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Commerce Optional-2019 Paper-1 Suggested Answer to Question-1(a)

Explain why the companies Buy Back their own shares. How is it different from issue of Bonus Shares?

Answer the Following in about 150 Words

Answer-

Buy back of shares means purchase of its own shares by a company. Provisions deals with same are from The Companies Act, 2013 and Securities and Exchange Board of India Act, 1992.

GURUKUL KENDRA

The company buyback its own shares due to the following reasons-

  • To improve earnings per share;
  • To provide an additional exit route to shareholders.
  • to discourage others to make hostile bid to take over the company
  • To support share price during periods of sluggish market conditions
  • to pay surplus cash to shareholders

GURUKUL KENDRA

Difference with issue of Bonus Share are as follows-

  • Bonus Shares are free additional share, which a company provides in addition to the shares shareholders are already holding. Buyback is repurchase back from shareholders.
  • Companies issue bonus shares to encourage retail participation and increase their equity base while Buy back is to discourage.
  • If  price per share of a company is high bonus shares are issues and results price falls. In case of Buyback shares are issued to meet sluggish market condition.
  • In case of Bonus issue there is no cash outflow, however buyback results in outflow of cash.
  • Bonus shares decrease the EPS whereas  Buyback improve earnings per share.

GURUKUL KENDRA

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