Buyback of its own shares by a company is nothing but a reduction of share capital. A buyback of shares, also known as a share repurchase, refers to a company’s decision to repurchase its own shares from existing shareholders. This process involves a company using its available cash or borrowing funds to buy back shares on the open market or directly from shareholders at a specified price. Buyback involves rearrangements of its financial structure to make the company’s finances more balanced. It is an adjustment of the debt-equity ratio.
It’s important to note that the decision to initiate a buyback of shares is typically made by a company’s board of directors and is subject to various legal and regulatory requirements. The specifics of a share repurchase program, such as the maximum number of shares to be repurchased, the duration of the program, and the purchase price, are outlined in a company’s public announcements or filings with regulatory authorities.
Objective of Back of Shares Under Companies Act 2013:
Companies may choose to buy back shares for various reasons, including:
- Return excess capital: If a company has excess cash on its balance sheet, it may decide to repurchase shares as a way to return value to shareholders.
- Support share price: By reducing the number of shares available, a buyback can increase the demand for the remaining shares, potentially leading to an increase in the share price.
- Improve financial ratios: A share repurchase can boost key financial ratios, such as earnings per share (EPS), by reducing the number of shares outstanding. This can make the company’s financial performance appear more favorable.
- Signal confidence: A buyback can signal to the market that the company believes its stock is undervalued, which may instill confidence in investors.
Legal Framework for Buy Back: –
i. In case of Listed Companies:
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- Companies Act, 2013
- SEBI (Buy-Back of Securities Regulations, 2018)
ii. In case of Private/Unlisted Public Companies:
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- Companies Act, 2013
- Rule 17 of Companies (Share Capital and Debenture) Rules, 2014
Buyback under Companies Act, 2013:
Section 68 overrides all other provisions of Companies Act, 2013, as it starts with “Notwithstanding anything contained in this Act,” but is subject to Section 70 of Companies Act. Though capital is reduced under buyback, the provisions of Section 66 of Companies Act, 2013 requiring NCLT approval are not required as Section 68 overrides all other sections of Section 66. Thus, only sections 68, 69, and 70 need to be complied with.
Section 68 of the Act, consisting of eleven subsections, provides a detailed procedure to be followed for buyback of securities, including the details of funds that can be utilized, the method to be adopted, the conditions to be fulfilled, etc.
Important Provisions:
Section 68(1) – A company may purchase its own shares or other specified securities, i.e., engage in the buyback of its securities out of:
- Its free reserves
- The securities premium account or
- The proceeds of the issue of any shares or other specified securities, except for proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Mandatory Requirements:
Section 68(2)(a) – Buyback shall be authorized by the articles of the company.
- Maximum Expenditure for Buyback
- By passing Board Resolution
- Section 68(2)(b)
- Expenditure: Up to 10% of paid-up equity capital + free reserves
- By passing Special Resolution
- Section 68(2)(b)
- Expenditure: Up to 25% of paid-up equity + preference + free reserves
- By passing Board Resolution
- Section 68(2)(c) – The buyback is 25% of aggregate paid-up share capital & free reserves.
- Provided that in the case of buyback of equity shares of reference of 25% shall be construed with respect to its paid-up equity capital.
- Section 68(2)(d) – The debt-equity ratio shall not exceed 2:1 after buyback.
- Provided that in the case of government company engaged in Housing Finance and NBFCs, the debt-equity ratio shall be 6:1 after buyback.
- Section 68(2)(e) – All shares or other specified securities for buyback are fully paid up.
- Section 68(2)(f) – Time-lapse between two buyback offers should be one year.
- Section 68(3) – The notice containing the special resolution should be passed and should be accompanied by an explanatory statement stating:
- All material facts, fully and completely disclosed
- The necessity for buyback
- The class of security intended to be purchased by the buyback
- The amount to be invested under buyback
- Section 68(4) – Every buyback must be completed within a period of one year from the date of passing of the special resolution, or Board resolution as the case may be.
