Grey Areas: Firstly, the period within which the payment for a buy-back is to be made is not specified. Section 207 of the Companies Act prescribes a penalty for the non-payment or not posting of the warrant for dividend within 42 days of the date of declaration of dividend. Surely, a time limit for the payment will have to be prescribed and harsh penalties imposed for non-compliance.

Secondly, a buy-back is permitted from the proceeds of any issue made specifically for the purpose of the buy-back. Common sense rules out equity dilution to buy-back shares, but the management may prefer to issue preference shares to finance the buy-back. This will only help the existing management to hike its stake, as though preference capital is included for calculating net worth (and hence the 2:1 norm can be maintained), except in specified cases it does not carry voting rights. It may lead to aconcentration of voting rights. It also works out to be more expensive than debt (post-tax), as the interest is tax deductible, while the dividend attracts tax at the rate of 10 per cent. Importantly while the earnings per share (EPS) might improve, the RoNW and the RoCE definitely will not. As a result, the issue of preference shares will serve no purpose except hike the voting rights of the management.

Thirdly, clause 69(7) stipulates that the company shall not make a further issue of securities within a period of 12 months, except by way of bonus issue or the pending conversions. Since the term used is "securities", does it include debentures (convertible or non-convertible), preference shares or any other security as defined in clause 2 (63) of the Companies Bill - 1997? The language of clause 69 states that when a company "completes a buy back of its securities it should not make further issue of securities..." Does it mean that securities can be issued after the opening of the buy-back offer butbefore its completion?

Fourthly, clause 69(5) suggests that where a special resolution has been passed to permit a buy-back of shares or securities, the company shall file a declaration that it will not be rendered insolvent within a period of one year of the date of declaration adopted by the board. The buy-back period, however, could be up to 15 months. In any case, what is the need for the certificate? Even post buy-back, the accounts will be prepared on a going concern basis.

The volume of shares that can be purchased from the market in a single day/settlement is required to be specified to prevent the unduly price volatility in the scrip.

Advantages of buyback: Besides the well-known advantage of creating value for shareholders and enhancing it by maintaining dividend per share, it will also create shareholder awareness. The investments in group companies will be questioned on the grounds that cash could have been utilised for buy-back. It will also provide an option to cash-rich companieswhich have limited investment options to utilise funds more productively. Quite a few otherwise excellent companies which are paying for the excessive equity dilutions will also become major beneficiaries. It may be possible that companies may opt to buy-back shares instead of declaring a dividend. This, however, will result in the reduction of floating stock coupled with improved financials and will lead to a sharp spurt in the price.

Disadvantages of buyback: Although industry associations have been demanding that buy-back should be allowed for treasury operations as well, that is, shares can be reissued after a buy-back, this may well prove dangerous in the Indian context. Many developed countries, for example the UK, do not allow this for the simple reason that it allows plenty of scope for manipulation by price-rigging. Thus the current governments thinking that shares bought back should be extinguished is the correct approach.