.

The reduction in share capital strengthens the promoter’s control and enhances the equity value for
shareholders. In the latter option, companies buy their shares from open market and keep these as
‘treasury stock’.

This enables the promoters to strengthen their control over the shares bought back, without any
investment of their own. In case of treasure operations, there is a diversion of company’s funds to
buy shares and reduction in the value of equity for the shareholders.

The main aim of shares repurchase might be reduce the number of shares in circulation in order to
improve the share price, or simply to return to the shareholders resources no longer needed by the
company.

The shares repurchase may be by way of purchase from the open market or by general tender offer to
all shareholders made by the company to repurchase a fixed amount of its securities at pre-stated
price.

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1.2 DEFINATION

1. The purchase of a long position to offset a short position.

2. A corporation's repurchase of stock or bonds it has issued. In the case of stocks, this reduces the
number of shares outstanding, giving each remaining shareholder a larger percentage ownership of
the company. This is usually considered a sign that the company's management is optimistic about
the future and believes that the current share price is undervalued. Reasons for buybacks include
putting unused cash to use, raising earnings per share, increasing internal control of the company,
and obtaining stock for employee stock option plans or pension plans.

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 1.3 OBJECTIVES OF BUYBACK

Shares may be bought back by the company on account of one or more of the following reasons

1.3.1 To increase promoters holding

1.3.2 Increase Earning per share

1.3.3 Rationalized the capital structure by writing off capital not represented by available assets.

1.3.4 Support share value

1.3.5 To thwart take overbid

1.3.6 To pay surplus cash not required by business

Infect the best strategy to maintain the share price in a bear run is to buy back the shares
from the open market at a premium over the prevailing market price.

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1.4 HISTORY OF BUYBACK ACROSS THEWORLD

Development of newer methods and techniques for raising capital, new investment options
and newer means to distribute earnings could be traced back to developed economies and their
mature markets. These concepts drift slowly to the developing economies with improving
development and strengthening of capital markets in such economies over a period of time.
However, their adoption and the resulting changes in regulatory mechanisms for the same have to
be done with due caution.

The differential in terms of prevailing economic and business environment has to be

identified and analyzed for ensuring smooth transformation. Thus, any study undertaken to
analyses the dynamics of buyback needs to carry the torchlight from the home of buyback,i.e. USA.
US markets have shown significant advances in development and usage of buyback as
corporate financial strategy sinc its introduction. Besides, the extent of research work undertaken
and the amount of literature available is exhaustive and relevant to studies in any part of the
world. Keeping in mind these perspectives, the next section is devoted to documenting the history,
trends and possible explanations for development of share buyback in US capital markets. The
chronological introduction of buy backing countries across the world outside US has been made to
gain insight into its global acceptance.

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1.4.3 BUYBACK IN EUROPE, ASIA ANDOTHER COUNTRIES

Following US and Canada, many countries around the world have made amendments to
allow buyback under the corporate legal framework. In most of the European countries, these
changes have occurred before the conceptualization of European Union and after the passing of
European Union directive in 2004 under which the regulations in respective countries have started
to converge towards a common framework (Gunslinger et al., 2008). Table 1.4 shows the
respective year of introduction of buyback in various countries around the world (both developed
and emerging markets) indicating a sudden flurry of amendments in company law allowing
buyback in almost all major economies of the world. Some countries took an initiallead (likeUK,
Austriaand Luxemburg) while others followed the trends (Rau et al.,2002).

However, regulations enacted in these markets relating to level of buyback allowed,

accounting treatment, tax treatments, corporate reporting and creation of treasury shares has been
quite diverse. On the other hand, there are large numbers of markets across the world which does
not allow buyback .As per Rashid Sabri (2003), countries like China, Jordan, Morocco, Poland,
Saudi Arabia, Oman, Egypt and Lebanon still have regulations disallowing buyback in their
respective markets.

BUY BACK OF SHARES 24

1.5 REASONS FOR BUY BACK OFSHARES

One of the first multinationals (MNCs) to offer buy back option was Royal Philips
Electronics of Netherlands (Philips), the Dutch parent of Philips India Limited in the year 2000. The
open offer was made at Rs.105, a premium of 46% over the then prevailing stock market price.
Cadbury India, Otis Elevators, Carrier Aircon etc. soon followed suit. Fund managers which held
these companies' stocks felt that allowing buyback of shares was one of most favorable
developments in the Indian stock markets.

There are several reasons for which a company may decide to buy back shares issued by it.

The top three reasons are:

1) The company has surplus funds but does not have suitable projects to invest the funds in.
Companies aim to maximize profits. For this they continuously seek to improve current projects,
start new projects, expand into newer markets, acquire other companies etc. However there may be
a situation wherein the company has lot of surplus money but it is unable to identify suitable
avenues to invest that money. In such a situation it may consider using the surplus funds to buy back
its shares from existing shareholders.

2) The company may seek to increase the market price of its shares. Buying back shares would
reduce the number of shares that are available in the market for trading. This decrease in supply of
shares may lead to an increase in the shareprice.
3) Buy back of shares is a defense to a hostile takeover. The buyback would reduce the shares
available in the open markets thereby making it difficult for a potential acquirer to buy the shares
required to take over the company.

It is not open to a company to purchase its own shares, for s 77 of the Companies Act declares that
no company limited by shares or guarantee and having a share capital shall have power to buy its
own shares, unless the consequent reduction of capital is effected and sanctioned by the court's
consent, nor may a company do so indirectly by getting another person to buy the shares on its
behalf. Buying its own shares by a company involves a permanent reduction of capital without the
sanction of the court and which is illegitimate and in violation of law. The object of the section is to
prevent a person from acquiring control of a company and paying for its shares out of the
accumulated assets of the company itself.
Exceptions to this section are lending of money by a banking company in the ordinary course of business, the
provisions of money for the purchase of fully paid up shares in the company by trustees for and on behalf of
the companies' employees, and lending money by a company to its employees to enable them to buy fully
paid shares in the company and to hold them by way of beneficial ownership.

