SEBI (Buy Back of Securities) Regulations, 2018 For CS Executive

BUY-BACK –

‘Buy-back’ means the purchase of its own shares or other specified securities by a company.

A buy-back represent a more flexible way of returning surplus cash to its shareholders as it is governed by a process laid down by law.

Features –

a. It may be carried out through the stock exchange mechanism.

b. It is more tax efficient as it does not involve the company to make payment of dividend distribution tax.

c. It has the benefits of long-term capital gains.

Buy-Back Period –

‘Buyback period’ means the period between the date of board of directors’ resolution or date of 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;

OBJECTIVES/ADVANTAGES OF BUY-BACK –

a. To strategically increase promoters’ shareholding subject to compliance with SEBI (SAST) Regulations.

b. To improve Earning Per Shares (EPS).

c. To improve ROE, ROCE and to enhance the long-term shareholder’s value.

d. To prevent hostile takeover bids.

e. To return shareholders the surplus cash to shareholders.

f. To achieve optimum capital structure.

g. Tax on dividends received at the applicable tax rate compared to a low (capital gains) tax rate in case of buy-backs.

PROVISIONS OF THE COMPANIES ACT, 2013 –

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.

For Listed Companies, the SEBI Regulations for Buy Back will also be applicable.

Section 68(1) of the Companies Act, 2013, a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of –

a. its free reserves;

b. the securities premium account; or

c. the proceeds of the issue of any shares or other specified securities of different class.

Conditions for Buy-Back pursuant to section 68(2) of the Companies Act, 2013

a. the buy-back must be authorised by its articles.

b. Buy back must be authorized by a Special Resolution. [if Buy back is 10% or less of (Paid-up Share capital + Free Reserve) the BR is sufficient.]

c. The buy-back is twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company.

d. Debt to Capital Ratio shall not be more than 2:1. (debts Includes Secured and Unsecured debts both).

e. Shares must be fully paid-up.

f. Buy back must be in accordance with SEBI (buy back of securities) Regulations, 2018.

g. No offer of buy-back mentioned above shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back.

h. Every buy-back shall be completed within a period of one year from the date of passing of the special resolution or Board Resolution as the case may be.

Applicability [Regulation 3]

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.

Conditions of Buy Back of Shares [Regulation 4]

1. 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 [based on both standalone and consolidated financial statements of the company].

Note – In respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent in this regulation shall be construed with respect to its total paid-up equity capital in that financial year

2. Debt – Equity Ratio shall be less than or equal to 2:1 after buy back of shares [, based on both standalone and consolidated financial statements of the company].

Note –

i. If a higher ratio of the debt to capital and free reserves for the company has been notified under the Companies Act, 2013, the same shall prevail.

ii. Equity means paid-up capital and free reserves.

iii. Financial statements of all subsidiaries that are non-banking financial companies and housing finance companies regulated by Reserve Bank of India or National Housing Bank shall be excluded.

iv. Excluded subsidiaries have their ratio of aggregate of secured and unsecured debts to the paid-up capital and free reserves of not more than 6:1 on standalone basis.

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

4. A company shall not buy-back its shares or other specified securities so as to delist its shares or other specified securities from the stock exchange.

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

6. A company shall not make any offer of buy-back within a period of one year reckoned from the date of expiry of buyback period of the preceding offer of buy-back, if any

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

Sources of Buy Back

A company may undertake a buy-back of its own shares or other specified securities out of—

a. its free reserves;

b. the securities premium account; or

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

Note – 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.

PROHIBITIONS FOR BUY-BACK

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 and 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 remedied and a period of three years has lapsed after such default ceased to subsist.

AUTHORISATION FOR BUY-BACK

1. The company shall not authorise for any buy-back whether by way of tender offer or from open market or odd lot unless:

•  Authorisation for Buyback in the Articles of the Company.
• A special resolution is required to passed at a general meeting of the company for such authorisation.

Note – only BR is required where the buy-back is 10% or less of the total paid-up equity capital and free reserves of the company.

2. Every buy-back shall be completed within a period of one year from the date of passing of SR/BR.

3. The company shall file with the ROC and SEBI, a Buy Back Return within thirty days of expiry of Buy Back Period, in the Form No. SH-11.

