A company may choose to purchase shares of another company and return them to the public in a buyback. A buyback helps to reduce the number of shares in the market, which improves the ownership stake of the investor. It also reduces the number of outstanding shares on the balance sheet, which increases Return on Assets. A buyback allows a company to exit the stock market relatively easily, and the provisions of buybacks are found in the Companies Act 2013.
A company must file a letter of offer with the Registrar of Companies. This letter must be signed by two directors, including the Managing Director. In addition, the Company must file a declaration of solvency with the Securities and Exchange Board, which requires an affidavit. When it has passed these requirements, the buyback may begin. During the time of the buyback, the company must not issue the same kind of securities again, except for in certain cases.
The provisions of buy back shares differ between states, but the general concept is the same. A company cannot buy back its own shares or a specified security unless it complies with the provisions of the Dividend Act and the Financial Statement. Similarly, a company cannot buy back the securities it issued to its employees. For example, if the company issued these securities to employees under stock option plans, sweat equity schemes, or any other scheme, it may not be able to purchase them. If the company buys back the security, it must do so at its Fair Market Value and obtain a CA certificate.
While companies are increasingly opting for buybacks of their stock, it is important to understand the legal implications before implementing such an initiative. In particular, companies should ensure that employees are aware of any legal restrictions, contracts, and necessary processes. If a share repurchase program is going to be initiated, it must comply with all of its contractual obligations. However, a company cannot initiate a share buyback program if it has material nonpublic information in its hands.
Although buybacks are good for investors, there are downsides to these investments. A poorly executed buyback can destroy shareholder capital, starving the business of money it could use elsewhere. If a company decides to purchase stock at a price below its value, it could use the money for other purposes, such as new products or facilities. Further, a poorly executed buyback could be a sign of incompetence or self-dealing by the management team.
