{"id":14568,"date":"2020-10-23T12:43:48","date_gmt":"2020-10-23T07:13:48","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=14568"},"modified":"2020-11-24T18:07:20","modified_gmt":"2020-11-24T12:37:20","slug":"buyback-of-shares-meaning-and-its-purpose","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/","title":{"rendered":"Buyback of Shares: Meaning and Its Purpose"},"content":{"rendered":"\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-6a547d15d6019\" 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-6a547d15d6019\"  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\/buyback-of-shares-meaning-and-its-purpose\/#Overview_of_Buyback_of_Shares\" title=\"Overview of Buyback of Shares\">Overview of Buyback of Shares<\/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\/buyback-of-shares-meaning-and-its-purpose\/#Meaning_of_Buyback_of_Shares\" title=\"Meaning of Buyback of Shares\">Meaning of Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/#Provisions_Regulating_Buyback_of_Shares\" title=\"Provisions Regulating Buyback of Shares \">Provisions Regulating Buyback of Shares <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/#Rules_laid_down_for_Buyback_of_Shares\" title=\"Rules laid down for Buyback of Shares\">Rules laid down for Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/#Modes_of_Buyback_of_Shares\" title=\"Modes of Buyback of Shares\">Modes of Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/#Procedure_of_Buyback_of_Shares\" title=\"Procedure of Buyback of Shares\">Procedure of Buyback of Shares<\/a><\/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\/buyback-of-shares-meaning-and-its-purpose\/#Why_do_Companies_Consider_Buyback_of_Shares\" title=\"Why do Companies Consider Buyback of Shares?\">Why do Companies Consider 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\/buyback-of-shares-meaning-and-its-purpose\/#Reasons\" title=\"Reasons\">Reasons<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/#Increase_in_Earnings_per_Share_EPS\" title=\"Increase in Earnings per Share (EPS):\">Increase in Earnings per Share (EPS):<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/#Distribution_of_Excess_Cash\" title=\"Distribution of Excess Cash:\">Distribution of Excess Cash:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/swaritadvisors.com\/learning\/buyback-of-shares-meaning-and-its-purpose\/#Buyback_of_Share_Helps_in_Improvement_of_Valuation_of_Companies\" title=\"Buyback of Share Helps in Improvement of Valuation of Companies:\">Buyback of Share Helps in Improvement of Valuation of Companies:<\/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\/buyback-of-shares-meaning-and-its-purpose\/#Conclusion\" title=\"Conclusion&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; \">Conclusion&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Overview_of_Buyback_of_Shares\"><\/span>Overview of Buyback of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"has-drop-cap\">Buyback of shares is defined under section 68 of the Companies Act, 2013. Earlier, the concept of buyback of shares was dealt under the Companies Act, 1956. Later on, it was amended in the year 1999.<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\" class=\"text-primary\">Buyback of shares<\/a><\/strong> is a kind of financial strategy followed by any company for the purpose of restructuring and realignment of its shares and securities in order to prevent any unwanted takeovers.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Meaning_of_Buyback_of_Shares\"><\/span>Meaning of Buyback of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>It is defined as the process by which any company can buy back its own shares and securities from any existing shareholders usually at a price which is higher than the market price. This process by which a company is allowed to repurchase its own shares and securities at a price higher than the existing market price is referred to as \u201cBuyback of shares\u201d. <\/p>\n\n\n\n<p>However, the number of outstanding shares in the market declines, when any company buybacks its own shares along with other securities.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Provisions_Regulating_Buyback_of_Shares\"><\/span>Provisions Regulating Buyback of Shares <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" loading=\"lazy\" width=\"599\" height=\"369\" src=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/10\/Provisions-regulating-buy-back-of-shares.jpg\" alt=\"Provisions Regulating Buy back of Shares \" class=\"wp-image-14569\" srcset=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/10\/Provisions-regulating-buy-back-of-shares.jpg 599w, https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/10\/Provisions-regulating-buy-back-of-shares-300x185.jpg 300w\" sizes=\"(max-width: 599px) 100vw, 599px\" \/><\/figure><\/div>\n\n\n\n<p>Buyback of shares is regulated by law under the following provisions:<\/p>\n\n\n\n<ul><li><strong>Section 68 <\/strong>to<strong>70 <\/strong>of<strong> Companies Act, 2013<\/strong><sup><a href=\"http:\/\/mca.gov.in\/SearchableActs\/Section68.htm\" class=\"text-primary\"><strong><em>[1]<\/em><\/strong><\/a><\/sup>.<\/li><li>Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.<\/li><li>SEBI (Buyback of Securities) Regulations, 1998.<\/li><li>Securities and Exchange Board of India (Buyback of Securities) (Amendment) Regulations, 2013.<\/li><\/ul>\n\n\n\n<p>These are some of the provisions which regulate the concept of Buyback of shares in India.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Rules_laid_down_for_Buyback_of_Shares\"><\/span>Rules laid down for Buyback of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Following are some of the rules or criteria which must be followed for the procedure of Buyback of shares:<\/p>\n\n\n\n<ul><li>As mentioned in SEBI guideline, the maximum upper limit for the buyback of shares is 25 percent or less than the total paid up capital of the company along with the company reserves.<\/li><li>The ratio of aggregate secured or unsecured debts of any company should always be more than the twice paid up capital of the company.<\/li><li>This should be allowed only for the fully paid up shares and securities of the company.