BUYBACK

HISTORY
Prior to the amendment of the 1999 of the companies act there
was no way a company could buy its shares back from the
shareholders without a prior sanction of the court (except for the
preferential shares).

Though there were ways by which a company could buy its

shares back from the shareholders but it could not be done without
the sanction of the court.

This was done to protect the rights of the creditors as well as

the shareholders. But the need of less complex ways of buying its
shares back by the company was always felt.
 What Does Buyback Mean?

• Buyback is reverse of issue of shares by a

company where it offers to take back its
shares owned by the investors at a specified
price; this offer can be binding or optional to
the investors.

• The repurchase of outstanding shares

(repurchase) by a company in order to reduce
the number of shares on the market.
 Sections
• 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.
 Procedure for buy back
 Where a company proposes to buy back its shares, it shall, after passing
of the special/Board resolution make a public announcement at least one
English National Daily, one Hindi National daily and Regional Language
Daily at the place where the registered office of the company is situated.

 The public announcement shall specify a date, which shall be "specified

date" for the purpose of determining the names of shareholders to
whom the letter of offer has to be sent.

 A public notice shall be given containing disclosures as specified in

Schedule I of the SEBI regulations.

 A draft letter of offer shall be filed with SEBI through a merchant

Banker. The letter of offer shall then be dispatched to the members of
the company.
Cont….
 A copy of the Board resolution authorizing the buy back
shall be filed with the SEBI and stock exchanges.

 The date of opening of the offer shall not be earlier than

seven days or later than 30 days after the specified date

 The buy back offer shall remain open for a period of not less
than 15 days and not more than 30 days.

 A company opting for buy back through the public offer or

tender offer shall open an Escrow Account.
 Buy-Back from whom ?
• Buy-back is permitted only for the equity shares and preference
shares, employees’ stock options and sweat equity shares, of a
company.

Buy-Back from where?

• Existing security holders on a proportional basis

• Open market

• ESOP (Employee Stock Option)

 Reasons for Buyback
• To prevent hostile take over bids
• To return surplus cash to share holder
• To increase the underlying share value
• To support the share price during periods of
temporary weakness
• To achieve or to maintain a target capital structure
• To shrink equity base, thereby injecting much
needed flexibility
 Why companies go for buyback?
• Unused Cash
• Tax Gains
• Market perception
• Exit option
• Escape monitoring of accounts and legal
controls
• Show rosier financials
• Increase promoter's stake
 Sources
• Free Reserves.

• Securities Premium Account.

• Proceeds of any shares or other specified

securities like employee’ stock option.
Conditions
a) The buy back is authorized by its articles.

b) A special resolution has been passed in general meeting

of the company authorizing buy back.

c) If buy back is 10% or less of the total paid up capital

and free reserves of the company, such buy back may be
made if authorized by board of directors at resolution
passed at meeting.

d) The buy back does not exceed 25% of the total paid up
capital and free reserves of the company.
CONT….
e) Debt equity (including free reserves) ratio does not exceed
to 2:1 after the proposal buy back.

f) All shares or other specified securities are fully paid up.

g) The buy back is in accordance with SEBI regulations framed

for this purpose.

h) The buy back of shares listed on stock exchange should be

in accordance with regulations made by SEBI.

i) Every buy back should be completed within 12 months from

the date of passing the special resolution or board resolution
 Method of Buy Back
• Buyback through Open Market Operations

• Buyback through Tender Offer.

• Selective buy-backs
• Open Offer Purchase
– In an open offer, a company can buy its shares
directly from the stock market through brokers.
Open-market purchases are resorted to when the
number of shares to be bought back is relatively
small. The company has to fix a maximum price for
an open market offer, stipulate the number of
shares it intends to purchase, and announced the
closing date of the offer.
• Tender Offer
– A tender offer is made when the number of shares to be
bought back is large. Such an offer is a fixed price offer, i.e.,
the company fixes a particular price for the maximum number
of shares it is willing to purchase. It also fixes an outer time
limit for accepting the offer. The offer price is usually fixed at a
premium in order to encourage shareholders to surrender
their shares. The company accepts the shares on a
proportionate basis if the offer is over subscribed. But if offer
is under-subscribed, the company may either accept whatever
is tendered or extend the time limit.
 Reference slide
• The fundamental difference between an open
offer and a tender offer depends on the price
at which the shares are repurchased. In a
tender offer, a company is forced to pay the
price that it had fixed for the repurchase,
whereas in an open offer, the company only
fixes a maximum price, but the repurchase is
made at the prevailing market price.
 The fundamental difference between

