A buyback is a term used to describe when a company chooses to purchase its
own outstanding shares from the market. The company may do this for a variety of
reasons, such as to increase the value of remaining shares, to improve financial
ratios such as Earnings per share, or to return surplus cash to shareholders.
Companies typically fund buybacks with cash on hand, debt, or by issuing new
There are several potential reasons why a company might choose to buy back
its own shares, including:
- To return surplus cash to shareholders:
Some companies may have more cash on hand than they need to fund their
operations and growth, so they use buybacks as a way to return that cash to
- To improve the stake of the promoter:
Company may decide to buy back shares for the purpose of increasing the
stake of the promoter or management in the company, which can align the
interests of management with those of shareholders.
- To improve the value of remaining shares:
By reducing the number of outstanding shares, buybacks can increase the
earnings per share (EPS) for remaining shareholders, which can lead to an
increase in the stock price.
- Conversion of public company into private company:
Company can conduct a buyback to delist the shares from the stock exchange,
effectively making the company a private one.
- Permanent reduction of paid-up share capital:
One of the features of buyback is that it reduces the total number of shares
outstanding, thus company can reduce the paid-up capital by buying back
shares. The buyback process does not require court approval, but is
typically subject to regulatory approval.
It's important to acknowledge that while repurchases of shares can have positive
impacts on a firm's stock value and financial performance indicators, they are
not always advantageous. Some individuals argue that repurchases can be utilized
to manipulate a company's stock value, or that they redirect resources away from
investments in expansion or creativity.
"Do share buybacks always have a positive impact on shareholders? While buybacks
can raise the value of remaining shares and boost returns, it's important to
evaluate the company's financials and determine if the buyback is indicative of
sound or poor management. Additionally, it's crucial to examine how the buyback
is financed, to determine if the company is taking on excessive debt or
neglecting future investments. Ultimately, the success of a buyback will depend
on the particular circumstances of the company and the motivations behind the
Under Indian Company Law, for a buyback of shares, a company must pass a board
resolution and get approval from shareholders by way of a special resolution,
which typically requires a higher threshold of approval than a normal
The Companies Act, 2013 of India permits companies to buy back shares to the
extent of 10% of its paid-up share capital and free reserves by passing a board
resolution and 25% of its paid-up share capital and free reserves by passing a
In a single financial year, a company is allowed to do buyback of shares to the
extent of 25% of its total paid-up share capital and free reserves. However, in
case of buyback of equity shares, the percentage of buyback is capped to 25% of
equity share capital and free reserves.
It is important to keep in mind that buyback is a complicated process and
requires compliance with regulations from the Companies Act, 2013 and the
Securities and Exchange Board of India (SEBI). Additionally, companies must pass
a board resolution and gain approval from shareholders through a special
resolution, and are subject to limits on the percentage of shares that can be
Also, companies must adhere to guidelines outlined by SEBI for buyback of
securities, including appointing a merchant banker, announcing the buyback,
making a public announcement, and other disclosures. It is crucial that
companies have adequate funds to complete the buyback and enough surplus to
continue funding ongoing operations and growth after the buyback.
Under Indian company law, companies can fund a buyback of shares using a few
different sources, including:
- Free reserve:
A company's free reserve is the portion of its profits that is not earmarked
for any specific purpose, such as reinvestment in the business or payment of
dividends. This reserve can be used to fund a buyback of shares.
- Securities premium:
Securities premium refers to the amount received by the company from the
issue of shares or other securities, in excess of their face value. This
amount can also be used by the company to buy back shares, in addition to
the free reserves.
- Proceeds out of earlier issue of different kind of shares or
The company can use proceeds of the earlier issue of different kind of
shares or securities (other than equity shares) to fund buyback of equity
shares, subject to conditions outlined in the Companies Act and regulations
of the Securities and Exchange Board of India (SEBI).
It's important to note that a company can only use the above-stated sources to
fund buyback if it has enough surplus after meeting its ongoing obligations, and
has not defaulted in repayment of any debt. Additionally, the company should
also be compliant with all other relevant laws and regulations while using any
of the above-stated sources of funds to conduct buyback of shares
The authority for a company to buy back its own shares is typically included in
its articles of association. The articles of association are a document that
sets out a company's internal rules and regulations, including its powers and
Under Indian company law, a company can conduct buyback of shares only if it is
authorized to do so by its articles of association. If the articles of
association are silent on the matter, the company must first alter its articles
of association to include the buyback provision before proceeding with the
This can be done by passing a special resolution in the general meeting of the
shareholders, as per the provision of the Companies Act, 2013. Once the
alteration is made in the Article of association, the company can move forward
with buyback. It's important to remember that any alteration in the Article of
association should be compliant with the Companies Act, 2013 and other laws and
When a company wants to pass a special resolution to authorize a buyback of
shares, it must inform shareholders by providing them with an explanatory
statement. The explanatory statement must include all material facts related to
the buyback, such as the necessity of the buyback, the shares or securities to
be repurchased, the amount to be invested in the buyback, and the time limit for
completion of the buyback.
