INTRODUCTION

A stock buyback, also known as a "share repurchase", is a company's buying back its shares from
the marketplace. You can think of a buyback as a company investing in itself, or using its cash to
buy its own shares. The idea is simple: because a company cant act as its own shareholder,
repurchased shares are absorbed by the company, and the number of outstanding shares on the
market is reduced. When this happens, the relative ownership stake of each investor increases
because there are fewer shares, or claims, on the earnings of the company.
BUY BACK OF SHARES UNDER THE COMPANIES ACT, 1956
The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the
Companies 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 Limited Company
and Unlisted Public company (Buy Back of Securities) rules,1999 pursuant to Section 77A(2)(f)
and (g) respectively.
CONDITIONS OF BUY BACK

1. The buy-back is authorised by the Articles of association of the Company;

2. A special resolution has been passed in the general meeting of the company authorising the
buy-back. In the case of a listed company, this approval is required by means of a postal
ballot. Also, the shares for buy back should be free from lock in period/non transferability.
The buy-back can be made by a Board resolution If the quantity of buyback is or less than ten
percent of the paid up capital and free reserves;

3. The buy-back is of less than twenty-five per cent of the total paid-up capital and fee reserves
of the company and that the buy-back of equity shares in any financial year shall not exceed
twenty-five per cent of its total paid-up equity capital in that financial year;

4. The ratio of the debt owed by the company is not more than twice the capital and its free
reserves after such buy-back;

5. There has been no default in any of the following

a. in repayment of deposit or interest payable thereon,
b.

redemption of debentures, or preference shares or

c.

payment of dividend, if declared, to all shareholders within the stipulated time of 30

days from the date of declaration of dividend or

d.

repayment of any term loan or interest payable thereon to any financial institution or
bank;

6.

There has been no default in complying with the provisions of filing of Annual Return,
Payment of Dividend, and form and contents of Annual Accounts;

7. All the shares or other specified securities for buy-back are fully paid-up;
8.

The buy-back of the shares or other specified securities listed on any recognised stock
exchange shall be in accordance with the regulations made by the Securities and Exchange
Board of India in this behalf; and

9. The buy-back in respect of shares or other specified securities of private and closely held
companies is in accordance with the guidelines as may be prescribed.
RESTRICTIONS ON BUYBACK BY INDIAN COMPANIES:
Some

of

the

features

in

government

regulation

for

buyback

of

shares

are:

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

2. Buyback should not exceed 25% of the total paid-up capital and free reserves
3. A declaration of solvency has to be filed with SEBI and Registrar Of Companies
4.

The

shares

bought

back

should

be

extinguished

and

physically

destroyed;

5. The company should not make any further issue of securities within 2 years, except bonus,
conversion of warrants, etc.
2

These restrictions were imposed to restrict the companies from using the stock markets as short
term money provider apart from protecting interests of small investors.
Penalty
If a company makes default in complying with the provisions the company or any officer of the
company who is in default shall be punishable with imprisonment for a term which may extend to
two years, or with fine which may extend to fifty thousand rupees, or with both. The offences are,
of course compoundable under Section 621A of the Companies Act, 1956.
CASE STUDY: BERGER PAINTS
Introduction
The Company was incorporated on 17 December, 1923, in the state of West Bengal as Had fields
(India) Limited. The name of the Company was changed to British Paints (India) Ltd. on
acquisition of the Company by British Paints (Holdings), U.K in 1947. The foreign shareholding
in the Company changed hands and finally rested with Berger Jenson Nicholson Limited, U.K. In
1976, the foreign shareholding in the Company was diluted to below 40% by sale of a portion of
the shares to the UB Group. On and from 31 December, 1983 the name of the Company was
changed to Berger Paints India Limited. In 1991,the stake of the UB Group in the Company was
purchased by the present promoters. The promoters, viz. Shri K S Dhingra, Shri G S Dhingra ,
their relatives and companies controlled by them, currently hold 73.53% of the paid-up capital of
the Company.
The Company is an existing profit making company having an uninterrupted dividend record
since 1981. The Company is presently engaged in the manufacture and sale of paints, varnishes
and enamels and powder coatings. The erstwhile Raj Doot Paints Limited was merged with the
Company effective1 October, 1998 and the erstwhile Berger Auto & Industrial Coatings Limited
was merged with the Company effective 1 April, 2004. The Company has an extensive
distribution network consisting of depots located all over the country and over 10000 dealers.
The Company also supplies a wide range of products to both the industrial and the architectural
segments. The Company has a number of technology tie-ups for various high technology paint
ranges.

