Buyback of shares is the process by which a company repurchases its own shares from the market. The shares can be repurchased either from the open market or from existing shareholders. Buyback of shares is used by companies to enhance shareholder value, reduce the number of shares outstanding, and improve earnings per share.
In India, the buyback of shares is regulated by the Companies Act, 2013 and the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.
According to the Companies Act, 2013, a company can buy back its own shares or other specified securities by following the procedure outlined in Section 68. This includes obtaining approval from the board of directors, passing a special resolution in a general meeting of shareholders, and complying with other requirements such as maintaining a register of shares bought back and making disclosures to the stock exchanges.
The SEBI (Buyback of Securities) Regulations, 2018 lays down the guidelines for buyback of shares by listed companies. Some of the key provisions of these regulations include:
A Company can undertake buyback only through a tender offer route.
- The buyback offer should remain open for a minimum period of 15 working days and a maximum of 30 working days.
- The maximum amount that a company can utilize for buyback is limited to 25% of its paid-up capital and free reserves.
- The buyback must be financed only out of the company’s free reserves or securities premium account.
- The company must disclose certain information such as the maximum price at which shares will be bought back, the number of shares to be bought back, and the percentage of share capital to be bought back.
- The company must ensure that the ratio of debt to equity after the buyback is not more than 2:1.
- The company must make public announcements about the buyback, and file various documents with the stock exchanges and SEBI.
It is important to note that companies must comply with both the Companies Act and SEBI regulations while conducting buybacks of shares. Failure to comply with these regulations may result in penalties and other legal consequences.
Process of Buyback of Shares
- Approval by the Board: The first step in a buyback of shares is for the company’s board of directors to approve the plan. The board approves the number of shares to be repurchased, the price range, and the time period during which the buyback will take place.
- Communication to Shareholders: Once the plan is approved by the board, the company communicates the plan to its shareholders. The communication includes details about the number of shares to be repurchased, the price range, and the time period during which the buyback will take place.
- Open Market Purchase or Tender Offer: The company can repurchase its shares either from the open market.
- Payment: The payment for the shares bought back must be made within 7 days of the completion of the buyback process
- Reporting Requirements: The company must file a declaration of solvency with the Registrar of Companies before the buyback process begins. The company must also file a return of buyback of securities with the Registrar of Companies within 30 days of the completion of the buyback process.
- Boost Shareholder Value: By buying back its own shares, a company can increase the value of its remaining shares. This is because the buyback reduces the number of outstanding shares, thereby increasing the earnings per share (EPS) and the book value per share.
- Prevent Hostile Takeovers: Buybacks can also be used as a defense against hostile takeovers. When a company buys back its own shares, it reduces the number of shares available in the market, making it more difficult for a hostile bidder to acquire a controlling stake in the company.
- Efficient Use of Surplus Cash: If a company has excess cash on its balance sheet, it can use it to buy back its own shares. This is a more efficient use of the cash than simply holding it, as the cash is put to work to increase shareholder value.
- Tax Benefits: In some countries, buybacks can be more tax-efficient than paying dividends to shareholders. This is because dividends are typically taxed at a higher rate than capital gains, which are realized when a shareholder sells their shares after a buyback.
- Flexibility in Capital Management: Buybacks provide flexibility in managing a company’s capital structure. By buying back shares, a company can adjust its leverage ratio, which can impact its cost of capital and financial flexibility.
- Improve Market Perception: A buyback can signal to the market that a company believes its shares are undervalued, which can improve the perception of the company and attract new investors.