Securities Transaction Tax Rules 2004 introduced with effect from 2004 by the then Finance Minister, Mr. P. Chidambaram  to cover the purchase and sale of securities under the ambit...
In August, Sebi has announced to ease its norms for buyback of shares by the listed companies. The norm especially applies to those who have subsidiaries in NBFC segments and housing finance. Everything related to shares repurchasing comes under the Buyback Regulations of SEBI and Companies Act. The provisions of buyback of shares state that the buyback offer cannot exceed 25% of the aggregate paid-up capital and free reserves of the company. Despite it requires the shareholder’s approval through a special resolution if the size exceeds 10%.
A company gets a permit to buyback if its aggregate ratio of secured and unsecured debts is not more than twice the paid-up capital and free reserves.
Reasons to ease Buyback of Shares
Lately, Sebi launches a public consultation process in May to consider the financial statements and to evaluate the buyback thresholds. It results in the outburst of various issues like the companies with subsidiaries have higher debt due to their presence in NBFC and housing finance segments.
After taking into account the feedback of the public, Sebi proposed to allow buybacks under the post-buyback debt-to-equity ratio of 2:1. It is not applicable for the companies which have been notified with a higher ratio under the Companies Act on a consolidated and standalone basis.
SEBI Norms for Buyback of Shares
Maximum limit of buyback share- The two primary factors in any share buyback are Paid-up capital and free reserves of the company. The paid-up capital refers to the amount of money which the shareholders receive in exchange for a stock. While free reserves constitute those reserves that a company may utilize freely during the distribution of dividends except those pre-specified in the Companies Act 2013.
Sebi has set the maximum limit of share buyback up to 25% or less than the total sum of the paid-up capital and free reserves.
Share buyback for decreasing share capital-The share repurchase and share cancellation is the only methods for reducing the value of share capital of a company. According to Sebi guidelines, no company can buy back its shares unless it affects the consequent reduction of its share capital under Section 67 of the Companies Act, 2013.
Modes of Share buyback– These are the modes of buyback under Sebi norms:
- Free reserves- In free reserves, the company must transfer a sum equivalent to the share’s nominal value to the Capital Redemption Reserve.
- Securities premium account- When a company sells shares above the fair value, then it gains the extra money that can be used for a share buyback.
- Proceeds of an earlier issue- A company can’t buy back its shares or securities out of the proceeds of an earlier issue of the same type of share/securities.
Purchase of own shares/securities– Under SEBI Regulations, a company cannot purchase its shares from any subsidiary and investment company. Also, the companies having a poor liquidity position do not have the authority to buy back their shares.
Approval for buyback of shares- a company shall authorize buyback on the following conditions:
- If Articles of association authorizes the buyback of the Company.
- If the company passes a special resolution in the general meeting. In case of a listed company, it requires to take approval through a postal ballot.
Norms for completion of the buyback- The company shall file a return entailing the particulars of the buyback with the Board and Registrar within 30 days of its completion.
Maximum tenure to complete the process of buyback– The maximum period to complete buyback of shares is 1 year from the passing date of resolution by the board of directors
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Other Guidelines of SEBI
Shareholder’s approval- To obtain buyback of shares, you need to seek approval from the shareholders under two resolutions:
- An Ordinary resolution- In ordinary resolution at least 51% of members are in favor of the buyback. It is sufficient when the buyback amount is about 10% of the total paid-up equity capital and free reserves.
- A Special resolution- In special resolution at least 75% of members are in favor of the buyback. It has to be passed when the buyback amount is up to 25% of the total paid-up capital and free reserves.
Rights to unregistered shareholders for buyback of shares– Securities and Exchange Board of India has also issued some norms for the bonafide shareholders who hold interest in the buyback of shares but does not get any tender offer.
The Board has provided a manner to safeguard the interest of unregistered shareholders. Such shareholders have the option to deposit the duly executed transfer deed in their name, along with the offer form & other documents of transfer.
Interest-bearing escrow account-To ensure that the merchant banker’s funds are accessible while making payment to the shareholders, all the cash components of the escrow account shall be held in the interest-bearing account according to Sebi.
Buyback of shares is an effective way to boost a company’s undervalued share price and reduce dilution. However, it is not always necessary that all share buybacks will turn into a perk for shareholders. So, it’s advisable to analyze the company’s historical record first, and then take the decision.
Also, Read: Buyback Tax: Everything you Need to Know About It.