Wednesday, May 12, 2010

Buy Back Of Equity Shares

Buy back of shares means reducing the total number of shares from the market.
Buy back of shares help to increase the goodwill of the company as well as help to increase the market value of shares .Buy back of shares require a large lump sum amount of liquid cash .Buy back help dispose the excess cash reserve of the company to protect the ownership of the company or to consolidate the ownership in the few of hands.Buy back has some condition also .In the different countries there are different rules need to follow when any company goes for the buyback policy .Company need to inform there shares holder in the general meeting that company goes for buyback process.Company need to get clearance from the governing body of that not able to issue fresh equity three months after the buy back process.
Company purchase there own shares from the market at a premium amount ,but these condition not exist after a some time because the market price of the shares increase up to the shares price to get the advantage of the increase amount benefit.

Prime Objective to buy back are:
1.To reduce the outstanding equity capital:
To reduce the outstanding equity capital as a consequence of which the floating stock in the market reduced.Buy back help to minimize the total amount of equity capital from the market,which help to stabilize the market price of the share.

2.To increase the return on the remaining portion of the shares :
Buy back help to reduce the volume of equity capital in the market and the remaining equity holder get the higher return than before .Suppose the net profit of the company is 15 million dollar and the total number of equity share holder are 100000 holding total 1 million shares but after the buyback of share the total number of shares reduce to 50000 that means 15 million dollar distributed among the 50000 shares definitely the unit holder getting better return than before .
3.When the company has surplus cash and run out of favorable investment opportunity:
Buyback is only possible when the company has sufficient liquid assets in their reserve and the investment rate of return is less than the cost of equity than the company goes for the buyback policy.
4.Support the shares price:
Buy back help to increase the market value of the shares and to reduce the fluctuation in the shares price of that company.


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