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Process for Buyback of Shares in India: A Guide

Process for Buyback of Shares in India
| Updated: Mar 02, 2021 | Category: Buyback of Shares, RBI Advisory

Whenever a company, whether a Private Limited Company or Public Limited Company, decides to restructure its capital to increase its EPS (Earning per Share) and to have good shareholder returns, it tends to undergo the process for Buyback of Shares in India. Further, the best time for the process of Buyback of Shares is when the market value of the shares issued is undervalued. As after absorbing the repurchased shares, the total number of the shares available in the market gets reduced.

In this learning blog, we will cover the concept, requirements, and process for buyback of shares in India.

Concept of Buyback of Shares

The term Buyback of Shares or Stock Buyback denotes a corporate action wherein the company repurchases its issued shares from the existing shareholders. Further, during stock buyback, the price of a share is usually higher than the market price. Also, it shall be relevant to state that there must be at least one year gap between two buybacks, and the debt – equity ratio for the company must not exceed the threshold of 2:1.

At present, the companies undergoing the process for Buyback of Shares are as follows:

Name of the Company Opening Date for Issue Closing Date for Issue Offer Price    
GAIL India Limited 25.02.2021 10.03.2021 150
National Aluminium Company Limited 25.02.2021 10.03.2021 57.5

Reasons to Choose the Process for Buyback of Shares in India

The reasons to choose the process for Buyback of Shares in India are as follows:

Reasons to Choose the Process for Buyback of Shares
  • Increases Earning Per Share of the Company;
  • Offers Funds instead of Dividends to Shareholders;
  • Protects Company against Hostile Takeovers;
  • Maintains Debt Equity Ratio;
  • Provide an Exit Route to the Shareholders;
  • Increases Return on Capital;
  • Increases Return on Investment;
  • Services Equity more Effectively;
  • Reduces Share Capital of the Company;

Also, Read: What you need to know about Buyback of Shares under SEBI Norms?

Laws Governing the Process for Buyback of Shares in India

The laws governing the process for Buyback of Shares in India are as follows:

  • Section 68 – 70 of the Companies Act 2013;
  • Rule 17 of the Companies (Share Capital & Debentures) Rules 2014;
  • SEBI (Buyback of Securities Amendment) Regulations 2013;

Modes for Buyback of Shares in India

Based on the provisions of section 68 (5) of the Companies Act 2013, the different modes for Buyback of Shares in India are as follows:

  • From the Open Market;
  • From the Existing Shareholders on Proportionate basis;
  • By Purchasing Shares from the Employees under the scheme of Sweat Equity and ESOP;

Sources for the Process of Buyback of Shares in India

The different sources for the process of buyback of shares in India are as follows:

Sources for the Process of Buyback of Shares
  • Free Reserves;
  • Securities Premium Account;
  • Out of the Proceeds of Fresh Issue;

It shall be noted that a company is not eligible to repurchase its shares from the proceeds of the previous issue.

Conditions for the Process for Buyback of Shares in India

The conditions required for the process for buyback of shares in India are as follows:

  • The AOA of the company must allow the process for buybacks;
  • A company is allowed to buyback only up to 25% of the total paid up share capital and free reserves;
  •  The debt – equity of a company must not exceed the ratio of 2:1 after the completion of the process for buyback;
  •  All the shares and securities must be fully paid up;
  • Whenever a company wants to buyback 10% of its shares, it needs to pass an ordinary resolution;
  • Whenever a company wants to buyback 25% of the total paid-up capital and free reserves, it needs to pass an SR (Special Resolution);
  • There should be a minimum of one year gap between the two buybacks;
  • A company is not permitted to buyback its share again for the period of six months from the date of completion of buyback;
  • After announcing the offer to the shareholders, a company cannot withdraw the said offer of buyback;
  • A company is not allowed to utilise any borrowed amount from the financial institutions;

Steps involved in the Process for Buyback of Shares in India

The steps involved in the process for buyback of shares in India are as follows:

Process for Buyback of Shares

Through Ordinary Resolution

If in case a company wish to buyback 10% or less of its total paid-up share capital and free reserves:

Sent the Notice

In the first step, the company requires to send notice to the Directors at least seven days prior to the date of the BM (Board Meeting).

Pass the Board Resolution

After that, the directors need to authorise the process of buyback by passing an Ordinary Resolution in the meeting.