4. 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 –

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.

b) Additional disclosures under these regulations as provided in Schedule I,

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

• •  The maximum price at which the buy-back of shares or other specified securities shall be made.
  • Whether the board of directors of the company is being authorised at the general meeting to determine subsequently the specific price at which the buy-back may be made at the appropriate time;
  • 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 six 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.

5. A copy of the SR shall be filed with the SEBI and the stock exchanges, where the shares or other specified securities of the company are listed, within seven days from the date of passing of the resolution.

6. 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.

7. A company, shall file a copy of the BR, with the SEBI and the stock exchanges, where the shares or other specified securities of the company are listed, within two working days of the date of the passing of the resolution.

8. No insider shall deal in shares or other specified securities of the company on the basis of unpublished price sensitive information relating to buy-back of shares or other specified securities of the company.

Methods of Buy Back

A company may buy-back its shares or other specified securities by 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—

i) book-building process,

ii) stock exchange;

c. From odd-lot holders:

Note – The buyback from open market shall be less than fifteen per cent of the paid up capital and free reserves of the company, based on both standalone and consolidated financial statements of the company.

1st Method

Buy Back from the existing shareholders or other specified securities holders on a proportionate basis through the tender offer –

• A company may buy-back its shares or other specified securities from its existing securities holders on a proportionate basis in accordance with the provisions of these Regulations.
•  In this Method a company proposes to buy back shares/securities sold earlier at a fixed price through a letter of offer from the holders of shares/securities of the company.
•  The company is required to make a fund allocation based on the fixed price and deposit a specified portion of money in a designated escrow account.
• The buy-back offer under the tender route is valid for a maximum period of thirty days from the date of initiation of the offer.
• In this method Bifurcation of shareholders is made into two categories, namely general and reserved (Small Shareholders Category).
• As per Regulation 6 of the SEBI (Buyback of Securities) Regulations, 2018, fifteen percent of the number of securities which the company proposes to buy back or number of securities entitled as per their shareholding, whichever is higher, shall be reserved for small shareholders.
• As per regulation 2(n) of the SEBI (Buy back of Securities) Regulations, 2018 ‘small shareholder’ means a shareholder of a company, who holds shares or other specified securities whose market value, on the basis of closing price, on the recognized stock exchange in which highest trading volume in respect of such securities, as on record date is not more than two lakh rupee.

Procedure for buy back under 1st method

1. The Company shall make a public announcement within two working days from the date of passing SR/BR in at least one English National Daily, one Hindi National Daily and one regional language daily, all with wide circulation at the place where the Registered Office of the company is situated and the said public announcement shall contain all the material information as specified in Schedule II.

2. A copy of the public announcement shall also be submitted to the SEBI, simultaneously, through a merchant banker.

3. The company shall within five working days of the public announcement file the following with the Board –

a. a draft letter of offer, containing disclosures as specified in Schedule III through a merchant banker.

b. a declaration of solvency

c. fees specified in Schedule V.

4. The Board may provide its comments on the draft letter of offer with in seven working days of the receipt of the draft letter of offer.

Note –

d) In the event the Board has sought clarifications or additional information from the merchant banker to the buy-back offer, the period of issuance of comments shall be extended to the seventh working day from the date of receipt of satisfactory reply to the clarification or additional information sought.

e) In the event the Board specifies any changes, the merchant banker to the buy-back offer and the company shall carryout such changes in the letter of offer before it is dispatched to the shareholders.

5. A company making a buy-back offer shall announce a record date in the public announcement for the purpose of determining the entitlement and the names of the security holders, who are eligible to participate in the proposed buy-back offer.

6. The letter of offer along with the tender form shall be dispatched to the securities holders who are eligible to participate in the buy-back offer, with in five working days from the receipt of communication of comments from the Board.

7. 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.

8. 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.

9. The date of the opening of the offer shall be not later than five working days from the date of dispatch of the letter of offer.

10. The offer for buy-back shall remain open for a period of ten working days.

11. 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.

12. The company shall accept shares or other specified securities from the securities holders on the basis of their entitlement as on record date.

13. The shares proposed to be bought back shall be divided into two categories;

(a) reserved category for small shareholders and

(b) the general category for other shareholders, and the entitlement of a shareholder in each category shall be calculated accordingly.

14. Escrow account –

a. if the consideration payable does not exceed Rupees 100 crores = 25 % of the consideration payable;

b. if the consideration payable exceeds Rupees 100 crores; 25 % up to Rupees 100 crores and 10 % thereafter.

