Strategic Financial Management Share Buyback

Nipu Kurup

EB-23

Nithin K Prakash EB-24

Vimal K
Aswin Vijayan

EB-33
- EB-07

Share Buyback
Share buybacks (also called share repurchases or stock repurchases) are when a
publicly traded business uses cash to buy back some of its outstanding shares. Share
buybacks reduce the amount of shares outstanding. This is good for the remaining
shareholders.
Both dividends and buy-backs are mechanisms to return money to shareholders; the
buy-backs are more advantageous from a company perspective in three factors
They are more tax efficient
Dividend payouts attract a dividend distribution tax of 20%-plus compared with no such tax
implication for share buy-backs for publicly listed firms. In case of share buy-backs, if the
company acquires shares from the open market through the stock exchange, it pays minimal
securities transaction tax.
The share surrendering person or entity would pay a capital gains tax depending on the holding
period. For shares held for more than a year, the incidence of capital gains tax would be zero.
Therefore, from the tax-efficiency perspective, the case for using the share buy-back route is very
strong.

Earnings per share (EPS) accretive, and

Provides liquidity to stocks, especially during down cycles

Still, the route is not often

used.
Why?

Mostly regarded in India as a capital reduction activity

than a tool for wealth distribution
Regulation that forbids companies from raising fresh
capital for one year from the closure of buyback.
These regulations were tightened after the Indian market
witnessed some malpractices associated with buy-backs.
For instance, with very little intention to actually buy
back shares, some companies used to announce buyback plans to send positive signals to the market
Only companies with very strong cash flows or those
sitting on huge piles of cash can think of taking this call

Novartis to consider buyback at Thursday board meet

Its Swiss parent Novartis AG holds 75 per cent in the company, while
institutions and non-institutions hold 1.43 per cent and 23.57 per
cent, respectively
The companys share price zoomed 17.16 per cent on the news of a
buyback to 833 at close on the BSE
Novartis is undergoing some realignment in its local business
following its global mega-asset swap with GlaxoSmithKline (GSK),
where Novartis got GSKs oncology portfolio while letting go of its
vaccines business to GSK.
The purpose and timing behind the announcement were not
explained by the company, leaving it open to assumptions of an
eventual delisting plan from the Indian market (article published in BL
after two days after the board decision)

Dr Reddy's board gives node to

Rs.1500 cr share buyback plan
Announced the schedule for buyback of equity shares from public for
about Rs 1,569.41 crore
it proposes to acquire 4,484,049 shares (around 4.48 million shares) of
face value of Rs 5 at a maximum buyback price of Rs 3,500 per share.
These shares represent a maximum buyback size of 14.9% of paid up
equity shares of the company.
The maximum buyback price fixed by the company represents 18.6% of
the two week average closing price of shares.
Dr Reddys said the buyback is proposed on account of the Companys
strong cash flow position and is expected to be earning per share (EPS)
accretive contributing to an overall enhancement of value of shareholders
going forward. (article published in business-standard)

Conclusion
Though share buy back is not so common in Indian market, it is gaining pace
and companies have started opting share buy back over dividend pay-out.
Company may buy-back its shares or other specified securities from the
existing security-holders on a proportionate basis through tender offer or
from the open market offer. Buy-back offer from the open market shall not be
made for 15% or more of the paid up capital and free reserves of the
company
No offer of buy-back shall be made by any company within a period of one
year from the date of closure of the preceding offer of buy back
At least 50% of the amount set aside for buy-back shall be utilized for buying
back shares or other specified securities
Public announcement of share buy back shall be made within 7 working days
and should end in 6 months from the date of passing the resolution
authorizing buy-back.