Buy Back
Legal Delight supports share buybacks with compliance, documentation, due diligence, tax strategy and strategic guidance for optimal shareholder value and legal adherence.
Introduction
Buyback, or share buyback, is a move in which a company repurchases its own shares from existing shareholders. This strategic action effectively reduces the total number of shares circulating in the market. Companies may undertake share buybacks for various reasons. They might aim to distribute excess capital to shareholders, potentially rewarding investors with a healthy return on their investment. Buybacks can also serve to bolster a company’s stock price. By reducing the number of outstanding shares, earnings per share (EPS) can increase, making the stock more attractive to investors and potentially driving up its price. Additionally, share buybacks can be used to consolidate ownership within a company, potentially granting management greater control over decision-making. In some cases, companies might enact share buybacks as a defensive measure to deter hostile takeovers. By repurchasing shares, they can make it more expensive for a potential acquirer to gain a controlling interest. It’s important to note that share buybacks are not undertaken lightly. They often necessitate meticulous legal compliance, thorough financial planning, and careful strategic consideration. This ensures the buyback maximizes shareholder value while adhering to all relevant regulations.
Advantages of Buy Back
- Redistribute excess cash to shareholders: When a company accumulates more cash than necessary for reinvestment or future growth, a buyback provides a means to distribute surplus funds to shareholders. This method is often viewed as a tax-efficient alternative to dividends, as share buybacks typically do not incur income taxes for shareholders.
- Enhance stock value: Through reducing the number of outstanding shares, a buyback can elevate earnings per share (EPS), a crucial metric for investors assessing profitability. Higher EPS can enhance investor perception of the stock’s attractiveness, potentially driving up its market value.
- Strengthen ownership structure: Implementing a buyback can concentrate ownership within the company, potentially granting management increased influence over strategic decisions. This consolidation can prove advantageous when management possesses a clear vision for the company’s direction.
- Deter hostile takeovers: By purchasing its own shares, a company can elevate the cost for potential acquirers seeking to attain a controlling stake. This defensive measure serves to discourage hostile takeover attempts and safeguard the company’s independence.
Modes of Share Buy Back
- Open Market Buyback: The company purchases its shares directly on the stock exchange through brokers, based on prevailing market prices. This method is transparent and efficient.
- Tender Offer: The company announces a specific price it will pay for a set number of shares. Shareholders have a designated period to tender their shares for sale at the offered price, allowing targeted reduction of outstanding shares.
- Fixed-Price Tender Offer: Similar to a tender offer, but with a predetermined price per share that the company will buy back. This provides certainty to participating shareholders.
- Dutch Auction Tender Offer: Shareholders submit bids specifying the number of shares and desired prices. The company sets a minimum price and repurchases shares starting from the lowest bids, up to a predetermined limit. This method can potentially result in lower average purchase prices.
- Buyback from Existing Shareholders Proportionately: Shares are repurchased from all shareholders on a pro-rata basis according to their existing shareholding percentages. This ensures a fair and equitable buyback process.
- Buyback of Sweat Equity or ESOP Shares: Companies repurchase shares issued under Employee Stock Option Plans (ESOPs) or sweat equity schemes. This allows companies to reward employees while reducing outstanding shares.
Conditions for Buy-Back as per Companies Act, 2013
- Articles of the company must authorize buy-back, or amendments must be made through a Special Resolution in a General Meeting.
- A Special Resolution in a General Meeting is required for buy-back, but up to 10% can be authorized via Board Resolution.
- The maximum amount of shares that can be repurchased is 25% of the paid-up share capital and free reserves (including equity and preference share capital, and securities premium).
- Post buy-back, the debt-equity ratio cannot exceed 2:1.
- Only fully paid-up shares can be repurchased in a financial year.
- If applicable, the company must declare insolvency using Form SH-9 signed by at least two directors, including one managing director (if any).
- The notice for the Special Resolution must include an explanatory statement disclosing all material facts, the necessity of buy-back, the class of shares, the amount involved, and the timeframe for completion.
- The company must maintain a Register of buy-back in Form SH-10.
- Submit a Return of buy-back in Form SH-11 along with a Compliance Certificate in Form SH-15, signed by two directors, including one managing director if applicable.
- Shares bought back must be extinguished and physically destroyed within 7 days of completion.
- A cooling-off period of 6 months applies, during which no fresh issue of shares is allowed.
- No new offer of buy-back can be made within one year from the closure of the preceding offer.
- The buy-back must be completed within one year from the date of passing the Special Resolution or Board Resolution, as applicable.
What is included in this
FAQs
In the financial world, when a company chooses to reacquire a portion of its shares from existing shareholders, it’s known as a share buyback. This strategic move effectively reduces the total number of shares circulating in the market.
There are multiple reasons why a company would buy back its own shares, including:
- To utilize excess cash
- To enhance shareholder value
- To signal undervaluation
- To prevent hostile takeovers
- To adjust capital structure
Generally, there are two methods through which a company can buy back its own shares, viz,
- Through Open Market: The Company purchases its shares directly on the stock exchange through brokers, based on prevailing market prices. This method is transparent and efficient.
- Through Tender Offer: The Company purchases the shares on a proportionate basis from existing shareholders.
Buyback decisions for companies depend on key factors such as strong cash positions, undervalued shares offering immediate shareholder value, and the need to efficiently deploy surplus funds when investment opportunities are limited. Balancing short-term returns with long-term growth considerations is crucial, ensuring buybacks align with shareholder expectations for sustained value creation.
Those eligible to participate in a share buyback typically include all existing shareholders of the company, provided they meet any specific criteria or conditions set by the company or regulatory authorities.
According to the provisions of Companies Act, 2013, a company is allowed to buy back shares up to maximum of ten per cent (10%) of the total paid-up equity capital and free reserves of the company authorised by the Board by means of a resolution passed at its meeting and twenty-five per cent (25%) of the aggregate of paid-up capital and free reserves of the company by a special resolution passed at a general meeting of the company authorising the buy-back.
Shareholders benefit from buybacks through potential increases in stock price, improved earnings per share (EPS), and higher ownership percentage in the company.
Yes, but there are typically restrictions on the frequency and volume of buybacks within a specific period to maintain financial stability and fairness to shareholders.
