Buyback of Shares by MNCs in India



Themes: Financial Markets
Period : 1997 - 2002
Organization : SEBI
Pub Date : 2002
Countries : India
Industry : Financial Services

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Case Code : FINC018
Case Length : 12 Pages
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The Buyback Act

The buyback ordinance was introduced by the Government of India (GOI) on October 31, 1998. The major objective of the buyback ordinance was to revive the capital markets and protect companies from hostile takeover bids.4 The buy back of shares was governed by the Securities and Exchange Board of India's (SEBI)5 Buy Back of Securities Regulation, 1998, and Securities and Exchange Board of India's (SEBI) Substantial Acquisition of Shares and Takeover Regulations, 1997.

The ordinance was issued along with a set of conditions6 intended to prevent its misuse by companies and protect the interests of investors. According to guidelines issued under SEBI's Buy Back of Securities Regulation, 1998, a company could buyback its shares from existing shareholders on a proportionate basis7 : Through tender offer.

• From the open market, through the book building process8 or the stock exchange.
• From odd lot holders9.

The ordinance allowed companies to buy back shares to the extent of 25 per cent of their paid up capital and free reserves in a financial year. The buyback had to be financed only out of the company's free reserves, securities premium account, or proceeds of any earlier issue specifically made with the purpose of buying back shares. The ordinance also prevented a company that had defaulted in the repayment of deposits, redemption of debentures or preference shares, and repayment to financial institutions from buying back its shares. Moreover, a company was not allowed to buy back its shares from any person through a negotiated deal, whether through a stock exchange, spot transactions,10 or any private arrangement.

It also allowed the promoters of a company to make an open offer11 (similar to an acquisition of shares) to purchase the shares of its subsidiary. This allowed foreign promoters to utilize their surplus funds and make an open offer to acquire a 100% stake in their Indian subsidiaries.

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4] A hostile takeover involves the acquisition of a certain block of equity shares of a company giving the acquirer a greater stake in the company than the promoter. This enables the acquirer to exercise control over the affairs of the company
5] SEBI was established by an act of Parliament in 1992 to protect the interests of small investors and to promote the development of and regulate the securities market in India.
6] According to SEBI's Buy Back of Securities Regulation, 1998, Chapter II, Conditions of Buyback.
7] The buyback had to be based on the proportion of shares held by an investor in case the buyback was oversubscribed.
8] The process of securing the optimum price for a company's share. The issuing company decides the price of the security by asking investors how many shares and at what price they would be interested in paying.
9] Odd lot holders refer to investors holding an odd multiple of shares less than 100 or 10. Odd lots are also called broken lot/uneven lot. An uneven or broken lot might be caused by the issue of rights shares or conversion of debentures and warrants.
10] A spot transaction involves a purchase or sale of a security with an immediate delivery for cash.
11] An open offer refers to an offer made by a party (the foreign promoter) to acquire shares of a company (Indian subsidiary) at a particular price. It is done with the objective of increasing the promoters' stake in a company.