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Buyback of Shares
Buyback of Shares refers to the process by which a company repurchases its shares from existing shareholders. This action reduces the number of outstanding shares in the market and is governed by the Companies Act, 2013, SEBI (Buyback of Securities) Regulations, 2018, and applicable tax laws. Companies typically opt for buybacks to return surplus cash, consolidate ownership, or improve financial ratios.
Buyback of shares allows companies to reduce share capital and reward shareholders by purchasing shares at a premium. It can be conducted through open market purchases, tender offers, or selective buybacks. The process is strictly regulated to ensure transparency and protect shareholder interests.
Important
1. Surplus Cash Utilization : Returns excess funds to shareholders effectively.
2. Improves Financial Ratios : Enhances earnings per share (EPS) and return on equity (ROE).
3. Price Support : Provides support to the share price in the market.
4. Consolidates Ownership : Reduces the number of shareholders and increases promoter stake.
5. Tax Efficiency : Can be a tax-efficient alternative to dividends.
Applicability
1. Private Limited Companies : Buyback for restructuring shareholding or utilizing surplus funds.
2. Public Limited Companies : Governed by SEBI regulations; offers buybacks as a corporate action.
3. Listed Companies : Must comply with SEBI's stringent disclosure and procedural requirements.
Modes of Buyback
1. Tender Offer : The company offers to repurchase shares from shareholders at a fixed price.
2. Open Market Purchase : Shares are repurchased directly from the stock market over a period of time.
3. Selective Buyback : Shares are bought back from specific shareholders, often promoters.
4. Through Book-Building Process : Applicable for large buybacks involving institutional investors.
Key Compliance Requirements
1. Board and Shareholder Approvals : Board approval is mandatory; shareholder approval is required if the buyback exceeds 10% of paid-up capital and reserves.
2. SEBI Filing (for Listed Companies) : File public disclosures and buyback offer documents with SEBI.
3. Maintenance of Debt-Equity Ratio : Post-buyback, the debt-to-equity ratio must not exceed 2:1.
4. Buyback Limit : Cannot exceed 25% of the company’s total paid-up capital and free reserves.
5. Utilization of Free Reserves : Buybacks must be funded using free reserves, securities premium, or proceeds from a fresh issue.
6. Time Limit for Completion : The buyback must be completed within 6 months of board or shareholder approval.
7. Destruction of Shares : Shares bought back must be extinguished within 7 days of completion.
Documents Required
Features
Features & Benefits of Buyback of Shares
Compliance with SEBI Regulations
Voluntary Process
Debt-Equity Ratio Compliance
Flexibility in Modes
Buyback of Shares
Mandatory Share Extinguishment
Tax Efficiency
Surplus Utilization
Stakeholder Benefits
Transparent Process
Comparison with Related Services
| Feature | Buyback of Shares | Share Allotment | Dividend Distribution |
|---|---|---|---|
| Objective | Reduce share capital | Increase share capital | Distribute profits |
| Regulatory Body | MCA, SEBI | MCA, ROC | MCA |
| Filing Frequency | One-time | Event-based | Periodic |
| Forms Required | SH-9, SH-11 | PAS-3 | Form MGT-7 |
| Tax Implications | May attract buyback tax | No tax on issue | Dividend tax applicable |
Frequently Asked Questions
What is the maximum limit for a share buyback?
The buyback cannot exceed 25% of the company’s total paid-up share capital and free reserves.
Is shareholder approval mandatory for buybacks?
Shareholder approval is required if the buyback exceeds 10% of paid-up capital and reserves.
What is Form SH-9?
Form SH-9 is a declaration of solvency that certifies the company can meet its obligations after the buyback.
What are the tax implications of a buyback?
Companies are subject to a buyback tax under Section 115QA of the Income Tax Act, which is 20% on the distributed income.
What happens to shares bought back by the company?
Bought-back shares must be extinguished and cannot be reissued.
How long does a buyback take?
The buyback process must be completed within 6 months of board or shareholder approval.