The brief audited financial information of the Company for the last three financial years and
unaudited financial information of the Company for the nine months ended 31 December, 2004
are given below:

PARTICULARS

No.

of

Shares
Promoters
persons

who

and/or 146543273
are

Equity %

of

existing No. of Shares Post % holding post

Equity Capital

Buyback

buyback

73.53

146543273

74.69

7.27

14489925

7.39

19.20

35162459

17.92

100

196195657

100

in

control and/or Persons

acting in concert with
them

Institutional

Investors 14489925

(Banks, Mutual Funds,

Fls, Flls)
Others

(Private 38260792

Corporate

Bodies,

Indian

Public,

NRIs/OCBs)
Total

199293990

PROCESS & METHODOLOGY ADOPTED FOR BUY BACK

The buy-back was open to all equity shareholders of the Company both registered and
unregistered holding shares either in physical and / or electronic form, except promoters.

As per the Buy-Back Regulations, a company intending to purchase its shares from the open
market, shall do so only on the Stock Exchange(s)having nationwide trading terminals.
Accordingly, the buy-back was implemented by the Company by way of open market
purchases through NSE using its nationwide electronic trading terminals.

For the aforesaid buy-back of equity shares, the Company has appointed the following
registered broker (Broker to the Offer) through whom the purchases and settlement on
account of buy-back would be made
ARK Securities Private Limited
73, Khan Market, Its Floor,
New Delhi 110 003

IMPACT OF THE BUY BACK ON THE COMPANY

The buy-back had caused any material impact on the profitability of the Company. The buy-back
had not impaired the growth of the Company and also contributes to the overall enhancement of
shareholder value.
The Company is capable of generating sufficient cash flows to meet the requirements of the
present business as well as assuring adequate return to its stakeholders. The Company may also
continue to avail financial assistance from banks/financial institutions for meeting its business
requirements.
Pursuant to Regulation 15(b) of the Buy-Back Regulations, the promoters and persons in control
are not entitled to offer equity shares held by them under the buy-back. Post buy-back, the
holding of the promoters and persons in control would be 74.69% of the total equity capital
assuming that the entire amount of Rs. 1859 lakhs is utilized for the buy-back and the equity
shares are bought back at the maximum price of Rs. 60/- per share. The buy-back had not
affected the existing management structure.
Post buy-back, the debt equity ratio of the Company will be within the limit of
2:1 as prescribed under the Companies Act

ANGELINA GUPTA
ROLL NO. 145

RELIANCE
INDUSTRIES LIMITED
BRIEF INFORMATION ABOUT THE COMPANY
R I L i s a f u l l y integrated energy and petrochemicals company, with business activities
encompassing all major growth sectors of the Indian economy such as oil and gas exploration and
production, petroleum refining and marketing, petrochemicals including intermediates, and
textiles and has investments in power, financial services, telecom and infocom sectors. RIL
manufactures and markets a wide range of products.
RIL is the first and only private sector company from India to feature in the 2004 Fortune Global
500 list of Worlds Largest Corporations and ranks amongst the Worlds Top
200companies in terms of profits. The brief audited financial information of the Company for the
last three financial years and unaudited financial information of the Company for the six months
ended September 30, 2004 is given below:

(Rs in Cr.)

2001-

2002-2003

2003-2004

2002

Six

months

ended
September
30,2004

Gross Turnover

57120

65061

74418

43680

Net Turnover

42089

45898

51802

30444

Total Income

42871

46899

52940

31087

Depreciation and Tax

8658

9366

10983

6618

Profit after Tax

3243

4104

5160

3189

Equity dividend

663

698

733

1396

1396

1396

Earnings before Interest

Paid-up

Equity

Share 1054

Capital

342

Equity Share Suspense

26416

28931

33057

Reserves & Surplus

27812

30327

34453

Key Ratio

23.4

29.3

36.8

Earnings per share (Rs.)

