As many as 24 companies have already taken shareholders approval to buyback their own shares once the law permits. The latest to join the list is Hero Honda, which has decided to take steps for buy-back of shares up to 10 per cent of its equity capital. Reliance Industries is taking a fresh approval in its AGM on June 26 to enable the company to buy-back upto 5 per cent of its paid-up capital.

These scrips with a shareholders approval for buyback have already shot up in the past three trading sessions. Another reason for these scrip shooting up is that many of these scrips have lost substantially in the past few days. A few are within a close range of their respective 52-week low levels,which makes these scrips all the more attractive. Apollo Tyres shot back with a spurt of over 20 per cent in the past three sessions from Rs 63 to Rs 76.3. Zee Telefilms too shot up by over 20 per cent to Rs 350 in the past three sessions. Scrips like Sterlite Industries, Tata Infotech, Procter & Gamble, Knoll Pharmaceuticals and Jindal Iron too have shown a rise of over 12 per cent in the past couple of days.

All these companies are well placed and have comparatively large equities with ample reserves to take up the buy back. The debt-equity ratio is also favourable to take up the buyback. Under the buy-back scheme, paid-up capital of the company can be reduced by cancelling the amount of shares purchased and thus increase the shareholders value. The other option is to reissue the shares boughtback after a period of 24 months from the date of last buy back of securities. After the buy-back is completed, the companies cannot make a fresh issue of shares within a period of 12 months except by way of bonusissue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes or conversion of preference shares into equity shares. However, the bought back shares do not qualify for any voting or dividend rights and for bonus or any rights issue before they are reissued.

In case the company goes in for extinguishing of the equity, it would boost the EPS (as the number of floating shares would come down). This, in turn, would mean a better discounting for the company's shares, which in turn gives a boost to the sagging stock prices which have been languishing way below their respective book values.

However, not all and sundry would be in a position to go in for buyback as strong cash flows and reserves are a prerequisite. Also, the managements would be willing to pay a premium to the prevailing share price to buyback shares, which means a win-win situation for shareholders and companies.

According to the draft document, the company has the right to buyback its own shares andother specified securities from its free reserves, securities premium account or the proceeds of a prior issue made specifically for the issue of buyback. The company has to authorise such buy-back by a special resolution at its general meeting. However, the company should not have a debt equity ratio exceeding 2:1 after buyback of shares.