A company is an association of person who come together for carrying out a business jointly. Although, incorporated by its members, a company has an independent existence. The members of the company are known as its shareholders who contribute to its share capital. In case of public company, the management often issues shares of the company to public with a view to raise the capital for carrying out its commercial transactions.

Buyback of Shares

The management in the form of board of directors of the company are vested with numerous powers to run the affairs of the company in a smooth manner. These include powers to make calls for unpaid amount of shares, issue debentures, grant loans, borrow money, invest company funds, corporate restructuring, etc. One of such powers include the power to buy-back the shares of the company itself.

A mode of capital restructuring, buyback of shares is a system where the company purchases its shares from its existing shareholders thereby reducing the outstanding shareholding and the capital.

Law governing Buyback of Shares

The legal framework monitoring the buyback of shares are stated below:

  • The Companies Act, 2013: Section 68 (Power of company to purchase its own securities), Section 69 (Transfer of certain sums to capital redemption reserve account), Section 70 (. Prohibition for buyback)
  • The SEBI (Buyback of Securities) Regulations, 1998

Advantages of Buyback of shares

Some of the benefits entailed by the buyback of shares are as follows:

  • Rise in the earnings per share;
  • Improves the market value of the share;
  • Increases the holdings of the promoter;
  • Dilutes surplus capital;
  • Tax benefit to the company as there are no capital gains;
  • Offers easier exit option for the existing shareholders

Limitations on Buyback of shares

The limit of buyback of shares of company is capped up to 25% of the aggregate of the paid-up capital and free reserves held by the company after authorization through its articles of association.

In the news[1]

Renowned engineering and construction giant in the Indian market L&T's has approved a proposal to buy back up to INR 6 crore equity shares amounting to 4.29% of the total paid-up equity share capital, at a maximum price of INR 1,500 per piece. The total buyback will be for an aggregate amount of INR 9,000 crore.