Buy-Back: A Strategic Decision

“Explore the strategic decision of share buybacks in this comprehensive guide. Understand the reasons, legal framework, methods, and benefits for both companies and shareholders. Learn about compliance, taxation aspects, and technical issues involved in the buyback process.”

Buy Back of shares or specified securities is a process through which a company may buy its own shares or specified securities, Buy – Back of shares is a good method of giving a return to shareholders of the company. Through buy-back company purchases its own shares from secondary market from the shareholders who want to sell. There is no obligation to sell the shares on shareholders.

Why buy back?

There are many reasons for companies to execute a share buyback. Some of them are mention below:

• To invest in itself, or to improve its financial ratios. Share buybacks can help companies reduce the dilution caused by employee stock option plans.
• If a company has any type of threat of a hostile takeover, the management of a target company may Go for buy back some of its shares from the market as a defense strategy.
• If the company has more cash in the balance sheet, then to make its over-capitalized company to balance-capitalized, may purchase its own shares.
• Many Companies prefer way of buy back of shares to give the return to shareholders, is better than giving dividend.
• If a company’s management believes that the company’s stock is undervalued, they may decide to buy back some of its shares from the market to increase the price of the remaining shares.

Legal framework for Buy – Back of Shares & Securities

For Unlisted Companies

• Section 68, 69 and 70 of Companies Act, 2013
• Rule 17 of Companies Share Capital & Debenture Rule, 2014

For Listed Companies

• For Listed Companies
• SEBI (Buy Back of securities) Regulation, 2018

Sources of Buy-back:

A Listed/Unlisted company may purchase its own shares and other specified securities from

1) Its free reserves

2) Its Securities premium account

3) The proceeds of any shares or other specified securities.

(However, no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities)

Pre-Conditions for Buy-back:

Listed/ Unlisted Company shall comply with the following conditions to purchase its own shares or other specified securities:

Conditions

1. Articles of Association (AOA) shall authorize Buy Back, if no provision in AOA, then alter the AOA.

2. The approval required for buy back:

• • Board resolution passed in Board meeting is required, if the buy back is up to 10% of its Paid up equity capital +Free reserves.
  • Special Resolution passed in a general meeting is required, if the buy back is up to 25% of its Paid up equity capital +Free reserves.

3. The Buy back shall be 25% or less of its total paid up share capital and free reserves.

4. Buy back of equity shares in any financial year shall not be more than 25% of its paid up equity capital.

5. The ratio of Debt equity ratio shall be 2:1 after buy bac

6. The shares and other specified securities should be fully paid up.

7. Buy back of the shares of listed Company shall be in accordance with the SEBI regulation prescribed for the Buy back of shares and other securities.

8. There shall be minimum 1 year gap between two Buy Back.

9. Company shall not withdraw the offer, once it is announced to the shareholders.

Listed Companies shall comply with the following additional conditions

10. A company shall not buy back its securities so as to delist its securities from the stock exchange

11. A company shall not buy back its securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions or through any private arrangement.

Buy Back of Shares under Companies Act, 2013:

Section 68 of Companies Act, 2013: Section 68 of the Companies Act, 2013 empowers a company to purchase its own shares or other securities in certain cases.

Method of Buy-Back

Unlisted Companies may do buy back of shares by the following methods:-

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.

Step by step Procedure of Buy-Back

Procedure of Buy-Back for unlisted companies mentioned under section 68 of Companies Act, 2013 & Rule 17 of Share Capital & Debenture Rule, 2014 is as follows:

Sl. No. Steps should be followed

1. Convene a Board meeting and pass a resolution for the proposal of buyback, if the buyback is up to 25% pass then pass a resolution for convening an Extraordinary general meeting to pass a special resolution. (Company may pass a resolution by postal ballot also).

2. File a MGT 14 with Registrar of Companies (ROC).

3. Where a special resolution is required for authorizing a buy back, the explanatory statement to be annexed with the notice of GM shall contain the following disclosures:

1) A full and complete disclosure of all material facts;

2) The necessity for the buy back;

i. the class of shares or securities intended to be purchased under the buy back;

ii. the amount to be invested under the buy back; and iii. the time limit for completion of buy back.

