Buy Back of Own Shares or Other Specified Securities

Applicable Acts

Companies Act, 2013 – Section 68, 69, 70

Companies (share capital and debentures) Rules, 2014 – Rule 17

SEBI(Buy-back of Securities) Regulations, 2018

Income Tax Act, 1961 – Section 115QA

Introduction

A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. A buyback allows companies to invest in themselves. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake.

Section 68, Rule 17 – Companies Act, 2013

Sources of Buy-back

A company may purchase its own shares or other specified securities (includes employee stock option and other securities notified by central government) out of

• its free reserves (includes security premium account);
• 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 shall be made out of the proceeds of an earlier issue of the same kind of shares.

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.

Condition of Buy-back

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

• In case of Special Resolution explanatory statement shall state points specified in Section 68(3) of Companies Act 2013 and Rule 17(1) of companies (share capital and debentures) 2014.
• Post buy-back debt-equity ratio cannot exceed 2:1.
• Only fully paid up shares can be brought back in a financial year.
• No offer of buy-back shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.
• Every 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 cannot issue same kind of shares including right issue of shares within a period of 6 months except Bonus issue or discharge of subsisting obligations (conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures).
• 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:

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

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

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.
• Passing of Special Resolution
• Notice of General Meeting: Send Notice of General Meeting 21 days prior to the date 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.
• Convene General Meeting and pass the resolution authorising Buy back. Alternatively, form MGT-14 should be filed to the Registrar of Companies (ROC) in 30 days from the day of passing the special resolution.

Letter of Offer

• Form SH-8: Before the buy-back of shares, the company authorising buy-back by special resolution shall file with the Registrar a Letter of Offer (must be dated and signed by any two directors one of whom shall be MD, if any) in e-form SH-8 and the Letter of Offer shall be dispatched to the shareholders immediately after filing the same with the Registrar but not later than 20 days from its filing to Registrar, 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 authorising buy-back through special resolution shall file with the ROC, along with the letter of offer, a declaration of solvency in e-Form SH-9 to be signed by at least two directors one of whom shall be MD, if any and verified by an affidavit by the BOD.

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 15 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 21 days from the date of closure of the offer.

Payment

• Within 7 days from the date of verification of the offers:

a) Make payment of consideration in cash to those shareholders whose shares has been accepted.

b) 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 stating completion of buy-back in compliance with the provisions of Act within 30 days of completion of buy-back.

Register of Buy-Back

•  Form SH-10: The Company shall maintain a register of shares which has been bought back in Form SH-10, which shall be maintained at the Registered Office of the Company and kept in the safe custody.

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 1 lakh but which may extend to 3 lakh rupees.

Transfer to Capital Redemption Reserve Account

Section 69 – Companies Act, 2013

Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.

The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

Prohibition on Buy Back

Section 70 – 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 shares or dividend thereon or repayment of any term loan.

However, the prohibition is lifted if the default has been remedied and a period of 3 years has elapsed after such default ceased to subsist.

When Company has defaulted in filing of:

• Annual Return – 92
• declaration of dividend – 123
• failure to distribute dividend – 127
• Financial statement – 129

Income Tax Act, 1961

Section 115QA

• Buy-Back Tax has to be paid by the company on the distributed income which is nothing but the consideration paid by the company on buyback of shares, as reduced by the amount received by the company on the issue of such shares, determined in the manner prescribed under Rule 40BB of the Income Tax Rules, 1962 (ITR).
• Also, such Buy Back Tax has to be paid by the company over and above the tax paid by it, if any, on its total income.
• Tax levied on account of buy-back of shares is at an effective rate of 23.296% (20% + 12% SC + 4% H&EC)
• The value determined should not be higher than the FMV of the shares of the company, as otherwise, the differential amount can be charged to tax as deemed dividend u/s 2(22)(e), if the relationship between the shareholder and company, as provided under that section is satisfied.
• Buy Back Tax is levied at the level of the company, the consequential income arising in the hands of shareholders is exempt from tax, as per Section 10(34A) of the ITA. 

Forms to be files to Registrar

CONTENTS OF EXPLANATORY STATEMENT

Section 68(3) of Companies Act, 2013

The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement stating—

(a) a full and complete disclosure of all material facts;

(b) the necessity for the buy-back;

(c) the class of shares or securities intended to be purchased under the buy-back;

(d) the amount to be invested under the buy-back; and

(e) the time-limit for completion of buy-back

Rule 17(1) of Companies (Share Capital and Debenture) Rules, 2014

The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following disclosures, namely:-

(a) the date of the board meeting at which the proposal for buy-back was approved by the board of directors of the company;

(b) the objective of the buy-back;

(c) the class of shares or other securities intended to be purchased under the buy-back;

(d) the number of securities that the company proposes to buy-back;

(e) the method to be adopted for the buy-back;

(f) the price at which the buy-back of shares or other securities shall be made;

(g) the basis of arriving at the buy-back price;

(h) the 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 the completion of buy-back;

(j) (i) the aggregate shareholding of the promoters and of the directors of the promoter, where the promoter is a company and of the directors and key managerial personnel 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, that, having regard to their intentions with respect to the management of the company’s business during that year and to the amount and character of the financial resources which will in their view be available to the company during that year, 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

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.

(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.