Buyback of Shares Meaning, Objectives and Legal framework for buyback under the Companies Act, 2013

Buyback of Shares refers to the process where a company repurchases its own shares from existing shareholders, reducing the total number of outstanding shares in the market. This is done to improve earnings per share (EPS), enhance shareholder value, and utilize surplus cash effectively. Companies may buy back shares to prevent hostile takeovers, adjust capital structure, or signal confidence in their financial health. The buyback can be conducted through Open market purchases, Tender offers, or Book-building processes, following regulatory guidelines set by SEBI (Securities and Exchange Board of India) under the Companies Act, 2013.

Objectives of buyback under the Companies Act, 2013:

• Enhancing Shareholder Value

Buyback helps improve Earnings Per Share (EPS) by reducing the number of outstanding shares in the market. With fewer shares available, the company’s profits are distributed among a smaller number of shares, leading to higher EPS. This makes the company more attractive to investors, increasing market confidence. Moreover, if shares are undervalued, the buyback can help correct the market price, ensuring that shareholders receive better returns on their investment.

• Utilization of Surplus Cash

Companies often generate excess cash that may not be immediately required for expansion or operational activities. Instead of letting the cash remain idle, firms use buybacks as a means to distribute excess funds to shareholders. This improves capital efficiency and signals strong financial health. By reducing idle cash, companies also lower the risk of inefficient investments that may not yield significant returns.

• Capital Restructuring

Buyback of shares is a strategic tool for optimizing the capital structure by reducing equity capital and increasing the proportion of debt. This helps maintain an optimal debt-to-equity ratio, which can lead to better financial stability. A balanced capital structure also helps companies take advantage of tax benefits associated with debt financing, leading to a lower overall cost of capital.

• Preventing Hostile Takeovers

Companies buy back shares to prevent external entities from gaining a controlling stake through open market purchases. A higher percentage of promoter holding after the buyback strengthens control over decision-making and governance. This strategy protects the company from unwanted acquisitions, ensuring that management retains autonomy over business operations and future strategic plans.

• Boosting Market Perception

Buybacks are often viewed as a positive market signal, indicating that the company believes its shares are undervalued. This enhances investor confidence, attracting more investments. Additionally, reducing the number of outstanding shares increases demand, which can push up stock prices. A well-executed buyback often results in better market sentiment and higher overall valuation.

• Tax-Efficient Way of Distributing Profits

Compared to dividends, which are taxed at both the company and shareholder levels, buybacks offer a more tax-efficient alternative for distributing excess funds. Under the Companies Act, 2013, buybacks are subject to capital gains tax instead of dividend distribution tax, which may result in lower tax liabilities for shareholders, making it a preferred mode of rewarding investors.

Legal framework for buyback under the Companies Act, 2013:

The Companies Act, 2013 regulates the buyback of shares under Section 68, 69, and 70, along with the Companies (Share Capital and Debentures) Rules, 2014. The legal framework ensures that companies comply with the provisions while repurchasing shares.

1. Conditions for Buyback (Section 68)

A company can buy back its shares or other specified securities if:

• The buyback is authorized by its Articles of Association (AOA).

• A special resolution (SR) is passed in a general meeting (if buyback exceeds 10% of paid-up capital and free reserves).

• The buyback does not exceed 25% of the total paid-up capital and free reserves.

• The debt-to-equity ratio does not exceed 2:1 after the buyback (except for government companies).

• The buyback is completed within 12 months from the date of passing the special resolution or board resolution.

• The buyback can be done through free reserves, securities premium account, or proceeds from fresh issue of shares (not through borrowed funds).

2. Methods of Buyback

The buyback can be carried out through:

• Open market purchases (Stock exchange or book-building process).

• Tender offer to existing shareholders on a proportionate basis.

• Buyback from employees under an Employee Stock Option Scheme (ESOS).

3. Prohibition on Buyback (Section 70)

A company cannot buy back its shares if:

• It has defaulted in repaying deposits or interest on deposits.

• It has defaulted in redemption of debentures or preference shares.

• It has defaulted in payment of dividends or repayment of loans.

• It has not complied with SEBI regulations (if the company is listed).

4. Compliance and Reporting Requirements

• The company must file Form SH-9 (Declaration of Solvency) with the Registrar of Companies (ROC) before initiating the buyback.

• The company must extinguish the bought-back shares within 7 days from the date of completion.

• A return in Form SH-11 must be filed with the ROC within 30 days of buyback completion.

5. Penalty for Non-Compliance

If a company violates the buyback provisions:

• The company is fined up to ₹1 lakh to ₹3 lakh.

• Every officer in default may be fined ₹1 lakh or imprisoned for up to 3 years, or both.