Parimal Pharma Ltd. sold its few brands to another pharmaceutical company namely Areva Ltd. for a sum of ₹6,000 crore. Number of options were available to Parimal Pharma Ltd. to deploy these funds to generate profits for

CS Professional · Capital Commodity and Money Market · PYQS · June 2018
Parimal Pharma Ltd. sold its few brands to another pharmaceutical company namely Areva Ltd. for a sum of ₹6,000 crore. Number of options were available to Parimal Pharma Ltd. to deploy these funds to generate profits for the company. A team was constituted to decide and finalize the following proposals: (I) ₹2,000 crore shall be invested in the equity of various companies as a strategic partner. (II) ₹1,500 crore shall be used to provide inter-corporate loans as to provide yield of 12%. (III) ₹1,500 crore shall be used to buy back its own equity shares having face value of ₹10 each at a price of ₹3,000 per share (present market price of ₹2,400 per share) being 10% of the paid up equity share capital of the company by way of tender route wherein promoters also intend to participate. Promoters hold 75% equity shares in the company. (IV) ₹500 crore were allocated to a team which will actively participate in capital and commodity market to generate a return of 15%. Proposal III (c) ₹1,500 crore shall be used to buy back its own equity shares having face value of ₹10 each at a price of ₹3,000 per share (present market price of ₹2,400 per share) being 10% of the paid up equity share capital of the company by way of tender route wherein promoters also intend to participate. Promoters hold 75% equity shares in the company. (i) Prepare a Board note to be placed in the Board Meeting.

Answer & Explanation:

Proposal III(c)(i) - Broad Note for Buyback The company has surplus funds. The company can declare a one-time high dividend. However, due to the sale to the bonds, the turnover and profitability from its manufacturing operations might come down. In this scenario, it is suggested that: Instead of dividend, the company can opt for buy-back of shares. This will revert the state of the receipt by many of the shareholders including the promoters. The share capital will come down. So that the company needs to serve less paid-up share capital. It would not change the voting pattern of the shareholders in percentage terms. The company shall be able to maintain the EPS on that paid-up capital. Submitted for discussion.

Topics: Buyback of Shares

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