The last few years have witnessed a deluge of buyback issues from companies. A **Buyback of Shares** occurs when a company buys some portion of its shares from its shareholders. As this Buyback from the shareholders is usually at a price higher than market price, many small investors are interested to know what shall be the acceptance ratio if they buy just one share of a company like Bosch or HEG or for that matter any other company where buyback is open. Our focus here is on these who desire to know whether they can benefit by just buying one share of a company before record date even though the entitlement and final acceptance may not be 100%.

### Fractional Entitlement Rules for Buybacks

We shall illustrate these rules by taking actual case of two Buybacks

#### 1) TCS Buyback 2018

Buyback Entitlement for small share holders was 43 Equity Shares for every 96 Equity Share i.e in fraction terms 1 share for every 2.23 shares held. The following rules are applicable.

- If the Buyback Entitlement under the Buyback, after applying the above mentioned ratios to the Equity Shares held on Record

Date is not in the multiple of one Equity Share, then the fractional entitlement shall be ignored for computation of Buyback. - On account of ignoring the fractional entitlement, those Small Shareholders who hold 2 or less Equity Shares as on Record Date will be dispatched a Tender Form with zero entitlement. Such Small Shareholders may tender Additional Equity Shares as part of the Buyback and will be given preference in the Acceptance of one Equity Share, if such Small Shareholders have tendered additional Equity .
- Adjustment for fractional results in case of proportionate Acceptance:
- For any Small Shareholder, if the number of Additional Equity Shares to be Accepted, calculated on a proportionate basis is not a multiple of one and the fractional Acceptance is greater than or equal to 0.50, then the fraction would be rounded off to the next higher integer
- For any Small Shareholder, if the number of Additional Equity Shares to be Accepted, calculated on a proportionate basis is not in the multiple of one and the fractional Acceptance is less than 0.50, then the fraction shall be ignored

#### 2) NALCO 2018 Buyback

Buyback Entitlement for small share holders was 25 Equity Shares out of every 164 fully paid-up Equity Shares held on the Record Date i.e. in fractional terms 1 share for 6.56 shares held. The following rules were applicable.

- f the Buyback Entitlement, after applying the above mentioned ratios to the Equity Shares held on Record Date, is not a round number (i.e. not in the multiple of 1 (one) Equity Share) then the fractional entitlement shall be ignored for computation of Buyback Entitlement to tender Equity Shares in the Buyback Offer, for both categories of Eligible Shareholders.
- On account of ignoring the fractional entitlement, those Small Shareholders who hold 06 (Six) or less Equity Shares as on Record Date will be dispatched a Tender Form with zero entitlement. Such Small Shareholders are entitled to tender Additional Equity Shares as part of the Buyback Offer and will be given preference in the Acceptance of 1 (one) Equity Share, if such Small Shareholders have tendered for Additional Equity Shares. The Company shall make best efforts subject to Buyback Regulations in accepting Equity Shares tendered by such Shareholders to the extent possible and permissible.
- Adjustment for fractional results in case of proportionate Acceptance:
- For any Small Shareholder, if the number of Additional Equity Shares to be Accepted, calculated on a proportionate basis is not a multiple of one and the fractional Acceptance is greater than or equal to 0.50, then the fraction would be rounded off to the next higher integer
- For any Small Shareholder, if the number of Additional Equity Shares to be Accepted, calculated on a proportionate basis is not in the multiple of one and the fractional Acceptance is less than 0.50, then the fraction shall be ignored

### Interpretation

Thus a small shareholder who says buys only one share in say Nalco before the record date, he will get an offer letter with zero entitlement. In case of Nalco the final acceptance turned out to be about 52%. Let us if he had offered his one share for buyback against Zero entitlement , his share would have got accepted as his fractional entitlement was more than 50%. If he had bought 1 more share and thus offered 2 shares for buyback, his acceptance entitlement would be 2 x .52 i.e. 1.04 and so only one share out of two would have been accepted.

If we take this analogy to likely scenario in case of Bosch , based on my estimates, there are good chances that every holder of one share in Bosch India may get an entitlement of one share and also an acceptance of one share.

Incase of HEG if the entitlement turns out to be 20% and final acceptance 35% (purely arbitrary figures), retail investor who initially have one share and purchases another one after entitlement is out ( i.e after RD) and makes an offer for buyback of 2 shares may end up getting one share accepted. Thus this investors acceptance will be 1 out of 2 i.e. 50% vis a vis 35% for others due to benefit from fraction rules. An investor who bought two shares in this case before RD will also get the same benefit. An investor of one share holding in these circumstances who doesn’t go for additional share buyback and submits his one share for buyback ends up with Zero acceptance. These figures are only for illustration purpose.

In nutshell small investors with less funds at disposal can buy one share in buyback offers where the ruling Market price are high and a reasonable gap exists with respect to Buyback price and slightly increase his probability of acceptance. However other aspects related to buyback also need to be kept on mind and utility may be only be in high priced shares.

Thus due to these rules for fraction, as a special case those holding even one share and having zero entitlement get an additional chance to buy after RD and after entitlement ratio is out and offer these shares for buyback so as to increase their chances of getting at least one share accepted in buyback. However maximum accepted share in such case is restricted to one.

**This is based on my understanding. Please do your own diligence as I may have wrongly interpreted the rules**.

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.