What is Share Buyback –Objectives, Conditions and Analysis

Dec 08 ,2023 / Complinova Team /


The process of buy-back of shares is a crucial financial mechanism that enables companies to repurchase their own shares. In India, the buy-back of shares by private companies is regulated by the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014.

When shares are bought back by a company, they have to be cancelled by the company. Thus, share buyback results in decrease in share capital of the company. A company cannot buy its own shares for the purpose of investment. A company having sufficient cash may decide to buy its own shares.

Objectives-

The following may be the objectives of buyback of shares:

  • If a company has excess cash on its balance sheet, it may decide to repurchase shares as a way to return value to shareholders.

  • To increase earnings per share if there is no dilution in company’s earnings as the buyback of shares reduces the outstanding number of shares.

  • By reducing the number of shares available, a buyback can increase the demand for the remaining shares, potentially leading to an increase in the share price.

  • A buyback can signal to the market that the company believes its stock is undervalued, which may instill confidence in investors.

Sources of Buy back (Section 68(1))-

A company may purchase its own shares or other specified securities, i.e., engage in the buyback of its securities out of:

  1. Free Reserves

  2. Securities Premium account

  3. Proceed from issue of any share or securities except out of earlier issue of same kind of shares

Pre- Conditions for Buy back (Section 68(2))-

The buyback must be authorized by the company’s articles of association.

  1. The buyback must be approved by the shareholders through a special resolution passed at a general meeting except in the below mentioned case; Buy-back is 10% or less of the company’s total paid-up equity capital and free reserves and Such Buy-back shall be authorized by the Board through a board resolution passed in its meeting.

  2. The buyback must not exceed 25% of the company’s total paid-up capital and free reserves in particular financial year.

  3. Post-buy-back Debt–Equity Ratio is not more than 2:1.

  4. All shares or other specified securities for buy-back are fully paid up.

  5. Time-lapse amidst two buy-back offers should be one yea.

  6. The buyback must be completed within 12 months from the date of passing the special resolution.

Creation of CRR (Section 69):

Where a company buys back shares out of free reserves or out of the securities premium account, then an amount equal to the nominal value of the shares needs to be transferred to the Capital Redemption Reserve Account. Such transfer details need to be disclosed in the balance sheet. The Capital Redemption Reserve account may be utilized for paying unissued shares of the company to the members as fully paid bonus share

Prohibition of Buyback in certain cases (Section 70)-

Section 70 of the Companies Act, 2013 provides that no company shall directly or indirectly purchase its own-shares or other specified securities:

  1. through any subsidiary company including its own subsidiary companies; or

  2. through any investment company or group of investment companies; or

  3. if a default is subsisting in repayment of deposits or interest due thereon, redemption of debentures or preference shares, or payment of dividend, or repayment of any term loan or interest thereon to any financial institution or bank.

SEBI Regulations-

SEBI (Buy Back of Securities) Regulations, 1999, inter alia, provide that the notice of the meeting at which special resolution regarding buy-back is proposed to be passed shall be accompanied by an explanatory statement stating:

  1. a full and complete disclosure of all material facts

  2. the necessity for the buy-back;

  3. the class of security intended to be purchased under the buy-back

  4. the amount to be invested under the buy-back;

  5. the amount limit for completion of buy-back

  6. the specific price or maximum price at which buyback of shares shall be made.

  7. if the promoter intends to offer their shares:

    1. the quantum of shares proposed to be tendered, and.

    2. the details of their transactions and their holdings for the last 6 months prior to the passing of the special resolution for buy-back including information on number of shares acquired, the price and the date of acquisition.



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