199.2

217.2

246.7

Net Worth
22.8(1)
-

Book Value Per Share

NECESSITY FOR BUY BACK

The Company has accumulated free reserves and satisfactory liquidity. The Buy Back
is expected to lead to: (a) reduction in outstanding number of equity shares, and
consequent increase in Earnings per Share; (b) improvement in Return on Net Worth;
(c) reduction in

volatility

the weighted average cost

in the
of capital;

Companys

stock price, leading

(d) reflection

of the

to reduction in

under-valuation

of the

Companys stock price and the confidence of the management in future growth
prospects; and (e) positive impact on the Companys stock price, contributing to
maximization of overall shareholder value.
7

THE OFFER & BUY BACK PRICE

Reliance Industries Limited

hereby announces the Buy Back its f u l l y p a i d - u p

equity shares of face value Rs. 10 each (Equity Shares) from the existing
shareholders/beneficial owners of the equity shares of RIL (Buy Back) through the
openm a r k e t u s i n g t h e n a t i o n w i d e e l e c t r o n i c t r a d i n g f a c i l i t i e s o f t h e S t o c k
E x c h a n g e , M u m b a i (BSE) and the National Stock Exchange of India Limited (NSE),
pursuant to Article 5(g) of the Articles of Association of the Company and in accordance
with Sections 77A, 77AA and 77Bof the Companies Act, 1956 (the Companies Act) and
the Securities and Exchange Board of India (Buy Back of Securities) Regulations,
1998 (the Buy Back Regulations) at a price not exceeding Rs. 570 per equity share
(Maximum Offer Price) payable in cash.
SOURCES OF FUNDS
The maximum amount, which the Company would require for the purposes of the
Buy Back, is Rs. 2,999 crore. The Company has significant investments which are
reflected

in

the

cash

and bank

balances, fixed

deposits,

investment in

government securities, treasury bills, investments in mutual funds and equity shares of listed
companies.
MANAGEMENT DISCUSSION AND ANALYSIS ON THE LIKELY IMPACT OFTHE
BUYBACKONTHECOMPANY
The Buy Back is not likely to cause any material impact on the profitability of
the Company.
Post Buy Back the ratio of the debt owed by the Company will not be more than twice the
capital and free reserves of the Company after the Buy Back.
PROCESSANDMETHODOLOGYTOBEADOPTEDFORBUYBACK
Beneficial owners, that is, persons who hold Equity Shares in electronic form and who
desire to offer their Equity Shares under the Buy Back, would have to do so through their
stock broker.
The Company is under no obligation to place a buy order on a daily basis,
nor is the Company under any obligation to place an order on both the Stock
Exchange(s) and/or on bothodd lots as well as normal trading segment of the Stock
Exchange(s), as applicable.
8

METHODOF SETTLEMENT
The Company will pay the Buy Back consideration to the respective Brokers to the Offer
on or before every pay-in date for each settlement, as applicable to NSE /
BSE, through which exchange the transaction was executed.
The Company has opened a depository account styled RIL - Buyback of
equity shares- 2005.
The Equity Shares lying in credit in the aforesaid depository account will be
periodically e x t i n g u i s h e d w i t h i n t h e s t i p u l a t e d d a ys in the manner specified
in the Buy Back Regulations.
EKATA AGRAWAL
ROLL NO.148

CASE STUDY ON HINDUSTAN UNILEVER LIMITED

About Hindustan Unilever Limited
Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods
Company, touching the lives of two out of three Indians. HULs mission is to add vitality to life
through its presence in over 20 distinct categories in Home & Personal
Care Products and Foods & Beverages. The company meets everyday needs for nutrition,
hygiene, and personal care, with brands that help people feel good, look good and get more out of
life
1) Beginnings: The company's 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 1895 and other famous brands like Pears, Lux and Vim.
2) Corporate History: The company's corporate existence came into being with the
establishment of Hindustan Vanaspati Manufacturing Company. This was 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.
9

