What is Buy-Back of Shares ?
Buy-back of shares means purchase of its own shares by a company. When shares are bought back by a company, they have to be cancelled by the company. Thus, shares buy-back results in decrease in share capital of the company. A company cannot buy its own shares for the purpose of investment.
Provision Regarding Buy-Back of Shares Under SEBI Regulation and Companies Act,2013
(A) Provisions Under Companies Act,2013
Power of Company to Purchase its Own Securities [Section 68]
Source of Funds for Buy-back of Shares
According to Section 68 (1), a company may purchase its own shares or other specified securities. The purchase should be made out of:
(i) its free reserves
(ii) the securities premium account
(iii) the proceeds of the issue of any shares or other specified securities. However, buy-back of any kind of shares or other specified securities cannot be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Conditions for Buy-Back
(a) the buy-back is authorised by its articles
(b) a special resolution authorising the buy-back is passed in general meeting of the company
Exception: A special resolution is not necessary where:
(i) The buy-back is, ten per cent or less of the total paid-up equity capital and free reserves of the company
(ii) such buy-back has been authorised by the Board by means of a resolution passed at its meeting
(c) the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company;
It is provided that the buy-back of equity shares in any financial year shall not exceed 25% of its total paid up equity capital in that financial year.
(d) the ratio of the aggregate debts (secured and unsecured) owed by the company after buy back is not more than twice the paid up capital and its free reserves;
(e) all the shares or other specified securities for buy-back are fully paid-up;
(f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by SEBI on this behalfProcedure Before Buy-Backs According to Section 68 (3)47, the notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating (a) a full and complete disclosure of all the 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 (e) the time limit for completion of buy-back.
Time limit for Completion of Buy-Back Section 68(4) states that every buy-back shall be completed within twelve months from the date of passing the special resolution or a resolution passed by the Board at the general meeting authorising the buy-back.
Buy-back from Whom (a)from the existing shareholders or security holders on a proportionate basis (b) from the open market (c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Extinguishment of Securities where a company buys back its own securities or other specified securities, it shall extinguish and physically destroy the shares or securities so bought-back within seven days of the last date of completion of buy-back.
Cooling Period Where a company completes a buy-back of its shares or other specified securities
under this section, it shall not make further issue of same kind of shares or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
Filing of Buy-Back Return A Company shall, after completion of the buy-back under this section, file with the Registrar and the SEBI, a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed.
Penalty for Default if a company makes default in complying with the provisions of this section or any regulations made by SEBI under clause (f) of sub-section (2)the punishment shall be as under: Company: It shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees; and Every officer of the company who is in default: He shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.
Transfer of certain Sums to Capital Redemption Reserve Account [Section 69]
Section 69 requires a certain amount to be transferred to the capital redemption reserve account in case a company buys back its own shares. The provisions are as under: (1) Amount to be transferred to CRR Account: Section 69 (1) prescribes that where a company purchases its own shares out of free reserves or securities premium account, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet. (2) Application of CRR Account: Section 69 (2) states that 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 for Buy-Back in Certain Circumstances [Section 70] Section 70 prohibits a company to buy back its own securities in certain circumstances. The provisions are as under:
(1) No company shall directly or indirectly purchase its own shares or other specified securities
- through any subsidiary company including companies;
- through any investment company or group of investment companies; or
- if a default, is made by the company, in repayment of deposits,interest payment thereon, 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 institutions or banking company its own subsidiary It is provided that where the default is remedied and a period of three years has lapsed after such default ceased to subsist, such buy-back is not prohibited.
(2) No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with provisions of:
- Section 92 (Annual Report)
- Section 123 (Declaration and Payment of Dividend),
- Section 127 (Punishment for failure to distribute dividends),
- Section 129 (Financial Statement).
(B) Provisions Under SEBI Regulations
In exercise of the powers conferred under section 30 of the Securities and Exchange Board of India Act, 1992, SEBI made Securities and Exchange Board of India (Buy-back of Securities) (Amendment) Regulations, 2013 to amend the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998. The important provisions of the new regulations are: (i) No offer of buy-back for fifteen per cent or more of the paid up capital and free reserves of the company shall be made from the open market. (ii)A company shall not make any offer of buy-back within a period of one year reckoned from the date of closure of the preceding offer of buy-back, if any. (iii)The company shall ensure that at least fifty per cent of the amount earmarked for buy-back is utilized for buying-back shares or other specified securities. Advantages of Buy-Back of Share
- to increase earnings per share if there is no dilution in the company’s earnings as the buy-back of shares reduces the outstanding number of shares.
to increase promoters holding as the shares which are bought back are cancelled. - to discourage others to make hostile bids to take over the company as the buy-back will increase the promoters holding.
- to support the share price on the stock exchanges when the share price, in the opinion of company management, is less than its worth, especially in the depressed market.
- to pay surplus cash to shareholders when the company does not need it for business.
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