Table of Contents
- 1 What does reduction in share capital mean?
- 2 What is capital for share buy-back?
- 3 Why do a capital reduction?
- 4 How do you account for reduction in share capital?
- 5 What are the benefits of share buybacks?
- 6 Do share buybacks increase stock price?
- 7 What is the difference between a share buy-back and share capital reduction?
- 8 What is a shareshare buyback?
- 9 Why do companies buy back their own shares?
The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the company. Previously, reduction of share capital was governed by section 100 to 104 of the Companies Act, 1956, now it is governed by section 66 of the Companies Act, 2013.
As an example, for a company with 100 ordinary shares on issue and $200 recorded as paid-up capital, the average capital per share would be $2 (i.e. $200/100). If a buy-back were to be undertaken for 30 of the company’s shares, the capital component of this buy-back for tax purposes would be $60 (i.e. $2 X 30).
What happens in capital reduction?
Capital reduction is the process of decreasing a company’s shareholder equity through share cancellations and share repurchases, also known as share buybacks. The reduction of capital is done by companies for numerous reasons, including increasing shareholder value and producing a more efficient capital structure.
Why do a capital reduction?
A company may want to reduce its share capital for various reasons, including to create distributable reserves to pay a dividend or to buy back or redeem its own shares; to reduce or eliminate accumulated realised losses in order to be able to make distributions in the future; to return surplus capital to shareholders; …
A share capital reduction can be achieved by a variety of methods:
- cancelling share capital no longer supported by the company’s assets;
- repaying share capital no longer required and then cancelling the shares;
- reducing the nominal value of a share class where the capital is no longer supported by the company’s assets;
How does share reduction work?
Share capital reduction is the term used for the process of decreasing a company’s shareholder equity. Another term for this concept is share buybacks, and it is done through share cancellations and share repurchases. Companies usually want to reduce share capital due to various changes in their business strategy.
Buybacks benefit investors by increasing share prices, effectively returning money to shareholders in a tax-efficient manner.
- Improved Shareholder Value. There are many ways profitable companies can measure the success of its stocks.
- Boost in Share Prices.
- Tax Benefits.
- Utilize Excess Cash.
A buyback will increase share prices. Stocks trade in part based upon supply and demand and a reduction in the number of outstanding shares often precipitates a price increase. Therefore, a company can bring about an increase in its stock value by creating a supply shock via a share repurchase.
Why do companies go for capital reduction?
Under a share capital reduction, any money paid to a company in respect of a member’s share is returned to the member. Capital reductions can also occur when certain shares are cancelled for nil consideration. A share buy-back, on the other hand, is when a company acquires shares in itself from existing shareholders, and then cancels these shares.
Share buyback is a mechanism where the company purchases its own shares either out of distributable profits or by issuing fresh shares. Private companies does this to return surplus cash to existing shareholders and to provide an exit route to retiring shareholders. On the other hand, public compan
What is meant by reduction in capital of a company?
Reduction in capital- means when a company reduces its share capital. For eg. At present, face value of a share is Rs.10, company reduces face value of share to Rs.8 and refunds Rs.2 to the member/shareholder. It generally happens when company is undergoing internal reconstruction.
The main reasons for carrying out a purchase of own shares include: To exit a shareholder from the company: the most common use for a buy-back is to allow for the purchase of an exiting shareholder’s shares.