- Section 68(5) – Methods of buyback state that the securities can be bought back from:
- From the existing shareholders or security holders on a proportionate basis
- From the open market
- By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
- Section 68(6) – The company, before making any buyback as per the stipulated provisions, shall file a declaration of solvency in Form SH.9 along with the letter of offer in Form SH-8, ensuring the following:
- Such Declaration and Letter of Offer to be signed by a minimum of two directors, one of whom shall be the managing director if any.
- Such declaration to be verified by an affidavit to the effect that the Board of Directors has made a full inquiry into the company’s affairs concluding that the company is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of the declaration adopted by the Board.
- Such declaration to be filed with the Registrar along with the prescribed fees and the following documents:
- Statement of assets and liabilities
- Auditor’s report
- Affidavit as per Rule 17(3) of the Companies (Share Capital and Debenture) Rules
- Optional attachment(s), if any
- Section 68(7) – The company shall extinguish and physically destroy the share certificate within 7 days from completion of buyback.
- In case of Unlisted company: Shares shall be physically destroyed.
- In case of Listed company: Shares are held in Demat form. So here, physically destroy the Jumbo share certificate held with depositories.
- Section 68(8) – The company shall abstain from making a further issue of the same kind of shares or other securities, including allotment of new shares under Section 62 (1)(a) of the Act or other specified securities within a period of six months, except by the following modes: bonus issue or; discharging subsisting obligations such as the conversion of warrants, stock option schemes, sweat equity, or conversion of preference shares or debentures into equity shares.
- Section 68(9) – The company shall maintain a register of shares/other specified securities in Form No. SH.10 comprising details like shares/securities so bought, consideration paid, cancellation date of shares/securities, date of extinguishing/physically destroying the shares/securities, and such other particulars. Such Register of shares or securities bought-back shall be maintained at the company’s registered office in the custody of the Company Secretary or any other person authorized by the board on this behalf.
- Section 68(10) – The company shall file a return in Form No. SH.11 within 30 days of the completion of buyback with the Registrar along with stipulated fee and the following documents:
- Description of shares or other specified securities bought back
- Particulars relating to holders of securities before buyback
- Certified true copy of the special resolution passed at the general meeting
- Certified true copy of board resolution authorizing buyback
- Balance Sheet of the company
- Compliance certificate for the buyback rules as per the sub-rule (14) of Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014
- Optional attachment(s) if any.
- Section 68(11) – If a company defaults in complying with provisions of Section 68 of the Companies Act, 2013, the company shall be punishable with a fine which shall not be less than 1 lakh but which may extend to 3 lakh, and every officer in default shall be punishable with a fine which shall not be less than 1 lakh but which may extend to 5 lakh.
Creation of CRR [Section 69]:
According to Section 69 of the Companies Act, 2013, where a company buys back shares out of free reserves or out of the securities premium account, then an amount equal to the nominal value of the shares needs to be transferred to the Capital Redemption Reserve Account. Such transfer details need to be disclosed in the balance sheet.
The Capital Redemption Reserve account may be utilized for paying unissued shares of the company to the members as fully paid bonus shares.
Prohibition for Buyback [Section 70]:
According to Section 70 of the Companies Act, 2013, a company should not buy back its securities or other specified securities, directly or indirectly:
- Company cannot directly or indirectly go to purchase its own shares and other securities through any Subsidiary Company, which includes the company’s own Subsidiary Companies.
- Company cannot directly or indirectly go to purchase its own shares and other securities through any Investment Company or group of Investment Companies.
- When the company has defaulted in filing the Annual Return, declaration of dividend & financial statement, the company cannot directly or indirectly purchase its own shares and other securities in case the company has made a default in the following:
- Repayment of deposits accepted either before or after the commencement of the Companies Act, 2013.
- Payment of interest thereon.
- The payment of dividend to any shareholder.
- Redemption of debentures or preference shares of the company.
- Repayment of any interest payable or any term loan thereon to any Banking Company or Financial Institution.
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