Share Buyback

All About Buyback:

Buyback Meaning:- 

It means when company purchases its own shares from the shareholders.

ie. Buy + Back 

Reason for Buyback

1. Strengthen promoter stake in the company

2. Excess Cash Reserve but no major expansion plans

3. To Reward shareholders of the company

4. Tax free income in hands of shareholder

Buyback Methods:-

1.Tender offer

2. Open Market -Stock Exchange Route & Book Building Route 

3. Odd Lots Method

A company should announce the record date in the public announcement for determining the entitlement for Buyback.

Condition for Buyback:-

 ✓ Max. limit - 25% of Paid-up capital +Free Reserves based on both Standalone & CFS of company. ( 15% Limit for Buyback from Open market )

✓ Debt Equity Ratio post buyback should be <= 2:1 (Higher ratio prevail if companies act allows )

✓ Buyback should not conducted before expiry of 1 yr. of a previous buyback.

 ✓ Only -Free Reserve , -SPR , -proceeds from issue of shares (Not same kind of securities) can be used for Buyback.

✓ not allowed if company default in - Repayment of deposits - Interest/Dividend payment, - Redemption of debentures/ PS, - repayment of any term loan to FI, Banking company.

Entitlement Ratio:-

Minimum no. Of shares that a shareholder is entitled to tender during buyback.

Diffrent Entitlement ratio (Declared in Letter of Offer) for

1. Small shareholder Category (Holding shares Upto value of 2,00,000)- Atleast 15% of buyback

2.General Category (Other shareholders) -balance i.e 85% Co. is allowed to adjust the Deficit of some shareholders with the excess shares tendered by other shareholders within the same category on priority and if there is still any deficit on an overall basis , then it can be adjusted with surplus of the other shareholder category.

Acceptance Ratio:-

 Acceptance Ratio is the number of shares accepted against no. Of shares tendered.

AR = Total No. Of shares bought back *100 /Total No. Of shares tendered Acceptance Ratio are different for each category of shareholders and are declared after completion of buyback.

 General Obligations:-

✓The Company shall not issue any shares or other specified securities including by way of bonus till the date of expiry of buyback period.

✓The company shall not raise further capital for a period of one year from the expiry of buyback period (NA to Stock option or warrants or Convertible securities)

✓Buyback should not be withdrawn after making public announcement or after filing the draft letter of offer with sebi.

Taxation on buyback of shares:- 

On Shhareholder: As per tax laws , proceeds from buyback are exempt for shareholders.

On Company: As per Sec 115QA , company pay taxes @20% on distributed income (Buyback price- Issue price) in case of  buyback of shares.

Effective Tax rate = 20%Tax +12%Surcharge+4%Cess= 23.296% 

e.g Suppose 

LIC's IPO came in 2022 @ 950/share & now LIC is offering buyback @ 1,500/share

Mr. A has bought some shares @1,200/share after 2 months from the issue & ready to participate in buyback.

LIC wil pay tax on 550 (1,500-950).

Benefits to Company:- 

Comp. can utilize excess liquidity  to cancel its shares today and issue them again in future at higher price if situation favor. Buyback helps in improving the financial ratios of the company and consolidate its ownership to prevent hostile takeover.

Benefits to Shareholders:-

Shareholder gets a premium valuation as compared to current market prices. Later they can buy those shares again in the secondary market. this will help in tax saving in capital gain also.

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