The escrow account referred to in this regulation shall consist of,

(i) cash deposited with a scheduled commercial bank, or

(ii) bank guarantee in favour of the merchant banker, or

(iii) deposit of acceptable securities with appropriate margin, with the merchant banker, or

(iv) a combination of (i), (ii) and (iii).

Note –

• Where the escrow account consists of bank guarantee or deposit of approved securities, the company shall also deposit with the bank in cash a sum of at least one per cent of the total consideration payable, as and by way of security for fulfilment of the obligations under the regulations by the company.
• On payment of consideration to all the securities holders who have accepted the offer and after completion of all formalities of buy-back, the amount, guarantee and securities in the escrow, if any, shall be released to the company.
•  The Board in the interest of the securities holders may in case of nonfulfillment of obligations under the regulations by the company forfeit the escrow account either in full or in part.

15. Closure and Payment to Securities Holders –

•  The company shall open a special account with a banker to an issue, registered with the SEBI immediately after the date of closure of the offer, and deposit therein, such sum as would, together with ninety percent of the amount lying in the escrow account, make-up the entire sum due and payable as consideration for buy-back in terms of these regulations.
•  The company shall complete the verification of offers received and make payment of consideration to those holders of securities whose offer has been accepted and return the remaining shares or other specified securities to the securities holders within seven working days of the closure of the offer.

16. Extinguishment of Certificate and other Closure Compliances –

•  The company shall extinguish and physically destroy the securities certificates so bought back in the presence of a registrar to issue or the Merchant Banker and the Statutory Auditor within fifteen days of the date of acceptance of the shares or other specified securities.
•  the company shall ensure that all the securities bought-back are extinguished within seven days of expiry of buy-back period.
•  If the shares or other specified securities offered for buy-back is already dematerialised, then it shall be extinguished and destroyed in the manner specified under SEBI (Depositories and Participants) Regulations, 1996, and the bye-laws, the circulars and guidelines framed thereunder.
• Where a company buys-back its shares or other specified securities it shall maintain a register of the shares or securities so bought, in Form SH. 10 in pursuance of section 68(9) of the Companies Act, 2013.
• The company shall furnish the particulars of the securities certificates extinguished and destroyed, to the stock exchanges where the shares of the company are listed within seven days of extinguishment and destruction of the certificates.
•  The company shall, furnish a certificate to the SEBI duly certified and verified by:

a) the registrar and whenever there is no registrar, by the merchant banker;

b) two directors of the company, one of whom shall be a managing director, where there is one; and

c) the statutory auditor of the company,

Note – This certificate shall be furnished to the Board within seven days of extinguishment and destruction of the certificates

2nd Method

ODD-LOT BUY-BACK

‘Odd lots’ mean the lots of shares or other specified securities of a company, whose shares are listed on a recognised stock exchange, which are smaller than such marketable lots, as may be specified by the stock exchange;

The provisions pertaining to buy-back through tender offer as specified above shall be apply mutatis mutandis to odd-lot shares or other specified securities.

3rd Method

BUY-BACK FROM THE OPEN MARKET

• The buy-back of shares or other specified securities from the open market may be in any one of the following methods:

(a) through stock exchange,

(b) book-building process.

• The company shall ensure that at least fifty per cent of the amount earmarked for buy-back, as specified in the resolution of the board of directors or the special resolution, as the case may be, is utilized for buying-back shares or other specified securities.

Buy-back through stock exchange –

Pre-Opening Conditions –

• The buy-back shall be made only on stock exchanges having nationwide trading terminals;
•  The buy-back of the shares or other specified securities through the stock exchange shall not be made from the promoters or persons in control of the company;
• The buy-back of shares or other specified securities shall be made only through the order matching mechanism except ‘all or none’ order matching system;

Disclosures, filing requirements and timelines of public announcement: –

•  The company shall appoint a merchant banker and make a public announcement as referred to in regulation 7 pertaining to tender offer;
•  The public announcement shall be made within two working days from the date of passing the BR/SR as relevant and shall contain disclosures as specified in Schedule IV;
•  Simultaneously with the issue of such public announcement, the company shall file a copy of the public announcement with the SEBI along with the fees specified in Schedule V;
•  The public announcement shall also contain disclosures regarding details of the brokers and stock exchanges through which the buy-back of shares or other specified securities would be made;

Note: In case of the buy-back from open market, no draft letter of offer/ letter of offer is required to be filed with the Board.