The purpose of the explanatory statement is to provide shareholders with all the
relevant information they need to make an informed decision about whether to
approve the buyback.
In addition to special resolution, when a company wants to pass a board
resolution, the Directors of the company need to take a decision regarding the
price at which the shares are to be bought back, the objective of the buyback,
whom the buyback is to be done, and other important aspects related to buyback.
The company's board of directors should also take into consideration of the
rules and regulations set by the SEBI and the Companies Act, 2013 before taking
a decision on buyback resolution.
When a company wants to offer its existing shareholders the option to
participate in a buyback, it must issue a letter of offer. This letter must be
filed by the company with the Registrar of Companies (ROC) before it is sent to
The letter of offer is essentially a formal document that outlines the details
of the buyback, including the terms and conditions, the price at which shares
will be repurchased, the number of shares to be repurchased, and the time frame
within which shareholders can participate in the buyback.
As per SEBI regulations, the letter of offer remains valid for a period of 21
days. It is the time provided for the shareholders to exercise the option to
sell their shares back to the company.
The company should offer a minimum of 15 days and a maximum of 30 days to the
existing shareholders to exercise their option to participate in the buyback.
It's important to note that the buyback process must comply with the regulations
of the SEBI and other laws as well as should be in accordance to the company act
2013, before issuing the letter of offer
The debt-equity ratio is a financial metric that compares a company's total debt
to its total equity. The ratio is used to evaluate a company's financial
leverage and is usually expressed as a decimal or a percentage. The optimal
debt-equity ratio can vary depending on the industry and the company, but a
general rule of thumb is that it should not be higher than 2:1.
With respect to buyback, the company should ensure that after the buyback, the
debt-equity ratio does not exceed 2:1, as per the regulations of SEBI and as
well as the provisions of the Companies Act, 2013. The ratio refers to the total
debt which includes both secured and unsecured debts, and equity.
It's important to keep in mind that a higher debt-equity ratio can indicate that
a company is taking on more debt than it can handle and could be a red flag for
investors. Companies that have a debt-equity ratio higher than 2:1 may be
considered more risky to invest in, as they could have trouble servicing their
debt in the event of a downturn in their business. Therefore, company should be
considerate enough that post buyback debt equity ratio should not cross the
threshold of 2:1, while deciding on buyback strategy
In addition to the regulations outlined previously, there are several other
conditions that a company must comply with when conducting a buyback of shares:
- All shares or securities to be repurchased must be fully paid up.
- The company should complete the buyback within a period of 1 year.
- Company should file a declaration of solvency to the Registrar of
Companies (ROC) and Securities and Exchange Board of India (SEBI) before
conducting buyback, if the company is listed, the board of directors should
also declare that the company will not become insolvent within one year from
the date of the declaration.
- The gap between two buybacks should be at least one year.
- All shares or securities repurchased must be destroyed within seven days
of the completion of the buyback.
- There is a cooling period of up to 6 months during which the company
should not offer further shares through a public issue or right issue,
however the company can do bonus, conversion of warrants, stock option
schemes, sweat equity, or conversion of preference shares or debentures into
- The company should maintain a register of buyback.
- The company should file a buyback return within 30 days of completion of
buyback with the ROC and SEBI (if a listed company).
If a company contravenes any of the provisions regarding buyback, the company
may be liable for penalties ranging from a minimum of 1 lakh to a maximum of 3
Officers of the company who are in default may be subject to punishment of up to
three years or penalties ranging from 1 lakh to 3 lakh, or both.
If a company uses its free reserve to fund a buyback of shares, it must transfer
an equal amount to its Capital Redemption Reserve (CRR) account. The Capital
Redemption Reserve is a reserve created by the company by allocating a portion
of its profits for the purpose of redemption of capital.
The transfer to the CRR is done to ensure that the company has enough capital to
meet its obligations in case of redemption of shares in future. In case of
buyback, the amount is transferred to CRR to offset the reduction in the paid-up
capital as a result of the buyback.
The funds held in the CRR can be used by the company for the allotment of bonus
shares, but they cannot be used for any other purpose. It's worth noting that
company can use CRR for the buyback of shares or for redemption of preference
shares or debentures in case of redemption of those securities but the transfer
to CRR should be done before that
It's important to keep in mind that the rules for CRR can vary depending on the
country, so it's important to consult with experts and verify with relevant laws
and regulations in India
Under Indian law, there are certain circumstances in which a company is
prohibited from buying back its own shares. These include:
- When the buyback is done through a subsidiary company, including its own
- When the buyback is done through an investment company or a group of
- When the company has made a default in repayment of deposits or has
failed to repay past dividends. Even if the company has fulfilled the
default, it will be prohibited from conducting buyback for a period of 3
years from the date of fulfillment of default.
- When the company has failed to comply with certain provisions of the
Companies Act, 2013 such as Annual return sec 92, declaration of dividend
(section 123), failure to pay dividend on time (section 127), or default in
It's important to note that these are some of the examples and there may be
other prohibition for buyback as per company act 2013, other laws and
regulations. It's important for companies to comply with all laws and
regulations to avoid contravening any provisions and facing penalties or other