{"id":10095,"date":"2020-04-17T16:46:32","date_gmt":"2020-04-17T11:16:32","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=10095"},"modified":"2020-04-20T19:52:09","modified_gmt":"2020-04-20T14:22:09","slug":"checklist-for-buyback-of-shares-under-companies-act-2013","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/","title":{"rendered":"Checklist for Buyback of Shares under Companies Act 2013: A Comprehensive Guide"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Buyback is a corporate technique wherein a company repurchases its outstanding shares from the existing shareholders to extinguish their numbers in the open market. Companies prefer to buy back shares for a variety of reasons, such as to write off the accumulated loss or inflate the value of remaining shares by reducing the supply. <strong>Section 68 of the Companies Act, 2013<\/strong> prescribes that any listed or unlisted company which is limited by shares or guarantees with share capital can choose to buyback of shares and any other specified securities. This write-up will provide a complete checklist of buyback of shares. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a31f31764d70\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a31f31764d70\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#An_overview_of_Share_Buyback\" title=\"An overview of Share Buyback \">An overview of Share Buyback <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#Regulatory_Framework_that_regulates_Buyback_of_Shares\" title=\"Regulatory Framework that regulates Buyback of Shares \">Regulatory Framework that regulates Buyback of Shares <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#What_are_the_different_methods_of_Buyback_of_Shares\" title=\"What are the different methods of Buyback of Shares?\">What are the different methods of Buyback of Shares?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#Benefits_of_Share_Buyback\" title=\"Benefits of Share Buyback\">Benefits of Share Buyback<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#Checklist_of_prerequisites_for_Buyback_of_Shares\" title=\"Checklist of prerequisites for Buyback of Shares\">Checklist of prerequisites for Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#Post_Compliance\" title=\"Post Compliance\">Post Compliance<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#Restrictions_for_Share_Repurchase\" title=\"Restrictions for Share Repurchase&nbsp; \">Restrictions for Share Repurchase&nbsp; <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#Step_by_Step_Procedure_for_Buyback_of_Shares\" title=\"Step by Step Procedure for Buyback of Shares \">Step by Step Procedure for Buyback of Shares <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#Penalty_for_non-compliance_of_Buyback_Process\" title=\"Penalty for non-compliance of Buyback Process\">Penalty for non-compliance of Buyback Process<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/swaritadvisors.com\/learning\/checklist-for-buyback-of-shares-under-companies-act-2013\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"An_overview_of_Share_Buyback\"><\/span>An overview of Share Buyback <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Buyback of shares is a method of financial\nreinforcement. It enables companies to approach their shareholders for repurchasing\nthe shares and give them funds in return instead of dividends.<\/p>\n\n\n\n<p>&nbsp;When\na company has a substantial amount of cash resources, it may purchase its own\nshares from the market, especially when the prevailing rates of its shares are\nmuch lower than the book value.<\/p>\n\n\n\n<p>Earlier, the <strong><a href=\"https:\/\/www.mca.gov.in\/Ministry\/pdf\/Companies_Act_1956_13jun2011.pdf\">Companies Act, 1956<\/a><\/strong>, didn\u2019t incorporate share buyback until it got amended in 1999. Besides that, Section 68, 69, and 70 of the Companies Act, 2013, along with the Rule 17 of the Companies (Shares Capital and Debentures) Rules, 2014 monitors the process of buyback of shares.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Regulatory_Framework_that_regulates_Buyback_of_Shares\"><\/span>Regulatory Framework that regulates Buyback of Shares <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Following are the legal frameworks which govern and specify the checklist of buyback of shares:<\/em><\/p>\n\n\n\n<ul><li><strong>Companies Act, 2013<\/strong>;<\/li><li><strong>Rule 17 of Companies (Shares Capital &amp; Debenture) Rules 2014<\/strong>; <\/li><li><strong>SEBI (Buyback of Securities Amendment) Regulations<\/strong>.<\/li><\/ul>\n\n\n\n<p>Any company that intends to undertake the\nprocess of buyback of shares must comply with the provisions of these\nregulatory frameworks. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_different_methods_of_Buyback_of_Shares\"><\/span>What are the different methods of Buyback of Shares?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>A company can repurchase its shares through any of these sources:<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" loading=\"lazy\" width=\"595\" height=\"111\" src=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/04\/Untitled.png\" alt=\"different methods of Buyback of Shares\" class=\"wp-image-10097\" srcset=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/04\/Untitled.png 595w, https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/04\/Untitled-300x56.png 300w\" sizes=\"(max-width: 595px) 100vw, 595px\" \/><\/figure>\n\n\n\n<ul><li>From the existing shareholders (tender offer) on a proportionate basis;<\/li><li>&nbsp;Open Market through Book-building process &amp; Stock Exchange; <\/li><li>Buying shares from employees under the scheme of Sweat Equity Shares or <strong><em><a href=\"https:\/\/swaritadvisors.com\/employee-stock-option-plan\">Employee Stock Option Plan<\/a><\/em><\/strong> (ESOP).