“Unlock the intricacies of Buy Back of Shares under the Companies Act, 2013. Learn about methods, sources, conditions, and procedures. A comprehensive guide for companies seeking financial strategies.”
Introduction: The process of buyback of shares involves various methods, sources, and conditions regulated by the Companies Act, 2013. Understanding this financial maneuver is crucial for companies aiming to enhance shareholder value. This article provides a comprehensive overview of the buyback process, covering methods, sources, conditions, procedures, and legal restrictions.
Page Contents
1. Method of the Buy Back:
The method of buyback provides companies with different avenues to repurchase their shares. Let’s delve into each method:
1. Buyback of Shares from Existing Shareholders on a Proportionate Basis: In this method, companies repurchase their shares directly from existing shareholders in proportion to their existing holdings. This ensures a fair and equitable distribution of buyback benefits among shareholders. The buyback price is often determined based on the proportionate ownership of each shareholder, maintaining fairness and preventing any undue advantage to larger shareholders.
2. Buyback of Shares from an Open Market: Companies can opt to buy back their shares from the open market, where shares are traded publicly. This method involves purchasing shares from various shareholders who are willing to sell them on the stock exchange. The buyback price is influenced by market forces, and companies may use this method to capitalize on favorable market conditions or to adjust their capital structure.
3. Buy-back of Securities Issued to Employees under ESOP or Sweat Equity: Employee Stock Option Plans (ESOP) and sweat equity are mechanisms through which companies reward employees with shares. The buyback of securities issued under these plans involves repurchasing shares from employees who acquired them through ESOP or sweat equity. This method allows companies to manage their capital structure while providing a liquidity option for employees holding company shares.
Each buyback method comes with its own set of considerations and implications. Companies choose the most suitable method based on their strategic objectives, financial condition, and regulatory compliance.
2. Sources of Buy-Back:
The sources of buyback provide insight into where a company can derive the funds for repurchasing its shares or specified securities. Here’s an exploration of the sources:
1. Free Reserves: Companies can utilize their accumulated free reserves to fund the buyback. Free reserves are the portion of profits that a company retains after meeting all its statutory requirements, such as dividends and taxes. Using free reserves for buyback reflects a company’s ability to deploy retained earnings for strategic purposes, enhancing shareholder value.
2. Securities Premium Account: The securities premium account is another source available for buyback. This account is created when a company issues shares at a premium, i.e., at a price higher than their face value. The premium collected goes into the securities premium account. Utilizing this account for buyback provides a financial reservoir derived from the premium received during previous share issuances.
3. Proceeds of the Issue of Shares or Specified Securities: Companies can fund buyback from the proceeds generated through the issuance of new shares or other specified securities. This allows for a dynamic approach, where the company can leverage its ongoing financial activities to repurchase its own shares. It also aligns with the concept of recycling capital within the company.
Limitation: It’s important to note that no buyback of any kind of shares can be made out of the proceeds of an earlier issue of the same kind of shares. This restriction ensures that the funds generated from a specific issuance are not directly used for repurchasing the same type of shares, maintaining financial integrity and preventing circular financial transactions.
Specified Securities: The term “Specified Securities” encompasses not only shares but also includes securities issued under Employee Stock Option Plans (ESOP) or any other securities as may be notified by the Central Government from time to time. This broad definition allows companies flexibility in choosing the types of securities they can repurchase under the buyback program.
3. Condition of Buy-back:
As per Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are:
No company shall purchase its own shares or other specified securities, unless—
1. the buy-back is authorised by its articles;
2. a special resolution has been passed at a general meeting of the company authorizing the buy-back:
3. But if the Buy Back is only of ten per cent or less of the total paid-up equity capital and free reserves of the company; then buy-back has been authorised by the Board by means of a resolution passed at its meeting of Board of Directors.
4. The Maximum Buy Back that the Company can do is 25% or less of the aggregate of paid-up capital and free reserves of the company:
5. The Post Buy Back Debt-Equity Ratio will be 2:1
6. Only fully paid up shares can be brought back in a financial year.
7. 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.
8. from the date of completion of Buy-back Company cannot issue same kind shares including right issue of shares within a period of 6month except Bonus issue or discharge of subsisting obligations.
9. Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
1. Convene the meeting of the Board of Directors of the Company.
2. Send Notice of General Meeting at which special resolution to be passed accompanied by Explanatory statement in which the particulars required to be mentioned:
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- a full and complete disclosure of all material facts;
- the necessity for the buy-back;
- the class of shares or securities intended to be purchased under the buy-back;
- the amount to be invested under the buy-back; and
- the time-limit for completion of buy-back.
3. The company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a letter of offer in Form No. SH.8.
4. The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than twenty days from its filing with the Registrar of Companies.
5. The offer for buy-back shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer.
6. The offer for buy-back shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer.
7. 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.
8. The company shall 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 in terms of these rules.
9. The company shall within seven days:
1. make payment of consideration in cash to those shareholders or security holders whose securities have been accepted; or
2. return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance.
10. The company, shall maintain a register of shares or other securities which have been bought-back in Form No. SH.10.
11. The company, after the completion of the buy-back under these rules, shall file with the Registrar, a return in the Form No. SH.11
5. Restriction on Buy-back:
In adherence to Section 70 of the Companies Act, 2013, stringent restrictions are imposed on companies contemplating buybacks. These restrictions aim to ensure financial prudence and safeguard the interests of stakeholders. Here are the key prohibitions:
- Through Any Subsidiary, Including its Own Subsidiaries: Companies are prohibited from executing buybacks directly or indirectly through any subsidiary, including their own subsidiaries. This restriction prevents the manipulation of buyback transactions through intricate corporate structures.
- Through Investment or Group of Investment Companies: The Companies Act prohibits buybacks conducted through investments or a group of investment companies. This restriction curtails the potential misuse of investment entities for the purpose of buybacks.
- Default in Repayment or Redemption Obligations: Companies are barred from buybacks if they have defaulted in the repayment of deposits, interest payable, or in the redemption of debentures, preference shares, or repayment of any term loan. However, there is a provision for lifting this prohibition under specific circumstances:
- The default must be remedied.
- A minimum period of three years must elapse after the default has ceased to subsist.
- Default in Filing Annual Return, Declaration of Dividend & Financial Statement: Companies facing default in the filing of annual return, declaration of dividends, or financial statements are restricted from undertaking buybacks. This provision underscores the importance of timely and transparent financial reporting.
6. Company must get valuation report from registered valuer, before buy-back to form basis for buy-back.
Conclusion: Understanding the process of buyback of shares is pivotal for companies navigating financial strategies. Compliance with the Companies Act, 2013, ensures legality and transparency in buyback transactions. By comprehensively analyzing methods, sources, conditions, and procedures, companies can make informed decisions, safeguard shareholder interests, and enhance overall financial stability. Valuation reports play a crucial role in this process, providing a fair assessment of the shares involved.
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