Meaning, Benefits, & Reasons for Company Buyback of Shares

Buyback of shares

Buyback of Shares – Meaning

To understand the buyback of shares, it is essential to understand what shares are, which shares the companies are interested in buy-back, and why.

What are Shares

Equity shares in Common and preferential stocks are issued to ordinary people or investors through Initial public offerings or private placements. Shares are sold in the form of Equity and Preference shares.

Which Shares are buyback by the company

So, Equity shares are the shares that the companies buy back.

  • Type of buybackTender offer: An offer price is attached to the same, and then the company on the due date who applies for buy-back offers the credit in their account.
  • Open Market Offer: Buy at the market rates.
  • Purchase through Stock Option or Sweat Equity: The shares issued to employees or consultants are compulsorily repurchased on a specific date at a particular price.

Share buyback benefits

Generally, the shares are issued to the public to raise the capital and use it to grow the business as planned. Once a specific business growth is achieved, the companies plan to consolidate by asking the public to sell back shares to the company. The common reasons are:

  1. Improving the shareholding pattern
  2. Reducing the cost of capital
  3. Preserving the stock prices
  4. Undervaluation and boosting its key financial ratios
  5. Improved growth to offer to shareholders as one-time dividends better than market price.

How the shares are bought back

When companies have surplus cash inflows from the General Reserves or Share Premium account and want to bring down equity exposure in the market, they offer to buy back. The broad standard process works like this:

  1. The company decided to buyback of shares
  2. Offer the same to shareholders and take their acceptance
  3. Apply Sections 68, 69 and 70 of the Companies Act 2013, which explains the process of share buy-back
  4. Once the shares are repurchased, they are cancelled by the company, resulting in a reduction of the share capital

    Mandatory requirements

  1. Article of Association of the company must authorise the company to buy back [Section 68(2)(a)]
  2. Pass a special board resolution in the company general meeting for buy-back authorisation under [Section 68(2)(b)] except for the below cases:
  1. If the buy-back of shares is 10% or less than the total paid-up equity capital and free reserves, then no special resolution and
  2. A board resolution shall be passed in the meeting authorised by the board for such buy-back.
  1. Buy-back shall be more than 10% and should be less than 25%*of the free General Reserve and paid-up capital of the company u/s 68(2)(c)
  2. Debt – Equity ratio should not cross more than 2:1 u/s 68(2)(d)
  3. An essential condition is to ensure shares and securities for buy-back are fully paid u/s 68(2)(e)
  4. No two buy-backs are possible in less than one year u/s 68(2)(g)
  5. All processes for buy-back from the date of special and board resolution for buy must be completed within one year of passing u/s 68(4)

Share buyback procedure

  • Confirm if the Article of Association allows; if not, do what is needed as changes.
  • A board meeting to approve for buy-back with a special resolution if the buy-back is more than 10% of the paid-up share capital and free general reserves
  • File the form MGT-14 within 30 days of passing the special resolution for the document and requisite fees with ROC.
    1. At least two directors must sign the document for solvency in form SH9 and file it with the registrar of companies.
    2. File letter of offer for the buy-back in form SH8
    3. Despatch the letter of offer to the shareholder and make a share buy-back announcement with the registrar not later than 20 days from the date of filing.
    4. The offer period should be open not less than 15 days and not more than 30 days from the date of sending the letter.
    5. Verify the offer within 15 days from the date of closure
    6. Transfer a certain amount to the capital redemption reserve
    7. Destroying or removing the bought-back shares from the share capital. So, the buy-back share list shall be removed from the company’s overall share capital.
    8. Close of the offer
    9. File formSH11 for completion and reporting of the buy-back

Share buyback example

  1. The company has an authorised and paid-up equity share capital of 10,000,000. Out of which 300,000 of Rs 1 each share are with the public.
  2. The current market capital of the company is INR 100,000,000 (Rs 10 per share)value of shares. 
  3. The company decided to buy back 20% of the shares
  4. The free reserves of the company are 5,000,000
  5. The current value of 200,000 shares is @ 10 per share is INR 2,000,000 
  6. The company took the cut-off price of Rs 10 for 200,000 shares and started the offer

After a few years of good operation and good reserve accumulation, companies keep buying back the shares to ensure they have a good hold on the company. It is an excellent way to consolidate shares spread in the market and do some cleanup in the cap table.

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