Why in the
News?
The trend of
buyback of shares by the corporates started since 2022 with 58 listed companies
bought back shares worth Rs.50,000Cr. Companies such as Infosys, Wipro, L&T
have followed the suit.
What is
Corporate Buyback?
The Corporates
buyback involves buying back of the already-issued shares and it will be
cancelled.
Why Corporates
buyback the shares?
1. To increase the
Promotors’ control.
2.
To avert hostile takeover of the company.
3.
To boost the share price.
a.
Buyback is profitable for the investors as
they are offered a premium for surrendering the shares.
b.
Due to buyback, fewer prices remain in the
cart which leads to increase in their prices.
c.
Those who do not surrender their shares gain
due to increased prices.
4. A low (capital
gains) tax rate in case of buy-backs compared to Tax on dividends received at
the applicable tax rate.
Criticisms
about the Corporate Buybacks in India:
1. Buybacks can
unfairly boost the prices of the shares, thus benefitting promoters, large
investors and key company officials holding large stake of shares.
2.
Companies use cash from their reserves for
the buyback, which could have else been used for more productive investments
such as Capital Expenditure, R&D or upskilling employees.
·
Indian Government decreased the corporate tax
from 30% to 22% to allow more private investments. But the companies are using
their cash reserves for Shares Buyback.
What are the
regulations in India regarding Corporate Buybacks?
1. Companies Act,
2013:
a.
A company can buy-back its shares out of its,
i.
Free reserves
ii.
Securities premium amount
iii.
The proceeds of issue of shares.
b.
the maximum limit of any buy-back shall be
less than or equal to 25% of its aggregate paid-up capital and free reserves of
the company.
c.
The Debt-Equity ratio shall be less than or
equal to 2:1 after the buy-back of shares.
d.
A
company shall not offer buy-back within the expiry of one year of preceding
Buy-back offer.
2.
SEBI Buy-back regulations for listed
companies:
a.
The company shall not Buy-back its own shares
directly or indirectly through any subsidiaries including its own subsidiaries.
b.
The Buyback shall not be made out of the
proceeds of an earlier issue of the same kind of shares or same kind of other
specified securities of the company.
c. A company shall
not offer buyback of its shares unless its share capital is affected.
