Under the Companies Act and SEBI regulations, how does a Share Buyback impact a company's balance sheet, and what are the primary methods of execution?

[ A ]Funded out of free reserves/securities premium; bought-back shares are physically extinguished, reducing share capital and cash, which boosts EPS and ROE for remaining shareholders; executed via Tender Offer to existing shareholders or Open Market book building.[ CORRECT ]

[ B ]Funded by printing counterfeit physical paper currency, with shares distributed free to government officials.

[ C ]Executed exclusively by forcing all minority retail shareholders to forfeit their shares with zero compensation.

[ D ]A buyback expands the company's issued share capital by 500% while increasing total company borrowings.

Takeaway

Option A is correct: Funded out of free reserves/securities premium; bought-back shares are physically extinguished, reducing share capital and cash, which boosts EPS and ROE for remaining shareholders; executed via Tender Offer to existing shareholders or Open Market book building.

Derivation

Under Section 68 of the Companies Act, 2013 and SEBI Buyback Regulations: A company can buy back its own shares out of free reserves, securities premium, or proceeds of fresh issues. The bought-back shares must be extinguished within statutory timelines, reducing paid-up equity capital and cash. Because the same future company profits are now divided over a smaller number of remaining shares, Earnings Per Share (EPS) and Return on Equity (ROE) increase. Buybacks can be conducted via: (1) Tender offer on a proportionate basis from existing shareholders, or (2) Open market purchase through stock exchanges. This tests buyback rules. A common error is assuming buybacks expand share capital.

Why the others fail

B — Funded by printing counterfeit physical paper currency, with shares distributed free to government officials.

Buybacks are legitimate corporate financial distributions funded from audited corporate free reserves via regulated banking channels.

C — Executed exclusively by forcing all minority retail shareholders to forfeit their shares with zero compensation.

Buybacks are voluntary exit offers made at attractive premium prices, never forced confiscations of minority holdings.

D — A buyback expands the company's issued share capital by 500% while increasing total company borrowings.

Buybacks reduce and extinguish outstanding equity share capital; they never expand issued shares or increase borrowings.