<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Benefits_of_Share_Buyback\"><\/span>Benefits of Share Buyback<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are several advantages that companies\navail from repurchasing their shares. Here are the advantages of buyback of\nshares:<\/p>\n\n\n\n<ul><li><strong>Inflates the shareholder value- <\/strong>When a\ncompany pursues share buyback, it reduces the assets on its balance sheets and\ninflates its return on assets. Similarly, decreasing the number of shares in\nthe market and maintaining the same level of profitability increases earnings\nper share. It turns the table for those shareholders who do not sell their shares;\nyields a higher percentage of ownership of that company\u2019s shares with a higher\nprice per share.<\/li><li><strong>Protection against hostile takeovers-<\/strong>\nBuyback of shares helps the promoters to build an efficient defensive strategy\nagainst the bids of hostile takeover.<\/li><li><strong>Indicate that stocks are undervalued-<\/strong> The preliminary signal which a company gives by purchasing its own\nshares using its reserves is the bottoming price of its shares. By repurchasing\nthe shares at a higher value, the company reduces the number of outstanding\nshares, which elevates its market value. <\/li><\/ul>\n\n\n\n<div class=\"read\"><p><b>Our Recommendation:<\/b> <mark><a href=\"https:\/\/swaritadvisors.com\/learning\/what-you-need-to-know-about-buyback-of-shares-under-sebi-norms\/\" target=\"_blank\" rel=\"noopener noreferrer\">What you need to know about Buyback of Shares under SEBI Norms?<\/a><\/mark>.<\/p><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Checklist_of_prerequisites_for_Buyback_of_Shares\"><\/span>Checklist of prerequisites for Buyback of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The Companies Act, 2013 has laid down a\nlist of conditions that each applicant company must fulfill before repurchasing\nits shares, which is as follows: <\/p>\n\n\n\n<ul><li>The preliminary condition is that the buyback needs to be authorized by\nthe company\u2019s (AOA) Article of Association.<\/li><li>Once the company has announced the buyback offer to its shareholders, it\ncannot be withdrawn.<\/li><li>A company can use its borrowed funds from any bank, NBFC, or other financial\ninstitution for buyback.<\/li><li>Buyback can be done through Security Premium Account, Free Reserves, and Proceed from the issue of any securities\/shares.<\/li><\/ul>\n\n\n\n<div class=\"shadow4\"><strong>Note:<\/strong>&nbsp;No such\nshare buyback shall be made from the proceeds of the issue of a similar kind of\nshares.<\/div>\n\n\n\n<ul><li><strong>The maximum limit for a company\nto buy back the shares is 25% of its paid-up share capital &amp; free reserve.<\/strong> The same\nhas to be authorized by passing a special resolution.<\/li><li>If the buyback is10% or less:&nbsp;then\nthe company needs to authorize the same by passing board resolution in the Board\nMeeting.<\/li><li><strong>The buyback process must be\ncompleted within one year from the date of passing the board resolution or a\nspecial resolution<\/strong>.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Post_Compliance\"><\/span>Post Compliance<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>After complying with the prerequisites, the\ncompany also have to meet some post requirements:<\/p>\n\n\n\n<ul><li>Companies must ensure that after the buyback, its debt-equity <strong>ratio does not exceed 2:1<\/strong>. It implies\nthat the secured &amp; unsecured debt after share repurchase must not be more\nthan twice of free reserve &amp; paid-up capital.<\/li><li>All the shares for buyback must be&nbsp;<strong>fully paid.<\/strong><strong><\/strong><\/li><li>Any listed or unlisted company <strong>cannot\nissue a new share within six months from the date of Buyback completion<\/strong>.<\/li><li>There minimum gap between two Buyback transactions is at least one year.\nThe company can only issue a fresh buyback when one year is passed from the\ndate of closure of the previous buyback offer.<\/li><li>The concerned company must transfer an amount equal to the nominal value\nof the share purchased to the Capital Redemption Reserve Account and disclose\nthe same in the Balance Sheet.<\/li><li>Further, the company can use the transferred amount in CRR account for\npaying unissued shares by issuing to its members as fully paid bonus shares.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Restrictions_for_Share_Repurchase\"><\/span>Restrictions for Share Repurchase&nbsp; <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Apart from conditions, there is a\nrestriction checklist of buyback of shares for the companies opting for it.\nLet\u2019s look at the restrictions:<\/p>\n\n\n\n<ul><li>Companies cannot buy back their\nshares or securities from an individual through negotiated deals, stock\nexchange, spot transactions, or private arrangements.<\/li><li>A company can\u2019t repurchase its\nshares or securities from the stock exchange to satiate the purpose of\ndelisting the shares\/securities.<\/li><li><strong>Companies can\u2019t render any buyback within one year from the expiry\ndate of the preceding buyback offer<\/strong> (if any).<\/li><li>No company can repurchase its shares unless the ensuing reduction of its\nshare capital is affected.&nbsp;<\/li><li>Companies cannot purchase its\nshares or other securities either directly or indirectly through any of its own\nsubsidiary company.<\/li><li>Also, companies <strong>cannot buyback through any investment or\ngroup of investment companies.<\/strong><\/li><li>If the company has made any\ndefault in the repayment of deposits on interest payment thereon, in the\nredemption of debentures\/preference shares\/ payment of dividend\/any term loan\/interest\npayable to any financial institution, then the company cannot buy back its\nshares.