1. Brief Introduction and Purpose of Buy Back:

A Company having excess fund and does not have any good investment solution and considering it that unused Cash is costly for the Company therefore by using that Cash Company can Bay back its shares from the Market, though Companies do buybacks for various reasons, including company consolidation, equity value increase, and to look more financially attractive.

2. Buy Back of shares meaning:

A buyback of shares is buying back of own shares by a company that was issued earlier. It is a corporate action event wherein a company makes a public announcement for the buyback offer to acquire the shares from existing shareholders within a given timeframe. The company announces an offer price for the buyback that is generally higher than the current market price.

3. Statutory provisions of Buy Back:

-Section 68 of the Companies Act, 2013 empowers a company to purchase its own shares or other securities in certain cases

-Section 69 of the Companies Act,2013 Accounting treatment of the proceed of Buyback

-Sections 70 of the Companies Act, 2013 imposes restriction on buy back of shares in certain circumstances

Therefore, Section 68,69 and 70 of the Companies Act,2013 read together with the rule 17 of the Companies (share capital and debentures) Amendment Rules,2016 regulates the process of Buyback of shares by an unlisted company.

The buy-back of the shares listed on any recognised stock exchange is in accordance with the regulations made by the SEBI.

4. Sources of Buy-Back:

A company may purchase its own shares or other “specified securities”

  • its free reserves;
  • the securities premium account; or
  • the proceeds of the issue of any shares or other specified securities.

However, no buy-back of any kind of shares can be made out of the proceeds of an earlier issue of the same kind of shares.

“Specified Securities” include ESOP or other securities as may be notified by the Central Government from time to time.

5. Buyback of Shares Reasons:

There are several reasons associated with it that urge a company to announce a buyback.

Undervalued Stock

  • Excess cash with not many project opportunities
  • Strengthening promoter holding in the Company
  • To achieve optimum capital structure

6. Methods of Buyback of shares:

Buyback may be done in following manner:

  • Buyback of shares from existing shareholders on the proportionate basis
  • Buyback of shares from an open market
  • Buy-back of securities issued to employees under ESOP or sweat equity.

7. Condition of Buy-back:

As per Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are:

  • Authorization for Buy-Back: Articles of Association(AOA) of the company should authorize Buy-Back, if no provision in AOA then first alter the AOA.
  • Approval::

Approval of Board of Directors- up to10% of the total paid-up equity capital and free reserves of the company; or

  • Approval of Shareholders- up to25% of the aggregate of paid-up capital and free reserves of the company.
  • Post buy-back debt-equity ratio cannot exceed 2:1.
  • Only fully paid up shares can be brought back in a financial year.
  • Time limits: The buy-back should be completed within a period of one year from the date of passing of Special Resolution or Board Resolution, as the case may be.
  • Cooling Period: from the date of completion of Buy-back Company can not issue same kind shares including right issue of shares within a period of 6month except Bonus issue or discharge of subsisting obligations.
  • Withdrawal of offer: No withdrawal of offer is allowed once it is announced to the shareholders.
  • Basis of arriving at Buy-back price: Calculation of Buy-back needs to be done on the basis of :

♦ Audited account which is not more than 6month old from the date of offer document; or

♦ Unaudited account not older than 6 month from offer document subject to limited review by Auditor of the Company

8. Procedure for Buy-back of shares for unlisted Companies:

Following procedure should be followed by the Company intending for Buy-back:

  • Convene the meeting of the Board of Directors of the Company,
  • Notice of General Meeting: Send Notice of General Meeting at which special resolution to be passed accompanied by Explanatory statement in which the particulars required to be mentioned as per section 68(3) [a to e] and Rule 17(1) [a to n] of Companies (Share Capital and Debentures) Rules, 2014 should be disclosed.
  • Letter of Offer (Form SH-8): Before the buy-back of shares, the company shall file with the Registrar of Companies a Letter of Offer in e-form SH-8 and the Letter of Offer shall be dispatched to the shareholders immediately after filing the same with the Registrar of Companies, ensuring the matters as prescribed in the Sub-rule 10 of Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014.
  • Offer Period: The offer for buy back shall remain open for a minimum period of 15 days but not more than 30 days from the date of dispatch of letter of offer. (Period may be less than 15 days, if all the members agree.)
  • Declaration of Solvency (Form SH-9): The company shall file with the Registrar of Companies, along with the letter of offer, a declaration of solvency in e-Form SH-9 and verified by affidavit
  • 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.
  • 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.
  • Verification: The company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer and the shares or other securities 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
  • Payment: Within 7 days from the date of verification of the offers:

♦ Make payment of consideration in cash to those shareholders whose shares has been accepted

♦ Return the share certificate to those whose shares are not accepted

  • Extinguishment of Shares: A Company should extinguish and physically destroy shares bought back within 7 days of completion of the buy-back.
  • Return of Buy-Back (Form SH-11): Submit Return of buy-back in Form SH-11 Annexed with Compliance Certificate in Form SH-15, Signed by 2 Directors out of which One must be a Managing Director, if any.
  • Register of Buy-Back (Form SH-10): The Company shall maintain a register of shares which has been bought back in Form SH-10.

9. Restriction on Buy-back :

According to section 70 of the Companies Act, 2013, A Company should not buy-back its securities or other specified securities , directly or indirectly –

  • Through any subsidiary including its own subsidiaries; or
  • Through investment or group of investment Companies; or

When Company has defaulted in repayment of deposits or interest payable thereon, or in redemption of debentures or preference share or repayment of any term loan. The prohibition is lifted if the default has been remedied and a period of3 years has elapsed after such default ceased to subsist.

When Company has defaulted in filing of Annual Return, declaration of dividend & financial statement.

10. Punishment:

  • If a company makes any default in complying with the provisions of Section 68, then the punishment shall be as follows:
  • Company and officer in default: punishable with fine which shall not be less than 1lakh but which may extend to 3lakh rupees.

11. Conclusion:

Through this article we try to cover compliance aspect of buy-back of securities, which might /will help you to understand provisions regarding the same.

Author Bio

Qualification: CS
Company: Venture Finance
Location: Indore, Madhya Pradesh, India
Member Since: 03 Nov 2019 | Total Posts: 3

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5 Comments

  1. Sandeep says:

    Can a company roll out a new ESOP scheme immediately after the buy back is completed or it has to wait for six months period as specified

  2. RAGAVENDHIRAN says:

    Madam

    After filing necessary form for buyback of shares with MCA the paid up capital not reduced to the extent of buyback share paid up capital value. What form required to file reduce the paid up capital for buyback ?

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