8. The repurchase of shares and securities is authorized by Section 77B if the company`s liquidity situation is good. Companies that repay deposits, buybacks of bonds or preferred shares or repayments of loans or term interest payable by banks and financial institutions are not allowed to obtain redemption shares. This is good control for companies that have an unhealthy liquidity position. On the public market, a buyback always increases the value of the share to the benefit of shareholders. However, investors should consider whether a company uses only buybacks to support ratios, to lighten the price of stocks in short-term trouble, or to exit in a context of excessive dilution. 6. A company cannot repurchase its shares more than once a year, but there are no restrictions on making repeated buybacks year after year. It also paves the way for developers to quickly achieve their goals in order to increase their share and control in companies. Under these conditions, the buyback would not be considered a distribution of income as a dividend (i.e. subject to income tax), which is the default position if the conditions are not met.
The tax treatment of capital income could lead to the transaction being much more tax efficient for the seller depending on the tax situation, especially when he is eligible for capital gains tax relief. PR Newswire. „S-P 500 share repurchases in 2010 increased by 117%; Share repurchases were up for the 6th consecutive quarter. Access on July 31, 2020. Why are buybacks favoured over dividends? If the economy slows or falls into recession, the bank may be forced to reduce its dividend to obtain cash. The result would undoubtedly result in a liquidation of the stock. However, if the bank decided to buy back fewer shares and thus obtain the same level of capital preservation as a reduction in dividends, the share price would probably be less likely. The obligation to distribute dividends with constant increases will certainly push a company`s stock up, but the dividend strategy can be a double-edged sword for a company. In the event of a recession, share buybacks can be reduced more easily than dividends, which has a much less negative impact on share prices.
The market generally sees buyback as a positive indicator for a company, and the share price often soars after a buyback. Companies that place their share prices at much lower positions could contribute to the stability of share prices by resorting to buybacks. Such situations exist in a country like ours, where prices could be manipulated by rumours or other actors who want to damage the image of a company. Another reason why a company can move forward with a buyback is the reduction in dilution, often caused by generous employee stock option plans (ESOP). Business Standard has always strived to provide up-to-date information and feedback on developments that interest you and that have broader political and economic implications for the country and the world.