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BUY-BACK OF SHARES - AN OVERVIEW

Buy-Back of shares means that the company who has issued the shares in the first place repurchases the same shares either from the open market or by providing an offer to its existing shareholders to Buy-Back from them on fixed price. Buy-Back is mainly done by the Company when the market value of its shares is undervalued & after buying back Company absorbs the repurchased stocks and the number of stock in the market gets reduced. It is one of the methods of giving funds to the shareholders in place of dividends. Buy-Back of the Equity Share is one of the crucial modes of capital restructuring. This practice of Buy-Back of shares prevails globally as it also helps in achieving the objectives of increasing Earning per Share (EPS) and improving returns to the shareholders. Buy-Back of shares is an alternate for reducing share capital.

LEGAL FRAMEWORK OF BUY-BACK OF SHARES

Buy-Back of shares is regulated by the following legal framework:

  • Companies Act, 2013
  • Companies(Share Capital & Debenture) Rules 2014
  • Securities Exchange Board of India (Buy-Back of Securities Amendment) Regulations, 2013

CLASS OF COMPANIES

REGULATION

Buy-Back of Unlisted Public Company & Private Limited Company

 

• Section 68, 69, 70 of Companies Act, 2013

• Rule 17 of Companies (Share Capital & Debentures) Rule, 2014

Buy-Back for Listed Companies

• Section 68, 69, 70 of Companies Act, 2013

• Rule 17 of Companies (Share Capital & Debentures) Rule, 2014

• Securities Exchange Board of India (Buy-Back of Securities Amendment) Regulations, 2013

 

PROVISIONS OF COMPANIES ACT FOR BUY-BACK

    SECTION 68 OF COMPANIES ACT 2013

  1. PRELIMINARY CONDITIONS:
    • First of all, Buy-Back has to be authorized through its Article of Association
    • Debt-Equity ratio after such Buy-Back of shares shall not exceed 2:1. That is secured & unsecured debt after Buy-Back cannot be more than twice of paid-up capital & free reserve.
    • All the shares for Buy-Back must be fully paid.
    • The company cannot issue fresh shares within six months from the date of completion of Buy-Back.
    • The minimum time gap between two Buy-Back shall be one year, i.e. one year has to be passed for the fresh Buy-Back from the date of closure of the preceding offer of Buy-Back.
    • Once the offer is announced to the shareholder, the same cannot be withdrawn.
    • The company can utilize the money borrowed from any bank or financial institution for Buy-Back.
  2. BUY-BACK CAN BE DONE THROUGH:
    • Free Reserves
    • Security Premium Account
    • Proceed from the issue of any shares.
  3. Note: No Buy-Back shall be made from the proceeds of the issue of the same kind of shares.

    • MAXIMUM LIMIT:
    • Buy-Back of the shares can be done up to only 25% of paid-up share capital & free reserve.
    • In case Buy-Back is 10% or less: the same has to be authorized through board resolution passed in Board Meeting.
    • In case Buy-Back is 25% of the paid-up equity capital & free reserve: the same has to be authorized through Special Resolution.
  4. TIME LIMIT:
  5. Buy-Back has to be mandatorily completed within one year from the date of passing a special resolution or board resolution for the authorization of Buy-Back.

  6. MODES OF BUY-BACK:
  7. The Buy-Back can be made:

    • From the existing shareholders on the proportionate basis
    • From the open market
    • By purchasing the shares from an employee under the scheme of employee stock option or sweat equity.
  8. MAINTENANCE OF REGISTERS:
  9. The company has to maintain a register in form SH-10 for the securities bought back. Full details have to be incorporated in a register such as consideration paid for the shares bought back, date of cancellation of shares, date of physically destroying the shares. Such a register has to be maintained at the registered office of the Company and it has to be kept in the custody of the company secretary.

    SECTION 69 OF COMPANIES ACT 2013

    • CAPITAL REDEMPTION RESERVE ACCOUNT:

    An amount equal to the nominal value of the share purchased has to be transferred to Capital Redemption Reserve Account and the same has to be disclosed in the Balance Sheet.

    • UTILIZATION OF CRR ACCOUNT:

    The amount in CRR account can be utilized for paying unissued shares of the company to be issued to its members as fully paid bonus shares.

    SECTION 70 OF COMPANIES ACT 2013

  10. RESTRICTION ON BUY-BACK OF SHARES:
    • The company is not allowed to Buy-Back its shares through any subsidiary company or its own subsidiary company.
    • The company cannot purchase its shares or security through an Investment Company or a group of Investment Companies.
    • Buy-Back is prohibited if there any default is made by the company in repayment of deposit, on interest paid thereon, in the redemption of debentures, in the redemption of preference shares, on payment of dividend.

STEPS FOR BUY-BACK OF SHARES

  • Call the board meeting and send the notice of the board meeting at least 7 days before the date of the meeting.
  • At board meeting approve the Buy-Back, fix the date of Extra-Ordinary Meeting (EGM), approve the notice of EGM along with explanatory statement u/s 102.
  • Send the notice of EGM of clear 21 days before the date of EGM
  • Conduct the meeting & pass the special resolution in EGM for the approval of Buy-Back of shares
  • After passing Special Resolution, file the letter of offer with the registrar in form SH-8 that has to be signed by a minimum of two directors.
  • Declaration of Solvency in form SH-9 has also to be annexed with form SH-8 and the same has also to be signed by two directors.
  • The letter of the offer has to be dispatched to the shareholders within 20 days of filing SH-8 with the registrar.
  • The letter of the offer has to remain open for a minimum of 15 days & a maximum of 30 days.
  • Within 15 days of closure, offer is deemed to be accepted unless a communication of rejection is made within 21 days of closure of an offer.
  • A separate bank account needs to be open.
  • The total amount of consideration to be paid for the shares offered in Buy-Back has to be deposited in such a separate bank account.
  • Consideration has to be paid in cash within 7 days of verification
  • Shares to be bought back has to be physically destroyed within 7 days of completion of Buy-Back
  • Within 30 days of completion of the Buy-Back return in form, SH-11 has to be filed with Registrar.

Frequently Asked Questions (FAQs)

The company has to file a solvency declaration with the registrar before offering the Buy-Back of shares. The declaration has to be signed by two directors in the form SH-9. This declaration state that the Board of Directors has made full inquiry & the company can meet its liabilities and will not be declared insolvent within at least one year from the date of Buy-Back.

After the competition of Buy-Back of shares, the company has to file a return with the registrar in form SH-11 within thirty days of completion of such Buy-Back containing the particulars of such Buy-Back.

A certificate in form SH-15 which is signed by a minimum of two directors has to be annexed with the form SH-11. SH-15 is a declaration that certifies that the Buy-Back of the shares has been completed as per the provisions of Acts & Rules.

In the case of default, Company shall be punishable with fine which is not less than INR 100000 but can be extended up to INR 300000. Officers in default can be liable for imprisonment which may extend to three years along with fine.

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