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Journalism of Courage
MUMBAI, June 28: As the government is all set to give permission for buy-back of shares to company managements, a host of leading companies are gearing up for the new exercise. Once buy-back is in place, these companies will be the first ones to jump and take up the buy-back route to aid the scrip’s valuations and thus improve the sentiment in the scrip.
As many as 24 companies have already taken shareholders approval to buy back their own shares once the law permits. The latest to join the list is Hero Honda, which has decided to take steps for buy-back of shares up to 10 per cent of its equity capital. Reliance Industries has taken a fresh approval in its AGM for buy-back of upto 5 per cent of its paid-up capital.
Major companies which are preparing the ground for buy-back include Apollo Tyres, BPL, Bajaj Auto, Bombay Dyeing, Jindal Strips, Knoll Pharma, Procter & Gamble, Smithkline Pharma, Sterlite, Tata Chemicals, Telco, Tisco, Videocon International and Zee Telefilms.
In fact, share buy-back is onereason for the buoyancy on the stock exchanges recently. Brokers feel that buy-back will boost the market sentiment which has taken a severe beating. SEBI has also argued for buy-back with certain built-in safety measures to tackle the menace of insider trading.
Currently, corporates are not allowed to buy-back their securities under section 77 of the Companies Act. The proposed bill stipulates that buy-back should be allowed for returning surplus cash to shareholders, increase share value, to support share prices during periods of temporary weakness and prevent unwelcome takeovers.
The corporate sector has been clamouring for buy-back for quite some time now. This demand became more intense after the new takeover code came into force last year. There were fears that many well-managed companies might be taken over, particularly where the percentage of promoter’s holding is not very high. Under the buy-back scheme, paid-up capital of the company can be reduced by cancelling the amount of shares purchasedand thus increasing the shareholders value.
The other option is to reissue the shares bought back after a period of 24 months from the date of last buy back of securities. After the buy-back is completed, the companies cannot make a fresh issue of shares within a period of 12 months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes or conversion of preference shares. The bought back shares do not qualify for any voting or dividend rights and for bonus or any rights issue before they are reissued.
In case the company goes in for extinguishing of the equity, it would boost the earnings per share (as the number of floating shares would come down). This, in turn, would mean a better discounting for the company’s shares, which in turn would boost the sagging stock prices languishing way below their respective book values.
However, not all and sundry would be in a position to go in for buy-back as strong cash flows and reserves area prerequisite. Also, the managements should be willing to pay a premium to the prevailing share price to buy-back shares, which means a win-win situation for shareholders and firms.
According to the draft document, the company has the right to buy-back its own shares and other specified securities from its free reserves, securities premium account or the proceeds of a prior issue made specifically for the issue of buy-back. The company has to authorise such buy-back by a special resolution. It should also not have a debt equity ratio exceeding 2:1 after buy-back of shares.