Traditionally subject only to a few exceptions specified above, companies were not
permitted to purchase their own shares. Section 77A brought in by the Companies Amendment Act,
1999, has caused this structural change in the theme and philosophy of company law that, subject to
the restrictions envisaged in the section, a company may buy back its own shares. Thus now it falls
under the exceptions where no confirmation by the court is necessary. Buy back is governed by
SEBI guidelines 1998.
S 77A of the Companies Act authorizes a company to buy back its shares out of its free reserves, the
securities premium account or the proceeds of any shares or other specified securities. However the
company is not permitted to make a buy back any a security out of the proceeds of an earlier issue of
the same type of securities.

Sub section 2 of 77A prescribes certain formalities. There should be a provision in the articles
authorizing buy back of shares. In the exercise of that authority a special resolution at a meeting of
the shareholders should be passed. The amount involved in buy back should be less than 25% of the
company's total paid up capital and free resources. After the buy back, the ratio between the debts
owed by the company should not be more than twice the capital and free resources of the company.
The shares to be bought back should be fully paid. The buyback should be in accordance with SEBI
regulations in case of listed securities. An amendment introduced in 2001 provides an exception to
the operation of sub sec 2 in case the buyback is 10% or less of capital and free reserves then
shareholders' resolution is not necessary.
1.6 ADVANTAGES AND DISADVANTAGES OF BUYBACK OF SHARES

ADVANTAGES OF BUYBACK OF SHARES

Increase confidence in management:

It might enhance the confidence of its investors on the company’s board of directors, as these
investors know that t he d ir e c t o r s a r e e v e r w i l l i n g t o r et u r n s u r p l u s c a s h i f it ’ s no t
a b l e t o e a r n above the company’s alternative investment or cost of capital.

Enhances shareholders value:

G e ne r a l l y, s ha r e bu yb a c k s a r e g o o d fo r shareholders. The laws of supply and demand
would suggest that with
fewer s h a r e s o n t h e m a r k e t , t h e s h a r e p r i c e w o u l d t e n d t o r i s e . A l t h o u g h t h
e company will see a fall in profits because it will no longer receive interest on t he c a s h, t h i s i s mo r e
t ha n m a d e u p fo r b y t h e r e d u c t io n i n t h e nu m b e r o f shares
Higher Share Price:
Buying back stock means that the company earnings are s p l it a m o ng f e w e r s h a r e s , m e a n i n g
h i g h e r e a r n i n g s p e r s h a r e ( E P S ) . Theoretically, higher earnings per share should command a higher
stock price which is great
Reduce takeover chances:
B u y i n g b a c k s t o c k u s e s u p e xc e s s c a s h . T he r e t u r ns o n e xc e s s c a s h i n mo n e y
m a r k e t a c c o u nt s c a n d r a g d o w n o v e r a l l company performance. Cash rich companies are also
very attractive takeover t a r g e t s . B u yi n g b a c k s t o c k a l lo w s t h e c o m p a n y t o e a r n a be t t e r
r e t u r n o n excess cash and keep itself from becoming a takeover target.

Increase ROE:
Buying back stock can increase the return on equit y (ROE).T h i s e f f e c t i s g r e a t e r t he mo r e
u n d e r v a l u e d t he s h a r e s a r e w h e n t h e y a r e repurchased. If shares are undervalued, this may be
the most profitable course of action for the company.
Psychological Effect:
W h e n a c o m p a n y p u r c h a s e s i t s o w n s t o c k i t i s e s s e nt i a l l y t e l l i n g t h e m a r
k e t t ha t t he y t h i n k t h a t t he c o mp a n y’ s s t o c k is undervalued. This can have a psychological
effect on the market.

Buying back stock allows a company to pass on extra cash to shareholders wit hout raising the
dividend. If the cash is temporary in nature it may prove more beneficial to pass on value to
shareholders through buybacks rather than raising the dividend.
Excellent Tool For Financial Reengineering:
In the case of profit making, h i g h d i v i d e n d -
p a y i n g c o m p a n i e s w h o s e s h a r e p r i c e s a r e l a n g u i s h i n g , buybacks can actually boost
their bottom lines since dividends attract taxes. A bu yb a c k a n d t he s u b s e q u e nt ne u t r a l i s a t io n
o f s ha r e s , c a n r e d u c e d i v i d e nd outflows, and if the opportunity cost of funds used is lower than the
dividend savings, the company can laugh all the way to the bank.

Tax Implication:
E xe m p t io n i s a v a i l a b l e o n l y i f t h e s h a r e s a r e s o l d o n a recognised stock exchange and
if securit ies transact ion tax (STT) on the sale h a s b e e n p a i d . I n a bu yb a c k s c he m e ,
n e it h e r d o e s t he s a l e t a k e p l a c e o n a
recognised exchange nor is the STT paid. So, you will have to pay income taxon your long-term capital gain
on the buyback after deducting the acquisition cost of your shares plus the benefit of indexation from the
year of purchase to the year of buyback. On the resultant gain, the tax would be 20 per cent plus
the applicable surcharge, if any, plus 2 per cent educationcess. You may also work out the tax at 10 per
cent of the gain wit hout considering indexation .Your tax liability will be limited to the lower of
the two calculations.

Stock buybacks also raise the demand for the stock on the open market. This point is rather
self explanatory as the company is compet ing against other investors to purchase shares of its own
stock.
 DISADVANTAGES OF BUYBACK OF SHARES
Sending Negative Signals:

A buyback announcement can send a negative signal i n t h e s e s it u a t io n s . A t yp i c a l e x a m p l e i s t h e

H P c a s e : F r o m N o ve m b e r 1 9 9 8 through October 2000, the computer giant Hewlett-Packard
spent $8.2 billion to buy back 128 million of its shares. The aim was to make opportunistic purchases of HP
stock at attractive prices—in other words, at prices they felt undervalued the company. Instead o f
signaling a good operating prospects to the market, the buyback signal was completely drowned out
more powerful contradictory
signalsa bo u t t he c o m p a n y’ s f u t u r e w h i c h a r e a n a bo r t e d a c q u i s i t io n, a p r o t r a c t e d bu s i n
e s s r e s t r u c t u r i ng , s l i p p i n g f i n a n c i a l r e s u lt s , a nd a d e c a y i n t h e g e n e r a l profitability of key
markets. By last January, HP’s shares were trading at around half the average RS 64 per share paid to
repurchase the stock
Backfire:
Buybacks can also backfire for a company competing in a high-growth industry because they may be read
as an admission that the company has few i m p o r t a nt n e w o p p o r t u n it i e s o n w h i c h t o
o t he r w i s e s p e nd it s mo n e y. I n s u c h cases, long-term investors will respond to a buyback
announcement by selling the company’s shares
T he s h a r e bu y b a c k s c he m e m i g ht be c o m e a b i g d i s a d va nt a g e t o t he c o mp a n y w he n it
p a ys t o o mu c h fo r it s o w n s h a r e s . I nd e e d , it i s fo o l i s h t o bu y i n a n overpriced market.
Instead, the company should put the money into assets that can be easily converted back into cash. This
way, when the market swings the other way and is trading below its true value, shares of the company can
be bought back at a discount, ensuring current shareholders receive maximum benefit. Strictly, a company
should repurchase it s shares only when it s stock is trading below it s expected value and when no
better investment opportunities are available.
ROLE OF MERCHANT BANKING IN BUYBACK OF SHARES

