Buy-Back of Shares by Private Companies: Procedure & Analysis
Introduction
The process of buy-back of shares is a crucial financial mechanism that enables companies to repurchase their own shares. In India, the buy-back of shares by private companies is regulated by the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014. This article delves into the meaning of buy-back, the modes of buy-back, the sources of funds for buy-back, prohibitions, conditions, and the step-by-step procedure private companies must follow.
The Buy-Back of securities is governed by Section 68, 69 and 70 of the Companies Act, 2013 and Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.
Please Note: For listed Companies, the SEBI Regulations are also applicable.
This article explores the nuances of the applicable provisions, modes of Buy-Back, shedding light on the Conditions, Prohibitions, and Procedure for Buy-Back of shares in the realm of Private Companies.
A. Meaning of Buy-Back
The term buy-back implies the act of purchasing its own share/ securities by a Company. This facility enables the Company to go back to the holders of its own shares/ securities and make an offer to purchase such shares/ securities from them.
B. Modes of Buy-Back
As per Section 68(1) of the Companies Act, 2013 Buy-Back may be-
- from the existing shareholders or security holders on a proportionate basis;
- from the open market;
- by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
C. Sources of Buy-Back
As per Section 68(1) of the Companies Act, 2013 a company may purchase its own shares or other specified securities out of-
- its free reserves; or
- the security premium account; or
- the proceeds of the issue of any shares or other specified securities.
Note: The Company cannot use proceeds from a prior issue of same kind of shares or other specified securities for the Buy-Back.
D. Prohibition on Buy-Back
As per Section 70 of the Companies Act, 2013, No Company shall directly or indirectly purchase its own shares or other specified securities-
- through any subsidiary company including its own subsidiary companies
- through any investment company, or group of investment companies
- if a default, is made by the Company, in the repayment of deposits accepted, 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 institution or banking company.
Note: The Buy-Back is not prohibited, if the default is rectified and a period of three years has lapsed after such rectification.
E. Conditions for Buy-Back
1. Authorization by Articles of the Company [Section 68(2)(a)]: The Buy-Back needs to be duly permitted by the Articles of Association of the Company.
2. Shareholder approval through Special Resolution [Section 68(2)(b) & (c)]: The Company shall obtain permission for Buy-Back from the shareholders by means of a special resolution passed in the General Meeting.
Important Note: The Buy-Back of not more than 10% of the Company’s Paid-Up Equity Capital and Free Reserves, shall be approved by the Board of Directors via a Board Resolution and in this case an Approval of Shareholders through Special Resolution is not required.
3. Maximum Limit of Buy-Back: The aggregate value of the shares bought back should not exceed 25% of the Paid-Up Share Capital and Free Reserves of the Company.
4. Debt-Equity Ratio Post Buy-Back [Section 68(2)(d)]: After the Buy-Back, ratio of the aggregate of debts (secured and unsecured) owed by the Company should not be more than twice the Paid-Up Capital and its Free Reserves.
5. Shares or other specified securities should be full paid up [Section 68(2)(e)].
6. Completion period [Section 68(4)]: Every Buy-Back shall be completed within 1 year from the date of passing the Special Resolution or Board Resolution, as the case may be.
7. Minimum Gap Between Buy-Back Offers [Section 68(2)(g)]: There must be a minimum gap of 1 year between 2 successive Buy-Back offers.
8. Extinguishment of Shares [Section 68(7)]: The shares or other specified securities bought back shall be extinguished or physically destroyed within 7 days of the last date of completion of Buy-Back.
9. Waiting Period for New Buy-Back Offers [Section 68]: After completing 1 Buy-Back Offer, a Company must wait for at least 1 year before making another Buy-Back Offer.
10 .Post Buy-Back Restrictions on Issuance of Shares or Other Specified Securities [Section 68(8)]: After completing a Buy-Back, the Company is prohibited from issuing the same kind of shares or other specified securities for a period of 6 months, except in cases of Bonus Shares, ESOPs, Sweat Equity, or converting debts/ preference shares into equity.
F. Step Wise Procedure for Buy-Back by Private Companies
1. Authorization by the Articles [Section 68(2)]: The first step is to ensure that the Articles of the Company authorize the Buy-Back of shares or other specified securities and in the absence of relevant authorizations the Articles of the Company shall be altered to include such authorization. Alteration of Articles shall be in accordance with the Companies Act, 2013 and other applicable rules thereto.
2. Convene Board Meeting [Section 68(2)] : In case of Buy-Back of 10% or less of total Paid-Up Equity Share Capital and Free Reserve the Board of Directors can authorize the proposal through Board Resolution.
Note: While calling Board Meeting the provisions of the Companies Act, 2013 and Secretarial Standard on Meeting of Board of Directors (SS-1) shall be followed.
3. Convene General Meeting [Section 68(2)]: For Buy-Back exceeding 10% threshold (mentioned in Point No. 2 above) the Company shall obtain approval from its members by passing a Special Resolution in the General Meeting.
Note: While calling General Meeting the provisions of the Companies Act, 2013 and Secretarial Standard on General Meetings (SS-2) shall be followed.
4. File Form MGT-14 with Registrar: The Company shall file a copy of the Board Resolution and Special Resolution passed in its duly convened Board meeting and General meeting in Form No. MGT-14, within 30 days of passing such resolution along with the requisite documents and fees, with the Registrar of Companies (ROC).
Note: If a Private Limited Company conducts a Buy-Back solely through a Board Resolution, in such a case there’s no need to file the Form No. MGT-14.
