R. Kumar, B.Com. MBA (Finance)
Not only statute, but also common law, has upheld the ‘sanctity’ of a company’s capital. In 1887, in Trevor Vs. Whitworth 12 App Case 409, it was held that a company limited by shares may not purchase its own shares as this would amount to an unauthorized reduction of capital. The rationale for this decision is plain, namely that the creditors of the company make decisions on its credit-worthiness on several grounds, but an important ground is the amount of its share capital. If the courts had not established at an early stage that capital was ‘sacrosanct’ and could not be returned to shareholders at their whim, then share capital would not have been protected. Without this protection, creditors could find shareholders depleting share capital, with creditors left to carry all business risks.
In India, the rule in Trevor Vs. Whitworth was enshrined in section77 of the Companies Act,1956 which prohibited a company from buying or canceling its own shares, unless it complied with the provisions and followed the procedure for reduction of share capital under section 100 to 104 of the Companies Act,1956 which involved confirmation by the Court.
However, Section 77A of the Companies Act,1956 which was inserted in the Companies Act by the Companies (Amendment) Act,1999 with retrospective effect from 31.10.1998 is an exception to the prohibition under section 77 and section 100. Section 77A allows companies to buy-back their own shares as well as other specified securities.
Section 77(1) of the Companies Act provides that a company limited by share or a company limited by guarantee having a share capital cannot buy its own share, as it involves permanent reduction of capital without sanction of court.
However, the Companies (Amendment) Act 1999 has introduced three new sections, viz., Section 77A, 77AA and section 77B where under companies have been permitted to buy-back their share or other securities subject to certain conditions. Besides, SEBI has issued certain guidelines regulating these buy-backs. The provisions relating to buy-back as per the Amendment Act including SEBI guidelines in this regard are as follows:
Section 77A, inserted by the (Amendment) Act ,1999, allows [subject to provision of Section 77B(2)]
a company to buy its own share out of:
i. its free reserves; or
ii. the security premium account; or
iii. the proceeds of any share or other specified securities.
However, no buy-back of any kind of share or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of share or same kind of other specified securities.
In case share are bought back out of free reserves, then a sum equal to the nominal value of shares bought back shall be transferred to a reserve account to be called the Capital Redemption Reserve Account (Sec.77AA). The details of such transfer shall be disclosed in the balance sheet. SEBI guidelines stipulate that this account shall be disclosed in the balance sheet. SEBI guidelines stipulate that this account shall be allowed to be used for issue of fully paid bonus share.
Conditions for Buy-Back
A. Section 77A(2) provides that no company shall purchase its own shares or other specified securities unless:
a) the buy-back is authorised by its Articles;
b) a special resolution has been passed in general meeting of the company authorising the buy-back;
The Companies(Amendment) Act, 2001 (w.e.f. 23.10.2001) has authorised the buy-back by passing a resolution at a meeting of the Board of Directors provided the buy-back does not exceed 10 per cent of the total paid-up equity capital and free reserves of the company. However,there can not be more than one such buy-back in any period of 365 days.
c) the buy-back is less than 25% of the total paid-up capital and free reserves of the company purchasing its own shares or other specified securities. However, the buy-back of equity shares in any financial year must not exceed 25% of its paid up equity capital in that financial year;
d) the ratio of the debt (same includes secured and unsecured debtors) owed by the company is not more than twice the capital and its free reserves after such buy-back. However, the Central Government may prescribe a higher ratio of the debt for a class or classes of companies.
e) all the shares or other specified securities are fully paid-up;
f) the buy-back of listed securities is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.
g) the buy-back in respect of shares or shares or other specified securities not listed on recognised stock exchange is in accordance with the guidelines as may be prescribed.
B. The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating:
a) a full and complete disclosure of all material facts;
b) the necessity for the buy-back;
c) the class of security intended to be purchased under the buy-back;
d) the amount to be invested under buy-back;
e) the time limit for completion of buy-back;
f) the price at which buy-back of shares shall be made. In case of buy-back through the tender offer route, the maximum price ‘instead of specific price’ may be stated. ‘Specific Price’ may be determined by the Board of Directors. [SEBI Press Release dt. 19.03.1999]
g) if the promoter intends to offer their shares;
i. the quantum of shares proposed to be tendered, and
ii. the details of their transactions and their holdings for the last 6 months prior to passing of the special resolution for buy-back including information on number of shares acquired, the price and the date of acquisition.
C. Every buy-back shall be completed within 12 months from the date of passing the special resolution under sub-section (2).
