Is buyback a reduction of capital?

The share buyback is not ideally a scheme of capital reduction. The result of buyback leads to temporary capital reduction. This is because the number of shares post-buyback gets reduced.

The two main differences between the reduction of capital and share buyback:

• A capital reduction scheme requires approval from NCLT and the shareholders do not have a choice.
• In a buyback, there is no requirement of any approval from NCLT. The buyback is voluntary for the shareholder.

Buyback of shares is the replacement of capital. As per the Companies Act, a company is required to utilize free reserves and securities premium reserves and transfer the funds to a Capital Redemption Reserve (CRR) account for the issue of bonus shares in the future.