BUY-BACK OF SECURITIES
I. Applicable provisions:
– Section 68
– Section 69
– Section 70
– Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014
II. What is Buy-Back?
There is no definition given under Companies Act, 2013 or in SEBI Regulations.
In general, Buy-Back of securities means ‘purchasing own shares or other specified securities of the company from its existing shareholders to extinguish/reduce the outstanding shares or securities’. It is one of the modes of capital restructuring with no intervention of Tribunal.
III. Reasons for Buy-back :
– To increase the shareholder’s wealth
– It is a tax effective mode of rewarding shareholders
– To increase the value of the company
– To provide an additional exit route shareholder when shares are under valued
– To enhance consolidation of stake in the company
– To prevent unwelcome takeover bids
– To achieve optimum capital structure
– To support share price during the periods of sluggish market
IV. Sources of buy-back:
As per the Section 68 (1) of the Companies Act, 2014 buy-back can be made only out of:
– Free reserves
– Security premium account
– The proceeds out of fresh issue of shares or other specified securities
– Buy-back of any kind of shares or other specified securities cannot be made out of the proceeds of the earlier issue of same kind of shares or same kind of other specified securities.
V. Conditions for Buy-Back:
> Authorisation for Buy-back: AOA should authorise the Buy-back.
> Approval for Buy-back:
– Approval of Board of Directors: If the Buy-back is up to 10% of the Paid up capital and free reserve.
– Approval of Shareholders: If the buy-back is up to 25% of Paid up Capital and free reserve
> Filing of letter of offer:
Before the buy-back of shares company needs to file letter of offer with Registrar in form SH-8. Within 20 days from filing of letter of offer with ROC the letter of offer shall be dispatched to shareholders of the Company.
> Declaration of solvency:
The Company shall file with the ROC, declaration of solvency along with offer letter in form SH-9.
> Offer period
The buy-back shall be open for 15 -30 days from the date of dispatch of offer letter. (It can be less than 15 days if all the members approved)
> Fully paid up shares
Only fully paid up shares can be bought back.
> Time limit:
Buy-back should be completed within 1 year from the passing of Special resolution or Board Resolution.
> Acceptance of Offer:
In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the company, the acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.
Company should complete the verification of offers received within 15 days from the completion of offer and within 21 days from the date offer company shall intimate the rejection of offer received if any.
(If the company is not intimate the rejection within 21 days it is deemed to be accepted)
> 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.
Within 7 days from the date of verification of offers:
> Extinguishment of Shares:
Within 7 days from the date of completion of buyback the Company should extinguish and physically destroy the shares bought back.
> Return of Buy-back
Within 30 days from the completion of buyback Company needs to file return of buyback in form SH-11.
VI. Prohibition of Buy-Back in certain cases:
According to section 70 of the Companies Act, 2013, A Company should not buy-back its securities or other specified securities, directly or indirectly
a) Through its subsidiary Company, including its own subsidiary Company
b) Through any investment Company or group of investment Companies
c) If the company is defaulted in repayment of deposits, interest payment thereon, redemption of debenture or preference shares, payment of dividend to any shareholder and repayment of any term loan or interest thereon
Note: if the default is remedied and period of 3 years has been lapsed after such default ceased to subsist.
d) If the Company has not complied with the provisions of Section 92 (Annual Return), Section 123 (Declaration of Dividend), Section 127 (Punishment for failure to distribute dividends) and Section 129 (Financial Statements).
VII. Quantum of Buy-back
** the shareholders can approve by special resolution up to 25% of total equity capital in any financial year.
VIII. Steps involved in buy-back
I. Convening of Board Meeting:-
– Pass the resolution for buy-back of shares
– Approve the notice of Extra Ordinary General Meeting
II. Convening of Extra Ordinary General Meeting
– Pass the Resolution for buy-back of shares
– Filing of form MGT-14 with ROC (in case of passing of special resolution)
– Filing of letter of offer and declaration of solvency with ROC
– Circulation of letter of offer to shareholders
III. Opening of buy-back process
– Buy-back shall be open for 15-30 days from the dispatch of offer letter
– Verification of offer – Should be completed within 15 days from the completion of offer
– Rejection of offer – within 21 days from the date offer company shall intimate the rejection of offer received if any.
IV. Opening of Bank account
– After completion of buy-back Company shall open a separate Bank account and deposit the total amount of consideration payable for buy-back.
– Within 7 days from the date of verification shall make the payment to those shareholders whose shares are accepted
– Within 7 days from the date of completion of buyback the Company should extinguish and physically destroy the shares bought back.
VI. Return of buy-back
– Within 30 days from the completion of buyback Company needs to file return of buyback in form SH-11.
Disclaimer: The Views expressed are solely of the Author and the contents of this article is to share the Knowledge on subject matter. Expert advice should be sought for your specific circumstances.