Apart from this, however, the issue of bonus shares meant mere passing of accounting entries. In the nineties, therefore, several companies proposed bonus shares in the hope that market prices will shoot up. The markets, driven by fundamentals, wised up to this, and bonus has now become a totally ineffective tool.

What is buyback of shares in substance? A portion of sharesof the company are bought back at a price, expectedly at a significant premium over the market price. However, the payment is with the shareholders' money. In fact, if the fair value of the shares is really the pre-buyback market price, the post-buyback market price will actually be less, since the company has paid a higher price. It is said that the market price will shoot up when the company offers a higher price. No doubt it will, to an extent. But as soon as the buyback offer is over, the price will fall down, and probably, be lower than even the original price. Compare this with open offers in takeovers. The market price in an open offer goes up temporarily, but usually reverts back.

Let us now see what the new law provides. Before that, one is shocked to notice abysmally poor drafting and even grammatical mistakes. However, instead of trying to unravel the consequences of this poor drafting and consequent loopholes, let us take a charitable and constructive view and see the substance and intention ofthe provisions. It is clear that despite certain substantive and procedural restrictions, vast freedom and flexibility has been permitted in carrying out buybacks.

Private, public and listed companies can all buy back shares. However, listed companies will have to wait for the Securities & Exchange Board of India (Sebi) regulations. Power in articles and a special resolution are pre-requisites. Buyback can be one of four forms: Tender offers acquiring shares from shareholders on proportionate basis, purchases in open market, purchase of odd lots, and purchase of "sweat equity". Negotiated buybacks are not permitted, and this is welcome. Without adequate safeguards and transparency, negotiated buybacks have a serious potential for harm to shareholders' interests. At the same time, it should find a place with due protection as it is a convenient method to buyback certain groups of shareholders. Buyback can be out of securities premium, free reserves and prior issue. The debatable question will be, isrevaluation reserve a free reserve? In strict accounting practice, it is not. However, a company undertaking buyback offers a price higher than the market value, and which is generally even higher than its book value. The extra premium presumably reflects intangible assets, potential growth, or unrealised appreciation in fixed assets. Without considering this value, the buyback potential would be low. Further, companies circumventing this by transferring assets to group concerns or through other modes would not face this limitation. This aspect will need clarification.

Buyback of shares cannot exceed 25 per cent of net worth. Note that the limit is as a percentage of net worth, and not share capital. In other words, a company can buy back more than 25 per cent, and theoretically, even 100 per cent of its capital.

Take an example. A company has a capital of Rs 5 crore. Its free reserves are Rs 25 crore. Thus, the company can buy back up to Rs 7.50 crore. If, for some reason, the company offers a price ofRs 10, the face value, the company can buy back the whole Rs 5 crore without coming near the limit.Is the company allowed to buy back, in the aggregate, only 25 per cent, or is the 25 per cent with reference to the net worth after buyback? Take an example? A company with a net worth of Rs 100 crore makes a buyback in January 1999 of Rs 25 crore. Can it again make a buyback in April 1999 of Rs 18.75 crore, being 25 per cent of Rs 75 crore? Apparently, the answer is yes.

The debt-equity ratio post buyback should not exceed 2:1. The undefined term "debt" will generate controversy.

Buybacks have to be completed within 12 months of the resolution. Shares bought back will have to be cancelled within seven days of completion of the buyback. It would have been better if the cancellation would have been within seven days of each buyback rather than wait for all buybacks to be completed.

A solvency certificate by an affidavit will have to be filed prior to buybacks. This is another area of controversy, and itseffectiveness is also doubtful.

No issue of securities will be allowed for 24 months after completing buybacks. Companies are prohibited from buying back "through subsidiaries", "through investment companies", etc. These terms are undefined and vague. Companies presently in default in repayment of deposits, loans to institutions or banks and redemption of preference shares are barred from buybacks.

All in all, the provision is very welcome as it provides flexibility in capital and business restructuring. The legal niceties can be ironed out in the bill, which will be introduced in parliament. However, as a gimmick for boosting prices, it would take a lot more to outsmart investors, who are, these days, wise, informed and bitter.

(The author is a Mumbai-based chartered accountant)