A merchant banker, according to SEBI (Merchant Bankers) Regulations, 1992 “is a person who is engaged in the business
of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager
,consultant, advisor or rendering corporate advisory services in relation to such issue management
”.Merchant bankers render services to meet the needs of trade, industry and also investors by performing as intermediary,
consultant and a liaison. Merchant banking is a service oriented industry specializing in investment and financial decision
making, assisting in making corporate strategies, assessing capital needs and helping in procuring the equity and debt
funds for corporate sectors and ultimately helping in establishing favourable economic environment

ROLE OF MERCHANT BANKER IN A BUY BACK

Public Announcements:
To ensure that the public announcement has been made in compliance with the Regulations & the offer has been duly
filed.

Escrow Account:
Escrow account is the trust account established by a broker/ promoter / others under the provisions of the license law for
the purpose of holding funds on behalf of the broker’s principal or some other person until the consummation or
termination of a transaction. The provisions r elating to Escrow Account, as per the regulations, has been
made. Ensuring r elease of balance Escr ow amount deposited with the bank. The escrow account shall
consist Cash deposited with a scheduled commercial bank or
Bank guarantee in favor of the merchant banker; or Deposit of acceptable securities with appropriate margin, with the
merchant banker, or
A combination of above mentioned three points. Escrow Account can be payable in following manner:
If the consideration payable does not exceed Rs.100 crores - 25% of the consideration payable.
If the consideration payable exceeds Rs. 100 crores 25% + 10% there after.On completion of the buyback
obligation by the company, the merchant banker has to inform the bank for release of securities from the escrow account
Deposit of acceptable securities with appropriate margin, with the merchant banker, or A combination of above mentioned
three points. Escrow Account can be payable in following manner If the consideration payable does not exceed Rs.100
crores - 25% of the consideration payable.
If the consideration payable exceeds Rs. 100 crores 25% + 10% there after.On completion of the buyback
obligation by the company, the merchant banker has to inform the bank for release of securities from the escrow account.
Due diligence certificate:
the merchant bankers would be required to give `due diligence' certificate which certifies that all the documents of
the company with respect to or any dispute cases of patents, collaboration, etc are clean. The disclosures and the legal
requirements are in line with the guidelines.
Price fixation:
in case of book building method used, s determined by BRLM in consultation with the acquirer or promoter of
the company after the offer closing date in accordance with the SEBI guidelines.
Compliance with regulations
The merchant banker shall ensure compliance of section 77A and section 77B of the Companies Act, and other laws or
rules as may be applicable
Extinguishing of certificates:
Ensuring that the certificates of the bought back shares are destroyed as per the guidelines of SEBI
Report to the SEBI:
The merchant banker shall send a final report to the Board within 15 days from the date of closure of the buy-back offer
The purpose of this standard letter of offer for Buy Back of equity is to provide the requisite information about the offer so
as to enable the shareholders to make an informed decision of either remaining the shareholders of the offer or to exit from
the offer company. Care shall be taken by the Merchant Banker (MB) to ensure that the Letter of Offer may not be
technical in legal or financial jargons, but it shall be presented in simple, clear, concise and easily understandable
language.
This standard Letter of Offer enumerates the minimum disclosurerequirements to be contained in the Letter of Offer for
the Buy Back of equity. The Merchant Banker/ offer is fr ee to add any other disclosur e(s) which inhis opinion
is material for the shareholders, provided such disclosure(s) is not presented in an incomplete, inaccurate or
misleading manner and is made in accordance with the Regulations
VALUATION OF BUYBACK OF SHARES
There are two ways companies determine the buyback price.
•
They use the average closing price (which is a weighted average for volume) for a period immediately before to the
buyback announcement. Based on the trend and value a buyback price is decided Shareholders are invited to sell some
or all of their shares within a set price range .The low point of the range is at a discount to the market price,
while the top of the price range is set at a premium to the market price. Investors are given more
sayin the buyback price than in the above arrangement. Still this met hod is rarelyused. Generally,
the price is fixed at a mark up over and above the average priceof the last 12-18 months.
CHAPTER 3

3. RESEARCH AND METHODOLOGY

INTODUNCTION

A.PRIMARY DATA: Primary data is data that is collected by a researcher from first-hand sources, using methods
like surveys, interviews, or experiments. It is collected with the research project in mind, directly from primary sources.

B.SECONDARY DATA: Secondary data refers to data that is collected by someone other than the
user. Common sources of secondary data for social science include censuses, information collected by
government departments, organizational records and data that was originally collected for other research
purposes.
Secondary Data : It is the data which is collected from the another source of information available.. Common
data like censuses, information collected by government departments or the collected from another source.