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 became the first foreign subsidiary company in India to offer equity to the Indian
public. Today, HUL is listed in the Bombay Stock Exchange and the National Stock Exchange.
4) Shareholding: HULs parent Company, Unilever holds 52.02% of its equity, while 15.16% is
owned by Resident Individuals, 15.49% by Foreign Institutional Investors, 10.59% by Insurance
companies and Financial Institutions and the rest by Mutual Funds, Private Corporate Bodies,
and NRI OCB. Today, the company has 341,795 resident individual shareholders.
Offer
Hindustan Unilever Limited has decided to go for buyback of shares at its meeting held on 29th
July, 2007. The company proposes to buyback shares at a price not exceeding Rs 230 a share and
up to an aggregate amount of Rs 630 crore 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 Dec. 31, 2006.
The maximum price is at a premium of 17% over the closing price of the Companys
share as on 27th July 2007. The average closing price of HUL share in the BSE for the last six
months is Rs 196.
HUL net worth as on December 2006 stood close to Rs 2,724 crore, so 25% of that would be
about Rs 681 crore. When this news was announced, 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 feels the stock is undervalued and they believe in the prospects of the
Indian FMCG story. Which is why they may be willing to buyback some of their own stock to
create wealth for shareholders. The buyback is proposed to effectively utilize the surplus cash and
make the balance sheet leaner and more efficient to improve returns.
Effects on the company
10

ROA: Companys ROA in the year 2006 was 0.66 and in year 2007 it will become 0.86.
This is due to reduction in the total assets which goes down from Rs 2796.09 crore to Rs
2166.09 crore as the cash is reduced by Rs 630 crore for buying back shares @ Rs 230 each.
ROE: Companys ROE has increased from 0.68 in 2006 to 0.89 in 2007. Reason behind this is
that total net worth of the company has gone down from Rs 2722.82 crore in 2006
to Rs 2092.82 crore in 2007.
EPS: Companys EPS has increased from 8.39 in 2006 to 8.51 in 2007. Reason behind this is that
total number of share outstanding has reduced from Rs 220.68 crore in 2006 to Rs 217.94 crore
in 2007.
P/E Ratio: Companys P/E Ratio has increased from 25.73 in 2006 to 27.03 in 2007. Reason
behind this is that the market price of the share has increased from Rs 216/ share in 2006 to Rs
230/ share in 2007.
Promoters share
: Its share in the company was 50.37% during the year 2006 when number of shares was 221
crore. After buyback number of shares outstanding has reduced to 218 crore shares. Thus
increasing promoters share to 51.06%
Effects on the shareholders
Tax Benefits: If company would have given Rs 630 crore as dividend, then it would have
attracted dividend tax @ 15% i.e. Rs 94.5 crore. This tax cost would have been born by the
investor causing net cash in hand to reduce to Rs 535.5 crore. Thus by buyback method company
saves tax for the shareholders.

Higher Share price: Usually a company buy backs share at a premium from the public thus
increasing it market price. When HUL offered to buyback shares at Rs 230 each when share was
trading at Rs 196. this lead to an increase in the market price of the shares.
11

SHREYA CHANDAK
ROLL NO. 149

CASE STUDY
BUY BACK OF GLAXOSMITHKLINE CONSUMER HEALTHCARE
LIMITED
About the company:
GlaxoSmithKline Consumer Healthcare Ltd. was incorporated in India on October 30, 1958 with
the name Hindustan Milk food Manufacturers Private Limited. The Company was promoted by
Horlicks Limited of Buckinghamshire, UK primarily to manufacture and sell malted food under
the brand name of Horlicks. The world-wide interests of Horlicks Limited were purchased by
Beecham Group Limited of UK in 1969.Beecham (India) Private Limited merged with Hindustan
Milk food Manufacturers Limited in January, 1979. Consequently the name of the Company was
changed to HMM Limited on March 1, 1979. Subsequently, the name of the Company was
changed to: Smith Kline Beecham Consumer Brands Limited on September 16, 1991;Smith
Kline Beecham Consumer Healthcare Limited on March 29, 1994; and GlaxoSmithKline
Consumer Healthcare Limited on April 23, 2002.
Present Operations
The products manufactured by the Company are sold under various brand namely
Horlicks, Boost, Junior Horlicks, Horlicks Biscuits, Mothers Horlicks, Viva,Maltova and Gopika
Ghee. The Company also MARKETS certain OTC brands, namely Eno Fruit Salt, Crocin and
12

