The Benefits and Drawbacks of Share Buy-Backs

This essay discusses the benefits and drawbacks of share buy-backs as a capital management strategy. It highlights how share buy-backs can be an efficient way for management to boost undervalued shares and reduce dilution, while also showing confidence in their business operations. However, not every buyback will benefit shareholders, and the process may have some disadvantages if shares are purchased when they are already overvalued or if management has no better option to invest surplus cash.

Accounts for Share Buy-Backs

Table of Contents
INTRODUCTION...........................................................................................................................1
Topic : “Accounts for Share buy-backs”....................................................................................1
CONCLUSION ...............................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Buyback of share is known as the process of share repurchase. A company buy its own
outstanding share from the market to reduce the number of share available on the open market.
Buybacks are considered as more tax-effective means for rewarding shareholder (Mitchell, Izan,
and Lim, 2015). In this essay, importance of buybacks, reason, procedure, advantages and forms
and guidelines have been discussed.
Topic : “Accounts for Share buy-backs”
A buy back of share is known as the repurchase by a corporation/company of its own
share on the open market. It is a situation when a company buys its own outstanding share to
reduce the number of share available in the open market (what is Share Buy-Back, 2018). This is
generally done by company when they done by feel that its shares are undervalued. The company
announces a share buyback value with a specified amount and at a price per share including the
number of share it wishes to purchase back from shareholder. For example, XYZ company
announced a $11000 million buyback offer at $320 per share to purchase 34.37 million share
held by the shareholder.
Companies have been permitted since 1995 by the companies act according to
(Australian Securities & Investments Commission) to purchase/buy-back their own shares. In
recent times, As a way to return cash to shareholder, share buyback have became more important
than dividends (Haslam and et. Al, 2015). The buy back should not exceed 25% of the total
paid-up share capital and free reserves of the company. It is also important to see that, buy back
of equity share in any financial year should not exceed 25% of the total paid-up equity share
capital. The debt equity ratio should not exceed 2:1 as well.
There are number of reasons because of which a company may buy bucks its own shares
from open market. They are Like, to increase the value of remaining share by reducing the
supply; to prevent other shareholder from taking a controlling percentage. Through share buy
back company can signals that it preserve the stock price. The facts that achieving the same
preservation of capital as a dividend cut, the stock price would likely take less of a hit. It will
certainly drive a company's stock higher. It helps in increasing earning per share of the
company. When companies follow share buy back, it will reduce assets on their balance sheet
and increase return on assets. So, by reducing the number of outstanding share and maintain the

same level of profitability, Earning per share (EPS) will increase. It also help the promoters to
strengthen their share in the company (Michell, 2014). Share buyback offer are maid to
shareholder they may accept it or not. In case if the denied the offer shareholder are able to
increase their stake in the company. One of the major reason of buyback process, is that
company pay surplus cash which is not required by business to the shareholder. If there is a
situation when company do not have enough project to invest in; they may pay their excess
amount through buy back of its share. It help them to reduce dilution of shareholder and increase
ownership within the company. Also, through buyback company may rationalise the capital
structure by writing off capital not represented by available assets. It is also used as a financial
strategy by business firm for streamlining the capital structure, swapping equity for debt as well
as for reducing the number of share holder to reduce the cost of servicing them (Lei and Zhang,
2016).
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The procedure for buy back of share by a company includes number of rules and
guideline to be followed. Buyback of share from open market is carried out by companies in two
ways. Like, shareholder are presented with a tender offer, they have the option to submit or
tender, all share at once or a portion within given period of time at a value to the current market
price. This value make up investors for tendering their share rather than holding onto them.
Secondly, company buy backs share in the open market over an extended period of time. They
may develop a repurchase program at certain time or at regular interval.
ASIC have provided some guideline to be followed while doing buy back of share. ASIC
Notification of share buy back detail (form 280) is used to cover each documents which a
company requires to lodge related to buy back. It includes meeting notice, information for
shareholder, and other relevant documents. A company intends to give short (less than 14 days)
notice of a meeting to approve the buyback and lodge the notice of meeting to the relevant date.
Buy backs of share is a useful capital management strategy that is often seen as benefits
or reward to shareholder. It is an indirect benefits to shareholder since, it is a process of lowering
the number of share ultimately helps to increase the share price and company return cash back to
shareholder (Pozen, 2015). It also gives investors the opportunity to capitalise on their
investment. This process help to enhance market view towards the stock and management shows
confidence in their own company.
While buybacks are sensible way for companies to use extra cash, but in some situation
buybacks might have some disadvantages to shareholder. Like, if share are purchased when
company's share are already overvalued, management is not making the best use of the company
's cash. Using surplus cash for purchasing its own share might also indicate that the company's
management has no better option to invest surplus cash and the market may be disappointed as
there are better opportunities elsewhere (Brown, Handleyand O'Day, 2015).
CONCLUSION
In this essay it is concluded that, Share buybacks can be an efficient way for management
to boost the company's undervalued share price and reduce dilution. It also show confidence in
their business operation. However, as briefly outlined above, not every buyback will benefits
shareholder.
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REFERENCES
Books and journals:
Brown, C., Handley, J. and O'Day, J., 2015. The Dividend Substitution Hypothesis: A ustralian
Evidence. Abacus. 51(1). pp.37-62.
Haslam, C., and et. al., 2015, December. Real Estate Investment Trusts (REITS): A new
business model in the FTSE100. In Accounting Forum (Vol. 39, No. 4. pp. 239-248).
Elsevier.
Lei, Z. and Zhang, C., 2016. Leveraged buybacks. Journal of Corporate Finance. 39. pp.242-262.
Michell, J., 2014. Speculation, financial fragility and stock-flow consistency. Edward Elgar,
forthcoming.
Mitchell, J., Izan, H. Y. and Lim, R., 2015. Australian on-market buy-backs: an examination of
valuation issues.
Pozen, R. C., 2015. The role of institutional investors in curbing corporate short-termism.
Financial Analysts Journal. 71(5). p.10.
Online
what is Share Buy-Back. 2018. [Online]. Available through: <https://financial-
dictionary.thefreedictionary.com/Buyback>
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