5. File Letter of Offer [Rule 17(2)]: The Company which has been authorized by a Special Resolution shall, before the Buy-Back of shares, file with ROC a Letter of Offer in Form No. SH-8 along with the stipulated fees and the following documents:
Important Note: As per Rule 17(2) a Company is required to file Form No. SH-8 (letter of offer) only if the Buy-Back is authorized by a Special Resolution. However, as per Rule 17(3) and the general practices and recent issues faced while filing Form No. SH-11 (Return of Buy-Back), it is recommended to file Form No. SH-8 even in cases where the Buy-Back is authorized by the Board Resolution.
Now the Company shall file a Letter of Offer in Form No. SH-8 along with the stipulated fees and the following documents before the Buy-Back of Shares:
a. Mandatory Documents:
- Declaration by the Auditor(s);
- Copy of Board Resolution authorizing Buy-Back.
b. Documents on the basis of applicability as mentioned in the e-Form:
- Buyback details of the last 3 years are mandatory in case the Company has done any buyback in the last 3 years;
- Management discussion and analysis are mandatory in the case of the listed Company;
- List of Holding and Subsidiary Companies of the Company if applicable;
- Unaudited financial statements if applicable;
- Statutory approvals received (if any);
- Details of the Auditor, Legal Advisors, Bankers, and Trustees (if any);
- Any other information as an optional attachment(s) if deemed necessary.
6. File Declaration of Solvency [Section 68(6) and Rule 17(3)]
The Company shall file with the ROC a declaration of solvency in Form No. SH-9 along with the letter of offer in Form No. SH-8 ensuring the following:
a. Such Declaration and Letter of Offer to be signed by a minimum of 2 directors, 1 of whom shall be the managing director if any,
b. Such declaration to be verified by an affidavit to the effect that the Board of Directors has made a full inquiry into the Company’s affairs concluding that the Company is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of the declaration adopted by the Board
c. Such declaration to be filed with the Registrar along with the prescribed fees and the following documents:
-
- Statement of assets and liabilities;
- Auditor’s report;
- Affidavit as per rule 17(3) of the Companies (Share Capital and Debenture) Rules;
- Optional attachment(s), if any.
7. Dispatch of Letter of Offer [Rule 17(4)]: Once the Form No. SH-8 has been filed with the ROC the Company shall dispatch the Letter of Offer to the Shareholders or Security holders immediately but not later than 20 days from the date of filing with the ROC.
8. Offer Period [Rule 17(5)]: The Buy-Back Offer shall remain open for a period of at least 15 days and not more than 30 days from the date of dispatch of the Letter of Offer to the Shareholders or Security holders. In case where all the members of the Company agree, the Buy-Back Offer may remain open for a period of less than 15 days.
9. Verification of the Offers [Rule 17(7)]:
a. The Company shall complete the verification of the Offers so received within 15 days from the Offer closure date.
b. The shares or other securities so lodged shall be regarded as accepted unless a communication of rejection is made within 21 days from the Offer closure date.
10. Open a Separate Bank Account [Rule 17(8)]: Following the closure of offer, the Company shall immediately open a Separate Bank Account. This account shall hold the necessary funds to cover the entire sum due and payable as consideration for the shares tendered for Buy-Back.
Important Note: 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. [Section 69(1)]
11. Extinguishment of Shares/ Securities [Section 68(7)]: The Company buying back its own shares or other specified securities, shall extinguish and physically destroy the shares or securities so bought back within 7 days of the last date of completion of Buy-Back.
12. Closure of Offer [Rule 17(9)]: The Company shall within 7 days of the time specified in rule 17 (7)-
a. make payment of consideration in cash to those shareholders or security holders whose securities have been accepted; or
b. 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.
13. File Form SH-11 [Section 68(10) and Rule 17(13)]: The Company shall file a return in Form No. SH-11 within 30 days of the completion of Buy-Back with the Registrar along with stipulated fee and the following documents:
- Description of shares or other specified securities bought back;
- Particulars relating to holders of securities before Buy-Back;
- Copy of Special Resolution passed at the general meeting, if any;
- Copy of Board Resolution authorizing buyback;
- Balance Sheet of the Company
- Optional attachment(s) if any.
14. Maintain the Statutory Register [Section 68(9) and Rule 17(12)]
The Company shall maintain a register of shares or other specified securities bought-back in Form No. SH-10.
Such Register shall be maintained at the Company’s registered office in the custody of the Company Secretary or any other person authorized by the board.
Entries in such register shall be authenticated by the Company Secretary or any other person authorized by the Board on this behalf.
Conclusion
The procedure for buy-back of shares by private companies in India is a detailed process governed by legal provisions that protect the interests of both companies and shareholders. Understanding these procedures is essential for companies wishing to buy back their shares. Always consult legal experts or chartered accountants for specific advice and to ensure compliance with relevant laws and regulations.
Whether you are a company owner looking to buy back shares or a shareholder considering an offer, being informed about the buy-back procedure is crucial to making informed decisions and ensuring that the process is carried out smoothly and legally.
I believe this article has provided you with a clear understanding of the Procedure for Buy-Back by Private Companies. If you have any further inquiries or if you are seeking professional assistance, feel free to contact me at [email protected].
Author Bio
Thank you for the elaborate article on the subject matter. My query is regarding the Valuation. How the buyback price is decided and is it as per the valuation report to be obtained by the Company before the buyback or any variation and up to what limit is allowed considering the provisions of Income Tax as well?