Buy-back is an excellent tool for financial re-engineering. Buy-back of shares
relates to the company buying back its shares which it has issued earlier from
the market. 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.
In case of buyback, a company offers to take back its shares owned
by the investors at a specified price generally determined or arrived at on the
basis of the average price of the shares in the past few months. This
calculation is usually done at a premium on the market price so as to attract
more number of investors, which may vary as per the financial prudence of the
company. Thus, Buy-back is one of the prominent modes of capital restructuring
It is important to note that the company can buy-back equity as well as
preference shares. It is not necessary that preference shares must always be
redeemed as they can also be the subject of a buy-back of shares. Many times a
company has excess cash on its balance sheet which it wants to distribute
amongst its shareholders. A buyback is one of the modes by which it can achieve
Section 2(84) of companies act defines share as:
“A share in the share capital of a company and includes stock’’. A share is the
smaller part or fraction of share capital and also include interest of
shareholder in the company. When shares are issued and subscribed by the
shareholders it forms the share capital of the company each shareholder holding
the part of the share capital in the form of shares of fixed value.
Once the shares are subscribed by the shareholders they have no claim over money
only option left to them it is to transfer their shares and realize money back.
But there are certain provisions in the company act of 2013 which allows the
shareholders to sell their shares to the companies back and realize their price
of shares. This process of selling back of shares back to the company is known
as buying of shares
Buying back provides shareholders
with option to sell shares hold by them and exit from companies business therefrom. Further this buy-back should not be forced upon shareholder, in case
of National Consumer Disputes Redressal, Ritu Bhargava vs Godrej Industries Ltd
& Ors.1 It was established that shareholders cannot be made to sell his shares
without his consent and should follow appropriate steps.
Provisions under the Companies Act, 2013 (‘the Act’) for Buy-back of shares:
Section68, 69 and 70 brought in by the Companies Act, 2013, has caused this
structural change in the theme and philosophy of company law that, subject to
the restrictions envisaged in the section, a company may Buy-back its own
securities. Thus now it falls under the exceptions where no confirmation by the
court is necessary. In line with this, SEBI also came out with SEBI (Buy Back of
Securities) Regulations, 1998 applicable to listed Company. Rule 17 of Companies
(Share Capital & Debenture) Rules, 2014 contains the regulations regarding
buy-back of securities for unlisted companies.
What is Buy-back 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.
Buyback is reverse of issue of shares by a company where it offers to take
back its shares owned by the investors at a specified price; this offer can be
binding or optional to the investors.
A company may opt to buy back the shares under any one of the following
What are the reason of Buy-back
- When the quoted price on the stock exchange for the company’s share does
not represent the true value of the shares; or
- When the company doesn’t have paths to invest its accumulated funds, and
it goes for buyback of shares with a view to return the capital; or
- When the promoters are planning to increase their shareholding in the
- To use idle cash to improve earning per share (EPS).
For example, (A) earning RS.100 and (B) No. of shareholders 20. Therefore EPS
(a/b) =5. Suppose, after Buy-back no. of shareholders 10 then EPS= 10.
- To concentrate the diluted control
- To give confidence to shareholders at the3 time of falling prices.
- To give confidence to the Shareholders at the time of falling price; ∙
To increase promoters shareholding to reduce the chances of takeover; ∙ To
improve return on capital ,return on net-worth;
For example: out of 100 shares 40 are with promoter and 60 with public then
promoter holding 40% but if public have 40 shares then promoter holding
increases to 50%
- Companies do buybacks for various reasons such as ownership
consolidation plan, undervalued price, or for boosting its key financial
ratios making companies look more financially healthy. Also, historically
speaking, buyback offers have given more confidence to investors and has
attracted more new investors.
- It is not necessary that every share buyback will benefit shareholders.
So, it’s always advisable to check the company's historical track record and
then make a decision.
- To reduce the chances of takeover.
Advantages of Buy-back share.
Sources of Buy-back:-
- Utilisation of Reserves:
The profitable and cash rich companies can
utilize their earning and reserves to reduce to outstanding equity shares.
- Revival of the capital market:
Buyback can lead to revival of capital
market by flaring up the market value of shares in a bearish market. It will
help the company to maintain the market price of its shares.
- Rise in market price of shares:
Buyback leads to rise in earning per share, which results in rise in market
price of shares as the demand of the share increases
- Increase promoters stake in the company.
- Proper utilisation of excess funds:
Many companies have excess cash
without any profitable investment options.
It would be better for them to return surplus cash to shareholders than go on
simply spending for want of alternate.
Section 68 (1) of the Act provides that buy-back of shares can be financed only
- its free reserves
- the securities premium account; or
- the proceeds of the issue of any shares or other specified securities:
It is provided that no Buy-back of any kind of shares or other specified
securities can be made out of the proceeds of an earlier issue of the same kind
of shares or other specified securities as it will frustrate the purpose sought
to be achieved by an issue and will make no sense. It can however be used for
buy-back of another kind of security.
Conditions for a Buy-Back:
- Section 68 (2) of the Companies Act provides that a company can buy-back
its shares or other specified securities only when
- The buy-back is authorised by its articles;
- A special resolution has been passed at a general meeting of the company authorising the buy-back:
- The buy-back is10% or less of the total paid-up equity capital and free
reserves of the company and such buy-back has been authorised
by the Board by means of a resolution passed at Board meeting;
- The overall limit of buy-back is 25% or less of the aggregate of paid-up
capital and free reserves of the company.
