Buy Back for unlisted companies simplified

Introduction: Buy-back of shares is a strategic move by companies to repurchase their own shares from shareholders and cancel them. In the case of unlisted companies, this process is governed by specific regulations outlined in the Companies Act, 2013, and its associated rules.

Meaning: Buy back of shares means buying back of its own shares by the company from the shareholders thereof and then cancelling them.

Legal Framework: Section 68, 69, and 70 of the Companies Act, 2013 in conjunction with Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014 govern the issuance and management of shares and debentures within corporate entities.

Limit on Buy-Back

In order to buy back its own shares by the Company, the buy-back shall be authorised by its articles and:

• If buy back is upto 10% of Paid up capital and free reserve, approval of Board of Directors is required.
• If buy back is upto 25% of Paid up capital and free reserve, approval of shareholders is required by way of special resolution.

The calculation pertaining to the buyback referenced herein relies on audited accounts not exceeding six months from the date of the letter of offer. However, in cases where audited accounts exceed this timeframe, calculations concerning the buyback must be based on unaudited accounts not surpassing six months from the date of the offer document. These unaudited accounts are subject to a limited review by the company’s auditors.

Sources of payment for Buy-Back

A company may buy back its own shares or other specified securities out of-

(a) its free reserves;

(b) the securities premium account; or

(c) the proceeds of the issue of any shares or other specified securities:

TIME LIMIT

The buy-back shall be completed within a period of one year from the date of passing board resolution or special resolution as the case may be. Further, a new buy-back shall not be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

PROCEDURE AND FILINGS:

1. Arranging Financial Statements along with Statutory auditors report and auditors certificate for maximum amount permissible for buy-back.

2. Once financials are ready, calculate the buy back price and Debt-equity ratio post buy back as the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back should not be not more than twice the paid-up capital and its free reserves.

3. Hold a Board of Directors meeting for approving buy back of shares.

4. If buy back is more than 10% of paid up capital and free reserve but upto 25% of paid up capital and free reserve, call an Extraordinary General Meeting (EGM) of shareholders of the Company by issuing Notice along with explanatory statement. The Notice shall contain all material facts, necessity of buy back, amount to be invested under the buy back and the time limit for the completion of the buy back.

5. Hold Extraordinary General Meeting and pass a special resolution approving the buy back of shares.

6. File Form MGT-14 with Registrar of Companies within 30 days of passing the board resolution or special resolution, as the case may be.

7. The Company shall also file with the Registrar of Companies a letter of offer in Form No. SH.8 before the buy-back of shares. This letter of offer contains all the details of buy back including opening and closing date of offer.

8. Along with filing Form SH-8, the company shall also file with the Registrar of Companies a declaration of solvency in Form SH-9 verified by an affidavit to guarantee its solvency for at least a year after the completion of buy-back.

9. Thereafter, the letter of offer shall be dispatched to the shareholders immediately after filing the same with the Registrar of Companies but not later than twenty days from its filing with the Registrar of Companies.

10. The offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer.

11. 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.

12. The company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer and the shares 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.

13. The company shall within seven days of verification of offer: make payment of consideration in cash to those shareholders or security holders whose securities have been accepted; or 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.

14. The shares bought back shall be extinguished and physically destroyed within 7 days from the completion of buy back.

15. The company shall maintain a register of shares or other securities which have been bought-back in Form No. SH-10.

16. The company, after the completion of the buy-back under these rules, shall file with the Registrar of Companies, a return of buy back in Form SH.11.

17. The Company shall calculate and pay tax on distributed income i.e. buy back within 14 days from the date of payment to the shareholders.

Miscellaneous points

• All the shares to be bought back shall be fully paid-up.
• The company shall not utilize any money borrowed from banks and financial institutions for buyback.
• 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.

Conclusion: Navigating the buy-back process for unlisted companies requires adherence to legal provisions and meticulous planning. By following the prescribed steps and fulfilling filing requirements, companies can efficiently execute share buy-backs while ensuring compliance with regulatory norms.