A buyback is a repurchase of the company’s existing shares which reduces the number of its shares in the open market or any stock exchange. A fresh issuance of shares is made on behalf of the company by way of issuance of letter of offer to the existing shareholders. Essentially, a buyback occurs when the company pays shareholders the market value per share and takes back that portion of its ownership which was previously distributed among different investors. Further this instance of buyback occurs when the company has a lot of cash flow and at the same time the shares of the company are at the level where the company would be at a better position to gain further profits, hence preferably it would be wise to invest in their own company, where they feel their shares are undervalued.
Pre-requisites of Buy-Back
The Company must be authorized by its Articles, to offer a buyback to its shareholders, however if the company is not authorised to offer buyback, it requires to alter the Articles. A special resolution is to be passed at the general meeting of the company authorizing the buy-back, but the same is not required in certain cases. However, before making such buy-back, a company requires to file with the Registrar, a declaration of solvency.
On the completion of buy-back of its shares or other specified securities, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares or other specified securities.
Under Companies Act, 2013, Section 68, 69, and 70 of The Companies Act, 2013 along with Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014, governs the procedure of Buy-Back of shares and other specified securities by Unlisted Companies.
Under Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998 and Under Securities and Exchange Board of India (Buy-back of Securities) (Amendment) Regulations, 2013, entire procedure for conducting buyback for companies which are listed with any stock exchange is briefed.
Major reasons of buying back shares
1. It is an alternative mode of reduction in capital without requiring approval of the National Company Law Tribunal,
2. To enhance consolidation of stake in the company; to prevent unwelcome takeover bids,
3. To return surplus cash to shareholders; to achieve optimum capital structure,
4. To support share price during periods of sluggish market condition, to serve the equity more efficiently.
5. The primary objective of a share buyback programme is to arrest the fall in the value of a stock by downsizing the supply of the stock, which essentially boost up the share price through a better Private equity multiple.
6. The other objective is to improve earnings per share since the same dividend amount is now distributed among slight number of shares.
7. Share buyback is a tax efficient way of distributing revenue of the company
8. Buy-back benefits a company by giving a better use for its funds than reinvesting these funds in the same business at below average rates or going in for unnecessary diversification or buying growth through extravagant acquisitions.
Structural changes in any company after buying
1. Flexibility of companies to reorganise upgrades, as all the powers shall be in the hands of the company.
2. It provides better service to the remaining shareholders by way of sustained dividend and appreciation of share value in the long run.
3. The risk of possible raids owing to lesser volume of shares in circulation gets shrunk.
In the recent past, Tata Consultancy Services Ltd (TCS), had planned a Rs.16,000 crore share buyback, whose holding company is Tata Sons Ltd. Immediately followed, Infosys, the second-largest information technology (IT) firm, also amended its Articles of Association (AOA) so that they may go for a share buyback. This may be the largest buy-back as the company has offered to buy back its shares worth Rs.16,750 crore.
Share repurchases are a great way to build investor wealth over time, although they have a higher degree of uncertainty than dividends. A company enjoys several advantages if it buys back its shares instead of paying dividends to its shareholder out of profits. However while conducting this activity, the company needs to keep in mind several factors such as, the necessity for the buy-back, the class of security intended to be purchased under the buy-back, the basis of arriving at the buyback price, present capital structure of the Company, etc.