Iodex on behalf of its associate companies in India.The Companys Shares are at present listed on
The Stock Exchange, Mumbai (BSE), the National Stock Exchange (NSE)
CASE
The offer will open on March 14th 2005 and close on April 12th
2005. The manager to the buy back offer for the company was Citigroup Global MARKETS
Private Limited. The company decided to buy-back up to 3,325,083 fully paid equity shares of
Rs. 10/-each, representing up to 7.33 % of the outstanding fully paid up shares of the Company
price of Rs. 370/- per share for an aggregate amount not exceeding Rs. 123,02.81 lacs, equivalent
to 25% and 23.24% of the paid up equity capital and free reserves of the Company as on
December 2003 and 2004 respectively, through Tender Offer in accordance with the provisions of
the Articles of the Association of the Company, Section 77 A and 77 B of the Companies Act,
1956 and the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998,
and subsequent amendments thereof(The Regulations). The mode of payment is cash and the
consideration shall be paid by way of cheque / demand draft. Since the Buy-back was approved
by the Board of Directors on December 10, 2004, prior to the close of the financial year ended
December 31, 2004, the size of the Offer has been determined based on the paid up equity capital
and free reserves as of December 31,2003.The company will buy back the shares through the
Tender Offer to all the shareholders.The company will not buy back the shares through a
negotiated transaction or through any private arrangement. The aggregate shareholding of the
Promoters and of the Directors of the Promoters and of the person who are in control of the
Company represented 39.99% of the issued sharecapital, pre- buy back. The Promoters decided
not to participate in the buy back and assuch their percentage holding in the Company, post buy
back, was increased to 43.16%.
Reasons for Buy back
The buy back of shares had been done by the company in order to create long term Shareholders
value, improve return on Net Worth and enhance the Earning per share of the company. The
company seems to have surplus reserves with no current opportunities and it has also mentioned
that if in the future there is any growth opportunity they have enough reserves to fund its growth
and because of the availability of such reserves the company has bought back its shares rather
13

than keeping the reserves idle. It can be seen that as the company does not have any long term
debt, which would mean that there would not be any major payments in the future, therefore this
is one of the reason why the company has bought back its shares. Glaxo SmithKLine Consumer
HealthCare Limited is an FMCG company and it has been observed that this industry do not have
any major expansion plan and because they have surplus funds available with them, they tend to
utilize these funds by buying back its shares. Few buy back of FMCG companies are Britania,
Godrej, Glaxo, and now HUL is also coming up with a buy back program. This indicates that the
major FMCG companies have huge reserves with no current expansion plan and as such they
tend to buy back its SHARES.

CONCLUSION:
The company had a successful buy back offer. The company received offers for buy back of 78,
22,873 equity shares 135% more than the shares to be bought back by the company. The buy
back Committee followed the method of proportional acceptance of shares and only 33, 25,083
shares were bought back. Post buy back the shares were extinguished and consequently the share
capital of the company reduced.
RITIKA
ROLL NO. 146

14

Buyback of Shares by MNCs in India- Case Studies

In October 2000, Royal Philips Electronics of Netherlands (Philips), the Dutch parent of
Philips India Limited, announced its first offer to buyback the shares of its Indian subsidiary.
The open offer was initially made for 23% of the outstanding shares held by institutional
investors, private bodies[2] and the general public. The offer was made at Rs.105, a premium
of 46% over the then prevailing stock market price. With this, Philips became one of the first
multinational (MNCs) companies in India to offer buyback option to its shareholders.
Soon after, the buyback option was offered by several multinational companies (MNCs) to
increase their stake in their Indian ventures. Some of these companies were Cadbury India,
Otis Elevators, Carrier Aircon, Reckitt Benkiser etc. Fund managers which held these
companies' stocks felt that allowing buyback of shares was one of most favourable
developments in the Indian stock markets. It provided a much needed exit option for
shareholders in depressed market conditions. Buyback by the company usually indicated that
the management felt that its stock was undervalued. This resulted in an increase in the price,
bringing it closer to the intrinsic value and providing investors with a higher price for their
investment in the company.
15

However, critics of the buyback option claimed that large multinationals had utilized the
buyback option to repurchase the entire floating stock from the market with the objective of
delisting[3] from the stock exchange and eliminating an investment opportunity for investors.
Moreover, most MNCs that offered buyback option reported a steep decline in the trading
volumes of the shares of their Indian ventures. The declining liquidity of these shares
prompted critics to say that the Government of India's attempt to revive capital markets by
allowing buyback of shares had failed.

