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Buyback of Shares

Buyback of shares means to buy own shares by company. By learning this term, you will think, is it foolish and stupid way to repay the fund which company has received in the form of share capital? No one returns fund after receiving. Simply, there is no logic of buyback of shares, but you will feel wonder after reading  this recent news.

Unum which is an insurance company  plans $1 billion buyback of shares. See its ref. at here. From reading of this news, you will be find that buyback of shares is the way to improve financial condition of company. One side by buying own shares, it shows company's investment and other side it also increases earning per share.

Moreover, in India, there are 77 A , 77 AA and 77 B provisions of Indian company act 1956 deal only with buyback of shares. SEBI regulations also lights on this matter. We find also it as useful tool for company because company can easily increase his ERP by just decreasing the numbers of shares. We know that ERP is ratio of  ( profit after interest and pref. dividend / No. of equity shares ) To decrease the number of shares by buyback of shares means to increase ERP. If we study above example, then

1. #  Unum Company wants to effective use of his capital reserves with buyback because all 1$ billion stock will be bought through its capital reserves. ( Note : But in India, it is not possible because company can use only free reserves for this purpose. )

2.  # This technique is also use to improve the market value of per share. ( Read last line of news : Unum's stock closed at $25.14 Wednesday, down 50 cents from the previous day's close. In after hours trading and following the earnings announcement, Unum's stock was up 8 cents)

How to Buyback of Equity shares :

1st Step : Pass special resolution

It is the first step, just call all shareholders and pass special resolution for buyback. Be aware whether AOA allows this or not.

2nd Step : Fix maximum limit of buyback of shares

Maximum limit of buyback of shares is 25% of paid up equity share capital and free reserves.

3rd Step : Fix the time limit of buyback of shares

Time should be given to shareholders for accepting the offer. It must be between 15 and 30 days of notice of buyback.

4th Step : Filling of declaration of solvency before buyback in newspaper

Before buyback, company should filling of declaration of solvency in newspaper.

5th Step : Use Only free reserves and securities premium for buyback of shares

Company can use only free reserves and securities premium for buyback of shares.

6th Step : Record buyback of shares in register of bought back.

All bought back shares must be recorded in special register and should keep in registered office of company.

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Accounting Education: Buyback of Shares
Buyback of Shares
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