Buy back of shares refers to the purchase of a company’s own shares from existing shareholders, generally at a price higher than the prevailing market price. It enables companies to reinvest in themselves, reduce the number of outstanding shares in the market, and increase the proportionate ownership of remaining shareholders. The provisions governing buy back are contained under Section 68 of the Companies Act, 2013 read with Rule 17 of the Companies (Share Capital and Debentures) Amendment Rules, 2016, along with applicable SEBI regulations for listed companies. The procedure includes authorization through Articles of Association, passing board or special resolutions depending on the quantum of buy back, filing Form MGT-14, maintaining a post buy-back debt-equity ratio not exceeding 2:1, issuing a letter of offer in Form SH-8, filing declaration of solvency in Form SH-9, completing offer formalities, making payment, extinguishing bought-back shares, maintaining Form SH-10 register, and filing return in Form SH-11. Buy back can be funded through free reserves, securities premium, or proceeds of other securities and may be conducted through proportionate offers, open market purchases, or employee securities schemes.
STATUTORY PROVISIONS OF BUY BACK
-> Section 68 of The Companies Act, 2013 read with Rule 17 of the Companies (Share Capital and Debentures) Amendment Rules, 2016 states about the provisions for Buy Back.
-> In case shares are listed on recognized stock exchange, the regulations according to Securities Exchange Board of India to be looked after.
PROCEDURE FOR BUY BACK-
1. Articles of Association– The provisions for buy-back must be authorized by its articles of association. If not, articles to be amended.
2. Convening of Board Meeting/General Meeting– A company may buy back up to 10% of its paid up equity capital and free reserves by passing board resolution.
However, if company wants to buy back more than 10% but up to 25% of paid up capital and free reserves by passing special resolution in general meeting.
The buyback of equity shares cannot exceed more than 25% of its paid up equity capital in any financial year.
3 .Filing of Form MGT-14– The company shall file e-form MGT-14 with the registrar of company within 30 days of the passing of the special resolution.
4. Debt Equity Ratio– The ratio of debt to equity post buy back shall not be more than 2:1.
5. Fully paid up shares-All shares and other specified securities for buy back shall be fully paid up.
6. Letter of Offer– The company shall before the buyback of shares file with the Registrar a letter of offer in Form SH-8, which shall be signed on behalf of the Board of Directors of the company by not less than two directors, one of whom shall be the managing director of the company.
7. Declaration of Solvency– The company shall with the Registrar and SEBI(in case of listed companies), a declaration of solvency in Form SH-9 and verified by an affidavit that the directors has made full enquiry into the affairs of the company.
8. Dispatch of Letter of Offer– The letter of offer shall be dispatched to the shareholders or security holders within twenty days from its filling the same with Registrar of Companies
9. Offer Period– The offer period shall be open for minimum 15 days and maximum 30 days from the date of dispatch of letter of offer. However, if all members accept the offer, then offer period can be less than 15 days also.
10. Closure of offer-The Company shall complete the verifications of the offer received within 15 days from the date of closure of offer. The shares and other securities lodged shall be deemed to be accepted unless communication of rejection is made within 21 days from the closure of the offer.
11. Opening of Separate bank account– After the closure of the buy-back offer, the company shall immediately open a separate bank account and deposit therein, such sum, as would make up the entire sum due and payable as consideration for the shares tendered for buy-back in terms of these rules.
12. Payment– Within seven days, the Company shall make payment of consideration in cash to those shareholders whose securities have been accepted.
However, the Company shall return the share certificates to those shareholders or security holders whose securities have not been accepted.
13. Extinguishment of shares and securities– The company shall extinguish or physically destroy the shares and securities so bought back within 7 days from the completion of buy back.
14. Cooling period– A company cannot issue same kind of shares or other specified securities further once it completes its buy back within a period of six months, except by way of bonus issue or issue of shares in the discharge of subsisting obligations such as conversion of warrants, stock option scheme, sweat equity or conversion of preference shares or debentures into equity shares.
15. Register of Securities– The company shall maintain register of shares or securities bought back in Form SH-10.
16. Return of Buy back– The Company after the completion of buy back shall file the Registrar and SEBI(in case of listed company), a return in Form SH-11 within 30 days of such completion. Along with SH-11, a certificate in Form SH-15 shall be annexed, signed by two directors including managing director, certifying that the buy back of the securities has been made in compliance with the provisions of acts and rules.
SOURCES OF FUND FOR BUY BACK-
A Company may purchase its own shares or other specified securities from-
- Its free reserves
- The security premium account
- Proceeds of the issue of any shares or other specified securities.
Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
METHODS OF BUY BACK-
The buy back can be made as follows-
- From existing shareholders or security holders on proportionate basis
- From the open market
- By purchasing the securities issued to employees under ESOP or sweat equity
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