D. Buy-back shall be permissible:
a) from the existing shareholders on a proportionate basis through the tender offer;
b) from open market through-
i. book building process;
ii. stock exchange;
c) from odd-lot holders;
d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweet equity.
E. Where a company has passed a special resolution to buy-back its own share or other securities under this section, it shall, before making such purchases, file with the Registrar and the Security and Exchange Board of India a declaration of solvency in the form prescribed, verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the board, and signed by at least two directors of the company, one of whom shall be the managing director, if any.
However, no declaration of solvency shall be filed with Security and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange.
F. Where a company buys back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy-back. SEBI guidelines in this regard stipulate that the share certificates bought back shall be destroyed in the presence of a Registrar/Merchant Banker and the Statutory Auditor. A certificate to this effect shall be furnished to SEBI duly signed by two Whole time Directors including the Managing Director and verified by the Registrar/Merchant Banker and Statutory Auditor.
G. Where a company completes a buy-back of its shares and other securities under this section, it shall not make further issue of same kind of share including by way of rights or other specified securities within a period of twenty-four months except by way of bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
Where a company buys back its securities under this section, it shall maintain a register of the securities so bought, the consideration paid for the securities bought back, the date of cancellation of securities, the date of extinguishing and physically destroying the securities and such other particulars as may be prescribed.
H. A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India; a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed.[Sec.77A(10)]. However, no such return shall be required to be filed with SEBI in case the company buying-back is an unlisted company.
Some of the SEBI guidelines with respect to buy-back stipulate as follows:
1. Buy-back offer shall remain open for not less than 15 days and not more than 30 days.
2. The verification of shares received in buy-back shall be completed within 15 days of the closure of the offer and payments made within 7 days.
3. The company shall within 2 days of the completion of buy back issue a public advertisement in a national daily, inter alia, disclosing:
a) number of share bought;
b) total amount investment in buy-back;
c) details of shareholders from whom share exceeding 1% of the total shares bought-back; and
d) the consequent changes in the capital structure and the shareholding pattern after and before the buy-back.
Penalty:- If a company makes default in complying with the provisions of this section or any rules and regulations made there under, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to Rs. 50,000, or with both.
Prohibition for Buy-Back in Certain Circumstances (Sec. 77B)
No company shall, directly or indirectly, purchase its own share or other specified securities-
a) through any subsidiary company including its own subsidiary companies ;or
b) through any investment company or group of investment companies ;or
c) if a default, in repayment of deposit or interest thereon, redemption of debentures or preference shares or payment of dividend or repayment of term loan or interest thereon to any financial institution or bank is subsisting;
d) in case it has not complied with provisions of section 159 (i.e., Annual Return), section 207 (i.e., failure to distribute dividends within specified time) and section 211 (i.e., form and contents of Balance Sheet and Profit & Loss Account and Compliance with the Accounting Standards).
However, in the following cases the company is not taken to have purchased the shares when it has:
a) redeemed its redeemable preference shares,
b) forfeited its shares for non-payment of calls, or
c) accepted a valid surrender of shares.
It may be noted that there is no prohibition on a company to buy its own shares from any member for prevention of oppression and mismanagement in pursuance of a court order under sec.402 of the Act.
Giving Loan or Providing Financial Assistance for Purchase of Company’s Own Share Prohibited
Section 77(2) provides that a public company cannot give loan or provide financial assistance to any person to enable him to purchase company’s own shares or shares of its holding company.
However, the aforesaid provisions regarding giving of loans or providing financial assistance to buy its own share shall not affect:
a. the lending of money by a banking company in the ordinary course of its business; or
b. the provision by a company of money for the purchase of fully paid-up shares in the company or its holding company for the benefit of the employees of the company, including any director holding a salaried office or employment in the company;
c. the making by a company of loans to person (other than directors or managers) bona fide in the employment of the company, to enable them to purchase fully paid shares in the company or its holding company to be held themselves by way of beneficial ownership. However, the loan made to any employee for this purpose shall not exceed his salary or wages at the time for a period of six months.
In case of contravention of the provisions, the company and every officer of the company, who is in default, shall be punishable with fine which may extend to Rs. 10,000.
SECRETARIAL PRACTICE- CHECK-LIST
1.1. Convene a Board meeting to transact the business and any other business.
1.2. Convene a general meeting after giving due notice to transact the business.
1.3. Inform Stock exchanges where the shares of the company as listed of the intention of the company to reduce its capital by buying-back its shares as required under the listing agreement.
