Buyback of Shares by MNCs in India
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Case Details:
Case Code : FINC018
Case Length : 12 Pages
Period : 1997 - 2002
Pub. Date : 2002
Teaching Note : Available
Organization : SEBI
Industry : Financial Services Countries : India
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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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 :
» From the open market, through the book building process8 or the stock exchange.
» From odd lot holders.9
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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.
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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... |
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