BUY BACK OF SECURITIES

Meaning: - buyback of shares means the repurchase of its own shares by the

company. When shares are bought back by a company, they have to be cancelled

by the company. Thus shares buy back results in decrease in share capital of the

company. A company cannot buy its own shares for the purpose of investments.

A company having sufficient cash may decide to buy back its own shares. The

following may be the advantages of buy back of shares:-

(a) To increase earnings per share as the buyback of shares reduces number of

shares outstanding.

(b) To increase % holding of promoters as the shares which are bought back are

cancelled.

(c) To discourage others to make hostile bid to take over the company as the buy

back will increase % of promoters holding.

(d) To support the share price on the stock exchange when the share price is less

than its worth.

(e) To pay surplus cash to share holders when the company does not need it for

business.

The companies act, 2013 under section 68(1) permits companies to buy back their

own shares and other specified securities out of:

(i)its free reserves (ii) the securities premium; or (iii) the proceeds of the issue of

any shares other specified securities. Note: no buy back of any kind of shares or

other specified securities shall be made out of the proceeds of an earlier issue of

the same kind of shares or other specified securities. For example, if equity shares

are to be buy back, then preference shares may be used for the purpose( but not

equity shares).

Conditions of buy back of shares.[ SECTION 68(2)]

(a) There must be a provision in the articles of association of a company

authorizing the company to purchase its own shares.

(b) A special resolution has to be passed in Annual General Meeting of the

company. But if the buy back is upto 10% of its paid up share capital plus free

reserves, then special resolution is not required. In that case company is required

only to pass board resolution.

(c) The buyback must not exceed 25% of the total paid up capital and free

reserves of the company.( resource test)

(d) the buyback of shares in any financial year must not exceed 25% of its shares.(

share outstanding test)

(e) The debt- equity ratio should not be more than 2:1. It means the

ratio of the debt owned by the company (both secured and unsecured)

after such buy back is not more than twice the total of its paid up

capital and its free reserves.

(f) all the shares for buy back should be fully paid up.

(g) Buy back of only those shares are possible which are listed as per

SEBI Regulation.

NOTE: (I) buy back of shares must be completed within 12 months from

date of passing special resolution/board resolution.

(II) No offer of buy back shall be made within a period of one year from

the date of closure of a previous offer of buy back. This means that

there cannot be more than one buyback in one year.