In respect of the buy-back of Equity shares in any financial year, the reference
to 25% in this clause shall be construed with respect to its total
paid-up equity capital in that financial year;
- The buy-back debt-equity ratio is within the permissible 2:1 range.
The ratio of the aggregate of secured and unsecured debts owed by the company
after buy-back is not more than twice the paid-up capital and its free
reserves. The Central Government is empowered to relax the debt-equity ratio in
respect of a class or classes of companies but not in respect of any particular
According to Section 68 (3) the notice containing the special resolution
should be passed and should be accompanied by an explanatory statement stating:
- All the shares or other specified securities for buy-back are fully
paid-up. Ø The buy-back of the shares or other specified securities listed
on any recognized stock exchange is in accordance with the regulations made
by the Securities and Exchange Board in this behalf.
- Every buy-back is required to be completed within 12 months from the
date of passing the Special Resolution or the Board Resolution, as the case
- No offer of buy-back under this sub-section 68 (2) shall be made within
a period of 1 year reckoned from the date of the closure of the preceding
offer of buy-back.
- All material facts, fully and completely disclosed:
- The necessity for buy-back;
- The class of security intended to be purchased by the buy-back;
- The amount to be invested under buy-back;
The time limit for completion of buy-back. The company is also required to pass
a special resolution in its general meeting after following the procedure laid
down in section 101& 102.
Time Limit of completion of buy-back:
Section 68 (4) provides that every buy-back is required to be completed
within 1year from the date of passing the special resolution or the Board
resolution, as the case may be.
Modes of Buy-Back:
Section 68 (5) states that the securities can be bought back from:
Other Formalities for Buy-back:
- From the existing shareholders or security holders on a proportionate
- From the open market;
- By purchasing the securities issued to employees of the company pursuant
to a scheme of stock option or sweat equity.
- The company which has been authorized by a special resolution shall,
before the buy-back of shares, file with the Registrar of Companies a letter
of offer in Form No. SH-8, along with the fee. Provided that such letter of
offer shall be dated and signed on behalf of the Board of directors of the
company by not less than two directors of the company, one of whom shall be
the managing director, where there is one. [Rule 17 (2)]
- Under Section 68 (6) provides a Declaration of Solvency is required to
be filed by the company with the Registrar in the prescribed Form SH-9signed
by at least two directors of the company, one of whom shall be the managing
director, if any, and verified by an affidavit before the buy-back is
implemented to guarantee its solvency for at least a year after the
completion of buy-back
A company after the completion of buy-back is required to extinguish and
physically destroy its securities within 7 days of the last day on which the
buyback process is completed.[U/s 68(7)]
A company buying back its securities is prohibited from making a further
issue of securities within a period of 6 months. It may however make a bonus
issue and discharge its existing obligations such as conversion of warrants,
stock option schemes, sweat equity or conversion of preference shares or
debentures into equity shares.[U/s 68(8)]
How many types or Methods for buyback offers?
Transfer of certain sum to Capital Redemption Reserve Account (CRR)
- Fixed price tender offer:
Shareholders have the option to sell or
hold the fixed number of shares, offered by the company at a fixed price. This
process ensures all shareholders are treated equally, doesn't matter if they
hold majority or minority stake.
- Buying from the open market:
The company buybacks its own shares
from the market, repurchase program happens for an extended period of time as a
large block of shares needs to be bought.
According to section 69 of the Companies Act, 2013, where a Company brought back
shares out of free reserves or out of the securities premium account, then an
amount equal to the nominal value of the shares need to be transferred to
the Capital Redemption Reserve Account. Such transfer detailed 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 shares.
Restrictions on Buy-back of Securities in certain circumstances
According to section 70 of the Companies Act, 2013, A Company should not
buy-back its securities or other specified securities , directly or indirectly:
- Company cannot directly or indirectly go to purchase its own shares and other
securities through any Subsidiary Company which includes Company’s own
- Company cannot directly or indirectly go to purchase its own shares and other
securities through any Investment Company or group of Investment Companies;
- When Company has defaulted in filing of Annual Return, declaration of dividend &
financial statement. Company cannot directly or indirectly purchase its own
shares and other securities in case the Company has made a default in the
- Repayment of Deposits is accepted either before or after the
commencement of the Companies Act, 2013,
- Payment of Interest thereon,
- The payment of Dividend to any Shareholder,
- Redemption of Debentures or Preference Shares of Company,
- Repayment of any interest payable or any term loan thereon to any
Banking Company or Financial Institution.
- When Company has defaulted in repayment of deposits or interest payable
thereon, or in redemption of debentures or preference shares 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.
- After availing Company Registration, if the Company has not complied
with the provisions of Sections 92, 123, 127 and Section 129 of the
Companies Act, 2013, the Company cannot directly or indirectly purchase its
own Shares and other Securities.
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 buyback 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.
It prevents takeovers and mergers thus preventing monopolization and aiding the
survival of consumer sovereignty. On the other hand Buy back can help in
manipulating the records in flatting share prices Price-Earning Ratio, Earning
per share, thus misleading shareholders. Thus, knowledge of the impacts of
Buy-back becomes vital and every shareholder must reconsider all his views
before purchasing the shares of companies involved in the process of Buyback.
- Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.