ICAI 291109 - Case Studies on Buyback of shares

Case Studies on Buyback of Shares and Reduction of Share Capital - Accounting and Company Law Aspects

CASE STUDIES ON BUYBACK OF SHARES AND REDUCTION OF SHARE CAPITAL ACCOUNTING & COMPANY LAW ASPECTS

CA. Parag Ved

BUYBACK 

Buyback is acquiring its own shares from the existing shareholders out of :•

free reserves; or

•

securities premium account; or

•

proceeds of any shares or other specified securities

(Section 77A, 77AA and 77BB of the Companies Act, 1956)

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BUYBACK 

Reasons for buy back include: • In the opinion of the management Current market price is much lower than Intrinsic value of share. • Putting unused cash to use. • raising earnings per share • helping capital restructuring by way of capital reduction • reduced equity base strengthens management control and thus eliminating any threats of hostile takeover. • obtaining stock for ESOP or pension plans

Conditions for Buy Back

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Authorised by its Articles



A special resolution has to be passed in general meeting of the shareholders where buyback is proposed to be more than 10% of paid share capital and free reserves



Buyback cannot not exceed 25% of the total paid-up capital and free reserves



The ratio of the Debt owned by the Company is not more than twice of the capital and its free reserves after such buyback

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Conditions of Buy Back

(cont..)

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Shares bought should be fully paid up.

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The Company shall extinguish the securities within 7 days of last day of completion of buyback.

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Every buy-back shall be completed within 12 months from the date of passing the resolution.

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A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue, rights issue upto 6 months from the date of completion of buy back.

Sources from where the shares can be purchased The securities can be bought back from :-

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existing security-holders on a proportionate basis (tender offer), or



the open market through • book building process; stock exchanges, or •



odd lots, or

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purchasing the securities issued on account of ESOP or sweat equity

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Prohibition of of Buy Back

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A Company cannot buyback its shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares or specified securities



A company shall not directly or indirectly purchase its own shares or other specified securities (a) (b)

through any subsidiary company including its own subsidiary companies; or through any investment company or group of investment companies;

Buyback of Shares – Tax Implications 

On Buyback of shares the shareholder is liable to tax based on the following criteria;



Gains on transfer of Shares is taxable at rates prescribed below:

Short-Term (unlisted)

normal tax rate**

Short-Term (Listed Shares subjected to STT) 15% ** Long-Term (Listed Shares subjected to STT)

Exempt

Other Long-Term Gains

20% **

** Plus applicable Education Cess & Surcharge

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Buyback OF Shares – Tax Implications 

Indexation on the cost of acquisition in case of unlisted shares held for Long Term



Also in case of listed securities (not subjected to STT) the assessee has tax benefit u/s 112 of the Income Tax Act, 1961 Assessee has an option to take cost of acquisition either with or without Indexation benefit. Accordingly, the tax rate applicable for calculating the Long Term Capital Gain tax will be as follows: Option Available

Tax rate Applicable

With Indexation Benefit

20%

Without Indexation Benefit

10%

Accounting Entries for Buyback

Shareholders A/c To Bank A/c (with the amount paid on buyback)

Dr

XX XX

For cancellation of shares bought back : Share Capital A/c Dr (with the nominal value of security bought back) Free Reserves/Securities premium A/c Dr (with the excess amount i.e.,premium over nominal value) To Shareholders A/c (with the amount paid)

November 29, 2009

XX XX

XX

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Accounting Entries for Buyback

For transfer of nominal value of shares purchased out of free reserves/securities premium A/c to CR R A/c Free Reserve A/c Dr Securities Premium A/c Dr To CRR A/c (with the nominal value of shares bought back)

XX XX XX

Buyback – Case Study

Mastek Limited:The Company had announced buyback of shares in 2007 at Rs.750 per Share through open market route. As of June 30, 2008, the Company had bought back 14,83,232 equity shares of Rs. 5/each at an average price of Rs. 393.58 per share (14,83,232 X 393.58 = 5837.70 Lacs)

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PARTICULARS (Mastek)

BEFORE BUYBACK (Rs. In Lacs)

ADJUSTMENTS (Rs. In Lacs)

AFTER BUYBACK (Rs. In Lacs) (Face Value Rs.5)

(Face Value Rs.5)

Share Capital

1423.21

(74.16)

1349.05

Free Reserv es

11664.54

(4681.08)

6983.46

1156.64

(1156.64)

-

74.16

74.16

Share premium A/c CRR

-

EPS - Basic

44.10

M.P

45.56 362

Buyback – Case Study GATEWAY DISTRIPARKS LIMITED :-

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Pursuant to the approval of the BOD, for buyback of Equity shares up to 10% of the paid – up equity share capital and free reserves of the Company aggregating Rs 6400 lacs at a maximum price of Rs. 110 each.



The Company has bought back 7,883,412 equity shares through open market transactions at an average price of Rs. 81.18 each aggregating to Rs. 6400 lacs.

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PARTICULARS (Gateway)



(Face Value

(Face Value Rs.10)

Share Capital

AFTER BUYBACK (Rs. In Lacs) Rs.10)

11,559.67

(788.34)

10,771.33

General Reserves

3,735

(788.34)

2946.66

Share premium A/c

38,769.46

(5,611.66)

33,157.80

CRR

-

788.34

788.34

EPS

6.88

M.P.