<\/li><\/ul>\n\n\n\n<p><div class=\"shadow4\"><strong>Exception<\/strong>:A company is not restricted from buying back its shares if it has resolved its default and has passed a period of three years after such a default.<\/div><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Step_by_Step_Procedure_for_Buyback_of_Shares\"><\/span>Step by Step Procedure for Buyback of Shares <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Now that you have perceived the checklist for <strong><a href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\"><em>buyback of shares<\/em><\/a><\/strong>, you must be eager to undergo the process. So follow these simple steps to repurchase your company\u2019s shares:<\/p>\n\n\n\n<ul><li><strong>Step 1: Call the Board Meeting- <\/strong>First;\nyou need to convene a Board Meeting by sending a notice to the Directors at\nleast 7 days before the date of the meeting.<\/li><li><strong>Step 2: Approval for Extraordinary General Meeting- <\/strong>At Board Meeting, approve buyback, and fix the date of the Extraordinary\nGeneral Meeting (EGM). Draft a notice for EGM &amp; affix it with an explanatory\nstatement under Section 102.<\/li><li><strong>Step 3: Send the EGM Notice-<\/strong>The next\nstep is to send the EGM notice at least 21 days prior to the date of the\nmeeting.<\/li><li><strong>Step 4:<\/strong> <strong>Pass\nSpecial Resolution for Buyback of Shares- <\/strong>Conduct\nthe Extraordinary General Meeting to pass a Special Resolution for the approval\nof the buyback of shares.<\/li><li><strong>Step 5: File Letter of Offer- <\/strong>Once the\nResolution is passed, it\u2019s time tofile\nthe Letter of Offer in (Form SH-8) to the ROC. Ensure to have the signature of\ntwo directors on the Form.<\/li><li><strong>Step 6: Annex a Declaration of Solvency-<\/strong>You\nshould annex (Form SH-9) that denotes the declaration of solvency with Form\nSH-8. It must also be signed by the two Directors of the company.<\/li><li><strong>Step 7: Send \u2018Letter of Offer\u2019 to the Shareholders- <\/strong>Now you need to send the \u2018Letter of Offer\u2019 to the Shareholders of\nyour company\nwithin 20 days of filing SH-8 to the Registrar. The \u2018Letter\nof Offer\u2019 must remain open for at least 15 days to a maximum period of 30 days.<\/li><li><strong>Step 8: Acceptance of Offer- <\/strong>Offer shall be considered as accepted by the Shareholders\nin case no communication of rejection was intimated within 21 days of closure.<strong><\/strong><\/li><li><strong>Step 9: Open a Bank Account-<\/strong> When the Shareholders\naccept your offer, you must proceed to open a separate bank account. Thereon, the\ntotal amount of consideration for the buyback of shares should be deposited in\na separate bank account. Also, the consideration amount must be paid within 7 days\nof verification. The shares which are repurchased must be destroyed within\nseven days of buyback completion.<\/li><li><strong>Step 10: File Form SH-11 to Registrar- <\/strong>The\nlast step is to file (Form SH-11) within 30 days of the buyback return\ncompletion.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Penalty_for_non-compliance_of_Buyback_Process\"><\/span>Penalty for non-compliance of Buyback Process<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In case, a company makes any default in the buyback process under <strong><em>Section 68 of the Companies Act 2013<\/em><\/strong> or any other regulation prescribed by SEBI, it may get subject to the following penalties:<\/p>\n\n\n\n<ul><li>Such a company shall be <strong>penalized with not less than INR1 Lakh<\/strong> that could exceed up to INR 3 Lakhs.<\/li><li>Moreover, each officer engaged in such a process shall <strong>be punished for a maximum period of three years <\/strong>or fined with an amount of not less than INR 1 Lakh.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This checklist of buyback of share has\ncovered all the essential aspects involved in the process. Through repurchasing\nthe shares, companies can improve their share value and increase earnings per\nshare. <\/p>\n\n\n\n<p>If you want to ease the procedure of\nbuyback, take the consultancy of Swarit Advisors. We can help in the\npreparation of documents and guide you about the appropriate mode of share\nbuyback for your business.<\/p>\n\n\n\n<div class=\"read\"><p><b>Read, More:<\/b> <mark><a href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-buyback-of-shares-and-other-specified-securities\/\" target=\"_blank\" rel=\"noopener noreferrer\">Procedure for Buyback of Shares and Other Specified Securities<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Buyback is a corporate technique wherein a company repurchases its outstanding shares from the existing shareholders to extinguish their numbers in the open market. Companies prefer to buy back shares for a variety of reasons, such as to write off the accumulated loss or inflate the value of remaining shares by reducing the supply. Section [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":10098,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[546],"tags":[599],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10095"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=10095"}],"version-history":[{"count":5,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10095\/revisions"}],"predecessor-version":[{"id":10145,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10095\/revisions\/10145"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/10098"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=10095"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=10095"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=10095"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}