Advantages of buyback shares

The Pros and Cons of Stock Buybacks - WSJ

Companies possessing large free reserves base and are willing to use funds to purchase or acquire shares and other securities under the buyback scheme, can use their funds in a wise and effective manner. As share buy backs change the capital structure of the firm, sometimes share buy backs are undertaken as a counter-measure against re-issue of shares which are made compulsorily to discharge the existing obligations to maintain a balance, to the extent possible, in the capital structure.

In other words, share repurchases are undertaken to provide shares for retirement programmes e. Buy back of shares and securities helps the promoters to formulate an effective defensive strategy against hostile takeover bids.

A company cannot buy back its shares more than once in a year but there is no restriction to adopt repeated buy back deals year after year. This also paves the way of the promoters to reach their targets quickly to increase their share and more control in the companies.

Buyback of shares and securities results in lower capital base, enhances post-buyback earning per share and appreciates considerably the price-earnings ratio. Companies which have defaulted in repayment of deposits, redemption of debentures or preference shares or repayment of term loans or interest payable thereon, from banks and financial institutions are not allowed buyback shares.

It is a good check on the companies with unhealthy liquidity position. After buyback of shares the companies will have the advantage of servicing a reduced capital base with higher dividend yield.