[Section 68(3)].

4. After passing the Board Resolution/ special resolution, as the case may be but before the Buyback begin, file with the ROC following documents:-

• • SH 8 i.e. Letter of Offer [Rule 17].
  • E form SH 9 i.e Declaration of Solvency, verified by an affidavit to the effect that, company is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the Board [Section 68(6)].

5. The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the ROC but not later than 20 days from its filing with the ROC.

6. The offer for buy back shall remain open for · Minimum period of 15 days · Maximum for 30 days, from the date of dispatch of the letter of offer.

(Further, where all members of a company agree, the offer for buy back may remain open for a period less than 15 days.)

7. Timeline for Buy Back · The buy back shall be completed within a period of 1 year from the date of passing of Special Resolution or Board Resolution, as the case may be [Section 68(4)]. · No further fresh issue of the same kind of shares is allowed within 6 months from buy back, except by way of issue of bonus shares, ESOPs, sweat equity and conversion of debt/preference shares into equity [Section 68(8)].

8. On closing of the offer period, immediately open a separate bank account and deposit the entire sum due.

9. Within 15 days of the end of the offer period, complete the verification of the offer received.

10. Within 7 days of verification, Make a payment of consideration to shareholders Or Return share certificates of shareholders, whose shares are not accepted Shares lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of the offer.

11. Within 7 days of the last day of completion of buyback, extinguish or physically destroy the shares bought back.

12. Maintain a register of Buyback in SH 10 [Section 68(9)].

13. Within 30 days from completion of buyback: ü Company shall file a return of buyback to the ROC in form SH 11 [Section 68(10)]. ü Company shall file SH 15 signed by the directors, certifying that all provisions of the Companies Act and rules are complied with.

14. The audited account on the basis of which calculation with reference to buy back is done should not be more than 6 months old from the date of offer document. However, where the audited accounts are more than 6 months old, the calculations shall be done on the basis of un audited accounts not older than 6 months from the date of offer document which are subjected to limited review by the auditors of the company.

15. If the buyback is done out of free reserves or securities premium, then the amount equal to the nominal value of the shares bought back shall be transferred to the Capital Redemption Reserve (CRR) account, which may be utilized for the issue of fully paid bonus shares. (Section 69)

Buy Back of Securities and other specified securities as per SEBI (Buy Back of securities) Regulation, 2018:The listed Companies shall follow the provisions of above said SEBI regulations, companies act, 2013 and rules made thereunder.

Applicability
These regulations shall be applicable to buy-back of shares or other specified securities of a company in accordance with the applicable provisions of the Companies Act.

Methods of Buy-Back for Listed Entities

A Listed entity may buy-back its shares or other specified securities through any one of the following methods:

a) From the existing shareholders or other specified securities holders on a proportionate basis through the tender offer;

b) From the open market through—

• • book-building process
  • stock exchange;

c) From odd-lot holders:

(However no offer of buy-back for 15% or more of the paid up capital and free reserves of the company shall be made from the open market.)

Compliances related to Buy Back for Listed Companies:

A company has to follow the same provisions mentioned under Section 68/69/70 of Companies Act, 2013 as describe above. However, there is some additional compliance for listed entities as mentioned under Buy Back of Securities and other specified securities as per SEBI (Buy-Back of securities) Regulation, 2018.

Additional Provisions

1. A company shall · File a copy of the Board resolution within 2 working days of the date of the passing of the resolution or · within 7 working days in case of Special resolution, With the SEBI and the stock exchanges, where the shares or other specified securities of the company are listed.

2. Where a special resolution is required for authorizing a buy back, the explanatory statement to be annexed with the notice of GM shall contain the following disclosures: a) Disclosures under sub section 3 of section 68 of the Companies Act as mentioned above
b) Additional disclosures under these regulations as provided in Schedule I

3. Provided that where the buy back is through tender offer from existing securities holders, the explanatory statement shall contain the following additional disclosures:

a) The maximum price at which the buy–back shall be made. Whether the board of directors of the company is being authorized at the general meeting to determine subsequently the specific price at which the buy–back may be made at the appropriate time;

b) If the promoter intends to offer his shares or other specified securities, the quantum of shares proposed to be tendered and The details of their transactions and their holdings for the last 6 months prior to the passing of the special resolution for buy–back including information of number of shares or other specified securities acquired, the price and the date of acquisition. (Where the buy–back is from open market either through the stock exchange or through book building, the BR/SR shall specify the maximum price at which the buy–back shall be made.)