As per the requirements of Section 173(2) read with Section 77A and other applicable provisions of the
Companies Act, 1956 and the Securities and Exchange Board of India (Buy-back of Securities) Regulations,
1998, the Explanatory Statement contains relevant and material information to enable the shareholders to
consider and approve the Special Resolution on Buy-back of Company’s shares.
1. The Company intends to acquire equity shares each of face value of Re. 1/- at a price not exceeding Rs.
280/- per equity share (“maximum Buy-back price”) with the total aggregate amount to be expended not
to exceed Rs. 630 Crores which is within 25% of the Company’s fully paid-up Equity Share Capital and
Free Reserves as per Audited Balance Sheet as on March 31, 2010.
2. The Board of Directors of the Company at its meeting held on June 11, 2010 approved, subject to the
consent of the Members of the Company, the proposal for Buy-back of Company’s shares in accordance
with Article 169A of the Articles of Association of the Company subject to the provisions of Sections 77A,
77AA, 77B and all other applicable provisions of the Companies Act, 1956 (hereinafter referred to as “the
Act”) and the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998
(hereinafter referred to as “Buy-back Regulations”).
3. The Buy-back is proposed to be implemented by the Company from the Open Market purchases through
the Bombay Stock Exchange Limited and the National Stock Exchange of India Limited (hereinafter
collectively referred to as “the Stock Exchanges”).
4. There will be no Buy-back from any persons through negotiated deals whether through the Stock
Exchanges or through spot transactions or through any private arrangement.
5. The Buy-back is proposed on account of the Company’s strong cash flow delivery and the accumulated
cash being more than what is needed to fund growth. The Buy-back is expected to :
 reduce outstanding number of shares and consequently increase Earnings Per Share over a period of time
and enhance long term value creation;
 effectively utilise surplus cash; and
 make the Balance Sheet leaner and more efficient to improve key ratios like Return on Net Worth,
Return on Assets, etc.
6. The aggregate Paid-up Share Capital and Free Reserves of the Company as on March 31, 2010 is Rs.
2,551.26 crores and under the provisions of the Act, the funds deployed for Buy-back shall not exceed 25%
of the Paid-up Capital and Free Reserves of the Company. Accordingly, the maximum amount that can be
7. utilised in the present Buy-back is Rs. 637.81 crores. The total aggregate amount proposed to be expended
for the Buy-back is Rs. 630 crores, which is within the maximum amount as aforesaid. Further, under the
Act, the number of Equity Shares that can be bought back during the financial year shall not exceed
25% of the Paid-up Equity Shares of the Company. Accordingly, the maximum number of Equity Shares
that can be bought back cannot exceed 54,54,21,695 Equity Shares being 25% of 2,18,16,86,781 Equity
Shares each of face value of Re.1/- as per the Audited Balance Sheet as on March 31, 2010.
8. The maximum Buy-back price of Rs. 280/- has been arrived at taking into account the trends in the
market price of the equity shares of the Company during the last six months prior to the date of Board
Meeting. The average closing market price of the Equity Shares in last three calender months on the Bombay
Stock Exchange Limited was Rs. 232.81 and on the National Stock Exchange of India was Rs. 233.07. The
maximum Buy-back price of Rs. 280/- is at a premium of approximately 20% over the aforesaid prices.
Monthly high, low and average prices for the six months preceding the date of the Board Meeting held on
June 11, 2010 to approve the Buy-back and their corresponding volumes on the Stock Exchanges are as
follows:

Bombay Stock Exchange Limited (BSE)

 High Date & No. of Low Date & No. of Average Volume
Month Price shares traded Price shares traded on Closing (Number of
(Rs.) on the day of (Rs.) the day of low Price (Rs.) shares
high price price traded)
December, 286.2 December 1, 260.25 December 23, 268.9 54,83,442
2009 5 2009 2009 8
3,83,194 6,07,947
January, 268.2 January 11, 241.60 January 29, 259.8 93,68,614
2010 5 2010 2010 1
2,91,220 6,78,202
February, 248.0 February 1, 225.15 February 5, 236.3 66,62,906
2010 0 2010 2010 1
6,06,420 6,62,772
March, 2010 244.3 March 8, 2010 218.10 March 15, 2010 232.9 81,18,900
5 3,82,548 10,47,070 6
April, 2010 243.2 April 27, 2010 220.70 April 9, 2010 230.9 68,47,073
0 10,48,714 and 4,44,992 4
April 28, 2010
2,98,693
May, 2010 243.0 May 18, 2010 225.25 May 10, 2010 234.4 41,51,566
0 1,13,492 1,80,219 3
June 1, 256.5 June 4, 2010 232.40 June 1, 2010 246.7 31,19,266
2010 to 0 8,47,114 and 84,110 9
June 10, June 8, 2010
2010 3,23,469

(Source: BSE website)

National Stock Exchange of India Limited (NSE)

Date & No. of Date & No. of

High Low Average Volume
Mon shares traded shares traded
Price Price Closing (Number of
th on the day of on the day of
(Rs.) (Rs.) Price (Rs.) shares
high price low price
traded)
 December, 286.50 December 1, 259.65 December 23, 268.8 4,62,64,57
2009 2009 2009 9 6
40,84,853 34,14,514
January, 268.35 January 11, 241.05 January 29, 259.6 6,41,35,67
2010 2010 2010 8 1
22,51,471 64,96,604
February, 247.35 February 22, 227.00 February 5, 236.4 5,22,39,26
2010 2010 2010 7 0
22,80,787 43,45,866
March, 244.70 March 8, 2010 218.00 March 15, 2010 233.3 7,21,86,15
2010 29,70,886 63,29,071 8 7
April, 2010 244.00 April 28, 2010 220.70 April 9, 2010 231.1 6,25,43,28
29,48,610 24,20,707 2 3
May, 2010 257.00 May 10, 2010 226.25 May 25, 2010 234.6 3,54,49,77
11,03,808 12,02,978 4 6
June 1, 2010 257.20 June 4, 2010 232.35 June 1, 2010 246.7 1,72,66,42
to 50,72,279 10,42,836 9 4
June 10,
2010
(Source: NSE website)
9. The Resolution seeks to authorise the Board to Buy-back Company’s shares upto 25% of the Paid-up Share
Capital and the number of Equity Shares to be bought back by the Company will be within the limits as
aforesaid. The funds required for the Buy-back will be drawn out of the Share Premium Account and / or
Free Reserves of the Company.
10. The actual reduction in outstanding number of shares would depend upon the price at which the shares are
bought back as well as the total number of shares available for purchase. However, assuming the shares
are purchased at the maximum price (Rs.280/-) and that the Company would be in a position to
successfully purchase shares for an amount of Rs. 630 Crores as approved by the shareholders, the total
number of shares that would be purchased in terms of the approval of the shareholders would be
approximately 2,25,00,000 equity shares and the outstanding shares would accordingly reduce to that
extent.
11. a. The aggregate shareholding of Unilever PLC and its associates (hereinafter referred to as “the
Promoters”) as on date of the Notice is 1,13,48,49,460 Equity Shares each of face value of Re.1/-
constituting 52.02% of the total Equity Share Capital of the Company. Pursuant to the Buy-back of
 Equity Shares as proposed and depending on the response to the Buy-back offer, the percentage holding
of the Promoters would increase marginally. Such an increase in the percentage holding of Promoters is
consequential and indirect in nature and falls within the limits prescribed under the Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
b. No shares were either purchased or sold by the Promoters during the period of six months preceding
the date of the Board Meeting at which the proposal for Buy-back is approved.
c. The Promoters will not participate in the Buy-back.