THE BUYBACK ACT

The buyback ordinance was introduced by the Government of India (GOI) on October 31,
1998. The major objective of the buyback ordinance was to revive the capital markets and
protect companies from hostile takeover bids[4]. The buy back of shares was governed by the
Securities and Exchange Board of India's (SEBI)[5] Buy Back of Securities Regulation, 1998,
and Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and
Takeover Regulations, 1997.
The ordinance was issued along with a set of conditions[6]intended to prevent its misuse by
companies and protect the interests of investors. According to guidelines issued under SEBI's
Buy Back of Securities Regulation, 1998, a company could buyback its shares from existing
shareholders on a proportionate basis[7] :
Through tender offer.
From the open market, through the book building process[8] or the stock exchange.
From odd lot holders[9] .
THE BUYBACK ACT Contd...
The ordinance allowed companies to buy back shares to the extent of 25 per cent of their paid
up capital and free reserves in a financial year. The buyback had to be financed only out of the
company's free reserves, securities premium account, or proceeds of any earlier issue
specifically made with the purpose of buying back shares. The ordinance also prevented a
company that had defaulted in the repayment of deposits, redemption of debentures or
preference shares, and repayment to financial institutions from buying back its shares.
Moreover, a company was not allowed to buy back its shares from any person through a
16

negotiated deal, whether through a stock exchange, spot transactions[10], or any private
arrangement.
It also allowed the promoters of a company to make an open offer[11] (similar to an
acquisition of shares) to purchase the shares of its subsidiary. This allowed foreign promoters
to utilize their surplus funds and make an open offer to acquire a 100% stake in their Indian
subsidiaries.
The buyback of shares was allowed only if the Articles of Association[12] of the company
permitted it to do so. The ordinance also required the company to pass a special resolution at a
general meeting and obtain the shareholders' approval for the buyback. In addition, companies
were not allowed to make a public or rights issue of equity shares within a period of 24
months from the day of completing the buyback, except by way of bonus issues and
conversion of warrants, preference shares or debentures.
The ordinance did not lead to increased buyback activity by multinational companies. In the
financial year 1999-2000, only six MNCs came out with buyback offers, and in the year
2000-2001, only eight more companies offered to buyback shares. According to the analysts,
the low level of buyback activity in 1999 and 2000 could be attributed to the fact that buyback
regulations were very elaborate and discouraged companies from making use of buyback
option (Refer Exhibit I for the buyback process and Exhibit II for methods of buyback).
The lack of interest in the buyback option could also be the result of SEBI's restrictive
regulations. Some companies complained that the process of buyback was delayed because
the law required them to obtain shareholder approval for offering a buyback. SEBI guidelines
prevented companies from raising fresh equity to finance their projects. It also prohibited any
subsequent buyback offer by the same company once it had made one for a period of two
years. These complaints and the need to revive the stock markets after the September 11, 2001
terrorists' attacks in the US forced the government to make amendments to the buyback
ordinance.
The government made amendments to the buyback ordinance in October 2001, relaxing the
buyback norms. The new amendments allowed the promoters of a multinational company to
make an open offer to purchase up to 10% of its equity without making a public
announcement. This purchase just required a mere approval from the board of directors.
17

However, a public announcement and shareholder approval were necessary for any offer
above 10%. The amendments also reduced the time limit for issuing fresh shares from 24
months to 6 months. These two changes were incorporated into the buyback ordinance, which
was passed by the government in December 2001 (and subsequently became the Buyback
Act).
The amendments in the buyback ordinance coupled with depressed stock market conditions
saw an increase in buyback activity. MNCs (through the open offer route) regarded the
buyback option as an opportunity to raise their equity stake in their Indian ventures.
KOMAL CHAUDHARY
ROLL NO.-154

CONCLUSION

Buyback should be used as an opportunity to exit only when there is concern over a companys
prospects or when the post-buyback free float is expected to shrink considerably. In most other
cases, buybacks do offer the lure of an immediate benefit but you might be better as a residua
shareholder, and gain from a hike in the share of assets and profit of the business.

18