Procedure for buyback of equity shares

Read this article to learn about the meaning, reasons, financing aspects, benefits, drawbacks, legal provisions and ascertainment of profit and loss of buy back of shares. Buy-back of shares is a method of financial engineering. It can be described as a procedure which enables a company to go back to the holders of its shares and offer to purchase the shares held by them. Buy-back helps a company by giving a better use for its funds than reinvesting these funds in the same business at below average rates or going in for unnecessary diversification or buying growth through costly acquisitions.

When a company has substantial cash resources, it may like to buy its own shares from the market particularly when the prevailing rate of its shares in the market is much lower than the book value or what the company perceives to be its true value.

A company can utilize its reserves to buy-back equity shares for the purpose of extinguishing these or treasure operations.

Naturally, the market price of equity goes up. This enables the promoters to strengthen their control over the shares bought back, without any investment of their own. The shares repurchase may be by way of purchase from the open market or by general tender offer to all shareholders made by the company to repurchase a fixed amount of its securities at pre-stated price.

To improve shareholder value, since buy-back provides a means for utilizing the companies surplus funds which have unattractive alternative investment options, and since a reduction in the capital base arising from buy-back would generally results in higher earnings per share EPS.

It is used as a defense mechanism, in an environment where the threat of corporate takeovers has become real. It would enable corporate to shrink their equity base thereby injecting much needed flexibility.

Procedure of Buy Back of Equity Shares in Pvt Ltd | Corporate Law Reporter

It improves the intrinsic value of the shares by virtue of the reduced level of floating stock. It would enable corporate to make use of the buy-back shares for subsequent use in the process of mergers and acquisitions without enlarging their capital base.

Finance is the nerve centre for the business activities and success is more depending on the better and efficient management of funds and finance. In order to buy-back of shares and securities in large numbers, the company needs huge amounts of capital and funds which may be mobilized through one or more of the sources viz. Firms whose profitability was below their industry average enjoy greater share price growth after shares are repurchased than firms whose profitability was above their industry average.

Firms whose sales growth was below their industry average enjoy greater share price growth after shares are repurchased than firms whose sales growth was above their industry average.

Profitable and growth firms that repurchase shares provide a clear indication to the investors about the strengths of the company. Repurchasing firms with debt ratios below but sales growth rates above their industry average experience substantially higher share price growth after repurchasing than firms with debt ratios above but sales growth below their industry average.

Repurchasing firms with profitability and debt ratios below their industry average demonstrate higher share price growth after repurchasing than firms with profitability and debt ratios above their industry average. Buy-back enables the company to go back to its shareholders and offers cash flow statement examples indirect method purchase from them the share they held.

With the introduction of sections 77A, 77A A and 77B in the Companies Act, through the Companies Amendment Act,now the companies ways to make money smithing buy-back shares.

Buy Back Shares: Meaning, Reasons, Aspects and Other Details

They buy-back of shares are also subject to the SEBI Buy-back of Securities Regulations, The said legal provisions are summarized as follows: The Sources of funds for buy-back of shares or other specified securities of a company are: No buy-back should be made out of the proceeds of an earlier issue of same kind of shares or same kind procedure for buyback of equity shares other specified securities. The amounts credited after the close of financial year to free reserves and the securities premium account should not be utilized for buy-back.

The company may buy-back its own shares or other specified securities in any of the following manner: Where the companies buy-back its own shares, it shall extinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy-back. A company can issue bonus shares at any time after the buy-back of shares. Regulation 19 l a of the SEBI Buy-back of Securities Regulations,a company shall not issue any specified securities including by way of bonus till the date of closure of the offers for buy-back made under the regulations.

Section 77 8 prohibits further issue of shares including allotment of further shares under clause a of sub-section 1 of section 81 for a period of six months except by way of bonus shares.

A company can buy-back its shares every year but subject to the satisfaction of other conditions such as debt-equity ratio, limits of buy-back stipulated in section 77A etc. Promoters can participate under tender offer or buy-back through book building subject to full disclosures being made in the letter of offer.

A company cannot buy-back equity shares from the promoter or person in control of the company if the buy-back is through stock exchange. Passing of resolution by a company does not create any obligation on the company to buy-back its securities.

Buy-back becomes irrevocable only when the letter of offer is filed with the appropriate authority or public announcement of the offer to buy-back is made. The cost of buy-back of securities should be taken as an expense and charged procedure for buyback of equity shares the Profit and Loss Account.

Listed companies are required to intimate the stoke exchange of general meeting and resolution passed thereof. The buy-back shares of a private limited company are subject to the compliance of Private Limited Company Buy-back of Securities Rules, A listed company is required to open an escrow account which is to be used as a security for the purpose of making payment in respect of buy-back of shares.

The company should deposit in an escrow account opened with a scheduled commercial bank on or before the opening of the offer for buy-back of securities, such sum work from home pune vishrantwadi specified below:.

Where the fxcm standard forex account consideration payable for buy-back does not exceed Rs. In case the consideration payable for buy-back exceed Rs.

The company is required to extinguish and physically destroy the security certificates bought back in the presence of the Registers or Merchant Banker or Statutory Auditor within seven days from the date of acceptance of securities.

The securities offered for buy back, if already dematerialized, should be extinguished and destroyed in the manner specified under SEBI Depositories and Participants Regulations, and the bye-laws framed thereunder. Disclosure are required to be made in Directors Report as to reasons for failure of buy- back, if shares are not bought back within 12 months from date of Board or Shareholders resolution.

A company may acquire another business from a date prior to its incorporation, normally from the beginning of the accounting year of the selling concern with to avoid preparation of final accounts up to the date of acquisition.

Buyback of shares

For example, a company incorporated on May 1,may purchase a business with effect from January 1,the date on which the accounting year of the vendor starts. Suppose, the company closes its accounts on December 31 and prepares the Profit and Loss Account for the year ended December 31,any Profit earned by the company from January 1,to April 30, i.

In the same manner any loss incurred prior to incorporation is treated as capital loss and debited to the Goodwill Account. The profit earned by the company after the date of its incorporation is its revenue profit and is available for dividend. A pertinent point to be noted is that even though a public company can earn revenue profits only after getting the Certificate of Commencement, for all practical purposes, the date of incorporation is taken as the basis for the calculation of profit prior to incorporation.

The following steps are taken to ascertain the profit earned prior to incorporation and after incorporation. Mohan as from 1st January The financial accounts of the business for the year ended 31st December You are requested to prepare a statement apportioning the balance of profit between the periods prior to after incorporation and show the profit and loss appropriation account for the year ended 31st December The first accounts were closed on September 30, Rent p to June 30 was Rs.

Salary of the manager, who on formation of the Company had become a whole time director and whose remuneration has been given above, was agreed at Rs. The Company earned a uniform Gross Profit. The sales up to September were Rs.

The monthly average of sales for the first months of the year was one-half of the remaining periods. Show the Profit and Loss Account and indicate how you would deal with the pre-incorporation results. Pre-incorporation profit is a capital profit — dividends cannot be paid out of it.

Procedure for buy back - Corporate Law Forum

It can be used by the directors to write off expenses and commission on the issue of shares or debentures, preliminary expenses, etc. The purchase price Rs. Prepare the final accounts for the year ending December 31,considering the following additional details: