CS Nikita Snehil

SEBI at its meeting held on March 28, 2018[1] had approved the proposal of undertaking a public consultation process for reviewing the SEBI (Buy-Back of Securities) Regulations, 1998 (Regulations, 1998) with an objective of simplifying the language, removing redundant provisions and inconsistencies, updating the references to the Companies Act, 2013/ other new SEBI Regulations, and incorporating the relevant circulars, FAQs, informal guidance in the regulations, wherever possible. Thereafter, SEBI vide its Notification[2] dated September 11, 2018, has notified the changes proposed by it in the Discussion Paper, through the SEBI (Buy-Back of Securities) Regulations, 2018 (‘Amended Regulations’). The present Article provides the changes brought in by the new set of Regulations:

Changes brought in by the new Regulations:

a) Meaning of Buyback Period

  • Amended provision [New insertion]-

‘Buyback period’ means the period between the date of board of directors resolution or date of declaration of results of the postal ballot for special resolution, as the case may be, to authorize buyback of shares of the company and the date on which the payment of consideration to shareholders who have accepted the buyback offer is made.”

The term ‘Buyback period’ has been used in various provisions of the Regulations, therefore, in order to provide clarity, the same has been defined in the Amended Regulation, as to mean the time between date of authorisation for buyback by a co. and the date on which the payment is made to shareholders who have accepted the offer.

However, the Amended Regulation has not incorporated the amendment brought in by the Companies (Amendment) Act, 2017, as prior to the said amendment, a company could obtain the shareholder’s approval through postal ballot only. Currently, companies may obtain the said approval either by postal ballot or by conducting a general meeting. Therefore, a clarification/ amendment in the said definition shall be awaited.

b) Maximum limit of buy-back of securities

  • Amended provision [New insertion]

The maximum limit of any buy-back shall be twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company:

Explanation: In respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent in this regulation shall mean its total paid-up equity capital in that financial year;

It’s a clarificatory change, updating reference to provisions of Section 68 (2) (c) of the Companies Act, 2013.

c) Ratio of the aggregate of secured and unsecured debts

  • Amended provision [New insertion]

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 free reserves.

Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies.

It’s a clarificatory change, updating reference to provisions of Section 68 (2) (d) of the Companies Act, 2013.

d) Fully paid up securities

  • Amended provision [New insertion]

All shares or other specified securities for buy-back shall be fully paid-up.

It’s a clarificatory change, updating reference to provisions of Section 68 (2) (e) of the Companies Act, 2013

e) Reduction of share capital:

  • Amended provision [New insertion]

A company shall not allow buy-back of its shares unless the consequent reduction of its share capital is effected.

It’s a clarificatory change, updating reference to provisions of Section 67 (1) of the Companies Act, 2013

f) Buy-Back can be undertaken through

  • Amended provision [New insertion]

(a) its free reserves;

(b) the securities premium account; or

(c) the proceeds of the issue of any shares or other specified securities:

Provided that no such buy-back shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

It’s a clarificatory change, updating reference to provisions of Section 68 (1) of the Companies Act, 2013.

g) Restrictions on purchase of own shares or securities:

  • Amended provision [New insertion]

No company shall directly or indirectly purchase its own shares 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 a default is made by the company in the repayment of deposits accepted either before or after the commencement of the Companies Act, 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:

Provided that 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.

It’s a clarificatory change, updating reference to provisions of Section 70 of the Companies Act, 2013.

h) Authorization/ approval for buy-back

  • Amended provision [New insertion]

The company shall not authorise any buy-back (whether tender offer or from open market or odd lot) unless:

a) The buy-back is authorised by the company’s articles;

b) Except otherwise specified in this regulation, a special resolution has been passed at a general meeting of the company authorising the buy-back;

It’s a clarificatory change, updating reference to provisions of Section 68 (2) of the Companies Act, 2013.

i) Max tenure to complete the buy-back process

  • Amended provision [New insertion]

Every buy-back shall be completed within a period of one year from the date of passing of the special resolution at general meeting, or the resolution passed by the board of directors of the company, as the case may be.

It’s a clarificatory change, updating reference to provisions of Section 68 (4) of the Companies Act, 2013.

j) Clarification on the timeline for public announcement

  • Amended provision [New insertion]

The company which has been authorised by a special resolution or a resolution passed by the board of directors, as the case may be, shall make a public announcement within two working days from the date of declaration of results of the postal ballot for special resolution/board of directors resolution…

The requirement of making the PA was even there in the erstwhile Regulation, however, clarity has been provided with respect to the initiation of the time frame, i.e., the period of two working days shall be computed from the date of approval received from the respective approving authority.