.
2.1 TYPES OFMETHODOLOGY

2.1.1 METHOD OF BUY BACK OF LISTEDCOMPANIES

HERE ARE SOME METHODS OF BUY BACK OF SHARES

The company can buy back its shares in following ways:-

1. From the existing shareholders on a proportionate basis through the tenderoffer.

2. From open market through

a) Stock exchange
b) Book building process.

3. From odd-lot holders

1. BUYBACK OF SHARES THROUGH TENDER OFFER:-

The company fixes and announces a price at which the buyback procedure will be
carried out.

it is permissible for the promoters to offer their shares for buy- back, provided they make specified
disclosures as follows -

1. The quantum of shares proposed to be tendered,&

2.The details of their transactions and their holdings for the last six months prior to the passing of
the special resolution for buy-back including information of number of shares acquired, the price
and the date of acquisition.

If the number of shares offered for buy-back by the shareholders at this price exceeds the total
number of shares determined by the company to be bought back, then shares shall be bought from
each shareholder propoublic announcement has to be done before the buy back is made in at least
one English National Daily, one Hindi National Daily and a Regional language daily at the place
where the Registered office of the company is situated and shall contain all the material information

The public announcement shall specify a date, which shall be the

`specified date’ for the purpose of determining the names of the shareholders to whom the letter of
offer shall be sent.

The specified date shall not be earlier than thirty days and not later than forty-two days from the date
of the public announcement.

The Company shall within seven working days of the public announcement shall file with
the Board a draft-letter of offer containing disclosures through a merchant banker who is not
associated with the company.

The draft letter shall be accompanied with the fees.

The letter of offer shall be dispatched not earlier than twenty-one days from its submission to the
Board.

The company shall complete the verifications of the offers received within fifteen days of the closure
of the offer

The deposit in the escrow account shall be made before the opening of the offer Advertisements
BUY BACK FROM OPEN MARKET

A. STOCK EXCHANGES
B. BOOK BUILDING
1. SPECIALRESOLUTION
 2. DECLARATION OFSOLVENCY

Form SH – 9 is a declaration for solvency related to buyback of securities. We have discuss ed rules
related to declaration of solvency earlier here. Here, we will discuss contents of the declaration.

Following information is required to be given in this form:

Whether company is listed, name of stock exchange, Date of listing, Name of Merchant Banker,
Date of board of director’s resolution authorising buyback

Following documents shall be attached:

1. Copy of board resolution

2. Statement of assets and liabilities

3. Auditor’s report

4. Affidavit as per rule 17(3)

5. Copy of Special Resolution

3. APPOINTMENT OF MERCHAT BANKER

(1) The issuer shall appoint one or more merchant bankers, at least one of whom shall be a lead
banker and shall is appoint other intermediaries , in consultation with the lead merchant banker, to
carry out the obligations relating to the sissue.

(2) The issuer shall, in consultation with the lead merchant banker, appoint only those
intermediaries which are registered with the Board.

(3) Where the issue is managed by more than one merchant banker, the rights, obligations and
responsibilities, relating inter alia to disclosures, allotment, refund and underwriting obligations, if
any, of each merchant banker shall be predetermined and disclosed in the offer document specified
4) The lead merchant banker shall, only after independently assessing the capability of other
intermediaries to carry out their obligations, advise the issuer on their appointment.

(5) The issuer shall enter into an agreement with the lead merchant banker in the format specified
in Schedule II and with other intermediaries as required under the respective regulations applicable
to the intermediary concerned:

Provided that such agreements may include such other clauses as the issuer and the intermediary
may deem fit without diminishing or limiting in any way the liabilities and obligation of the
merchant bankers, other intermediaries and the issuer under the Act, the Companies Act, 1956, the
SecuritiesContracts(Regulation) Act, 1956,theDepositoriesAct,1996andtherulesandregulationsmade
thereunder or any statutory modification or statutory enactment thereof:
Provided further that in case of ASBA process, the issuer shall take cognizance of the deemed
agreement of the issuer with Self Certified Syndicate Banks.

(6) An issuer shall, in case of an issue made through the book building process, appoint syndicate
members and in the case of any other issue, appoint bankers to issue, at all mandatory collection
centre as specified in Schedule III and such other collection centres as it may deemfit.

(7) The issuer shall appoint a registrar which has connectivity with all the depositories:
Provided that if issue it self registrartion an issue registered with the Board, then another registrar
to an issue shall be appointed as registrar to the issue:

Provided further that the lead merchant banker shall not act as a registrar to the issue in which it is
also handling the post issue responsibilities.
GERIFICATION OF OFFERRECEVIED

a. The offer for buyback shall remain open to the members for a period not less than
fifteen days and not exceeding thirty days.

b. The date of the opening of the offer shall not be earlier than seven days or later than thirty
days after the specified date.

c. The letter of offer shall be sent to the shareholders so as to reach them before the
opening of the offer.

d. In case the number of shares offered by the shareholders is more than the total number of
shares to be bought back by the company, the acceptances per shareholder shall be equal
to the acceptance stendered by the shareholders divided by the total acceptances received
and multiplied by the total number of shares to be bought back.

e. The company shall complete the verifications of the offers received with in fifteen days of
the closure of the offerand the shares lodged shall be deemed to be accepted unless a
communication of rejection is made within fifteen days from the closure of the offer.
5. OPRNING OF OFFER OF BUYBACK
PUBLICANNOUNCEMENT
 6. PRICEDETERMINATION