Opening of the offer on stock exchange –

• The identity of the company as a purchaser shall appear on the electronic screen when the order is placed;
•  The buy-back offer shall open not later than seven working days from the date of public announcement and shall close within six months from the date of opening of the offer.

Subsequent compliances for open market buy-back through stock exchange

• The company shall submit the information regarding the shares or other specified securities bought-back, to the stock exchange on a daily basis in such form as may be specified by the Board and the stock exchange shall upload the same on its official website immediately;
• The company shall upload the information regarding the shares or other specified securities bought-back on its website on a daily basis.
• A company may buy-back its shares or other specified securities in physical form in the open market through stock exchange by following the procedure –
  •  A separate window shall be created by the stock exchange, which shall remain open during the period of buy-back, for buy-back of shares or other specified securities in physical form.
  • The company shall buy-back shares or other specified securities from eligible shareholders holding physical shares through the separate window, only after verification of the identity proof and address proof by the broker.
  • The price at which the shares or other specified securities are bought back shall be the volume weighted average price of the shares bought-back, other than in the physical form, during the calendar week in which such shares or other specified securities were received by the broker:

Note – The price of shares tendered during the first calendar week of the buy-back shall be the volume weighted average market price of the shares or other specified securities of the company during the preceding calendar week.
Explanation: In case no shares or other specified securities were bought back in the normal market during calendar week, the preceding week when the company has last bought back the shares or other specified securities may be considered.

Escrow account for open market buy-back through stock exchange –

• The company shall, before opening of the offer, create an escrow account and deposit in escrow account 25 % of the amount earmarked for the buy-back as specified in the BR/SR, as the case may be.
• The escrow account may be in the form of —

a) cash deposited with any scheduled commercial bank; or

b) bank guarantee issued in favour of the merchant banker by any scheduled commercial bank.

• Where part of the escrow account is in the form of a bank guarantee, the company shall deposit with a scheduled commercial bank, in cash, a sum of at least 2.5 % of the total amount earmarked for buy-back in BR/SR, as the case may be, as and by way of security for fulfilment of the obligations under the regulations by the company.
• The escrow amount may be released for making payment to the shareholders subject to at least 2.5 per cent of the amount earmarked for buyback as specified in the BR/SR, as the case may be, remaining in the escrow account at all points of time.
• On fulfilling the obligation, the amount and the guarantee remaining in the escrow account, if any, shall be released to the company.
• In the event of non-compliance, the SEBI may direct the merchant banker to forfeit the escrow account, subject to a maximum of 2.5 per cent of the amount earmarked for buy-back as specified in the BR/SR, as the case may be, except in cases where,-

a. volume weighted average market price (VWAMP) of the shares or other specified securities of the company during the buy-back period was higher than the buy-back price as certified by the Merchant banker based on the inputs provided by the Stock Exchanges.

b. sell orders were inadequate despite the buy orders placed by the company as certified by the Merchant banker based on the inputs provided by the Stock Exchanges.

c. such circumstances existed which were beyond the control of the company and in the opinion of the Board merit consideration.

• In the event of forfeiture for non-fulfilment of obligation, the amount forfeited shall be deposited in the Investor Protection and Education Fund of SEBI.

Extinguishment of certificates for open market buy-back through stock exchange

•  The provisions of regulation 11 pertaining to the extinguishment of certificates for tender offers shall apply for extinguishment of certificates under this Chapter.
• The company shall complete the verification of acceptances within fifteen days of the pay-out.
• The company shall extinguish and physically destroy the securities certificates so bought back during the month in the presence of a Merchant Banker and the Statutory Auditor, on or before the fifteenth day of the succeeding month:
• The company shall ensure that all the securities bought-back are extinguished within seven days of expiry of buy-back period.

Buy-back through book building –

A company may buy-back its shares or other specified securities through the book-building process as provided hereunder: –

• The SR/BR, as the case may be, shall be passed.
• Disclosures, filing requirements and timelines for public announcement:

(a) The company shall appoint a merchant banker and make a public announcement.

(b) The disclosures in the public announcement shall also be in accordance with Schedule II.

(c) The public announcement shall be made at least seven days prior to the commencement of buy-back.

• Escrow Account –

(a) The deposit in the escrow account shall be made before the date of the public announcement.

