## Buy-back of Shares: Concept and Objectives
### What Is Buy-back?
Buy-back of shares means a company purchases its own shares. The purchased shares must be mandatorily cancelled — a company cannot hold its own shares as an investment. The net effect is a reduction in share capital.
### Why Do Companies Buy Back Shares?
| Objective | How it Works |
|---|---|
| Increase Earnings Per Share (EPS) | Fewer shares outstanding → same total earnings → higher EPS |
| Increase promoter holding | Cancelled shares raise the proportionate stake of remaining shareholders |
| Defend against hostile takeover | Higher promoter holding makes acquiring a controlling stake harder |
| Support share price | Signals management belief that shares are undervalued; injects demand |
| Return surplus cash | Efficient way to distribute cash when no viable reinvestment opportunity exists |
### Sources for Buy-back [Section 68(1)]
A company may buy back its own shares only out of:
1. Free reserves
2. Securities premium account
3. Proceeds of issue of any shares or other specified securities
> Critical restriction: Buy-back of equity shares cannot be funded from the proceeds of an earlier issue of the same kind of shares. For example, equity buy-back cannot be funded from fresh equity proceeds — but preference share issue proceeds can fund equity buy-back.
### Nature of the Transaction
- Buy-back → cancellation → reduction in paid-up share capital
- It is not an investment; held shares would be meaningless (a company cannot owe itself dividends)
- Remaining shareholders benefit proportionately from the concentration of ownership