Question

“What would happen if firms were not allowed to buy back their own shares?”

Use at least 500 words to explain your answer...

Note: The editorial should be built around ONE well-developed and well-supported idea. Do not go off tangents as it is going to disrupt the flow of the editorial and confuse the reader. You need to support the idea with statistics, examples, etc. drawn from quality finance sources. Do not use Wikipedia, Investopedia or blogs as your references. Avoid using “I,” “I think,” “In my opinion,” etc

Answer 1

Both in the Income Tax Act 1961 and in the Companies Act 2013,there are relevant provisions for buy back of own shares by the companies from their shareholders..Buy back of shares are also goverened by the SEBI Guidelines 1998. If the buy back are not allowed to be made by the companies the the following problems may arise:

1.Companies would not have sufficient funds with them when they are in need..

2. If the companies wants to reduce the Market Price of their own share then the companies would not able to do so.

3.If they wants to compensate through the option of buy back then they would not able to do so.

4.If the companies wants to reduce their own shares or stock it will not able to do so.

5.Buy back of shares also increases the Earning Price per Shares ie EPS ,which would not happen if the buy back is not allowed.

6.Buy back also have some income tax benefits for the companies ,which would not be available if they are not allowed to do so.

7. Buy back its own shares are much easier than paying dividends.