{"id":10428,"date":"2020-05-07T11:47:19","date_gmt":"2020-05-07T06:17:19","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=10428"},"modified":"2021-03-24T18:16:20","modified_gmt":"2021-03-24T12:46:20","slug":"highlights-and-challenges-of-buyback-of-shares","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/","title":{"rendered":"Highlights and Challenges of Buyback of Shares"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Buyback refers to the corporate action wherein a company purchases its own outstanding shares from the existing shareholders at a price higher than the market value. A company buys back its shares for an array of reasons, such as to inflate the value of remaining shares by reducing their correspondence supply in the open market, improving earnings per share and<strong> <\/strong>return on net worth. The process of buyback is an efficient method of providing funds to the shareholders instead of dividends. Section 68 of the Companies Act, 2013, states that any listed or unlisted company which possesses limited shares or guarantees with share capital can choose to buy back its shares and other securities. This blog will highlight the Pros and Cons of Buyback of Shares. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a5556e3de4a2\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a5556e3de4a2\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#A_brief_about_Shares_Repurchase\" title=\"A brief about Shares Repurchase \">A brief about Shares Repurchase <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Different_Methods_of_Share_Buyback\" title=\"Different Methods of Share Buyback&nbsp; \">Different Methods of Share Buyback&nbsp; <\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Buying_share_from_the_Open_Market\" title=\"Buying share from the Open Market\">Buying share from the Open Market<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Fixed_Price_Tender_offer\" title=\"Fixed Price Tender offer\">Fixed Price Tender offer<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Dutch_Auction_Tender_Offer\" title=\"Dutch Auction Tender Offer\">Dutch Auction Tender Offer<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Repurchase_by_Direct_Negotiation\" title=\"Repurchase by Direct Negotiation\">Repurchase by Direct Negotiation<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Pros_and_Cons_of_Buyback_of_Shares\" title=\"Pros and Cons of Buyback of Shares\">Pros and Cons of Buyback of Shares<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Advantages_of_Buyback\" title=\"Advantages of Buyback\">Advantages of Buyback<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Disadvantages_of_Buyback\" title=\"Disadvantages of Buyback\">Disadvantages of Buyback<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Conditions_to_be_fulfilled_before_Buyback_of_Shares\" title=\"Conditions to be fulfilled before Buyback of Shares\">Conditions to be fulfilled before Buyback of Shares<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Limitation_for_Share_Repurchase\" title=\"Limitation for Share Repurchase&nbsp;\">Limitation for Share Repurchase&nbsp;<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/swaritadvisors.com\/learning\/highlights-and-challenges-of-buyback-of-shares\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"A_brief_about_Shares_Repurchase\"><\/span>A brief about Shares Repurchase <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Share repurchase or share buyback is a process of repurchasing those stocks which were earlier issued by the company to shareholders. It is one of the significant modes of restructuring a company\u2019s capital, and accentuates on the objective of increasing the earning per Share. There are various pros and cons of <strong><a href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\" class=\"text-primary\">buyback of shares<\/a><\/strong> that companies can avail. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Different_Methods_of_Share_Buyback\"><\/span>Different Methods of Share Buyback&nbsp; <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>A company can repurchase its shares in the following ways: <\/em><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Buying_share_from_the_Open_Market\"><\/span>Buying share from the Open Market<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In this method, the company purchases its stocks from the open market. Such a transaction usually happens with the assistance of a broker. The repurchase program takes place for an extended time frame since a large block of shares requires to be bought. The company is not restrained from conducting the repurchase program after the announcement, besides it has the option to cancel it. If the open market method is effectively implemented, it can be cost-effective for the company.