Dr CA Shilpa Bhide

BUY BACK OF SHARES

Meaning

 A buyback means a company buys its

own outstanding shares.
 It is also known as a share repurchase.
Section 68 to 70 of the Companies Act,
2013

 (a) A company may purchase its own shares or

other specified securities out of:
 (i) Its free reserves;
 (ii) The securities premium account;
 (iii) The proceeds of the issue of any shares or
other specified securities (not being the proceeds
of an earlier issue of the same kind of shares or
other specified securities).
 The buy-back is authorized by its articles.
 (c) A special resolution has been passed in
general meeting of the company authorizing
the buy-back (except where the buy back is of
less than 10% of the paid up equity capital
and free reserves of the company and the buy
back is authorized by the Board by means of a
resolution passed at a duly convened Board
Meeting)
 (d) The buy-back does not exceed 25% of the
total paid up capital and free reserves of the
company. Provided that in case of buy back of
equity shares in any financial year, the 25% of
paid up capital shall be construed as 25% of
the total paid up equity capital in that
financial year
 The ratio of the secured and unsecured debt
owed by the company after the buy back is
not more than twice the paid up capital and
its free reserves.
 (f) All the shares and other securities for buy-
back are fully paid up.
 (g) The buy-back is completed within 12
months of the passing of the special resolution
or a resolution passed by the Board.
 (h) The buy-back of the shares listed on any
recognized stock exchange is in accordance
with the regulations made by the SEBI in this
behalf.
 Declaration of Solvency to the Registrar and SEBI in
prescribed form.
 It should state that the Board of Directors has made
a full inquiry into the affairs of the company as a
result of which they have formed an opinion that the
Company is capable of meeting its liabilities and will
not be rendered insolvent within a period of one year
of the date of declaration adopted by the Board.
 The declaration has to be signed by at least two
directors of the company, one of them being
managing director, if any.
The buy back may be from;

 (i) the existing shareholders or security

holders on proportionate basis;
 (ii) the open market;
 (iii) the shares or securities issued to the
employees of the company pursuant to a
scheme of Stock Option or Sweat Equity
 Where a company purchases its own shares
out of its free reserves or securities premium
account it shall transfer an amount equal to
the nominal value of such shares to Capital
Redemption Reserve Account and details of
such transfers should be specified in the
Balance Sheet
Problem 1

 Liabilities of a Company are

 Equity Shares of Rs. 10 Each fully paid
Rs12,50,000.
 General Reserve ( Free) Rs. 15,00,000
 Securities Premium Rs 2,50,000
 Profit & Loss Account Rs 1,25,000
 Secured Loans: 12% Debentures 18,75,000
Unsecured Loans 10,00,000
 long term borrowings 16,50,000
Problem 1

 The company wants to buy back 25,000

equity shares of Rs. 10 each, on 1st April, 2020
at Rs. 20 per share.
 Resolution has been passed.
 Comment with your calculations, whether
buy back of shares by company is within the
provisions of the companies Act
Solution : Three Tests

 Shares Outstanding Test

 Particulars (Shares)
 Number of shares outstanding 1,25,000
 25% of the shares outstanding 31,250
Resources Test: Maximum permitted limit 25%
of Equity paid up capital + Free Reserves

 Particulars Paid up capital (Rs.) 12,50,000

 Free reserves (Rs.) (15,00,000 + 2,50,000 +
1,25,000) 18,75,000
 Shareholders’ funds (Rs.) 3125000
 25% of Shareholders fund (Rs.) 7,81,250
 Buy back price per share Rs. 20
 Number of shares that can be bought back
(shares) 39,062
 Actual Number of shares for buy back 25,000
Debt Equity Ratio Test: Loans cannot be
in excess of twice the Equity Funds post
Buy Back
1. Loan funds (18,75,000+10,00,000+16,50,000) = Rs
45,25,000
2. Minimum equity to be maintained after buy back
in the ratio of 2:1 (Loan funds /2) = Rs 22,62,500
3. Present equity/shareholders fund = 31,25,000
4. Shares can be bought buy 3125000-2262500=
862500
5. Number of shares worth can be bought back Rs
862500.
6.Number of Shares= 862500/20=43125
Summary

Particulars Number of shares

 Shares Outstanding Test
31,250
 Resources Test 39,062
 Debt Equity Ratio Test 43125
 Least is 31,250 shares hence they can be bought back.
 However, company wants to buy-back only 25,000
equity shares @ Rs. 20. Therefore, buyback of 25,000
shares, as desired by the company is within the
provisions of the Companies Act, 2013
Buyback ratio

 The buyback ratio is the amount of cash paid

by a company for buying back its common
shares over the past year, divided by its
market capitalization at the beginning of
the buyback period.
 The buyback ratio enables analysts to
compare the potential impact of repurchases
across different companies
Problem and Solution 2

 Company ABC spends Rs 100,000 on buying

back its common shares over the last 12
months. They have a market valuation of
25,00,000 at the beginning of this period.
 Solution
 1,00,000/25,00,000X 100=4%
 A buy-back cannot be made:
 (i) Through any subsidiary company including its own
subsidiary company; or
 (ii) Through any investment company or group of
investment companies; or
 (iii) If a default by the company is subsisting in
repayment of deposit or interest payable thereon,
redemption of debentures or preference shares or
payment of dividend to any shareholders or
repayment of any term loan or interest payable
thereon to any financial institution or ban
Method of Pricing

 Fix Price or tender offer

 Share Bidding at band given through reverse
book building.
Advantages

 Facilitates capital restructuring of the company.

 Increase EPS
 Buybacks shrink a company's outstanding share
float, which improves earnings and cash flow per
share
 As remedy of overcapitalization
 Can Go Public to Private
Disadvantage

 Companies may go from public to private to

avoid rules, regulations and disclosures.
 Delisting
 Market may fear that the company is shutting
down and making losses leading to fall in the
market.
 Thank You
 Sources
 ICAI study module