Understanding Share Buyback Sources

Buyback of shares, also known as share repurchase, is a corporate action where a company buys back its own shares from the open market or from its existing shareholders. This action reduces the number of outstanding shares in the market. Companies undertake buyback for various reasons, such as increasing shareholder value, improving financial ratios, or utilizing surplus cash.

The question asks from which source a buyback of shares cannot be done. Let's analyze the nature of different types of security holders mentioned in the options.

Analyzing the Options for Share Buyback

Regulations governing buyback of shares specify the legitimate sources from which a company can repurchase its own shares. Typically, buyback is related to equity share capital.

• Open Market: Companies can buy back shares through the stock exchange, which is referred to as the open market. This is a common method for buyback.
• Old net shareholders: This option likely refers to existing shareholders of the company. Companies can buy back shares from their existing shareholders, often on a proportionate basis, meaning shares are bought back from all shareholders in proportion to their holdings.
• Employees of the company: Shares issued to employees under employee stock option plans (ESOPs) or similar schemes can sometimes be part of a targeted buyback program aimed at these specific shareholders.
• Existing Debenture holders: Debenture holders are creditors of the company. They hold debt instruments and are entitled to receive interest payments and repayment of principal. They do not hold shares (equity) in the company. Buyback involves purchasing shares, not debt instruments. Therefore, a company cannot buy back shares from its debenture holders because debenture holders do not own the shares being repurchased.

Conclusion on Invalid Share Buyback Source

Based on the nature of share buyback, which involves repurchasing equity from shareholders, existing debenture holders, who are creditors and hold debt instruments, are not a source from which shares can be bought back. The transaction between the company and debenture holders relates to debt, not equity.

Revision Table: Permitted vs. Non-Permitted Buyback Sources

Additional Information on Share Buyback

Share buyback is a significant corporate finance activity. Here are some related points:

• Sources of Funds for Buyback: A company typically uses its free reserves, securities premium account, or proceeds from the issue of other shares or specified securities (but not from a prior issue of the same kind of shares) to finance a buyback.
• Objectives of Buyback: Reasons for buyback include improving earnings per share (EPS), enhancing return on equity (ROE), supporting the share price during undervaluation, returning surplus cash to shareholders, or consolidating ownership.
• Regulations: Share buybacks are strictly regulated by governing bodies (like SEBI in India, SEC in the USA) and relevant company laws to protect the interests of shareholders and creditors. Regulations specify limits on the amount of buyback, sources of funds, methods of buyback, and disclosures.
• Impact: A successful buyback can lead to an increase in the company's share price and improve certain financial ratios. However, if not managed well, it can strain the company's finances.

Understanding the distinction between equity holders (shareholders) and debt holders (like debenture holders) is crucial when discussing corporate actions like share buyback.