(b) The amount to be deposited in the escrow account shall be determined with reference to the maximum price as specified in the public announcement.

• A copy of the public announcement shall be filed with the Board within two days of such announcement along with the fees as specified in Schedule V.
•  The public announcement shall also contain the detailed methodology of the book-building process, the manner of acceptance, the format of acceptance to be sent by the securities holders pursuant to the public announcement and the details of bidding centres.
• The book-building process shall be made through an electronically linked transparent facility.
• The number of bidding centers shall not be less than thirty and there shall be at least one electronically linked computer terminal at all the bidding centers.
•  The offer for buy-back shall remain open to the securities holders for a period not less than fifteen days and not exceeding thirty days.
•  The merchant banker and the company shall determine the buy-back price based on the acceptances received.
•  The final buy-back price, which shall be the highest price accepted shall be paid to all holders whose shares or other specified securities have been accepted for buy-back.
•  The provisions of sub-regulation (ii) of regulation 10 pertaining to verification of acceptances and the provisions of regulation 10 pertaining to opening of special account and payment of consideration shall be applicable mutatis mutandis.

Extinguishment of certificates –

The provisions pertaining to extinguishment of certificates for tender offer shall be applicable mutatis mutandis to the buy-back through book building.

Obligations of the company for all buy-back procedure For company –

i. The company shall ensure that—

a. the letter of offer, the public announcement of the offer or any other advertisement, circular, brochure, publicity material shall contain true, factual and material information and shall not contain any misleading information and must state that the directors of the company accept the responsibility for the information contained in such documents;

b. the company shall not issue any shares or other specified securities including by way of bonus till the date of expiry of buyback period for the offer made under these regulations;

c. the company shall pay the consideration only by way of cash;

d. the company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the Board or public announcement of the offer to buy-back is made;

e. the promoter(s) or his/their associates shall not deal in the shares or other specified securities of the company in the stock exchange or off-market, including inter- se transfer of shares among the promoters during the period from the date of passing the resolution of the board of directors or the special resolution, as the case may be, till the closing of the offer.

f. the company shall not raise further capital for a period of one year from the expiry of buyback period, except in discharge of its subsisting obligations.

ii. No public announcement of buy-back shall be made during the pendency of any scheme of amalgamation or compromise or arrangement pursuant to the provisions of the Companies Act.

iii. The company shall nominate a compliance officer and investors service centre for compliance with the buy-back regulations and to redress the grievances of the investors.

iv. The particulars of the security certificates extinguished and destroyed shall be furnished by the company to the stock exchanges where the shares or other specified securities of the company are listed within seven days of extinguishment and destruction of the certificates.

v. The company shall not buy-back the locked-in shares or other specified securities and non-transferable shares or other specified securities till the pendency of the lock-in or till the shares or other specified securities become transferable.

vi. The company shall within two days of expiry of buy-back period issue a public advertisement in a national daily, inter alia, disclosing:

a. number of shares or other specified securities bought;

b. price at which the shares or other specified securities bought;

c. total amount invested in the buy-back;

d. details of the securities holders from whom shares or other specified securities exceeding one per cent of total shares or other specified securities were bought back; and

e. the consequent changes in the capital structure and the shareholding pattern after and before the buy-back.

vii. The company in addition to these regulations shall comply with the provisions of buy-back as contained in the Companies Act and other applicable laws.

Obligations of the merchant banker

The merchant banker shall ensure that—

(i) the company is able to implement the offer;

(ii) the provision relating to escrow account has been complied with;

(iii) firm arrangements for monies for payment to fulfil the obligations under the offer are in place;

(iv) the public announcement of buy-back is made in terms of the regulations;

(v) the letter of offer has been filed in terms of the regulations;

(vi) a due diligence certificate along with the draft letter of offer has been furnished to the Board;

(vii) the contents of the public announcement of offer as well as the letter of offer are true, fair and adequate and quoting the source wherever necessary;

(viii) due compliance of sections 68, 69 and 70 of the Companies Act and any other laws or rules as may be applicable in this regard has been made;

(ix) the bank with whom the escrow or special amount has been deposited releases the balance amount to the company only upon fulfilment of all obligations by the company under the regulations;

(x) a final report is submitted to the Board in the form specified within fifteen days from the date of expiry of buyback period.

