CS Varadvinayak Khambete
In this write-up, I have discussed the procedure and other things pertaining to buy-back of equity shares of an unlisted public company which is covered under section 68, 69 and 70 of the Companies Act, 2013.
Instead of giving exact words of law, I have given information in a simplified way so that readers may find it easy to understand and grasp.
A. PERMITTED RESOURCES AND PERMITTED METHODS FOR BUY-BACK OF EQUITY SHARES
Buy-back can be done out of—
(a) free reserves;
(b) securities premium account; or
(c) proceeds of the issue of any shares or other specified securities except out of the proceeds of an earlier issue of the same kind of shares.
Company shall not utilize
– any money borrowed from banks or financial institutions for the purpose of buy-back +
– proceeds of an earlier issue of the same kind of shares for the buy-back.
B. FROM WHOM THE EQUITY SHARES COULD BE BOUGHT BACK
(a) from existing shareholders or security holders on a proportionate basis;
(b) from the open market;
(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
C. ELIGIBILITY CRITERIA & CONDITIONS
1. Buy-back can not be done
i. through any subsidiary company including its own subsidiary companies
ii. through any investment company or group of investment companies
iii. if there are defaults subsisting in
– repayment of deposits, interest payment thereon;
– redemption of debentures or payment of interest thereon; or
– redemption of preference shares or payment of dividend due to any shareholder; or
– repayment of any term loans or interest payable thereon to any financial institution or banking company;
Provided that the buy-back is not prohibited if default is remedied and a period of three years has lapsed after such default ceased to subsist.
2. No buy-back can be done in case the company has not complied with sections
92 (Annual Return),
123 (manner of declaration of Dividend and its payment),
127 (punishment for failure to distribute Dividend)
129 (financial Statements. + There should not be any qualifying remark either on the Report of the Auditors or in the Notes and the financial statements should give true and fair view).
3. Buy-back should be authorised by AOA;
4. Audited accounts on the basis of which calculation with reference to buy-back is done should not be more than six months old from the date of offer document.
5. Buy-back can be authorised by the Board Resolution if it is 10% or less of the total paid-up equity capital and free reserves.
If it is more than 10% of PUEC +FR, special resolution is necessary authorizing the buy-back.
6. Buy-back should be 25% or less of the aggregate of paid-up capital and free reserves:
Provided that in respect of the buy-back of equity shares in any financial year, the reference to 25% shall be construed with respect to its total paid-up equity capital in that financial year;
7. Post buy-back debt-equity ratio should not be more than 2 : 1.
Debt = aggregate of secured + unsecured debts owed the after buy-back
Equity= is aggregate of the paid-up capital + its free reserves after buy-back.
8. All the shares for buy-back should be fully paid-up.
9. No offer of buy-back shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.
10. Time limit for completion of Buy-back – one year from passing of the resolution.
D. PROCEDURE FOR BUY-BACK
1. Take certificate from auditors based on audited a/cs not older than 6 months.
2. Convene Board Meeting for
· Calling EGM [ Check if postal ballot is applicable ] & approving the notice of EGM. EGM is to be called for
– Alteration of AOA, if needed
– Approval for buy-back.
3. Convene EGM / Postal Ballot.
4. Keep drafts of Letter of offer, declarations, affidavits etc. ready.
5. Once SR is passed, again convene Board Meeting for
i. Approval of the Draft buy-back offer (Form SH-8) and the declaration of Solvency in Form No.SH-9.
ii. Authorising the any one Director and the professional to digitally sign and certify Form No.MGT-14 for registering the special resolution and authorizing two Directors to sign the form SH-8 and SH-9.
iii. Opening a Special Bank Account for remittance and payment towards purchase consideration for buy back.
iv. Transfer of sum to Capital Redemption Reserve.
v. Fixing a cut-off date to identify members to whom the offer shall be made.
vi. To authorize secretary / other person to destroy the certificates of shares bought back and to keep and maintain and to authenticate entries in the Register of shares or other securities bought back.
