An Empirical Analysis
Rekha Raheja (Assistant Professor at Hindu College, Sonipat)
Buy back of own shares by the companies was prohibited under section 77 of Indian Companies Act 1956. But thereafter, in 1988 Government gave a green signal to this banned activity, as a result of which Government of India issued an ordinance on 31st October, 1988, allowing purchase of own shares by the companies. Share buy back led to reduction of share capital, thus expected to increase in earning per share of shareholders. The aim of this study is to investigate the impact of buy back on earning per share (EPS) of 25 public limited companies listed on Bombay stock exchange during 2005-09.
Stock buy back also known as “Share repurchase” is a company’s buying back its shares from the market place. This practice is, however, totally opposite of the issue of shares, as under it companies purchase its own shares from its existing shareholders at a specified rate. The offer can either be mandatory or voluntary to investors. This concept is new to Indian companies but the concept was there in the Western world for the decades. In general, a company is not allowed to buy back more than 25% of the existing capital, at a time. According to section 77 A (5), the buy back may be made: 1) from the existing shareholders on a proportionate bases ; or 2) from the open market; or
3) from odd lots; or
4) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Objectives of the Study
The study has been undertaken with the following objectives in mind:
1) To examine the impact of buy back of shares on Net profits of the companies. 2) To examine the impact of buy back of shares on EPS of the companies.
Research problem and Scope
Many researches have been conducted from time to time of this topic till now. Prominent amongst them is “An empirical analysis on the impact of buy back on EPS”, which ended with the conclusions that buy back does not have any positive impact on the earning per share of the companies. This study was based on only 5 companies. This study showed that buy back has a negative impact on EPS in case of three out of five companies contrary to what the theory claims. But another recent theory conducted on the topic, “ Impact of Buy back Announcement on Share Prices in India” , taking 40 listed companies under BSE showed that buy back has a favorable impact on market price of shares. These studies led to this research work. This study examines the impact of buy back of shares on EPS.
Sample selection and methodology:
Sample selection is based on the following criteria:
1) The company is listed on Bombay stock exchange.
2) Buy back using open market purchases are included.
3) All share buybacks executed by BSE listed companies from 2005 to 2009 were initially considered for inclusion in the sample. 4) All information on buy back for the years 2005 to 2009 were obtained from the website of BSE and SEBI and PROWESS database provided by Centre for Monitoring Indian Economy (CMIE). 5) To examine the impact of buy back of shares on EPS and Net profit after tax, three years data’s are taken, i.e. on the year of buy back, year preceding buy back and the year following buy back. .
Finding of the Study:-
The following table has showed EPS before buy back and EPS after buy back of 25 listed companies on Bombay Stock Exchange during 2005-09:
Effect of Buyback of shares on EPS of Sample Companies
Table-1 (Amount in Rs.) |Case |% of share reduced |Year of Buy back |EPS before buy back |EPS after...