Open Offer Tender Offer

A company only fixes a A company is forced to
maximum price, but the pay the price that it had
repurchase is made at the fixed for the repurchase
prevailing market price.
 Reference Slide
• Selective buy-backs
– In broad terms, a selective buy-back is one in which identical offers
are not made to every shareholder, for example, if offers are made
to only some of the shareholders in the company. The scheme must
first be approved by all shareholders, or by a special resolution
(requiring a 75% majority) of the members in which no vote is cast
by selling shareholders or their associates. Selling shareholders may
not vote in favour of a special resolution to approve a selective buy-
back. The notice to shareholders convening the meeting to vote on
a selective buy-back must include a statement setting out all
material information that is relevant to the proposal, although it is
not necessary for the company to provide information already
disclosed to the shareholders, if that would be unreasonable
 Selective buy-backs

• Identical offers are not made to every

shareholder
ESOP
 What is an ESOP?
• "ESOP" is an acronym that stands for Employee Stock
Option Plan.

• Employee benefit plan.

• The purpose of an ESOP is to enable employees to

acquire beneficial ownership in their Company without
having to invest their own money. 
 DEFINITIONS

• Section 2(15A): Employee Stock Option means the option given to the whole time
directors, officers or employees of a company, which gives such directors, officers
or employees the benefit or right to purchase or subscribe at a future date, the
securities offered by the company at a pre determined price.

• The Section 81 read with various SEBI Guidelines speaks about ESOP; Securities
Exchange Board of India framed the SEBI (Employee Stock Option Scheme and
Employees Stock Purchase Scheme) Guidelines, 1999 and has been amended
thereafter from time to time;
 OBJECTIVES OF ESOP

– Attracting critical skills

– Employee feeling of ownership and commitment
– Creating additional wealth for employees
– A method to supplement social security benefits
– To retain employees or groups apprehended of high turnover
– To introduce a performance management system without incurring full
cash out flow
– As a possible hedge against hostile controlling interest
– To enforce corporate governance
 Salient Features of ESOP
• An option is given to employees to acquire equity shares (or other convertible
securities) in the company after a future date but the price is fixed in advance;
• The employee has the choice to decide whether to acquire the shares/convertible
securities or not;
• In case the employee opts for the shares, he has to exercise an option and pay the
agreed price;
• After the lock-in period (if any) the employee can sell the shares in the market and
realize the gain;
• The employees holding stock options do not have the right to receive dividend or
vote or enjoy any other privileges of a shareholder till the shares are actually issued
on exercise of option, after the completion of vesting period;
• The options granted to the employees are not transferrable to any other person.
The option granted to the employee cannot be pledged, hypothecated, mortgaged
or otherwise alienated in any other manner
 Types of ESOP
Employee Stock Option Scheme (ESOS):
• the company grants an option to its employees to acquire shares at a future date at a
pre-determined price. Eligible employees are free to acquire shares on vesting within
the exercise period. Employees are free to dispose of the shares subject to lock-in-
period if any. Generally exercise price is lower than the prevalent market price.

Employee Stock Purchase Plan (ESPP):

• This is generally used in listed companies, wherein the employees are given the right to
acquire shares of the company immediately, not at a future date as in ESOS, at a price
lower than the prevailing market price. Shares issued by listed companies under ESPP
will be subject to lock-in-period, as a result, the employee cannot sell the shares and/or
the employee has to continue with the employer for a certain number of years. The
company offers shares to employees as part of a public issue .

