The case study discusses how L&T prepared for its first-ever share buyback and how the company approached SEBI to get the final approval for its buyback plan. Through the buyback, L&T planned to achieve two things – distribute capital to its shareholders and improve its ROE by reducing the number of outstanding shares. However, L&T’s plans came to nought with the SEBI, the stock exchange regulator of India, rejecting its buyback proposal on the grounds of high debt-to-equity ratio. The L&T management was left with the task of re-planning its strategy to distribute excess cash to the shareholders and achieve the targeted 18% return on equity by 2021.
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The case is structured to achieve the following teaching objectives:
To analyze SEBI’s decision to turn down L&T’s share buyback proposal
To analyze the different methods of capital restructuring.
To analyze the effect of buyback on ROE
To understand the impact of bonus shares on ROE
To understand the five-step method of the DuPont analysis