Buy-back of shares relates to the company buying back its shares which it has issued earlier from the market.
Buy Back Of Shares
Buy-back of shares relates to the company buying back its shares which it has issued earlier from the market. Buy-back is an excellent tool for financial re-engineering. Buyback of shares is nothing but reverse of issue of shares by a company. It means the purchase of its own shares or other specified securities by a company.
WHAT IS BUYBACK SHARE?
Buying shares is a financial engineering tool. In simple term Buy-back of shares implies the act of purchasing its own shares from the existing shareholders is called Buy-back of shares.
Buy-back means the repurchase of its own share by the company. The company can Buy-back both the kinds of shares i.e. equity as well as preference. Buyback of shares is nothing but reverse of issue of shares by a company.
Advantages Of Buy-Back Shares
Advantage | Description |
Utilization of Reserves | Profitable and cash-rich companies can use their earnings and reserves to reduce outstanding equity shares. |
Revival of the Capital Market | Buybacks can help revive the capital market by increasing the market value of shares in a bearish market. |
Rise in Market Price of Shares | A buyback increases earnings per share (EPS), leading to a rise in the market price of shares as demand increases. |
Increase Promoters’ Stake | Buybacks allow promoters to increase their ownership percentage in the company. |
Proper Utilization of Excess Funds | Companies with excess cash can return surplus funds to shareholders rather than spending without profitable investment options. |
Modes Of Buy Back Of Shares
The buy-back may be—
(a) from the existing shareholders or security holders on a proportionate basis;
(b) from the open market;
(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Sources Of Buyback Of Shares
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities
However, no buy-back of any kind of shares can be made out of the proceeds of an earlier issue of the same kind of shares.
“Specified Securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time.
Perquisites Of The Buyback Of Shares
The buy-back is authorized by its articles.
A special resolution has been passed at a general meeting of the company authorising the buy-back:
However, in case the buy-back is, ten per cent or less of the total paid-up equity capital and free reserves of the company there is no need to pass a special resolution in the company’s annual general meeting for authorizing the buy-back the board resolution can fulfil the same.
The buy-back is twenty-five per cent. or less of the aggregate of paid-up capital and free reserves of the company
Post buy-back debt-equity ratio cannot exceed 2:1.
All the shares or other specified securities for buy-back are fully paid-up.
However, no offer of buy-back shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.
Time Limit Of Completion Of Buy-Back
Section 68 (4) provides that every buy-back is required to be completed within 1 year from the date of passing the special resolution or the Board resolution, as the case may be.
Cooling Period
From the date of completion of Buy-back Company cannot issue same kind shares including right issue of shares within a period of 6 month except Bonus issue or discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
Steps Need To Be Followed
Step | Action |
1 | Convene Board Meeting: Notify all directors and pass the necessary resolution to approve the letter of offer. |
2 | Send Notice of General Meeting: Include explanatory statement as per Section 68(3) and Rule 17(1). |
3 | File Letter of Offer: Submit e-form SH-8 to Registrar of Companies and dispatch to shareholders. |
4 | File Declaration of Solvency: Use Form SH-9 with ROC & SEBI (if listed), signed by at least 2 directors. |
5 | Open Offer Period: Maintain the buyback offer for at least 15 days, not exceeding 30 days. |
6 | Proportionate Acceptance: If offers exceed the buyback limit, accept shares on a proportionate basis. |
7 | Verify Offers: Complete verification of offers within 15 days after the closure of the offer. |
8 | Open Bank Account: Deposit the total amount due for shares being bought back after the offer closes. |
9 | Make Payments: Pay cash to shareholders whose offers are accepted within 7 days of verification. Return share certificates for unaccepted shares. |
10 | Destroy Bought-Back Shares: Physically extinguish and destroy bought-back shares within 7 days of completion. |
Restriction On Buy-Back
According to section 70 of the Companies Act, 2013, A Company should not buy-back its securities or other specified securities, directly or indirectly –
Through any subsidiary including its own subsidiaries; or
Through investment or group of investment Companies; or
When Company has defaulted in repayment of deposits or interest payable thereon, or in redemption of debentures or preference share or repayment of any term loan.The prohibition is lifted if the default has been remedied and a period of 3 years has elapsed after such default ceased to subsist.
When Company has defaulted in filing of Annual Return, declaration of dividend & financial statement.
Conclusion
Thus, it can be concluded that Indian companies announce buyback in response to undervaluation position of their stocks in capital markets and they are well supported by availability of sufficient cash balance available for the same. Thus, on one hand, premium offered in terms of buy back prices announced offers an exit opportunity for shareholders and on the other hand, it offers an opportunity for the company to use its liquidity position to extinguish its shares today and issue them again in future.
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