4. Within 30 days from completion of buyback: ü Company shall file a return of buyback to the ROC & SEBI in form SH 11.

Restrictions on Buy-Back:

As per section 70of Companies Act, 2013, a Company (Listed/unlisted) directly or indirectly shall not buy-back its securities or other specified securities,–

a. through any subsidiary company including its own subsidiary companies;

b. through any investment company or group of investment companies; or

c. If there is any default in payment of deposits or interest due, redemption of debentures/preference shares or payment of dividend.

d. When Company has defaulted in filing of Annual Return, declaration of dividend & financial statement.

Benefits of Buy-back of shares to Companies:

✓ To increase the promoters holding as the shares which are bought are cancelled.

✓ It safeguards against a hostile takeover by increasing promoters holding.

✓ Buy back support the share price when the share price, in the opinion of the management is less than its fair value.

Benefits of Buy-back of shares to Shareholders

✓ 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.

✓ To increase EPS, if there is no dilution in companies earnings as the buy-back reduces the outstanding number of shares.

✓ It is tax efficient return to shareholders

Benefits of Buy-back of shares to Investors

✓ Increase in EPS, it impact reputation of the company, leaves overall positive image in the market.

✓ Builds the trust, buyback enhance the trust among the investors that company has a high potential to grow & better future plans.

Why Companies should go for Buyback at regular interval:

If the company has sufficient cash or balance, company may go for buy-back, as this is a new method which impact companies in many ways and it will gives a company as well as shareholders benefits in many ways. As Dividend payments are taxed as income whereas rising share values aren’t taxed at all. Any holders who sell their shares back to the company may recognize capital gains taxes, naturally, but shareholders who do not sell receive the reward of a higher share value and no additional taxes.

Taxation Aspect of Buy Back

Buy-Back Tax has to be paid by the company on the distributed income which is nothing but the consideration paid by the company on buyback of shares, as reduced by the amount received by the company on the issue of such shares, a buyback tax of 20% payable by a company on buyback. The consequential income arising in the hands of shareholders is exempt from tax.

In case of listed companies, the buyback could be carried out in 2 different ways.

✓ One is the offer tender route, where the shareholder directly surrenders his shares to the company at a particular price, and

✓ the second is the open market route, where the company makes an announcement and buys its own shares in the open market at rates not exceeding a particular price.

Under the offer tender route, there is no double taxation, as the company pays the buyback tax, and the shareholder would claim exemption from capital gains.

The problem arises under the open market route, where the company acquires the shares in the open market at the prevailing market prices (subject to the cap). Since market transactions, executed through the stock exchange trading platform, the seller is not aware about the identity of the buyer – whether it is the company, which is buying back its shares, or some investor. The seller of the shares would therefore continue to pay the capital gains tax on the sale of his shares, even though the company would be paying the buyback tax on the shares it has bought back.

The price-to-earnings ratio (P/E ratio), which helps investors understand a company’s relative valuation by comparing its stock price to its EPS, also affect the value of company.

There are so many other reasons also, as mentioned above for company to buy back its shares at regular interval.

Other technical issues in Buyback

Buy back may result in reduction in credit rating if the company borrows money to repurchase the shares, or loss of investor confidence in it. Further, sometimes buy back may leads to double taxation, as described above.

If a Company is buying stock at any price, rather than at a good price, it may destroy shareholder capital.

Further, the public companies will be required to pay an excise tax of 1% on buybacks.

Conclusion

Companies (listed/ unlisted) shall follow the compliances as mentioned in their respective rules and regulation for Buy-back of shares and Specified securities. Listed Companies has to follow the more procedure than unlisted company. Buy-back may result in positive or negative impact on the company or shareholders as per the different scenarios. Further, investors should be careful while deciding regarding buyback of shares.

Buy-Back of shares will be good enough if the company has enough cash to conduct its operational activities and for its future prospects, after the Buyback also.