<\/li><li>As reflected by SEBI guideline, no company has the power of Buy back of share for decreasing share capital.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Modes_of_Buyback_of_Shares\"><\/span>Modes of Buyback of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" loading=\"lazy\" width=\"599\" height=\"369\" src=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/10\/Modes-of-Buyback-of-Shares.jpg\" alt=\"Buyback of Shares Modes\" class=\"wp-image-14570\" srcset=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/10\/Modes-of-Buyback-of-Shares.jpg 599w, https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/10\/Modes-of-Buyback-of-Shares-300x185.jpg 300w\" sizes=\"(max-width: 599px) 100vw, 599px\" \/><\/figure><\/div>\n\n\n\n<p>Section 68(5) of the Companies Act,2013 deals with the concept of different modes of buyback of shares and securities. This can be achieved by the following modes:-<\/p>\n\n\n\n<ul><li>From the existing shareholders or the existing security holders<\/li><li>Open Market,<\/li><li>Shares purchased from employees under Employee Stock Option Plan (ESOP).<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Procedure_of_Buyback_of_Shares\"><\/span>Procedure of Buyback of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In order to file for the buyback of shares and securities of\nany company following are the procedures to be followed:<\/p>\n\n\n\n<ul><li>An offer letter must be filed with the registrar dated and duly signed on behalf of the board of directors of the company.<\/li><li>The letter filed must be dispatched to the shareholders of the company in not less than 21 days of filing with the Registrar of the Companies.<\/li><li>The offer made for the buyback of share shall remain open for more than 15 days and but not more than 30 days from the date of filing of letter of offer.<\/li><li>Register of buy back of shares and securities must be maintained by every company under FORM No. SH. 10.<\/li><li>Shares to be bought by the process of buy back must be a fully paid up shares.<\/li><li>The <strong><a href=\"https:\/\/swaritadvisors.com\/learning\/process-for-the-valuation-of-shares-for-buyback\/\" class=\"text-primary\">process of the valuation of shares for buyback<\/a><\/strong> must be completed within a time period of one year from the date of passing of special resolution.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why_do_Companies_Consider_Buyback_of_Shares\"><\/span>Why do Companies Consider Buyback of Shares?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>With the increasing number of companies in India, various companies look for the buyback of its shares and securities. The directors of the existing companies are of mind that the buyback of shares and securities of one\u2019s own company have a positive impact or effect on the existing shareholders of the company.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Reasons\"><\/span>Reasons<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Here are some of the reasons why a company is interested in buying back its own shares and securities:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Increase_in_Earnings_per_Share_EPS\"><\/span>Increase in Earnings per Share (EPS):<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In order to boost or increase the earnings per share of a company, various companies are interested in buyback of their own shares and securities. This is because buyback of share reduces the value of outstanding shares in the market.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Distribution_of_Excess_Cash\"><\/span>Distribution of Excess Cash:<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Another important reason for buyback of share of one\u2019s own\ncompany is to distribute excess cash to the shareholders of the company. This\nis done because the offer price is always more than the current price.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Buyback_of_Share_Helps_in_Improvement_of_Valuation_of_Companies\"><\/span>Buyback of Share Helps in Improvement of Valuation of Companies:<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Whenever a company buybacks its own shares and securities, the outstanding shares of the company and the capital base are reduced. Further, this helps in the improvement of not only EPS but also the ROE of the company.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Thus, Buyback of shares can be considered to be an efficient way to increase the price of the undervalued share of a company. This should be allowed only for the fully paid up shares and securities of the company. However, it can be said that not every Buy back of shares is considered to be profitable for a company. Thus, investors should always look at the time and purpose of the buyback of shares. We at <strong><a href=\"https:\/\/swaritadvisors.com\" class=\"text-primary\">Swarit Advisors<\/a><\/strong> have the team of experts who can help you with this process <\/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>Overview of Buyback of Shares Buyback of shares is defined under section 68 of the Companies Act, 2013. Earlier, the concept of buyback of shares was dealt under the Companies Act, 1956. Later on, it was amended in the year 1999. Buyback of shares is a kind of financial strategy followed by any company for [&hellip;]<\/p>\n","protected":false},"author":23,"featured_media":14571,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[546,624],"tags":[941],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/14568"}],"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\/23"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=14568"}],"version-history":[{"count":20,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/14568\/revisions"}],"predecessor-version":[{"id":16645,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/14568\/revisions\/16645"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/14571"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=14568"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=14568"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=14568"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}