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Accounting for Companies-I

Notes This resulted in an increase in the price, bringing it closer to the intrinsic value and
providing investors with a higher price for their investment in the company. However,
critics of the buyback option claimed that large multinationals had utilized the buyback
option to repurchase the entire floating stock from the market with the objective of delisting
from the stock exchange and eliminating an investment opportunity for investors.
Moreover, most MNCs that offered buyback option reported a steep decline in the trading
volumes of the shares of their Indian ventures. The declining liquidity of these shares
prompted critics to say that the Government of India’s attempt to revive capital markets
by allowing buyback of shares had failed.

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.
The buy back of shares was governed by the Securities and Exchange Board of India’s
(SEBI) Buy Back of Securities Regulations, 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 conditions intended to prevent its misuse by
companies and protect the interests of investors. According to guidelines issued under
SEBI’s Buy Back of Securities Regulations, 1998, a company could buyback its shares from
existing shareholders on a proportionate basis:
 From the open market, through the book building process or the stock exchange.
 From odd lot holders.
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, or any private arrangement. It also allowed the promoters of

a company to make an open offer (similar to an acquisition of shares) to purchase the
shares of its subsidiary...

Buyback Offer By MNCs
In the financial year 2001-2002, twenty MNCs made buyback offers. Some of the well-
known MNCs which offered to buy back their shares were Philips India Limited (Philips),
Cadbury India Limited (Cadbury), Britannia Industries Limited (Britannia), Carrier Aircon
(Carrier) and Otis Elevators (Otis).
All these companies made open offers for the non-promoter shareholding in their Indian
subsidiaries. To buy back shares, Cadbury paid 9 billion, Philips 2 billion, and Carrier,
Otis and Reckitt Benkiser all paid over 1 billion. According to analysts, the increased
buyback activity by MNCs was due to three reasons. They felt that the share prices of most
MNCs were under priced and did not reflect the true value of the company. Moreover, the
buyback of shares allowed MNCs to convert their Indian ventures into wholly owned
subsidiaries (WOS). It also allowed them to delist the shares of these ventures from the
stock markets and thus protect them from the volatility of the stock markets (caused by
scams and other market manipulations)...
Contd...

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