1.4. File the Special resolutions with the Registrar of Companies within 30 days of passing of the said resolutions as required under section 192(4) (a) and or before making the purchases as required under sub-section (6) of section 77A of CA, whichever is earlier.
1.5. File the Special resolution for buy-back of shares with SEBI and SEs where the companies shares are listed within seven days of the date of passing of the said resolutions as required under regulation 5(2).
Though the said regulation does not require the special resolution so filed to be accompanied by the explanatory statement it would be advisable as a good practice to file the explanatory statement as well, for, without this the desired purpose will not be served.
1.6. Ensure that the explanatory statement contains all the disclosures and information called for under Schedule-I of the regulations.
1.7. Ensure that no insider is dealing in securities of the company on the basis of unpublished information relating to buy-back [Reg. 4(3) of the regulations].
1.8. Arrange for publication of Public announcement relating to buy-back in one English daily, one Hindi daily and one regional daily, which are widely circulating at the place where the Registered office of the company is, situate. [Reg. 8(1)].
1.9. Ensure that the public announcement specifies a date which shall be the date for the purpose of determining the name of the shareholders to whom the letters of offer shall be sent. Since this is in the nature of a “record date” please make sure that this is fixed in consultation with the lead stock exchange after giving the requisite notice as required under the listing agreement [Reg. 8(2)].
1.10. Also ensure that the specified date is not earlier than thirty days and not later than 42 days from the date of public announcement [Reg. 8(3)].
1.11. File draft letter of offer within seven days of the publication of the public announcement containing the disclosures specified in Schedule-III to the said regulations [Reg. 8 (4)] and that the filing fee as specified in Schedule-IV is paid simultaneously with filing of the letter of offer [Reg. 8(5)].
1.12. Ensure that the letter of offer are dispatched not earlier than twenty-one days from the submission to the Board.
1.13. File solvency certificate with SEBI and ROC in the manner and in the format prescribed by SEBI before commencing the purchase of the shares as required under sub-section (6) of section 77A of CA.
1.14. Make sure that the offer is kept open for a minimum period of fifteen days and not exceeding 30 days [Reg. 9 (1)].
1.15. The date of opening of the offer should not be earlier than seven days or later than 30 days after the Specified date (record date) [Reg. 9 (2)].
1.16. Complete verification of offers within fifteen days of closure [Reg. 9(5)].
1.17.Deposit escrow money before opening of offer for the amount specified under Regulation 10(2).
1.18. Open a special bank account immediately after closure of the offer with a banker to the issue registered with SEBI and deposit therein such sum as would, together with the escrow account make up the entire sum due and payable for buy-back [Reg. 11(1)].
1.19. Monitor that payments to shareholders are made within seven days specified in sub-regulation (5) of regulation 9. The said regulation 9 (5) says that where the escrow account consists of bank guarantee, such bank guarantee shall be in favour of merchant banker and shall be valid for thirty days after closure [Reg. 11(2)].
1.20.The company should extinguish and physically destroy the share certificates so bought-back in the presence of Registrars or merchant banker and the statutory auditor within seven days from the date of acceptance of the offer—[Reg. 12(1)]. If shares accepted or in dematerialized form these shall be extinguished and destroyed in the manner specified under Securities and Exchange Board of India (Depositories and Participants) regulations [Reg. 12(2)].]
1.21. The company should furnish a certificate to the board of SEBI duly verified by :-
(i) registrars or merchant bankers as the case may be,
(ii) two whole-time directors including the MD, and
(iii) the statutory auditors of the company certifying compliance within seven days of extinguishment or destruction of share certificates [Reg. 12(3)].
1.22. The particulars of share certificates extinguished and destroyed shall be furnished to stock exchanges where the shares of the company are listed within seven days of extinguishment and destruction of the certificates [Reg.12(4)].
1.23. The company shall maintain a record of share certificates, which have been cancelled and destroyed as prescribed in sub-section (9) of section 77A of CA [Reg. 12(5)].
1.24. Take steps for the nomination of a compliance officer and investors service center for compliance with buy-back regulations and to redress grievances of the investors. [Reg. 19(3)]. Company secretary is normally expected to discharge this function.
1.25. Shares which are locked-in and are not transferable at the time of acceptance cannot be bought-back [Reg. 19 (5)].
1.26. Ensure that within two days of compliance of buy-back, a public announcement is issued disclosing the number of shares bought, price at which they were bought, total amount deployed, details of shareholders from whom shares exceeding one per cent total shares bought-back and the consequential changes in the capital structure and the shareholding pattern after and before buy-back [Reg. 19(7)]
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