7.39 128.75

Buyback – Case Study IPCA LABORATORIES LIMITED :

In the terms of scheme of Buyback of Equity shares, the Company has upto the year ended 31 st March, 2009 bought back 2,03,009 equity shares from open market at an average price of Rs 330.93. These shares have been extinguished and the paid up capital has been reduced accordingly by Rs 20 lacs.

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PARTICULARS (IPCA)

Share Capital General Reserves CRR EPS - Basic


AFTER ADJUSTMENTS BUYBACK (Rs. In Lacs) (Rs. In Lacs)

(Face Value Rs.10)

(Face Value Rs.10)

2518.90

(20)

2498.90

45690

(690)

45000

-

20

20

36.20

M.P

36.50 940

Buyback – Case Study HEG LIMITED :

The Board of Directors of the Company has approved the Buyback of its Equity shares from Open market through Stock exchange. The Buyback is approved for an amount not exceeding Rs. 4850 Lacs.



As on 31st March, 2009, 17,44,978 equity shares were bought back at an average price of Rs. 127.60 per share.

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PARTICULARS (HEG Limited)



(Face Value Rs.10)

AFTER BUYBACK (Rs. In Lacs) (Face Value Rs.10)

Share Capital

4431.84

174.50

4257.34

Free Reserves

-

-

-

7745.55

(2052.23)

5693.32

-

174.5

174.5

Share premium A/c CRR EPS - Basic

23.43

M.P

24.14 305

Buyback – Case Study UCO BANK:

On approval of Bank’s capital restructuring plan by the GOI effective from 22.12.2008, Bank has converted Rs.25000 lacs out of equity holding of the GOI into Perpetual Non-Cumulative Preference Shares (PNCPS) of equal amount carrying a coupon rate of Repo + 100 basis points to be reset annually. Resulting in reduction of Bank’s equity share capital from Rs.79936 lacs to Rs.54936 lacs and GOI’s equity share holding from 74.98% to 63.59%.

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As per the plan, GOI will be subscribing a sum of Rs 120000 lacs in innovative type capital instruments of the bank, in 2 tranches of Rs 45000 lacs and Rs 75000 lacs during the years 2008-09 and 2009-10 resp.

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The Bank has received Rs 45000 lacs on 30 th March, 2009 and accordingly allotted PNCPS to the GOI.

CAPITAL REDUCTION 

Capital Reduction is the process of decreasing a company’s shareholder equity through share cancellations and share repurchases so as to: • increase shareholder value • produce more efficient capital structure

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Situations in which a Company may reduce its capital: • Where the capital is unrepresented by assets; • Where substantial losses have accumulated; • To return excess cash to its shareholders where there is no likelihood of the cash ever being required for the business

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Capital Reduction 

(cont…)

Reduction of share capital may be effected in the following ways: •

In respect of share capital not paid-up, extinguishing or reducing the liability on any of its shares;

•

Cancel any paid-up share capital, which is lost, or is not represented by available assets; or

•

Pay off the paid-up share capital, which is in excess of the needs of the company. This may be done either through buyback or reduction of capital.

Accounting Entries for Capital Reduction

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Share Capital A/c To capital reduction A/c (being amount written off from share capital)

Dr

Reserve A/c To capital reduction A/c (being reserves utilized for capital reduction)

Dr

Capital reduction A/c To Profit & Loss A/c (being accumulated Loss written off)

Dr

XX XX

XX XX

XX XX

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Capital Reduction – Case Study Hindustan Copper Limited :

The Ministry of Corporate Affairs in 2008, had approved capital reduction by reducing the face value of equity shares from the existing Rs 10/- to Rs 5/- and also the waiver of the entire amount of preference share capital pursuant to financial restructuring proposal of the Company



The paid up share capital of the Company, as such, stands reduced from Rs 94,895 lacs to Rs 38,410 lacs.

Capital Reduction – Case Study

PARTICULARS

BEFORE (Rs. in Lacs.) (Face Value Rs. 10)

Share Capital (Equity Shares)

76,821.80

Preference Shares

18,073.24

Reserves and Surplus

Profit & Loss

-

(40987.38)

AFTER (Rs. in Lacs.) (Face Value Rs.5)

38,410.90 15496.76

-

The excess is transferred to general reserves.

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Capital Reduction – Case Study 

COLGATE-PALMOLIVE (INDIA) LIMITED:-

•

Pursuant to the scheme of reduction of share capital u/s 100 of the Companies Act, 1956 as approved by the shareholders and Bombay High Court, the Company reduced the face value of it’s shares from Rs. 10 per share to Re. 1 per share effective Nov 1, 2007.

•

Consequently, the existing issued, subscribed and paid-up equity share capital of the Company stood reduced from Rs. 13,599 lacs comprising of 13,59,92,817 equity shares of the face value of Rs. 10/each fully paid-up to Rs.1,359 lacs comprising of 13,59,92,817 equity shares of the face value of Re. 1/- each fully paid-up.

Capital Reduction – Case Study

PARTICULARS

BEFORE (Rs. in Lacs.) (Face Value Rs. 10)

Share Capital (Equity Shares)

November 29, 2009

13,599.28

AFTER (Rs. in Lacs.) (Face Value Rs.1)

13,59.93

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Thank You

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ICAI 291109 - Case Studies on Buyback of shares

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