- It can tender an offer to existing stockholders to buy up to a certain number of shares at a fixed price within a fixed period of time, or,
- It could offer to buy the shares in the open market over a period.
In the this grid, following a buyback, the company’s cash holding reduces from INR 2 crores to INR 0.5 crore, and the total assets of the company (cash being an asset) reduces from INR 5 crores to INR 3.5 crores. This leads to an increase in its ROA (Earnings/Assets) from 4 % to 5.71 %, even though earnings have not changed. A similar effect can be seen in the EPS number (Earnings/Shares Outstanding), which increases from INR 0.20 to INR 0.22.
- Where a stock grant to employees by way of employee stock options or a stock issuance for merger & acquisition is offsetting the shares taken out of circulation, thereby resulting in no net increase in share value.
- Where the management aims to cover up weak ratios or improve the market price of the shares by playing with investor sentiments.
- Promoters shall not participate in the buyback.
- As per the Act, the ratio of the Debt owed by the company should not be more than Twice the Share Capital & Free Reserves after Buyback.
- The Company will not be allowed to issue fresh equity shares within a period of 6 months after the completion of the Buyback except by way of Bonus issue or in the discharge of subsisting obligation such as conversions of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity.
- The company should confirm that there are no defaults subsisting in the repayment of deposits, redemption of debentures or preference shares or repayment of term loans to any financial institution or Banks.