7. PAYMENT TOSECURITYHOLDERS

a. The company shall immediately after the date of closure of the offer open a special account
with a bankers to an issue registered with SEBI and deposit therein, such sum as would, together
with ninety percent of the amount lying in the escrow account make- up the entire sum due and
payable as consideration for buyback in terms of these regulations and for this purpose, may
transfer the funds from the escrow account.

b. The company shall within seven days of the expiry of fifteen days of receiving offers make
payment of consideration in cash to those shareholders whose offer has been accepted or return
the shares to the shareholders.
8. EXTINGUISHMENT OFCERTIFICATE

a. The company shall extinguish and physically destroy the security certificates so bought
back in the presence of a registrar to issue or the merchant banker and the statutory auditor
within fifteen days of the date of acceptance of the shares. Provided that the company shall
ensure that all the securities bought back are extinguished within seven days of the last date
of completion of buyback.

b. The company shall furnish a certificate to the Board certifying complianc easduly
certified and verified by-

i. The registrar and whenever there is no registrar by the merchant banker.

ii. Two directors of the company one of whom shall be a managing director where
there is one.

iii. The statutory auditor of the company

c. The certificate required shall be furnished to SEBI and to the stock exchanges where the
shares are listed onamonthly basis by the seventh day of the month succeeding the month in
which the securities certificate are extinguished and destroyed.
3. FROM ODD LOT HOLDERS

The provisions pertaining to buyback through tender offeras specified above shall be
applicable mutatis mutandis to odd lot shares.

.
2.1.2 METHOD OF BUY BACK OF UNLISTED COMPANIES

Buy Back of Securities is a boon for Companies who wants to reduce their Share Capital.
First, here are few preliminary notes of Buy Back:

a. Introduced by ‘The Companies (Amendment) Act,1999

b. Governing Sections of Companies Act,1956:

 77A

 77AA

 77B

c. Specified Security: includes ESOP or other security as notified by Central Government.

d. Free Reserves: Clause (b) of explanation to section 372A defines free reserves as ‘Reserves
which, as per latest audited balance sheet of the company are free for distribution as dividend and
shall include balance to the credit of Security Premium A/c but shall not include Share Application
Money’.

e. Penalty: up to Rs. 50,000 and/or imprisonment up to 2years.

he buyback of securities by Private Limited Company and Unlisted Public Limited Company not listed on any
recognized stock exchange comes under Private Limited Company and Unlisted Public Limited Company (Buy-
back of Securities) Rules, 1999.These were passed by the Central Government on 6 thJuly1999.

Methods
A company may buy-back its shares by either of the following methods:

 From the existing shareholders on a proportionate basis through private offers.

 By purchasing the securities issued to employees of the company pursuant of to a scheme of stock option
or sweat equity.

SPECIAL RESOLUTION
A special resolution needs to be passed under sub-section (2) of section 77A of the Companies Act, 1956 and
the explanatory statement is to be annexed to the notice for the general meeting containing all disclosures.
The statement shall contain the date of the Board meeting at which the proposal for buy back was approved, the
necessity for the buy-back; the class of security intended to be purchased under the buy-back; the method to be
adopted for the buy-back; the basis of arriving at the buyback price; the time limit for the completion of buy-
back; etc. It will also state that the BOD has checked that the company would be able to pay all its debts.

LETTER OF OFFER
The Company, authorized by a special resolution, shall file with the Registrar of Companies
a draft letter of offer before the buy-back of shares. IT shall also declare solvency in Form No. 4A.

CONTENT OF LETTER OF OFFER

Details of the offer including the total number and percentage of the total paid up capitaland free reserves
proposed to be bought back and price.

 the proposed time table from opening of the offer till the extinguishment the certificate disclosure of all
material facts,

 The necessity for the buy back, process, brief information about the company; Audited
 Financial information for the last 3 years Present capital structure (including the number of fully paid
and partly paid securities) and shareholding pattern;

 The capital structure including details of outstanding convertible instruments, if any, post buy-back;

 The letter of offer shall contain pre and post buy-back debt equity ratios etc.

Dispatch LOF

The letter of offer shall be dispatched immediately after filing with Registrar of Companies but not later
than 21 days from it’s filing with Registrar of Companies.
Buyback Period
The offer for buyback shall remain open to the members for a period not less than 15days and not exceeding 30 days from
the date of dispatch of letter of offer.
Shares tenders exceeds limit
In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the
company, the acceptance per shareholder shall be on proportionate basis Process Completion
The company shall complete the verifications of the offers received within 15 days from the date of closure of the offer
and the shares lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the
closure of the offer.
Payment to the shareholder
The Company shall immediately after the date of closure of the offer open a special bank account and deposit therein,
which would make up the entire sum due and payable as consideration for the buy-back. After the 21 days the company
shall within 7 days make payment of consideration in cash or bank draft/pay order to those shareholders whose offer has
been accepted or return the share certificates to the shareholders forthwith
Process Completion
The company shall complete the verifications of the offers received within 15 days from the date of closure of the offer
and the shares lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the
closure of the offer.

Payment to the shareholder

The Company shall immediately after the date of closure of the offer open a special bank account and deposit therein,
which would make up the entire sum due and payable as consideration for the buy-back. After the 21 days the company
shall within 7 days make payment of consideration in cash or bank draft/pay order to those shareholders whose offer has
been accepted or return the share certificates to the shareholders forth with
General obligations of the company
The company shall ensure that:

 The letter of offer shall contain true, factual and material information i.e. no misleading information and state that
the directors of the company accept the responsibility for the information contained in such document;

 The company shall not issue any shares including by way of bonus till the date of the closure of the offer
under these rules;

 The company shall confirm in its offer the opening of separate bank account and pay the consideration only by
way of cash or Bank draft/pay order;

 The company shall not withdraw the offer once the draft letter of offer has been filed with the Registrar of
Companies; and The company shall not utilize any money borrowed from Banks/Financial Institutions for the
purpose of buying back its shares.
Return to be filed with Registrar
A company, after the completion of the buy-back under these rules, shall file with the Registrar a return in the Form,
the format of which is mentioned in the Rules.