Through Special Resolution

If in case the process for Buyback of shares is above 10% but up to 25% of the total paid up capital and free reserves, the steps to be followed are as follows:

Through Special Resolution under Buyback of Shares

Send Notice for Board Meeting

In the first step, the applicant needs to send a notice for BM (Board Meeting) to the directors at least seven days prior to the meeting date. Also, the said notice must have the agenda of the Board Meeting.

Convene Board Meeting

Now, the directors need to approve the following matters in the Board Meeting:

  • Process for Buyback of shares;
  • Approval of the Notice for EGM, together with the explanatory statements;
  • Fix date, time, venue of the meeting;

Send Notice for Extraordinary General Meeting

The company needs to dispatch the notice for meeting at least twenty one days before.

Convene EGM

In EGM, the shareholders need to pass a special resolution for authorising the process of Buyback.

Submit Form SH 8 and MGT 14

After passing the SR (Special Resolution), Directors of the concerned company are required to submit form MGT 14 with the ROC within thirty days from the date of the EGM. Further, the attachments of Form MGT – 14 are as follows:

  • A certified copy of the Special Resolution (SR) passed, together with the Explanatory Statement;

Further, the company requires to file a Letter of Offer (LOF), together with the Form SH – 8. The said form needs to be signed and certified by at least two directors, out of which one must be the MD (Managing Director) of the Company.

Also, the attachments of Form SH – 8 are as follows:

  • Details regarding the Company’s Promoters;
  • Declaration by the Auditors;
  • A certified copy of the BR (Board Resolution) passed;
  • A copy of the notice for the meeting, together with the Explanatory Statement;
  • Financial Statements for the last three financial years;
  • A complete list of the total Holding and Subsidiary Companies;
  • A complete list of all the Buybacks for the previous three financial years;

Also, the company needs to file a declaration of insolvency in Form SH – 8 must be filed, together with form SH – 9. The said form needs to be signed and certified by at least two directors, out of which one of whom must be the MD (Managing Director) of the Company.   

Offer Letter

Now in the next step of the process for Buyback of Shares in India, the company needs to send a Letter of Offer to the Shareholders within a period of twenty one days. Also, the said offer must not be open for a minimum of fifteen days and a maximum of thirty days, starting from the date of dispatch of the Letter of Offer.

Offer Acceptance by Shareholders

If in case the communication of rejection is not made within a period of twenty one days from the closure of the offer, then, in that case, the said offer will be deemed accepted by the shareholders.

Opening of bank Account

Further, in the next step of the process for buyback of shares in India, the director needs to open a separate current bank account and needs to deposit the amount collected for buyback in the same.

Verification and Acceptance or Rejection

The process of verification and acceptance of buyback needs to be done within fifteen days from the closure of the offer. Further, it shall be noted that the shares will be considered accepted if in case no communication of rejection has been made within twenty one days from the closure of the offer.

Also, it shall be noted that the payment of consideration must be made to the shareholders within a period of seven days, starting from the date of acceptance and verification.

If in case the shares are not accepted within the prescribed time, then, in that case, the share certificate of those shareholders needs to be returned within a period of seven days from the rejection.

Moreover, the shares brought back must be destroyed by the company within seven days from the completion.

Maintenance of Register for Shares and Securities

The company must maintain a register of shares brought back, based on Form SH – 10. Also, the said register is kept at the registered office of the company.

Furnish Return for Buyback

In the last step of the process for Buyback of Shares in India, the company requires to file the return concerning Buyback to the Registrar of Companies within a period of thirty days from the completion of the process.

Further, the attachments required to be submitted with the form SH -11 are as follows:

  • A copy of the Special Resolution (SR) passed at the EGM;
  • A copy of the Board Resolution (BR) passed at the Board meeting;
  • Details concerning the shares brought back;
  • A copy of the Audited Balance Sheet;
  • Details concerning the securities holders, prior to the process of Buyback;

Conclusion

In a nutshell, Buyback of Shares signifies a corporate action in which the company involved repurchases its issued shares from the existing shareholders. Further, it is a mode of Capital Restructure, and under this, the price of a share is normally higher than the market price.

Also, to undergo the process for Buyback of Shares in India, the different sources for the same are Free Reserves, Securities Premium Account, and Out of the Proceeds of Fresh Issue.

Also, Read: Procedure for Buyback of Shares and Other Specified Securities

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Shivani has completed her B com LLB (Hons) and has the experience of writing various research papers during her college time. Earlier she was working as an Associate in a Delhi based Law Firm, but her interest in writing made her pursue Legal Content Writing as a career. Her core area of interest is in writing about various legal enactments, tax, and finance.

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