The company may want to provide a market for its shareholders for buying the shareholders’ shares. When a shareholder wishes to exit a private limited company, he has to find a buyer for his shares. In a small company, a synergy is a key. Thus, a small private limited company (especially those of a closed company) would not want to suddenly end up with some random new shareholder. Hence, the avenue of purchasing a company’s own shares of the departing shareholders; or those of the shareholders who want to simply reduce its shareholding. This avenue is therefore beneficial for both sides (the shareholders and company). Also, one thing to remember that only public companies can sell shares to the public. Thus, a private limited company cannot do an IPO. Another thing to remember that this “own share purchase” has the effect of reducing a company’s capital (ie shares in issue). A public company can never reduce its capital.
There are other reasons as to why a private limited company may wish to purchase its own shares, for example, to return cash to the shareholders.
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