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.
After the enactment of the companies act, 2013 section 68, 69 and 70 read with rule 17 of the companies (share capital and debentures) Amendment Rules,2016 deal with buy back of shares. The companies are allowed to buy back their own shares and other specified securities subject to certain conditions. SEBI has also issued certain guidelines regulating the buy-back of shares in case of listed companies.
- 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.
Sources of Buy-back:
A company can purchase its own shares and other specified securities out of –
1) Free reserves
2) Securities premium account
3) The proceeds of any shares or other specified securities.
However, buy-back cannot be made out of the proceeds of an earlier issue of the same kind of shares.
Conditions of Buy-back:
1) Buy back of shares must be authorized by its Articles of Association (AOA) of the company, if no provision in AOA then first alter the AOA.
2) If the shares to be bought back amount to
a. Up to 10% of Paid-up capital + Free Reserves + Securities Premium – Pass Board Resolution.
b. Up to 25% of Paid-up capital + Free Reserves + Securities Premium – Pass Special Resolution.
3) Buy-back should not be more than 25% of the total paid up capital and free reserves of the company.
4) Buy-back of equity shares in any financial year must not exceed 25% of its paid up equity capital.
5) Debt-equity ratio should not fall below 2:1 after buy-back.
6) The shares and the specified securities should be fully paid up.
7) Company must follow the SEBI guidelines in case of listed shares and prescribed guidelines in case of others.
8) 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.
9) Shares must be physically destroyed within 7 days of completion of buy-back.
10) No fresh issue is allowed within 6 months from buy-back, except by way of issue of bonus shares, ESOPs, sweat equity and conversion of debt/preference shares into equity.
11) No withdrawal of offer is allowed once it is announced to the shareholders.
12) The company shall not utilize any money borrowed from banks and financial institutions for a buyback.
Restrictions 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 –
a. through any subsidiary company including its own subsidiary companies;
b. through any investment company or group of investment companies; or
c. If there is any default in payment of deposits or interest due, redemption
of debentures/preference shares or payment of dividend.
d. When Company has defaulted in filing of Annual Return, declaration of dividend & financial statement.
Objectives/Advantages of Buy-back of shares:
1) To increase the promoters holding as the shares which are bought are cancelled.
2) To increase EPS, if there is no dilution in companies earnings as the buy-back reduces the outstanding number of shares.
3) To support the share price when the share price, in the opinion of the management is less than its fair value.
4) To pay surplus cash to the shareholders when the company does not need it for the business.
5) To reward shareholders by Buy-back of shares at much higher price than ruling market price.
6) It safeguard against a hostile takeover by increasing promoters holding.
Audited and Un-Audited Accounts Requirement :
The audited account 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.
Provided that where the audited accounts are more than six months old, the calculations with reference to buy back shall be on the basis of un-audited accounts not older than six months from the date of offer document which are subjected to limited review by the auditors of the company.”
Procedure for Buy-back of shares for unlisted Companies:
Following procedure should be followed by the Company intending for Buy-back:
1) Convene the meeting of the Board of Directors of the Company,
2) 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 and Notice must include the details regarding all the materials facts, the necessity of the buy back, class of the securities intended to be bought back, amount to be invested under the buy back and the time limit for the completion of the buy back.
3) Filling form MGT-14 with Registrar of Companies notifying (with in 30 days) of passed the special resolution passed at the EGM altering the AOA together with amended the AOA.
4) 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.
5) 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).
6) 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 an affidavit to guarantee its solvency for at least a year after the completion of buy-back.
7) 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.
8) 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.
9) 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 (21) from the date of closure of the offer.
10) Payment: Within 7 days from the date of verification of the offers.
11) Extinguishment of Shares: A Company should extinguish and physically destroy shares bought back within 7 days of completion of the buy-back.
12) Register of Buy-Back (Form SH-10): The Company shall maintain a register of shares which has been bought back in Form SH-10 it will be attached in Form SH-11.
13) 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.
MCA E-FORMS RELATED TO BUYBACK WHICH WE HAVE TO FILE:
√ E-Form MGT-14
√ E-Form SH-8
√ E-Form SH-9
√ E-Form SH-11
OTHER DOCS AS REQUIRED FOR BUYBACK OF SHARES:
√ Certified Copy of Board Resolution
√ Buyback Notice of EGM with Explanatory
√ Certified Copy of Special Resolution with Explanatory Statement
√ Affidavit as Declaration of Solvency
√ Audited Financial Details of Last 3 years
√ Auditors Report as Certificate of Declaration
√ Details of Promoters of the Company
√ SH 10-Description of shares or other specified securities bought back
√ Particulars relating to holders of securities buyback
√ SH 15 – Compliance Certificate
√ Holders of securities before and after buy-back
√ Declaration by Directors on Completion of Buyback
√ Statement of Assets and Liabilities (is not more than six months old from the date of offer document)
Through this article we try to cover compliance aspect of buy-back of shares, which will help you to understand provisions regarding the same.
Author Bio
1- For Buy Back of Share any seperate Bank account has to open
2-If yes what shall be name of the account
3-is the amount of the decided buyback shares has to be deposited in the seperate account
4-after one buyback how may years gap should be there for another buy back
PLEASE CLARIFY
RAJESH KOCHAR
Dear Sir,
Thank you for viewing this article.
1- For Buy Back of Share any seperate Bank account has to open
Reply: Yes
2-If yes what shall be name of the account
Reply: As my practical working expires, it have open Current account in the specif name of co with sub title Buy Back.
3-is the amount of the decided buyback shares has to be deposited in the seperate account
Reply: Yes, before the making of consideration payment to shareholders.
4-after one buyback how may years gap should be there for another buy back
Reply: There must be a minimum gap of one year between two successive buy-back offers.
Madam,
If buyback offer is suppose Rs. 80/- and as per valulation of company its Rs. 600/-. Both share holders are agree for buyback at Rs. 80/-. Is it permitted to do so as per companies act? What will be pros and cons for the same.
Thank You in advance.
Nicely & Deeply Explained .
Is it mandatory for the unlisted company to get the valuation certificate for doing the buy back of unquoted shares.
Also, kindly let me know what shall be the valuation methodology as per Companies Act and SEBI Regulations for doing the buy back of unquoted shares.
Very Beautifully and Deeply Explained.
Thanks
Thank You Sir