Extinguishment of Certificate
The company shall extinguish and physically destroy the share certificates so bought back in the presence of the Company
Secretary within 7 days from the date of acceptance of the shares. The company shall furnish a verified certificate to the
ROC certifying compliance of these rules within 7 days of the extinguishment and destruction of the certificates. The
record of share certificates needs to be maintained.
Register of shares

The company shall maintain a Register of shares bought back by the Company in the Form mentioned in the
Rules. After all the requirements are fulfilled and document submitted to ROC the company can proceed with
the buyback. After the process is complete the company again has to file a form with the ROC and thus the
process will be completed
 2.2.3 BUYBACK OF LISTED COMPANY

The regulation is applicable to buyback of shares or other specified securities of a company listed on a Stock
Exchange. The buyback of shares can’t take place for delisting of shares from the Stock Exchange.
When the company is buying back shares it can’t buy back through negotiated deals with any person or through
spot transactions or through any private arrangement.
Special Regulation
In case the Offer size is greater than 25% of its Equity share capital & free reserves, the company can go ahead
with the buyback only if a special resolution is passed at the general meeting. When the notice is being sent to
the shareholders an Explanatory Statement must be annexed to the notice containing various disclosures
T he co mp a n y c a n a lso co mp a n y c a n go a he ad w it h t he bu y ba ck
o n l y i f a s p e c i a l r e s o lu t io n i s t hr o u g h t h e p o s t a l b a l l o t r o u t e a s p e r T h e C o m p a n i e s ( P a s
s i n g o f t h e Resolution by Postal Ballot)Rules,2001.“PostalBallot”includes vot ing by shareholders by
postal or electronic mode instead of voting personally by present ing for transact ing businesses in
a general meet ing of the company,

Method for sending notice:

The company may issue notices either,-

(i) Under Registered Post Acknowledgement Due; or
(ii) Under certificate of posting; and
(b) W ith a n a dvertise ment publis hed in a le ading Englis h Ne ws paper a

n d i n o n e v e r na c u la r N e w s p a p e r c ir c u la t i n g i n t h e St a t e i n w h ic h t h e re g i s t e
re d o f f ic e o f t he company is situated, about having dispatched the ballot papers.

Explanatory Statement
The company needs to make the following disclosures in the statement
1. The date of the Board meet ing at which the proposal for buy back was approved by the BOD.
2 . The necessity for the buyback
 3. The company may specify one reason to be adopted for buy-back so that the shareholders
authorize the BOD for the same.
4. The maximum amount required under the buy back and the sources of funds from which the
buyback would be financed
.5 . T he ba s i s o f a r r i v i n g a t t he b u y b a c k p r i c e .
6. The number of securit ies that the company proposes to buy back
7. The aggregate shareholding of the promoter and of the directors of the promoters, as on the date of
the notice convening the General Meeting.
a. Aggregate number of shares purchased or sold by such persons during a period of six months
preceding the date of the Board Meeting. The maximum and minimum price at which purchases and
sales were made along with the relevant dates.
8. Intent ion of the promoters and persons in control of the company to tender their shares for buy-
back indicating the number of shares and details of acquisition with dates and price.
9. A confirmat io n that there are no default s subsist ing in repayment of deposit s, redemption of
debentures or preference shares or repayment of term loans to any financial institutions or banks.
10. A confirmation that the BOD has made a full enquiry into the affairs and prospects of the company and
are of the opinion that there will be no grounds on which t he company could be found unable to pay
its debts;
b. The company during that year, the company will be able to meet its liabilities as and when they
fall due and will not be rendered in solvent within a period of one year from that General Meeting date ; and
c. In forming their opinion for the above purposes, the directors have taken into account the
liabilities as if the company were being wound up under the provisions of the Companies Act, 1956
11.A report addressed to the BOD by the Company’s auditors stating that-
a. They have inquired into the company’s state of affairs;
b. The amount of the permissible capit al payment for the securit ies is in their view properly
determined; and,
c. The Board of Directors have formed the opinion on reasonable ground sand that the company will
not be rendered insolvent within a period of one-year from that date .After the special resolution (requiring
2/3rdMajority) is passed the company can go ahead with the buyback. This resolution needs to be filed with
SEBI and the Stock Exchanges where the shares/ securities are listed with seven days of passing such
resolution.
Board Resolution

The Board will pass a resolution to buy back its shares. Before making the Public Announcement the company
shall give a public notice in at least one English national daily, one Hindi national daily and a regional language
daily, at the place where the registered office of the company is situated. The Board of Directors shall give
such public notice, within 2 days of the passing of the resolution. The public notice shall contain the disclosures
as specified in the Explanatory Statement A copy of the resolution, passed by the Board of Directors at its
meeting authorizing buy back of its shares shall be filed with SEBI and the stock exchanges, where the shares
of the company are listed, within two days of the date of the passing of the resolution.
2.2.3ACCOUNTING ENTRY OF BUY BACK OFSHARES

1.Final Call (When Shares Are Partly Paid Up)

A.Call
Final Call Account –Dr
To Equity ShareCapital Account-Cr
B.Money Received
Bank Account –Dr
To Final Call Account-Cr

2.Announce
Equity Share Capital Account –Dr
Premium On BuyBack Of Shares Account-Dr
To Equity Share Capital Account –Cr

3.Fresh Issue Of Shares

A.Sale Of Asset
Bank Account –Dr
To Fixed Asset-Cr

B.Issue Of Preferance Shares/Debentures

Bank Account-Dr
To Preferance Share Capital Account-Cr
To Security Premium Account-Cr
4. Set Off Premium
Security premium account –Dr
General reserve account –Dr
Profit and loss account –Dr
CRR(Capital Redemption Reserve Account)-Dr
To Premium On Buy Back Account-Cr

5.Maintain CRR(Capital Redemption Reserve Account)

General Reserve Account –Dr
Profit and Loss Account –Dr
Other Reserve account –Dr
To CRR(Capital Redemption Reserve Account)-Cr

6.Payment
Equity Shareholder Account -Dr
To Bank Account -Cr
 CHPTER-03

DATA ANALYSIS

3.1 INTRODUCTION

About Hindustan Unilever Limited

Hindustan Unilever Limited (HUL) is India Largest Fast Moving Consumer Hindustan
Good Company the lives of two out of three Indians. HUL mission is to “add vitality to
life” through its presence I over 20 distinct categories in Home and Personal Care
Products and Foods and Beverages. The company meets every day needs for nutrition,
hygiene and Personal care, with brands that help people feel goods, look goods and get
more out of life.