Share Appreciation Rights (SAR)/ Phantom Shares:

Under this scheme, no shares are offered or allotted to the employee. The employee
is given the appreciation in the value of shares between two specified dates as an
incentive or performance bonus, that is linked to the performance of the company as a
whole, as reflected in its share value.
 Why must the company adopt??
• The ESOP will enable the Company to buy out
the current owners, using tax-deductible
Company contributions.
• The ESOP will enable the employees to share
in the current and future economic rewards of
ownership.
• An ESOP will be a better incentive plan for
employees than other alternatives. 
SWEAT EQUITY
 Meaning

Sweat equity is a term used to describe the

contribution made to a project by people who
contribute their time and effort. It can be contrasted
with financial equity which is the money contributed
towards the project. It is used to refer to a form of
compensation by businesses to their owners or
employees.
 Cont…
• Sweat Equity Shares are shares given to the employees of the Company for
the efforts and work they put in.

• In India, the concept of SWEAT EQUITY SHARES was first started by Infosys.

• Sweat Equity Shares are given to the employees at a discounted rate of

market value.

• The whole idea behind giving Sweat Equity is to make the employee feel
that he/she is a part owner in the company.

• When employees feel their company has their own funds invested in it,
they get better motivated and work more earnestly towards company's
progress.
 
 TO WHOM SWEAT EQUITY COULD BE ISSUED

• Sweat equity shares by definition could be issued only to the

‘employees or directors’ of the company incorporated under the
Companies Act, 1956.
• It could also be issued to the directors or employees of the
foreign subsidiary of an Indian incorporated company a foreign
subsidiary is incorporated outside India and can at best be
covered by the definition of ‘body corporate’ and not a ‘company’
under the Companies Act, 1956, the section has made a fiction of
including such a body corporate as a company for the purposes of
issue of sweat equity shares.
• While the section mentions only ‘employees or directors’ the SEBI
regulations also mentions issue of sweat equity to ‘promoters’.
• The Consideration for Issue of Sweat Equity
– The allotment of sweat equity should be ‘at a discount’ or
‘consideration otherwise than cash’. Sweat equity could be issued in
consideration of providing know-how or making available rights in the
nature of intellectual property or for value addition contributed by
such employee or director.

• CLASS OF SHARES WHICH COULD BE ISSUED AS SWEAT

EQUITY
– Sweat equity shares can issued only of a class of shares already issued
– it must be only an ‘equity’ shares and not a ‘preference share’.
 ISSUING OF SWEAT EQUITY SHARES
• GENERAL PRINCIPLES IN ISSUE OF SWEAT EQUITY
– The issue shall be authorized by a special resolution.
– The issue of sweat equity shares by a listed company shall be in
accordance with the SEBI (Issue of Sweat Equity shares) Regulations,
2002.
– In case of an unlisted company, issue of sweat equity shares shall be
subject to Unlisted Companies (Issue of Sweat Equity shares) Rules,
2003.
– Sweat equity shares is treated as any ordinary equity shares issued by
the company in all respects except in certain cases the issue is for
consideration other than cash. The voting rights and rights as to
dividend etc. will be pari pasu with the existing class of equity shares.
– In terms f section 77A (5) (d) it is possible for the company to buy back
sweat equity issued to employees of the company pursuant, inter alia,
to a scheme of sweat equity.
 ADVANTAGES AND DISADVANTAGES OF SWEAT EQUITY
•Advantages of Sweat Equity Shares
Highly efficacious in extracting the employees efficiency
Promotional in nature as it a means of receiving shares without spending money
Cost efficient for company as it can save on the employee’s to be given salary
Receiving of sweat equity is a long term investment
More income to the employees
Receiving the right to participate in the company’s management for employees
Disadvantages of Sweat Equity Shares
More of dilution of power as share is being issued
Can lead to inefficiency of employees when the feeling of being in power creeps in
Can also lead to irregularity in income for the employees
Consideration in the nature of share can be heavy on otherwise low income employees
During recession or liquidation, the sweat equity share holders may face larger troubles as
their effort go non-benefitted to them.
Excessive issue of sweat equity shares can also lead to overcapitalisation which in turn
would be heavy for the company
 A COMPARATIVE STUDY OF ESOP AND SWEAT EQUITY
• ESOPS • Sweat Equity
Types of ESOPS: No options available for Sweat Equity
•Direct allotment of shares holders
•Option to acquire the shares
•Stock Appreciation Rights

Issued when the company is well Issued at the outset of a newly formed
established company or when the company is
starting a new line of business

It is issued as a motivation tactic. It is issued to attract the best & most

sought after people in the industry

Can be issued only to directors & Can be issued to promoters, directors &
employees of the company employees