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Fixed_Price_Tender_offer\"><\/span>Fixed Price Tender offer<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>As the name suggests, in this method, the company issues an offer to buy a fixed number of shares at a fixed amount of price to its shareholders. Generally, the price offered by the company is more than the current market price of the stock. In the fixed price tender offer method, the shareholders get an option to either sell back the shares or hold them. If the total number of shares exceeds the shares required by the company, then the shares are repurchased on a <em><strong>pro-rata basis<\/strong><\/em><sup><a class=\"text-primary\" href=\"https:\/\/en.wikipedia.org\/wiki\/Pro_rata\"><strong><em>[1]<\/em><\/strong><\/a><\/sup> It is a quicker method, but it can be costlier than the open market method.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Dutch_Auction_Tender_Offer\"><\/span>Dutch Auction Tender Offer<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This is similar to the fixed price tender offer. In this method, no\nfixed price is specified; instead, the company offers a range of prices to its\nshareholders, but the minimum price is above the current market price.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Repurchase_by_Direct_Negotiation\"><\/span>Repurchase by Direct Negotiation<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In\nthis share buyback method, the company reaches out to only those shareholders\nwho have a large block of shares. Companies pay a premium price more than the\ncurrent market price to the shareholders. It is a cerebral approach that\nenables a company to negotiate with large shareholders directly.<\/p>\n\n\n\n<p>The methods mentioned above provide several pros and cons of buyback of shares to the companies depending on their chosen method.<\/p>\n\n\n\n<p><b>Also, Read:<\/b> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/\">Buyback of Shares: Meaning and Its Purpose<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Pros_and_Cons_of_Buyback_of_Shares\"><\/span>Pros and Cons of Buyback of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are both <strong>advantages and disadvantages of shares buyback<\/strong>. Have a look at some of the pros and cons of buyback of shares:&nbsp; <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Advantages_of_Buyback\"><\/span>Advantages of Buyback<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ul><li><strong>Flexible in Nature- <\/strong>The buyback of shares can be done for an extended period, unlike dividends, which need to be paid immediately. A company is not legally obliged to conduct the share repurchase program. Moreover, the companies get the flexibility to cancel or modify the repurchase program as per their needs. Besides, the shareholders are also under no compulsion to sell back the shares, and they choose to hold them if they wish to.<\/li><li><strong>Tax  Benefits-&nbsp;<\/strong>In some countries, a lower capital gain tax rate is levied as compared to the dividend tax rate. The buyback of shares is taxed under the capital gain tax category, so the investors prefer to share repurchase over the cash dividend in such countries.<\/li><\/ul>\n\n\n\n<ul><li><strong>Gain More Control<\/strong>&#8211; Some companies use a share repurchase program as a means to regain control of the company itself. When a company is traded in the open market, the decisions regarding its future depends on shareholder&#8217;s votes. Hence, many companies regain its private control by repurchasing public stocks with buyback programs.<\/li><\/ul>\n\n\n\n<ul><li><strong>Signals the Growth- <\/strong>Share buyback creates a positive image of the company. Companies repurchase shares as they perceive it to be undervalued and want to attain prospective growth. <\/li><\/ul>\n\n\n\n<ul><li><strong>Increase\nShareholder Profits<\/strong>&#8211; The share repurchase\nplan can help the remaining shareholders of the company to improve their\nprofits. When the issuing company repurchases the company\u2019s shares, the shares\nget automatically reabsorbed into the financial assets of that company. The\nnumber repurchased by the company reduces the total number of outstanding\nshares available in the open market for stockholder purchases. As the supply of\nshares is reduced, it may increase the demand and purchase price of the\nremaining shares. Thereby, buyback raises share price, which benefits those\nstockholders who retain the company stock.<\/li><\/ul>\n\n\n\n<ul><li><strong>Build\nInvestor Confidence- <\/strong>Many\ncompanies invest in a share buyback plan to obtain investors\u2019 confidence in the\ncompany. Repurchasing company stock showcase that the company has stabilized operations\nand future success. An investor ascertains that a company will not purchase a worthless\nstock, so the company stock repurchase can boosts investor\u2019s confidence to\ncreate a buying surge of the stock.<strong><\/strong><\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Disadvantages_of_Buyback\"><\/span>Disadvantages of Buyback<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li><strong>Unrealistic pictures- <\/strong>Share buyback increases some ratios like ROA, EPS, and ROE. &nbsp;However, such rates are inflated not because of the increase in profitability, but due to a decrease in the outstanding shares. Thus, there is no organic growth in profit, yet the buyback represents a positive image which set off the economic reality of the company.