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What is Buyback of Shares

Introduction

Buyback is termed as a share purchase. Sometimes firm purchases its own outstanding shares to bring down the number of shares that are available in the open market. Firms buy back shares for many reasons. One of the main reason is to raise the remaining shares which are available by bringing down the supply. It is also to block the other shareholders from taking over the control.

By using the Option of buyback of shares-Firm can invest in their own selves.

 

The benefit of Buy-Back of shares

One bigger benefit on buyback of share that it indicates to investors that the firm has enough cash is kept emergencies, and there are fewer chances of cash scarcity.

The share repurchase brings down the number of existing shares which makes each share worth a greater percentage of the corporation. The stock’s Earning Per Share (EPS) thus raises while the Price-to-Earnings ratio (P/E) goes down or the stock price elevates.

 

Prohibitions on Buy-Back

No company shall directly or indirectly purchase its own shares:-

  • Through any subsidiary company including its own subsidiary companies;
  • Through any investment company or group of investment companies; or
  • If a default is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, the redemption of debentures or preference shares, or payment of dividend to any shareholder.
  • Repayment of any term loan or interest payable thereon to any financial institution or banking company, however, the buy-back is not prohibited, if the default is remedied and a period of three years has elapsed after such default ceased to subsist.

Approval of Buy-back of Shares

The Buy-back can be made with the approval of the Board of directors at a board meeting and/or by a special resolution (SR) passed by shareholders in general meeting, depending on the quantum of buyback:

  • Approval of Board of Directors- up to10% of the total paid-up equity capital and free reserves of the company.
  • Approval of Shareholders- up to25% of the aggregate of paid-up capital and free reserves of the company.

 

Methods on buyback of shares

The Buy-back of shares :

  • From the existing shareholders on a proportionate basis;
  • By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

 

Demystifying the Term “Buyback”

If there is a Compensation related issue, then firms could opt for a buyback. By Buyback of shares, Often, firms avoid the dilution of existing shareholders. The management awards employees with stock options and stock rewards.

Buybacks are done by utilizing a company’s retained earnings, the net economic impact to investors will be the same as of preserved earnings were given out as shareholder dividends.