Other relevant information about the company:

1. Beginnings: The company journey in India started with Sunlight soap in 1888. With it,
began an era of marketing branded Fast Moving Consumer Goods (FMCG) in India.
Sunlight was followed soon after by Lifebuoy in 1985 and famous brands like Pears,
Lux, Vim.

2. Corporate History: The company corporate existence came into being with the
establishment of Hindustan Vanaspati Manufacturing Company. This followed by
Lever Brothers India Limited in 1933 and United Traders Limited in 1935. These three
companies merged to form Hindustan Lever Limited in November 1956. The company
was renamed as Hindustan Unilever Limited in June 2007.
3. Listing : The company created history when it was listed in the Bombay, Kolkata, and
Madras Stock Exchanges in 1956 and offered 10% of its equity to Indian shareholders.
The company become the first foreign subsidiary company in India to offer equity to
the Indian public, HUL is listed in the Bombay Stock Exchange and the National Stock
Exchange.

4.Shareholding:HUL’s parent Company, Unilever holds 51.42% of its equity, while 17.50% is
owned by Resident Individuals , 12.32% by Foreign Institutional Investors, 12.93% by
Insurance companies and Financial Institutions and the rest by Mutual Funds, Private
Corporate Bodies, and NRI OCB. Today, the company has 410000 resident
shareholders.

OFFER

Hindustan Unilever Limited has decided to go for buyback of shares at its meeting held in 29 th
July 2007. The company propose to Buyback shares at a price not exceeding Rs230 a share and
up to an aggregate amount of Rs630crore that is less that 25% of the total paid up capital and
free reserves of the company as per the audited balance sheet as on 31, 2006.

The maximum price is at a premium of 17% over the closing price of the company’s shares as
on 27th July 2007. The average closing price if HUL share in the BSE for the last six month is
Rs196.

HUL net worth as on December 2006 stood close to Rs2,724crore so 25% of that would be
about Rs681crore. When this news was announce, the maximum number of shares that HUL
could have bought was 3.5 crore on its total equity base of 221 crore shares outstanding .So in
terms of equity value, HUL’s buy back is not substantial and more of probably a sentiment
booster for the stock.
REASON

The Unilever management feel the stock is undervalued and they believe in the prospects of the
Indian FMCG story. Which is why they may be willing to buy back some of their own stock to
create wealth for shareholders.
3.2 DAIGRAMS

From Chart 1, we can see surprisingly that the Hindustan Unilever Ltd companies usually
spent more money to buy back shares when their stock price was high and spend less when the
market price was low. In the third year of 2009, Hindustan Unilever Ltdcompanies spent more
money to buy back their own shares, which unfortunately were at the market peak. Then the market
crashed. In the year of 2010, The company has traded the more no of shares in the year 2010, Where
the shares price are low.
 From Chart 2, we can observe that when the market capitalization was low, only about
30% of the Hindustan Unilever Ltd bought back shares. When the market went up, more and more
companies repurchased their shares. From 2006 to 2007 and from 2011 to 2012, more than half of
the companies spent money on buying back their shares.
 In order to have a big impact for share buyback, I only consider the ones that were more than
0.5% in weight and ignore the quarters that have smaller weights.
KEY FINANCIAL RATIOS

EFFECTS ON THE COMPANY

EFFECTS ON THE SHAREHOLDERS
 CHAPTER- 04

CONCLUSION

With the present competitive environment in India arising due to globalization and multi-nationals
entering into the Indian market; it was felt that Indian companies need flexibility. Though the
response to buy-back option was lukewarm in the beginning, the situation is changing and the
provisions for buy-back have received laudable response from the corporate world. Since the
approval of buy-back of shares by companies, there has been commendable shoot up in the instances
of buy-back. However, the present regulations leave wide scope for misuse.

More specifically, it is found that the present regulations do not ensure the much desired
transparency in the case of open market method of buybacks. In such buybacks, a company in public
announcement declares the date of opening of the offer and the end date, the maximum total amount
to be bought back and the maximum offer price per share during the process of buy-back.
However, indicating the maximum price alone does not bring about the needed transparency in the
system and leaves much room for price manipulation by the company promoters. It is found in Table
12 that there is an unduly large gap between the maximum announced price and the actual buyback
price paid by the company in a large proportion in case of open market buybacks. The time gap
between the announcement date and the opening of the offer date of buy-back of shares varied from
day one to 110 days. The time gap between the announcement date and the opening of the offer date
was three days in case of 11 companies in thestudy.
However, irrespective of difference between the announcement date and the opening of the offer
date it is noted that the difference in price between announcement date and opening of the offer
date, ranged between (-25%) to ( +25%). Hence, from the shareholders viewpoint, the disclosure of
maximum price alone does not bring about the needed transparency in the system.

Besides, at what price, on which days and in what quantity will the company repurchase its shares
are all at the discretion of the company management. The companies are at liberty to end the
buy-back programmed or discontinue it before the end date and even before the total aggregate
amount are reached. According to Section 77A (9), such particulars are required to be entered in the
register of buy-back of securities within 7 days of the date of completion of buy-back. This system
lacks transparency and could benefit the insiders rather than investing shareholders at large.

The results of share price movements has shown that announcement effect resulted in a rise in price
from announcement date to opening of the offer date in case of 64.63% of buy-back cases thereby,
supporting management’s contention of undervaluation of shares. Besides, an analysis of the mean
share prices shows that in case of 55 companies (67%) there was an increase in the mean share
prices after buy-back as compared to the mean share prices for pre buy-back period. Thus, the
shareholders who did not participate in the buy-back programmed gained in these companies.
However, the overall effect of buy-back on the share prices is the algebraic sum of the
announcement effect and the post buy-back effect and no assurance can be given regarding the
pricemovements.
 CHAPTER- 05 WEBLOGRAPHY

https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-
shares.asp

www.goggle.com

https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-
shares.asp

https://www.nasdaq.com/article/share-buybacks-by-sp-500-companies-cm251453

https://www.slideshare.net/92_neil/buy-back-of-shares-58434033

https://aishmghrana.me/2014/06/09/declaration-of-solvency-for-buyback/

https://taxguru.in/company-law/buyback-securities-unlisted-public-company-private-company.html

http://WWW.HUL.COM