“A company’ cannot buy-back its own shares”, eXI)lain. Are there any exceptions to it?
Section 77 of the Companies Act does lIot permit a company to purchase its own shares, for it involves permanent reduction in share capital which is a
cushion to the creditors. The Companies Act also does not allow
reduction of share capital except for certain legitimate purposes by adapting’
the procedure given in Sections 100 to t03. .
There has been persistent demand from the corporate sector, in its endeavour to meet the international practices, to allow companies to buyback their
own securities (shares or debentures). Responding to this demand,
.the Government amended the Companies Act and allowed the corporate sector to buy-back its own shares vide Companies (Amendment) Act 1999. By
this Act a new Section 77 A was inserted containing the provisions permitting the companies to buy-back their own securities subject to certain conditions.
The major reasons for buy-back may be one or more of the following: (a) To increase underlying share value, as EPS (earning per sharc)
increases after buy-back. In turn. it will push up the market value of the remaining shares.
(b) For adjusting the capital base, if the company is over-capitalised
andor to achieve optimum debt-equity ratio.
© To p,’event hostile takeover as it will reduce the floating stock from
the market and s: JTe prices will also be increased in the market.
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