Buy back of shares, or other specified securities means buying back of its own shares or other specified securities by the company from the holder thereof and cancelling them. The purchase of the shares of a Company by the Company itself (i.e. buys its own shares). Buy Back of equity shares is a mode of capital restructuring is used as a corporate financial strategy with the objective of increasing Earnings per Share, preventing hostile takeovers and changing the capital and shareholding structure. It is an alternative to Reduction of Capital. In nutshell, it is exit option offered to the existing shareholders of the company which is governed by Section 68 of the companies Act, 2013.
Sources of Buy back:
i. Free Reserves
ii. Securities Premium account
iii. Proceed from issue of any share or securities except out of earlier issue of same kind of shares.
Pre- Conditions for Buy back:
i. The buyback must be authorized by the company’s articles of association.
ii. The buyback must be approved by the shareholders through a special resolution passed at a general meeting except In the below mentioned case;
iii. The buyback must not exceed 25% of the company’s total paid-up capital and free reserves in particular financial year.
iv. Post-buy-back Debt–Equity Ratio is not more than 2:1
v. All shares or other specified securities for buy-back are fully paid up
vi. Time-lapse amidst two buy-back offers should be one year
vi. The buyback must be completed within 12 months from the date of passing the special resolution.
Procedure of Buy Bank In Private Company:
1. Issue of Notice to conduct board meeting
2. Convene a board meeting and, Passing of below mentioned resolutions
a. Buy Back of securities
b. Authority to open separate bank account
c. Authority to file statement of solvency
d. Authority to execute affidavits and other necessary documents
e. File necessary forms with ROC
f. Issue of Notice to the members along with explanatory statement, if required.
3. Following details to be mentioned in the explanatory statement.
a. date of the board meeting at which the proposal for buy-back was approved by the board of directors of the company;
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 i.e with board approval or with member’s approval
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. the time-limit for completion of buy-back.
j. (i). aggregate shareholding of the promoters and of the directors as on the date of the notice convening the general meeting;
(ii.) the aggregate number of equity shares purchased or sold by persons mentioned in sub-clause (i) 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;
(iii) the maximum and minimum price at which purchases and sales referred to in sub-clause (ii) were made along with the relevant date;
k. if the persons mentioned in sub-clause (i) of clause (j) intend to tender their shares for buy-back –
(i) the quantum of shares proposed to be tendered;
(iii) 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. a confirmation that there are no 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;
m. a confirmation that the Board of directors 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 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. a report addressed to the Board of directors by the company’s auditors 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.
4. Filing of Letter of offer with ROC and shall be dispatched to the members immediately but not later than 21 days of filing FORM SH – 8 with ROC.
5. Dispatch letter of offer to the members, Offer should be open from 15-30 days, in case all member agree offer period can be less than 15 days.
6. Passing of board resolution for the acceptance of shares for Buy back.
7. Company shall verify the Offer letter being received within 15 days of the Closure of Offer.
8. Letter of Rejection, if any, shall be communicated within 21 days of the Closure of Offer.
9. Company shall immediately after the closure of offer open with the bank a separate account, along with the consideration.
10. Company shall make payment within 7 days of verification of communication of the rejection, make payment of Consideration or return the certificate tendered (upon the rejection)
11. Company shall extinguish the securities bought back, within 7 days of completion of Buy – back
12. Company to file Return of Buy – Back in Form SH – 11 within 30 days of Completion of Buy – Back
13. Company shall annex to the Return of Buy – back, a certificate of compliance in form SH – 15, to be signed by the 2 director, of which 1 shall be Managing Director
14. Company to maintain the register of Buy – Back in Form SH – 10
List of Forms required to be file:
1. Form MGT-14
Attachments: Members Resolution, Notice, Explanatory statement, shorter Notice consent, if any.
Attachments: Auditor report, Statutory Auditor certificate, Valuation report, Affidavits of Directors, Members resolution, Consent for offer period
Attachment: Auditor report, Statutory Auditor certificate, Affidavit
Attachment: Details of Securities Bough Back, BR for closure of Buy back, Board and members resolution, SH-15 and SH-10, #CS Certificate.
# In MCA V3, Now PCS has to digitally signed form SH-11 certifying that company has compliance with the requirement of Section 68 of the companies Act, 2013 which was earlier required to issue physical compliance certificate by PCS.
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