An action Of a company where it buys back the share of its own company from the shareholders at market price or usually at a price that is higher than market price is considered as buyback of shares. The number of shares outstanding in the market pause when the company buys back the shares. There are many reasons why a company considers buyback. Some reasons are- To return money To the shareholders, to improve return on net worth, it also reduces the chance of takeover, it shows improvement in return on capital, for the use of ideal cash, and to improve earning per share. When there is a reduction in the number of shares outstanding, the ROE and EPS of the company improves, However, This also shows that the business has very limited future investment and growth opportunities, and will have a lower P/E ratio.
A company buys back its shares through tender offers from the shareholders on a proportionate basis, it can also buy back its shares from the open market through Stock Exchange and book-building process, buyback also occurs from odd-lot holders. By bank, our purchase of a share occurs through companies free reserve, Through security premium, or other specified securities. The price is usually determined by considering various factors such as return on net-worth, Effect on EPS, book value, and market price. When buying back from shareholders, it should be authorized by Article of Association and a special resolution (or postal ballot for listed companies) should be passed.
A company cannot purchase (indirectly or directly) through any subsidiary company. In case the company has defaulted in payments of the deposits, loan, preference share, interest, or redemption of debentures, then it cannot buy back its shares. In case the company has not distributed dividends with the time of 30 days or has failed in filing an annual return or has not shown the account before the general meeting then this also bars a company from buying back shares.
Listed companies also have some restrictions regarding Buyback. Then the period off my back is open, the promoters cannot deal in the specified securities, in the Stock Exchange. Once the company filed a Letter of offer with the SEBI or has made a public announcement then it cannot withdraw the offer. Specified securities such as boon shares cannot be issued until the offer of buy-back has been closed. The company has to pay in cash for buyback as it is only considered acceptable. The non-transferable securities and locked-in securities cannot be purchased until they become free.
Buyback aids the survival of consumer sovereignty as it prevents monopolization by preventing takeovers and mergers, it also manipulates the records of share prices, price turn-in ratio and also misleads the shareholders. A company will buy back shares to provide investors with a return then they feel that the share is undervalued, however investors can also get an impression that it does not have growth opportunities, and the reason used for buyback is to inflate the share price artificially in the market.