POWER OF SEBI TO RELAX STRICT ENFORCEMENT OF THE REGULATIONS

1. SEBI may, in the interest of investors and the securities market, relax the strict enforcement of any requirement of these regulations except the provisions incorporated from the Companies Act, if the SEBI is satisfied that:

a. the requirement is procedural in nature; or

b. the requirement may cause undue hardship to investors; For seeking relaxation as above, the company shall file an application with the  SEBI, supported by a duly sworn affidavit, giving details and the grounds on which such relaxation has been sought.

2. The SEBI may, exempt any person or class of persons from –

• the operation of all or
•  any of the provisions of these regulations for a period as may be specified but not exceeding twelve months, for furthering innovation relating to testing new products, processes, services, business models, etc. in live environment of regulatory sandbox in the securities markets. Any exemption granted by the SEBI shall be subject to the applicant satisfying such condition as may be specified by the SEBI.

BUY-BACK VIS-A-VIS COMPLIANCE UNDER SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011

An increase in voting rights in a target company of any shareholder beyond 25%, pursuant to buy-back of shares by the target company shall be exempt from the obligation to make an open offer provided such shareholder reduces his shareholding such that his voting rights fall to below the threshold within ninety days from the date of the closure of the said buy-back offer.

In case the acquirer’s initial shareholding was more than 25% and the increase in shareholding due to buyback is beyond the permissible creeping acquisition limit of 5% per financial year, the acquirer can get an exemption from making an open offer, subject to the following:

(i) such shareholder has not voted in favour of the resolution authorising the buy-back of securities under section 68 of the Companies Act, 2013;

(ii) in the case of a shareholder resolution, voting is by way of postal ballot;

(iii) where a resolution of shareholders is not required for the buy-back, such shareholder, in his capacity as a director, or any other interested director has not voted in favour of the resolution of the board of directors of the target company authorising the buy-back of securities under section 68 of the Companies Act, 2013; and

(iv) the increase in voting rights does not result in an acquisition of control by such shareholder over the target company.

However where the aforesaid conditions are not met, in the event such shareholder reduces his shareholding such that his voting rights fall below the level at which the obligation to make an open offer would be attracted, within ninety days from the date of closure of the buy-back offer by the target company, the shareholder shall be exempt from the obligation to make an open offer.

Note: It is important to note that while the above key considerations are to be kept in mind while undertaking a buy- back under various methods, the listed company is also required to comply with the requirements specified under the Companies Act, 2013, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Foreign Exchange Management Act, 1999, the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, the Securities and Exchange Board of India (SAST) Regulations, 2011 and other applicable securities laws including other jurisdictions. Additionally, listed company specific issues such as employee stock option schemes, share based schemes or depository receipts may also have an impact on buy-backs undertaken by a listed company.

CS PAST YEARS QUESTION & ANSWERS

1. Answer the followings with reasons, with reference to SEBI Buyback Regulations, whether these buy-back are as per the provisions of the regulations?

a) The company can directly or indirectly purchase its own shares through any subsidiary including its own subsidiaries.

b) The company has made buy-back of shares out of the proceeds of an earlier issue of the same kind of shares.

c) The Company Secretary of the company advised not to allow buy-back of shares unless the consequent reduction of share capital is affected.

d) The company has prohibited from Buy-back whose default is remedied and a period of two years has lapsed after such default ceased to subsist.

e) The Board of directors has denied the offer of buy-back of shares for 16 percent of the paid up capital and free reserves to be made from the open market.

Answer –

a. As per the conditions and requirements for buyback of shares provided under the SEBI Buyback Regulations, the company shall not directly or indirectly purchase its own shares through any subsidiary including its own subsidiaries.

Therefore, this statement is not as per the provisions of the SEBI Buyback Regulations.

b. As per the conditions and requirements for buyback of shares provided under the SEBI Buyback Regulations, the Buyback shall not be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities of the company.

Therefore, this statement is not as per the provisions of the SEBI Buyback Regulations.

c. As per the conditions and requirements for buyback of shares provided under the SEBI Buyback Regulations, a company shall not allow buyback of its shares unless the consequent reduction of its share capital is affected.

Therefore, this statement is as per the provisions of the SEBI Buyback Regulations.

d. As per the conditions and requirements for buyback of shares provided under the SEBI Buyback Regulations, 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.

