Capital Reduction & Buy Back of Shares

1.1  Capital reduction and buyback of shares are one of the techniques of corporate restructuring. It leads to return of financial slack and also amounts to liquidating future dividend in the hand of shareholders. Broadly excluding certain exception both of the techniques try to achieve same objectives.

1.2       Capital reduction and buyback of shares have following objectives:

a)       To reorganisation of capital structure of the company

b)       To distribution of cash to shareholder. This being not a regular exercise it does not raises expectation of the shareholder for higher future dividend.

c)       To optimise own funds and mange EPS & ROE

d)       To squeeze out minority shareholders

e)       To increase promoter-holding

f)        To support share-price during period of temporary weakness

g)       To prevent unwelcome takeover bids

          Further capital reduction tool is also used for internal restructuring especially when company has huge book looses.

1.3     However under both these techniques there are different tax consequences in the hands of shareholders. Let us analyse one by one:

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