ABC Bearings, a leading bearings manufacturer and exporter, is engaged in the business of flexible engineering solutions. The company enjoys almost monopolistic position (for its innovative products) throughout the count

Advice to ABC Bearings as a Company Secretary (1) The Impact of buy-back of shares on the capital structure will be: (a) Equity Shares: As the equity capital is reduced, the debt-equity ratio is improved and the company is more leveraged and its financial risk is increased. (b) EPS: As number of shares are reduced, the EPS will increase. (c) NAV: The book value of the share may reduce or remain unchanged depending upon the price paid for the buy-back of shares and existing NAV. (d) Dividend: Dividend payments would decrease and cash flows or reserves may increase in the future. (2) Compare and contrast buy-back option with: (a) Early redemption of Non-Convertible Debentures (NCDs) Buy-back of NCDs: If NCDs are purchased instead of shares, then there would be a steep decline in the debt-equity ratio reducing the leverage and financial risk of the company. As cost of equity is more than cost of debt, purchase of NCDs may be preferred but in case of further need, it may have to raise funds at a higher interest rate. (b) Deploying cash surplus in the ICDs (Inter-Corporate Deposits) There would be an increase in earnings thereby increasing the EPS. However, the increase in EPS by purchase of ICDs versus buy-back depends on the interest income on ICDs and reduction in number of shares due to buy-back. Moreover, there would be reinvestment risk of interest inflows and security in repayment. (c) Buy-back for Treasury Operations This is purely an investment option. This operation should be undertaken only if the equity shares are currently under-priced. The shares can be purchased and held by the company. The shares can be resold when the prices move up. However, the company saves on the dividend outflows on these shares in the holding period.