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

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

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

Conditions of Buy Back (cont..)

Shares bought should be fully paid up.

The Company shall extinguish the securities within 7 days of last

day of completion of buyback.

Every buy-back shall be completed within 12 months from the date

of passing the resolution.

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 :-

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

the open market through

• book building process;
• stock exchanges, or

odd lots, or

purchasing the securities issued on account of ESOP or sweat

equity

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

Prohibition of Buy Back

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) through any subsidiary company including its own

subsidiary companies; or
(b) 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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Case Studies on Buyback of Shares and Reduction of Share Capital - Accounting and Company
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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 Dr XX
To Bank A/c XX
(with the amount paid on buyback)

For cancellation of shares bought back :

Share Capital A/c Dr XX

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

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

Accounting Entries for Buyback

For transfer of nominal value of shares purchased out of

free reserves/securities premium A/c to CRR A/c

Free Reserve A/c Dr XX

Securities Premium A/c Dr XX
To CRR A/c XX
(with the nominal value of shares bought back)

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

Buyback – Case Study

BEFORE AFTER
PARTICULARS BUYBACK ADJUSTMENTS BUYBACK
(Mastek) (Rs. In Lacs) (Rs. In Lacs) (Rs. In Lacs)
(Face Value Rs.5) (Face Value Rs.5)
Share Capital 1423.21 (74.16) 1349.05
Free Reserves 11664.54 (4681.08) 6983.46
Share premium A/c 1156.64 (1156.64) -
CRR - 74.16 74.16
EPS - Basic 44.10 45.56
M.P 362

Buyback – Case Study

GATEWAY DISTRIPARKS LIMITED :-

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

Buyback – Case Study

BEFORE AFTER
PARTICULARS BUYBACK ADJUSTMENTS BUYBACK
(Gateway) (Rs. In Lacs) (Rs. In Lacs) (Rs. In Lacs)
(Face Value (Face Value
Rs.10) Rs.10)

Share Capital 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 7.39
M.P. 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 31st 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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Case Studies on Buyback of Shares and Reduction of Share Capital - Accounting and Company
Law Aspects

Buyback – Case Study

BEFORE AFTER
PARTICULARS BUYBACK ADJUSTMENTS BUYBACK
(IPCA) (Rs. In Lacs) (Rs. In Lacs) (Rs. In Lacs)
(Face Value (Face Value
Rs.10) Rs.10)

Share Capital 2518.90 (20) 2498.90

General Reserves 45690 (690) 45000

CRR - 20 20
EPS - Basic 36.20 36.50
M.P 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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Case Studies on Buyback of Shares and Reduction of Share Capital - Accounting and Company
Law Aspects

Buyback – Case Study

BEFORE AFTER
PARTICULARS BUYBACK ADJUSTMENTS BUYBACK
(HEG Limited) (Rs. In Lacs) (Rs. In Lacs) (Rs. In Lacs)
(Face Value (Face Value
Rs.10) Rs.10)
Share Capital 4431.84 174.50 4257.34
Free Reserves - - -
Share premium A/c 7745.55 (2052.23) 5693.32
CRR - 174.5 174.5
EPS - Basic 23.43 24.14
M.P 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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Case Studies on Buyback of Shares and Reduction of Share Capital - Accounting and Company
Law Aspects

Buyback – Case Study

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.

The Bank has received Rs 45000 lacs on 30th 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

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

Share Capital A/c Dr XX

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

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

Capital reduction A/c Dr XX

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

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

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

BEFORE AFTER
PARTICULARS (Rs. in Lacs.) (Rs. in Lacs.)
(Face Value Rs. 10) (Face Value Rs.5)
Share Capital
(Equity Shares) 76,821.80 38,410.90
Preference Shares 18,073.24 -
Reserves and
Surplus - 15496.76

Profit & Loss (40987.38) -

The excess is transferred to general reserves.

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

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

BEFORE AFTER
PARTICULARS (Rs. in Lacs.) (Rs. in Lacs.)

(Face Value Rs. 10) (Face Value Rs.1)

Share Capital (Equity
Shares) 13,599.28 13,59.93

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

Thank You

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