6. Where a company proposes to buy-back, BEFORE making such buy-back file with ROC –
A. Letter of offer in form SH 8. [Before SH-8, file MGT 14]
[Attachments:-
Details of promoters,
Declaration by auditors,
Board Resolution,
EGM notice,
Audited financial statement of last 3 years]
[ LOO shall be dated & signed on behalf of Board by atleast two directors, one of whom shall be MD, where there is one ]
[ LOO shall contain true, factual and material information and shall not contain any misleading information and must state that the directors of the company accept the responsibility for the information contained in such document]
[ Company shall confirm in its offer the opening of a separate bank account adequately funded for this purpose and to pay the consideration only by way of cash; ( Note that consideration is to be paid in cash only) ]
B. A declaration of solvency in form SH 9 [signed by at least two directors, one of whom shall be MD, if any,] + verified by affidavit specified in the said form.
(For time being, SH-9 is to be attached to GNL-2 since e-form SH-9 is not available.)
[Attachments:-
Board Resolution,
Statement of assets & liabilities,
Auditors’ report
Affidavit as per rule 17(3) as mentioned in form SH-9.
7. Within 20 days from its filing with ROC, Letter of offer shall be dispatched to the shareholders.
Company shall not withdraw the offer once it has announced the offer to the shareholders.
8. Offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer.
9. Immediately after the date of closure of the offer, 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.
10. Acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.
11. Complete the verifications of the offers received within fifteen days from the date of closure of the offer.
Shares lodged shall be deemed to be accepted unless a communication of rejection is made within twenty one days from the date of closure of the offer.
12. Within seven days of the time specified in sub-rule (7) [ABOVE POINT]-
i. make payment of consideration in cash to shareholders; or
ii. return the share certificates to the shareholders whose shares have not been accepted at all or the balance of shares in case of part acceptance.
13. Company shall not issue any new shares including by way of bonus shares from the date of passing of special resolution authorizing buy-back till the date of the closure of the offer, except those arising out of any outstanding convertible instruments;
14. Extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
15. Maintain a register of the shares or securities so bought in form SH-10 at the registered office in the custody of the secretary of the company or any other person authorized by the board. Entries in the register shall be authenticated by the secretary or such authorised person.
16. Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the Capital Redemption Reserve account and details of such transfer shall be disclosed in the balance sheet.
17. File with ROC within 30 days of completion of buy-back form SH-11. Certificate in Form No. SH-15 signed by two directors of the company including MD, if any, certifying that the buy-back of securities has been made in compliance with the provisions of the Act and the rules made thereunder is to be annexed to SH-11.
[Attachments to SH-11:- Description of shares bought back,
Particulars relating to holder of shares before buy-back,
Board Resolution
Balance Sheet of Company
Certificate of compliance in SH-15 which needs to be verified by a PCS [Rule 17(14)]
E. CONTENTS OF THE NOTICE & EXPLANATORY STATEMENT
Notice of the general meeting at which the 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) necessity for the buy-back;
(c) class of shares or securities intended to be purchased under the buy-back;
(d) amount to be invested under the buy-back; and
(e) time-limit for completion of buy-back.
As per Rule:-
(a) date of the board meeting at which the proposal for buy-back was approved
(b) objective of the buy-back;
(c) class of shares or other securities intended to be purchased under the buy-back;
(d) number of securities that the company proposes to buy-back;
(e) method to be adopted for the buy-back;
(f) price at which the buy-back of shares or other securities shall be made;
(g) basis of arriving at the buy-back price;
(h) maximum amount to be paid for the buy-back and the sources of funds from which the buy-back would be financed;
(i) time-limit for the completion of buy-back;
(j) – the aggregate shareholding of the promoters, directors & KMP as on the date of the notice convening the general meeting;
– the aggregate number of equity shares purchased or sold by above persons during a period of twelve months preceding the date of the board meeting at which the buy-back was approved and from that date till the date of notice convening the general meeting;
– the maximum and minimum price at which abovementioned purchases and sales were made along with the relevant date
(k) If the persons mentioned in above clause (j) intend to tender their shares for buy-back –
(i) the quantum of shares proposed to be tendered;
(ii) the details of their transactions and their holdings for the last twelve months prior to the date of the board meeting at which the buy-back was approved including information of number of shares acquired, the price and the date of acquisition
(l) Confirmation that there are no defaults subsisting in
– repayment of deposits, interest payment thereon,
– redemption of debentures or payment of interest thereon
– redemption of preference shares or payment of dividend due to any shareholder
– repayment of any term loans or interest payable thereon to any financial institution or banking company
(m) Confirmation that the Board have made a full enquiry into the affairs and prospects of the company and that they have formed the opinion-
(i) that immediately following the date on which the general meeting is convened there shall be no grounds on which the company could be found unable to pay its debts;
(ii) as regards its prospects for the year immediately following that date, that, having regard to their intentions with respect to the management of the company’s business during that year and to the amount and character of the financial resources which will in their view be available to the company during that year, the company shall be able to meet its liabilities as and when they fall due and shall not be rendered insolvent within a period of one year from that date; and
(iii) the directors have taken into account the liabilities (including prospective and contingent liabilities), as if the company were being wound up under the provisions of the Companies Act, 2013.
