Overview
Share buyback, also known as a share repurchase, is a corporate action in which a company buys back its own shares from the marketplace. This reduces the number of outstanding shares in the market and is typically undertaken to enhance shareholder value. By repurchasing its shares, the company aims to improve financial ratios, increase the value of remaining shares, and utilize excess cash in a manner that benefits shareholders.
Share buybacks can be driven by various strategic objectives, such as boosting earnings per share (EPS), providing an alternative to dividends, optimizing the capital structure, or signaling confidence in the company's future prospects. It reflects the company's commitment to returning capital to its shareholders and can positively impact the market perception of the company's financial health and management’s confidence in its operations.
Process
PROCEDURE FOR BUYBACK OF SHARES
- Check authority in AOA
- Conduct Board Meeting and pass resolution for:
- authorizing Buyback
- For approval of audit report and calculation of permissible limits based on the audited or unaudited accounts not more than 6 months old from the date of offer document
- Declaration of solvency in form SH-9
- Declaration by Board of Directors under rule 17(1)(m)
- Opening of special A/c for buyback and to make payments for buy-back out of such account
- Approval of Letter of offer buy-back
- Approval of extinguishing share certificates
- E-form MGT-14 to be filed for Board resolution passed within 30 days of passing of resolution (Exempted for Private Companies)
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Special resolution to be passed in a general meeting approving buyback of securities (Not required if buyback is upto 10% of the total paid up equity capital and free reserves)
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E-form MGT-14 to be filed for the above special resolution if passed, within 30 days of passing the resolution
- E-form SH-8 filed for letter of offer with the registrar along with:
- Unaudited Financial Statement
- Declaration by Auditor
- Copy of the Board Resolution
- E-form SH-9 filed for Declaration of Solvency with the registrar along with:
- Statement of Assets and Liabilities
- Auditor’s Report
- Affidavit as per Rule 17(3)
- Letter of offer to be dispatched to shareholders within 20 days of filling of form SH-8/SH-9 with ROC.
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Offer of buy-back to remain open for a minimum of 15 days to maximum of 30 days from the date of dispatch of letter of offer
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Verification of offers received within 15 days from the date of closure of offer. Offer will be deemed accepted if no communication of rejection received within 20 days of closure of offer
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The money shall be deposited in separate bank account opened for Buyback purpose after closure of offer period
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Payment shall be made to the shareholders within 7 days of verification of their offers
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Entry should be made in register of shares bought back in form SH-10
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Buy back should be completed within 1 year of passing of BR/SR as the case may be
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E- form SH-11 for return for Buyback with ROC within 30 days from the date of Completion of buyback with Buyback details and Board Resolution.
- Physically destroy share certificates so bought back within 7 days of the last date of completion of Buyback
Required Document
LIST OF DOCUMENTS REQUIRED FOR BUYBACK
- Board Resolution
- Auditor report with limited review report
- Affidavit under 17(3) by Board of Directors
- Declaration of Directors under Rule 17(1)(m) with Statement of assets and Liabilities
- Letter of offer
- Acceptance form
- Declaration of completion of buy back
Benifit
BENEFITS FOR BUYBACK OF SHARES
The primary reasons for share buybacks in unlisted companies include:
- Capital Structure Adjustment: Companies may undertake share buybacks to adjust their capital structure, optimizing the balance between debt and equity.
- Ownership Consolidation: Share buybacks can help consolidate ownership by reducing the number of outstanding shares, making it easier for existing stakeholders to maintain control.
- Enhancing Shareholder Value: By reducing the number of shares in circulation, a buyback can increase earnings per share (EPS) and potentially boost the company's stock price, thus enhancing shareholder value.
- Signal of Confidence: A company's decision to buy back its own shares can be interpreted as a signal of confidence in its financial health and prospects, which may positively influence investor sentiment.
- Tax-Efficient Capital Return: Share buybacks can be a tax-efficient way to return capital to shareholders, especially when compared to dividends, which may have tax implications for shareholders.
- Undervaluation: If a company believes its stock is undervalued, it may choose to repurchase shares as an investment in itself, signaling confidence in the company's intrinsic value.
FAQ
FREQUENTLY ASKED QUESTIONS (FAQs)
- Are there any restrictions on utilizing the company’s reserves for funding the buy-back?
- Companies can utilize their free reserves, security premium account, or the proceeds from the issuance of shares or other specified securities to fund the buy-back. However, the proceeds from a previous issue of the same kind of shares or securities cannot be used for the buy-back.
- Is shareholder approval required for every buy-back offer?
- Shareholder approval through a special resolution is required for buy-back offers that exceed 10% of the company’s paid-up equity capital and free reserves. However, if the buy-back does not exceed this threshold, approval from the board of directors via a board resolution is sufficient.
- What is the timeline for completing a buy-back?
- A buy-back should be completed within one year from the date of passing the special resolution or board resolution, depending on the approval method.
- Can a company make multiple buy-back offers within a short timeframe?
- No, there should be a minimum gap of one year between two successive buy-back offers. A company must wait for at least one year after completing a buy-back offer before initiating another buy-back.
