Buy-Back of Shares and Securities | Advanced Accounting for CA Intermediate PDF Download

Definitions

• Buy-back is the process where a company repurchases its shares from existing shareholders, often at a price higher than the market rate. This reduces the number of outstanding shares in the market and provides shareholders with an exit option from the company.
• Buy-backs are governed by section 68 of the Companies Act, 2013.

Reasons for Buy-back

• To enhance Earnings per Share (EPS).
• To utilize excess cash effectively.
• To instill confidence in shareholders during periods of declining stock prices.
• To increase promoter shareholding, thereby reducing the risk of a takeover.
• To improve return on capital and return on net-worth.
• To distribute surplus cash to shareholders.

Modes of Buy-back

• From existing shareholders through a tender offer or through the open market via book-building process or stock exchange.
• Buy-back from odd-lot holders.

Sources of Buy-back

• Buy-back can be funded from free reserves, securities premium account, or proceeds from the issuance of shares or specified securities.
• However, buy-back cannot be financed using the proceeds from a previous issuance of similar shares or securities.

Conditions of Buy-back

• Authorization in the Articles of Association or through a special resolution in a general meeting.
• Limitations on the percentage of shares that can be bought back in a financial year.
• Maintenance of debt-equity ratio post buy-back.
• Requirement to extinguish and destroy repurchased shares within a specified timeframe.

Transfer to Capital Redemption Reserve Account (CRR)

• When shares are repurchased from free reserves or securities premium account, an amount equivalent to the nominal value of the shares must be transferred to the Capital Redemption Reserve Account.
• This transfer should be disclosed in the company's balance sheet.

Restrictions on Buy-back

• Prohibitions on buy-back under certain circumstances, such as defaults in repayment obligations or filing requirements.
• Conditions for lifting the prohibition after remedying defaults.

Conclusion

Buy-backs in Indian companies are responses to undervaluation in capital markets. They offer shareholders exit opportunities and enable companies to manage their liquidity effectively. While preventing takeovers, buy-backs can also manipulate financial indicators. Shareholders should carefully consider the implications of buy-backs before investing.