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When an organization buys back its own shares it is known as stock buy back. The provision for stock buy back was contained in the company’s act 1956. Basically the buy-back is authorized by the articles of association of the company. The buy-back is less than 25% of the total paid-up capital and fee reserves of the company and the buy-back of equity shares in any financial year shall not exceed 25% of its total paid-up equity capital in that financial year. All the shares or other specified securities for buy-back are fully paid up. The buy-back of the shares of the company are listed on any recognized stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India (SEBI). Buybacks involves paying cash to shareholders in order that the company may cancel stocks, although sometimes repurchased shares are held in treasury.

Buybacks reduces capitalization. Basically Buybacks are unfair and damaging to long-term investors for the reason being that the money that belongs to all investors goes to only a few and another reason being that company has diminished long-term capacity to increase earnings. Buybacks are unethical, but as long as most investors are unaware of this, the practice is likely to continue.

An organization can buy its own shares from- free reserves, securities premium account, proceeds of any other shares. Whenever a company buys its own shares out of free reserves, then the sum equal to the nominal value of the share so bought shall be transferred to the capital redemption reserve.

There are different sources from where the shares will be purchased. The shares can be bought back from existing security- holders on a proportionate basis. Shares can be bought through open market too, by stock exchanges, by book building process, purchasing the securities issued to employees of the company pursuant to a scheme of sweat equity.

Process of Buyback:

When a company proposes to buy back its shares the company is supposed to pass the special resolution. The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent. A public notice shall be given containing disclosures as per SEBI rules. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.
 The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date. The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days.
 A company opting for buy back shall open an escrow Account.

Objectives of Buyback:

Increase earning per share.
To support share value.
To increase promoters holdings.
Rationalize the capital structure by writing off capital.

These were the reasons why shares may be brought back by the organization. Infact the best technique is to maintain the share price in a bear run to buy back the shares from the open market at a premium price. A company should not purchase its shares directly or indirectly. It shall not be bought up through any subsidiary company including its own subsidiary companies, or it shall not buy its own shares through an investment company or group of investment companies.

Advantages to investors:

Buying back stock allows a company to pass on extra cash to shareholders without raising the dividend.
It can increase the Return on Equity (ROE)
Share buybacks raise the demand for the stock on the open market.
When a company purchases its own stock it is essentially telling the market that they think that the company’s stock is undervalued.

After completion of buyback of shares a company must maintain a register of the shares so bought up with these particulars: Consideration paid for the shares bought back, date of cancellation of shares, date of extinguishing shares and other particulars may also be prescribed.

Note: If a company buys-back its own shares or securities, it should extinguish and physically destroy the securities so bought-back within 7 days of the last date of completion of buy-back.

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