However, as mentioned in point no.1, the Amended Regulation has not incorporated the changes brought in by the Companies (Amendment) Act, 2017, and hence, the amended Regulations shall require another amendment or clarification to incorporate the approval by shareholders at the general meeting as well in the said timeline.

k) Filing of form post the completion of the buy-back

  • Amended provision [New insertion]

The company shall, after the completion of the buy-back, file with the Registrar of Companies and the Board, a return containing such particulars relating to the buy-back within thirty days of such completion, in the format as may be specified.

It’s a clarificatory change, updating reference to provisions of Section 68 (10) of the Companies Act, 2013.

l) Exemption from seeking shareholder’s approval

  • Amended provision [New insertion]

Nothing contained in sub-regulation (iv) of this regulation shall apply to a case where—

a) the buy-back is, ten per cent. or less of the total paid-up equity capital and free reserves of the company; and

b) such buy-back has been authorised by the Board of Directors of the company by means of a resolution passed at its meeting;

It’s a clarificatory change, updating reference to provisions of Section 68 (2) (b) of the Companies Act, 2013.

m) Mode of dispatch

  • Amended provision [New insertion]

1. Letter of Offer may also be dispatched through electronic mode in accordance with the provisions of the Companies Act.

2. On receipt of a request from any shareholder to receive a copy of the letter of offer in physical format, the same shall be provided.

3. The aforesaid shall be disclosed in the letter of offer.

It’s a clarificatory change, updating reference to provisions of the Companies Act, 2013.

n) Participation of an eligible public shareholder, who does not receive the tender offer/offer form

  • Amended provision [New insertion]

Even if an eligible public shareholder does not receive the tender offer/offer form, he may participate in the buy-back offer and tender shares in the manner as provided by the Board.

The amendment has been brought to safeguard the interest of the bonafide shareholders.

o) Rights of an unregistered shareholder to participate in the buy-back process

  • Amended provision [New insertion]

An unregistered shareholder may also tender his shares for buy-back by submitting the duly executed transfer deed for transfer of shares in his name, along with the offer form and other relevant documents as required for transfer, if any.

The amendment has been brought to safeguard the interest of the shareholders.

p) SEBI’s power to allow tendering of shares and settlement of the same, through the stock exchange mechanism

  • Existing provision-

“The acquirer or promoter shall facilitate tendering of shares by the shareholders and settlement of the same, through the stock exchange mechanism as specified by the Board.”

  • Amended provision –

“The company shall facilitate tendering of shares by the shareholders and settlement of the same, through the stock exchange mechanism in the manner as provided by the Board.”

The amendment makes the company responsible for facilitation of the tendering of shares and its settlement. Earlier the responsibility was only limited to the promoters/ acquirer.

q) Register of shares or other securities which have been bought-back

  • Existing provision-

“The company shall maintain a record of security certificates] which have been cancelled and destroyed as prescribed in sub-section (9) of section 77A of the Companies Act.”

  • Amended provision –

“Where a company buys back its shares or other specified securities under these regulations, it shall maintain a register of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed in sub-section (9) of section 68 of the Companies Act.”

It’s a clarificatory change, updating reference to provisions of Section 68 of the Companies Act, 2013 read with Rule 17 (12) (a) of the Companies (Share Capital and Debenture) Rules, 2014.

r) Interest bearing escrow account

  • Amended provision [New insertion]

The cash component of the escrow account may be maintained in an interest bearing account, provided that the merchant banker ensures that the funds are available at the time of making payment to shareholders.

The amendment shall eliminate the loss of interest on the amounts deposited by the companies in the escrow account.

s) Deletion of certain provisions

The entire provisions related to:

a) Power of the Board to order investigation;

b) Duty to produce records, etc.;

c) Submission of Report to the Board

under Regulation 1998, has been deleted.

Conclusion

As rightly mentioned in the Discussion Paper, the reframing of the Amended Regulation has mainly been done to incorporate a significant number of provisions as outlined under Section 68 and 70 of the Companies Act, 2013, to make the Amended Regulation self-contained and more comprehensive. Further, the existing provisions have also been re-structured and re-sequenced to give a better flow of the provisions.

[1] https://taxguru.in/sebi/sebi-decision-recommendations-kotak-committee.html

[2] https://taxguru.in/sebi/sebi-buy-back-securities-regulations-2018.html

(Author can be reached at nikita@vinodkothari.com )

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