<\/li><\/ul>\n\n\n\n<ul><li><strong>Error\nin Valuation<\/strong>&#8211; There is a scope of mistakes in\nvaluing the company. In case, the buyback plan is undertaken with the purpose\nto reinforce the undervaluation, but the company overestimates its prospects.\nIt makes the entire process of buyback futile.<\/li><\/ul>\n\n\n\n<ul><li><strong>Sinking\nDividend-<\/strong>&nbsp;Often, companies\nspend plenty amount of money on purchasing the shares and cuts their dividend\nsimultaneously. After spending money on buying back the shares, the company has\nless cash to give out in a quarterly dividend. If you are an investor who\nrelies on dividend, checks for the company\u2019s income as this could pinch you in\nthe pocket.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conditions_to_be_fulfilled_before_Buyback_of_Shares\"><\/span>Conditions to be fulfilled before Buyback of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Companies\nAct, 2013, has listed stringent conditions for buyback of shares. Below are the\nprerequisites that must be fulfilled prior to repurchasing shares:<\/p>\n\n\n\n<ul><li>The primary condition\nis to get share buyback authorized by the company\u2019s Article of Association.<\/li><li>A company can deploy\nits borrowed funds from an NBFC, bank, or financial institution to buy back its\nshares. <\/li><li>Buyback can be executed\nthrough Free Reserves, Security Premium Account, and from the proceeds of fresh\nissue of any securities or shares. Also, no such repurchase shall be made\nthrough the proceeds of issue of a similar kind of shares.<\/li><li>The maximum limit for a\ncompany to purchase shares is 25% of its Free Reserve and Paid-up Share Capital.\nFurther, the same needs to be authorized by passing a special resolution.<\/li><li>If the buyback of\nshares is 10% or less, then the company needs to authorize the transaction by\npassing a board resolution in the Board Meeting. Furthermore, the process of\nbuyback must be completed within one year from the date of passing the special\nresolution or board resolution. <\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Limitation_for_Share_Repurchase\"><\/span>Limitation for Share Repurchase&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Other\nthan the pros and cons of buyback of shares, there is an additional checklist\nof restrictions which all the companies must follow:<\/p>\n\n\n\n<ul><li>Companies cannot repurchase\ntheir shares and securities from an individual through private arrangements, negotiated\ndeals, stock exchange, or spot transactions.<\/li><li>A company cannot buy\nback its shares or securities from the stock exchange to meet the objective of\ndelisting the shares\/securities.<\/li><li>Companies can\u2019t\ninitiate any buyback plan within one year from the expiry date of the previous buyback\noffer&nbsp;(if any).<\/li><li>No company can buy back\nits shares unless the consequent reduction of its share capital is\naffected.&nbsp;<\/li><li>The companies can\u2019t\npurchase its shares or securities either directly or indirectly through any of\nits own subsidiary companies.<\/li><li>Companies cannot repurchase\nthe shares through an investment or group of investment companies.<\/li><\/ul>\n\n\n\n<div class=\"shadow4\"><strong>Note<\/strong>&#8211;\nIf any company makes a default in the repayment of interest payment or deposits\nin the redemption of preference shares\/ debentures\/ term loan\/ payment of\ndividend\/ interest payable to any financial institution, then the company\ncannot buyback its shares.<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Buyback\nis undoubtedly a powerful tool for companies to regain their position in the\nmarket. It helps the companies improve their share value and increase EPS\n(earnings per share).<\/p>\n\n\n\n<p>Though\nthere are pros and cons of buyback of shares, it is still one of the preferable\nsources of capital restructuring. If you also want to make a share buyback\nprogram, then take the professional assistance of Swarit Advisors.<\/p>\n\n\n\n<p><b>Also, Read:<\/b> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\">Checklist for Buyback of Shares under Companies Act 2013<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Buyback refers to the corporate action wherein a company purchases its own outstanding shares from the existing shareholders at a price higher than the market value. A company buys back its shares for an array of reasons, such as to inflate the value of remaining shares by reducing their correspondence supply in the open market, [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":10431,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[546,624],"tags":[601],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10428"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=10428"}],"version-history":[{"count":9,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10428\/revisions"}],"predecessor-version":[{"id":16631,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10428\/revisions\/16631"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/10431"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=10428"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=10428"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=10428"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}