This article talks about an important topic in company law and finance – the buyback of securities by Unlisted Companies. A buyback occurs when a company purchases its own shares from its shareholders. Companies may choose to do this for several reasons, such as improving the value of the remaining shares, using surplus funds, or signaling confidence in their business performance.
The purpose of this article is to explain what a buyback is, how it works, the legal procedures involved, and its impact on the company and its shareholders. The focus here is on the legal provisions under the Companies Act, 2013, specifically for unlisted companies.
This article has been written in simple language to help students, professionals, and anyone interested in company law understand the process easily.
Procedure for Buyback of Securities (Unlisted Companies)
1. Check Articles of Association (AoA): The company must ensure that its AoA authorizes the buyback of shares. If not, the AoA must be amended accordingly.
2. Call Board Meeting: A Board Meeting should be called with a minimum of 7 days’ notice to all directors.
3. Approval by Board/Shareholders:
-
- If the buyback is up to 10% of the total paid-up equity capital and free reserves, the Board of Directors can approve it.
- If the buyback exceeds 10%, a special resolution must be passed by the shareholders in a general meeting.
4. Shareholders’ Approval: If required, call a general meeting to pass a Special Resolution for buyback.
5. Filing of MGT-14: File Form MGT-14 with the ROC within 30 days of passing the Special Resolution.
6. Filing SH-8 and SH-9:
- SH-8 – Letter of Offer.
- SH-9 – Declaration of Solvency.
File these with the concerned ROC before making the offer.
7. Dispatch of Letter of Offer: Within 21 days of filing SH-8, the company must send the letter of offer to all shareholders.
8. Buyback Offer Period: The offer must remain open for a minimum of 15 days and a maximum of 30 days.
9. Open Separate Bank Account: A separate bank account should be opened, and sufficient funds must be deposited to meet the buyback obligations.
10. Verification of Securities: The company must verify the securities received within 15 days of the closure of the offer.
11. Intimation of Rejection (if any): If any securities are rejected, the company must inform the shareholders within 21 days of offer closure.
12. Payment & Return of Securities: Within 7 days of completing the verification process:
- Make payment to shareholders whose shares were accepted.
- Return securities to shareholders whose shares were rejected.
13. Filing of SH-11: File Form SH-11 with the ROC within 30 days of the completion of the buyback.
14. Maintain SH-10 Register: The company must maintain a register of bought-back securities in Form SH-10.
Important Points to Remember for Buyback of Securities (Unlisted Companies)
i) Sources of Buyback:
a. Free Reserves
b. Securities Premium Account
c. Proceeds from the issue of any other kind of securities (not the same kind being bought back)
ii) Conditions & Restrictions:
- All shares/securities must be fully paid-up.
- Post-buyback, the debt-equity ratio (secured + unsecured debt vs. paid-up capital and free reserves) must not exceed 2:1.
- There must be a gap of at least one year between two buybacks.
- Buyback must be completed within 1 year from the date of passing the Board/Special Resolution.
- Financial statements used must not be older than 6 months. If they are, unaudited financials, reviewed by the auditors, should be used.
iii) Thresholds:
- Buyback up to 10% of paid-up equity capital + free reserves: Board approval is sufficient.
- Buyback exceeding 10%: Requires shareholder approval via Special Resolution.
- Maximum buyback allowed:
- 25% of aggregate of paid-up capital + free reserves
- 25% of paid-up equity share capital in one financial year (in case of equity buyback)
iv) Capital Redemption Reserve (CRR):
An amount equal to the nominal value of the bought-back shares must be transferred to the CRR Account, and this must be disclosed in the Balance Sheet.
Prohibition on Buyback of Securities
A company is not allowed to buy back its shares if it has failed to comply with:
- Section 92 – Filing Annual Return
- Section 123 – Declaration and Payment of Dividend
- Section 127 – Failure to Distribute Dividends
- Section 129 – Financial Statements
Also, buyback is prohibited if the company has defaulted in:
- Repayment of debentures or interest thereon
- Redemption of preference shares
- Payment of any declared dividend
- Repayment of any term loan or interest thereon
*****
Disclaimer: This article is based on Sections 68, 69, and 70 of the Companies Act, 2013 and the relevant rules. I have tried my best to include all key points. However, readers are kindly advised to verify the latest provisions from the MCA E-Book or other official sources, as laws and regulations may be updated from time to time.
Author Bio
