Buyback of shares:ICI india limited case study ICI India Limited is a manufacturer and marketer of paints, specialty chemicals, adhesives, fragrances, starch and flavors. They have announced a programme to buyback shares with following features: The buyback to be effected with open market purchases through stock exchanges, without any negotiated deals, and offloading of promoters’ shares at the price prevailing in the market, but not exceeding Rs. 350 per share, commencing on the 29th of the September 2006 for a period of one year. Maximum buyback amount should not exceed Rs. 131.23 crore which is 25 percent of the capital and free reserve as on 31 Mar,2006. Buyback would be funded through the surplus cash available with the firm without resorting to any borrowing. Imperial chemical company , promoter of ICI , with 50.83% of the share capital, shall not tender any of its share in buyback. Shares bought back are cancelled and could not be reissued for next six months as per law. Debt to equity ratio will remain within stipulated norms 2:1.

1. ICI INDIA LIMITED – Buyback of
Shares
Submitted to Submitted by
Prof. Meena Sharma Aashna Garg
Angad Singh
Mohit Goyal
Nikhila Kharb
Ravneet Kaur
Vishal Vivek

2. CASE HIGHLIGHTS
• ICI India Limited is a manufacturer and marketer of
paints, specialty chemicals, adhesives, fragrances,
starch and flavors.
• They have announced a programme to buyback
shares with following features:
1. The buyback to be effected with open market
purchases through stock exchanges, without any
negotiated deals, and offloading of promoters’
shares at the price prevailing in the market, but not
exceeding Rs. 350 per share, commencing on the
29th of the September 2006 for a period of one
year.

3. CASE HIGHLIGHTS CONTD..
2. Maximum buyback amount should not exceed Rs.
131.23 crore which is 25 percent of the capital and free
reserve as on 31 Mar,2006.
3. Buyback would be funded through the surplus cash
available with the firm without resorting to any
borrowing.
4. Imperial chemical company , promoter of ICI , with
50.83% of the share capital, shall not tender any of its
share in buyback.
5. Shares bought back are cancelled and could not be
reissued for next six months as per law.
6. Debt to equity ratio will remain within stipulated norms
2:1.

4. CASE HIGHLIGHTS CONTD..
• ICI management limits the buyback to the
number of the shares that would confine the
promoters, holding to less than 55 % to avoid
takeover guidelines.
• The management of ICI has offered a buyback
price at a premium of about 20% over the
closing prices of the share on the date of
announcement of the buyback.

5. Ques1. What is the advantage of share buyback ?
Compare the two scenario if ICI paid
Rs.131.23 crore as dividend , instead of this
amount of buyback.
Answer. Share buyback have following advantages :
• Increased Shareholder Value - There are many
ways to value a profitable company but the most
common measurement is Earnings Per Share (EPS).
If earnings are flat but the number of outstanding
shares decreases, increase in period-to-period EPS
will result.
• Higher Stock Prices - An increase in EPS will
often alert investors that a stock is undervalued or
has the potential for increasing in value. The most
common result is an increase in demand and an
upward movement in the price of a stock. Buyback
of shares and securities results in lower capital base,
enhances post-buyback earning per share and
appreciates considerably the price-earnings ratio.

6. • Excess Cash - Companies usually buy back
their stock with excess cash. If a company has
excess cash, then at a minimum you can bank
that it doesn't have a cash flow problem. More
importantly, it signals that executives feel that
cash re-invested in the corporation will get a
better return than alternative investments.
• Preventing Takeover- Buy back of shares
and securities helps the promoters to
formulate an effective defensive strategy
against hostile takeover bids.
• Higher Dividend Yield- After buyback of
shares the companies will have the advantage
of servicing a reduced capital base with
higher dividend yield.

7. COMPARISON
• Option 1 – If amount is paid as dividend
• Total No. of Shares = 2,07,76,213/50.83*100
= 4,08,73,919
DPS earlier = 27.96 cr/40873919= 6.84
DPS = 131.23 cr/4,08,73,919
= Rs. 32.10
Change in EPS = Rs 0
• Option 2- Buyback:-
• No. of shares to be bought back – 131.23Cr/420
= 3124524 Shares
• EPS (Post Buyback) – 50.15cr/(40873919-3124524)
= Rs 13.28
Earlier EPS was 12.27, Hence
Change in EPS = Rs 1.01 (13.28-12.27)
So BUYBACK is better option because of increase in EPS .

8. Ques2.What would be the impact of
the other income of ICI be when the
buyback is complete?
Ans. There would be no change in the other
income as only cash is used for buyback ,other
income remaining unchanged.
The only change could be if this cash was
invested in some other investment which could
yield some interest i.e. other income to the
company.

9. Ques3. What changes in the
shareholding pattern did you
perceive consequent to the buyback
programme?
• Ans. Share Holding (Before buyback)= 50.83%
• New Imperial Share Holding
=2,07,76,213/(40873919-3124524)
= 2,07,76,213/ 37749395
=55.03%
Shares of ICI will increase from 50.83 % to 55 %
and management control would remain with
them.

10. Ques4. What is the maximum
number of shares ICI can repurchase
without Exceeding the limit of the
pre set amount and Without invoking
the takeover guidelines?
Answer.
Let x be the number of shares.
Max repurchase limit= 55%
Imperial Holding = 2,07,76,213/(4,08,73,919-
x)*100=55%
x = 30,90,000 shares

11. Ques5.Post buyback, what impact do
you see on the stock price, assuming
the same P/E ratio is maintained?
Ans. P/E Ratio= Market price of share/ EPS
= 350/ 12.27
=28.52
New Stock Price = P/E Ratio*New EPS
= 28.52*13.28
= Rs 378.8