Buyback of Shares and securities is popular in United States of America. Till October, 1998, the scheme of buyback of shares and securities was not known to the Indian companies. The Prime Minister of India, Mr. Atal Bihari Vajpayee unveiled an economic package to reverse the sagging capital market on 24th October, 1998 at the 71st annual session of the Federation of Indian Chambers of Commerce and Industry (FTCCI). One of the items of the economic package was the introduction of the scheme of buyback of shares and securities.
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Within a week followed by this announcement by the Prime Minister, the Government of India issued an ordinance on October 31, 1998 for buyback of shares, amending the Companies Act, 1956. Prior to the amendment of the Companies Act, 1956, the buyback of shares in India was prohibited. Section 77 of the Act, as stood before the amendment made in 1998, imposed a blanket ban on companies from buying their own shares. Section 77A, 77AA and 77B have been introduced in 1999 in the Companies Act, 1956 to enable companies to purchase their own shares on other specified securities.
6 Advantages of Buyback of Shares
1. Companies having large amount of free reserves are free to use funds to acquire shares and other specified securities under the buyback process.
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2. Buyback of shares is helpful to a company to reduce its share capital which is bloated (i.e, excessive wealth) unnecessarily for the time being. Unused and excessive share capital is reduced to give more benefits to the shareholders by trimming the capital structure.
3. Buyback of shares results in lower capital base, enhances post-buyback earning per share and appreciates considerably the price-earning ratio.
4. After buyback of shares the companies will have the advantage of servicing a reduced capital base with higher dividend yield.
5. Buyback of shares is allowed under Section 77B if the liquid position of the company is good. Companies which have defaulted in repayment of deposits, redemption of debentures or preference shares or repayment of term loans or interest payable thereon from banks and financial institutions arc not allowed buyback shares. It is a good check on the companies.
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6. Buyback of shares helps the promoters to formulate an effective defense strategy against hostile take-over bids.