(n) Report by the company’s auditors addressed to the Board stating that-
(i) they have inquired into the company’s state of affairs;
(ii) the amount of the permissible capital payment for the securities in question is in their view properly determined;
(iii) that the audited accounts on the basis of which calculation with reference to buy back is done is not more than six months old from the date of offer document; and
(iv) the Board of directors have formed the opinion as specified in clause (m) on reasonable grounds and that the company, having regard to its state of affairs, shall not be rendered insolvent within a period of one year from that date.
F. DRAFT CALENDAR OF EVENTS FOR BUY-BACK
| NO. | TASK | PROPOSED DATE |
| 1 | Take certificate from auditors based on audited accounts not older than 6 months | 28th Feb 2015 |
| 2 | Convene Initial Board Meeting | 28th Feb 2015 |
| 3 | Convene EGM | 28th Feb 2015 |
| 4 | Convene second Board Meeting | 02nd March 2015 |
| 5 | File MGT 14 for EGM & Accounts adoption | 02nd March 2015 |
| 6 | File Letter of offer with ROC [SH 8] & Declaration of solvency [SH -9] | 2nd March 2015 |
| 7 | Letter of Offer to be dispatched to members.
Completion of Dispatch. |
3rd March, 2015 |
| 8 | Buy-back Opening date | 5th March, 2015 |
| 9 | Buy-back Closing date | 19th March, 2015 |
| 10 | Open bank a/c + deposit money | Immediately after 19th March, 2015 |
| 11 | Complete verification of letters of acceptance received -within 15 days | On or before 3rd April, 2015 |
| 12 | If rejection, communication is to be made | Within 21 days from date of closure of the offer |
| 13 | Pay cash to shareholders | within 7 days of completion of verification |
| 14 | Transfer to CRR | Immediately |
| 15 | Destroy certificates | within 7 days of completion of buy-back |
| 16 | Make entry in Register | Immediately |
| 17 | Get SH-15 verified by PCS and file SH-11 with ROC | within 30 days of completion of buy-back |
F. EXAMPLE OF CALCULATION
| Particulars | Note | Amount | Amount |
| PAID UP CAPITAL
(50,000 EQUITY shares of Rs. 10 each) |
6,00,000 | ||
| FREE RESERVES | |||
| SECURITIES PREMIUM | 6,00,000 | ||
| GENERAL RESERVE | 1,90,00,000 | ||
| Profit & Loss Account | 3,80,00,000 | ||
| TOTAL FREE RESERVES | 5,76,00,000 | ||
| PAID UP CAPITAL + FREE RESERVES (A) | 5,82,00,000 | ||
| Board’s approval – If buy back is upto 10% of paid up EQUITY + free reserves | 10% of (A) | 58,20,000 | |
| Maximum amount which can be utilised for buy back | 25% of (A) | 1,45,50,000 | |
| Equity capital which can be reduced | 25% of Equity capital | 1,50,000 | |
| Number of shares that can be bought back | 1,50,000 /10 | 15,000 | |
| Maximum amount which can be paid per share | 1,45,50,000 / 15,000 | 970 |
Disclaimer:- This write up has been prepared based on self study & is not a professional opinion / advice. Probability of any mistake in it may exist. Readers are advised to refer to relevant provisions of law before applying or accepting any of the point mentioned above. Author accepts no responsibility, whatsoever, & shall not be liable for any losses, claims or damages which may arise because of the contents of this write up.
From where the requirement of SH.15 to be verified by PCS is derived. Rule 17 does not provide as such. Please throw some light on relevant provision in this respect.
Dear Sir, As mentioned in the above working, you have mentioned maximum amount which can be paid as 970/-. what is the minimum amount.
Is there any tax 1
As per your calculation, the maximum price of buy back can be the book value per share (Rs.970). How can a listed company offer a buy back at its book value per share when its market value per share would be much higher?