Buy-back is the process by which a Company buy-back its Shares from existing Shareholders usually at a price higher than the market price. When the Company buy-back the Shares, the number of Shares outstanding in the market reduces/falls. It is the option available to shareholders to exit from the Company business. It is governed by section 68 of the Companies Act, 2013.
1. GOVERNING SECTIONS:
♦ 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.
♦ Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014
2. SOURCES OF BUY-BACK:
A company may purchase its shares out of:
♦ Its free reserves;
♦ 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 can be made out of the proceeds of an earlier issue of the same kind of shares.
3. PROHIBITIONS ON BUY-BACK:
No company shall directly or indirectly purchase its own shares:-
♦ through any subsidiary company including its own subsidiary companies;
♦ through any investment company or group of investment companies; or
♦ if a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, the redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company, however, the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.
♦ if the company has not complied with the provisions of S. 92 (Annual Return), S. 123 (Declaration of Dividend), S. 127 (punishment for failure to distribute dividend), and S. 129 (Financial Statement)
4. METHODS OF BUY-BACK:
The Buy-back of shares of private & unlisted public companies may be:
♦ From the existing shareholders on a proportionate basis;
♦ By purchasing, the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
5. DEBT-EQUITY RATIO: The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and its free reserves. (2:1)
6. FULLY PAID-UP SHARES: Shares to be bought back must be fully paid up.
7. TIME LIMITS: Buy-back shall be completed within a period of 1 (one) year from the date of passing of SR or Board Resolution, as the case may be. No offer of buy-back shall be made within a period of one year from the date of the closure of the preceding offer of buy-back if any.
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. PAYMENT:
Within 7 days from the date of verification of the offers:
♦ Make a payment of consideration in cash to those shareholders whose shares have been accepted.
♦ Return the share certificates to those shareholders whose shares are not accepted at all or the balance of shares, if partly accepted.
10. EXTINGUISHMENT OF SHARES: The company shall Extinguish and physically destroy the shares bought back within 7 days of the last date of completion of the buyback.
11. PROHIBITION ON FURTHER ISSUE OF SHARES: The company shall not make a further issue of the same kind of shares including allotment of new shares under Clause (a) of Sub-section (1) of Section 62 within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as the conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
12. CAPITAL REDEMPTION RESERVE ACCOUNT
If the buy-back of shares is made 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 and the amount of the said reserve 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.
13. Objectives/Advantages of Buy-back of shares:
♦ To increase the promoter holding as the shares, which are bought, are canceled.
♦ To increase EPS if there is no dilution in the company’s earnings as the buy-back reduces the outstanding number of shares.
♦ To support the share price when the share price, in the opinion of the management is less than its fair value.
♦ To pay surplus cash to the shareholders when the company does not need it for the business.
♦ To reward shareholders by Buy-back of shares at much higher price than ruling market price.
♦ It safeguards against a hostile takeover by increasing promoter holding.
14. MCA E FORMS TO BE FILED
|
Form |
Fee | |
| E-Form MGT-14 | Filing of Resolution | 600/- |
| E-Form SH-8 & E-Form SH-9 | Letter of Offer & Declaration of Solvency | 600/-*2 |
| 600/- | ||
| E-Form SH-11 (annexed form SH-15) | Return in respect of Buy back of Securitas & Compliance Certificate | 600/- |
| SH-10 | Description of shares or other specified securities bought back | |
♦ SH-10 (Description of shares or other specified securities bought back),
♦ SH-15 (Compliance Certificate)
♦ FCTRS to be filed within 60 days of closure of Buy Back.
15. S 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 –
♦ through any subsidiary company including its own subsidiary companies;
♦ through any investment company or group of investment companies; or
♦ If there is any default in payment of deposits or interest due, the redemption of debentures/preference shares, or payment of dividends.
♦ When the Company has defaulted in the filing of an Annual Return, declaration of dividend & financial statement.
16. Conditions of Buy-back:
♦ Buyback of shares must be authorized by the Articles of Association (AOA) of the company, if no provision in AOA then first alter the AOA.
♦ 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.
♦ Buy-back should not be more than 25% of the total paid-up capital and free reserves of the company.
♦ Buy-back of equity shares in any financial year must not exceed 25% of it’s paid-up equity capital.
IMPORTANT TO NOTE:
- Company can buy back quantity as well as preference shares. It is not necessary that Preference shares must always be redeemed as they can also be the subject of a buy-back of shares.
- Debt Equity Ratio post Buy Back to be taken care of most.
|
Timeline |
Particular |
| Authorize by AOA (Article No. required) | |
| Day 1 | Holding of BOARD MEETING for
Considering buy back proposal, buy back price, Notice of EOGM, Letter of Offer, Approval of Statement of A/c and Auditors Report, Issue of Notice With Explanatory Statement. |
| + 26 days | Holding EGM and passing Special Resolution for Buyback |
| + 56 | Filing
1. FORM SH-9 (Declaration Of Solvency) 2. FORM SH-8 (Letter of Offer) 3. Form MGT-14 with the ROC (Within 30 days of EGM) |
| + 56 | Dispatch of letter of offer to all members after filing the same with ROC.
(within 20 days from filing SH-8) |
| + 86 | Open offer for a period of not less than 15 – 30 days from the date of dispatch of the letter of offer.
*it can be less than 15 days provided that where all the members agree. |
| +101 | Verification of offers to be completed within 15 days from the date of the closure of the offer |
| + 106 | Open a special bank account and deposit therein such sum, as would make up the entire sum due and payable as consideration for the buy-back
* Immediately on closure of offer & Making payment to shareholders whose offer has been accepted within 7 days. |
| The company shall maintain a register of shares or other securities which have been bought-back in Form No. SH.10
* Immediately after completion of acceptance |
|
| Extinguish and physically destroy the shares
* Within 7 days from completion of acceptance |
|
| +135 | File requisite form SH-11 within 30 days of completion of buy back. |
| + 193 | File TRS with RBI |
APPROVAL OF NCLT/COURT NOT REQUIRED.
Source- Buyback of Shares under Section 68 of Companies Act, 2013
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About the Author
The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closure business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office at New Delhi.
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