Therefore, the company is prohibited from Buyback whose default is remedied and a period of two years has lapsed after such default ceased to subsist, therefore, this statement is as per the provisions of the SEBI Buyback Regulations.

e. As per the conditions and requirements for buyback of shares provided under the SEBI Buyback Regulations, the buyback from open market shall be less than 15 percent of the paid up capital and free reserves of the company, based on both standalone and consolidated financial statements of the company.

Since the Board of Directors has denied the offer of buyback of shares for 16 percent of the paid up capital and free reserves to be made from the open market, therefore, this statement is as per the provisions of the SEBI Buyback Regulations.

2. PQR Limited, a listed company, is intending to make buy-back of its equity shares. Referring to SEBI Buy-back Regulations, explain the following:

i) The manner of deposit of amount in Escrow account.

ii) How can an unregistered shareholder tender his shares for buy-back?

iii) What is time limit for completing buy-back process?

Answer –

i) Escrow account –

a. if the consideration payable does not exceed Rupees 100 crores = 25 % of the consideration payable;

b. if the consideration payable exceeds Rupees 100 crores; 25 % up to Rupees 100 crores and 10 % thereafter.

The escrow account referred to in this regulation shall consist of,

(v) cash deposited with a scheduled commercial bank, or

(vi) bank guarantee in favour of the merchant banker, or

(vii) deposit of acceptable securities with appropriate margin, with the merchant banker, or

(viii) a combination of (i), (ii) and (iii).

ii) The 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.

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

3. TechNoGrow Ltd. approved buy back proposal of 200000 Equity share capital in its Board meeting on 25th April, 2019. The record date was fixed on 25th June, 2019. The closing market price on NSE as on 25th April, 2019 and 25th June, 2019 was `2640.40 and `2514.05 respectively. Determine the number of equity shares which is eligible to be tendered by Small Shareholder Category (rounded off to lower whole number).

Answer – In terms of proviso to the Regulation 6 of the SEBI (Buyback of Securities) Regulations, 2018, fifteen percent of the number of securities which the company proposes to buy back or number of securities entitled as per their shareholding, whichever is higher, shall be reserved for small shareholders. Hence the total shares reserved for buyback under the offer will be: 200,000 x 15% = 30,000 shares

Further, as per regulation 2(n) of the SEBI (Buy back of Securities) Regulations, 2018 ‘small shareholder’ means a shareholder of a company, who holds shares or other specified securities whose market value, on the basis of closing price or shares or other specified securities, on the recognized stock exchange in which highest trading volume in respect of such securities, as on record date is not more than two lakh rupee.

The closing price on record date is `2514.05.

The number of shares eligible for buy back under small shareholders category will be:

200000/2514.05 =79.55 shares 79.55 shares rounded off to lower whole number i.e 79 shares.

Hence, equity shareholders holding not more than 79 shares of TechNoGrow Ltd. shall be classified as Small Shareholders.

4. RN Ltd., has equity share capital of 20,00,000 of face value of `10 each, listed in Bombay Stock Exchange. The company has proposed for buy-back of its shares up to 25%. As a Company Secretary explain the conditions for buy-back of shares.

Answer – above

5. Can a Company buy-back its own shares or any specified securities through negotiated deals or through any private arrangements ? Comment with methods allowed for buy-back.

Answer – above

6. The financial data of a listed company as on 31st March, 2018 are as follows :

Authorized equity share capital Rs.10 crore

(1 crore shares of `10 each)

Paid-up equity share capital RS. 5 crore

General reserve Rs. 3 crore

Debenture redemption reserve Rs. 2 crore

The Board of directors of your company passed resolution by circulation for buy-back of shares to the extent of 9% of the company’s paid-up share capital and free reserves.

You are required to examine the validity of the proposal with reference to the provisions of the SEBI Regulations.

Answer – According to the regulation 5 of the SEBI (Buy-back of Securities) Regulations, 2018, the company shall not authorize any buy-back (whether by way of tender offer or from open market or odd lot) unless a special resolution has been passed at a general meeting of the company authorising the buy-back. However, special resolution is not required, where the buy-back is, ten per cent or less of the total paid-up equity capital and free reserves of the company; and such buy-back has been authorised by the board of directors by means of a resolution passed at its meeting.

In the given case, the company desired to buy-back of shares to the extent of 9% of paid-up capital and free reserves by way of passing of board resolution through circulation, however as per above regulations, the board resolution should be passed at its meeting not through circulation. Therefore with reference to the above stated provisions, the proposal of buy-back is not valid.