Buy- Back of Shares

Introduction:
• Sec. 67 to 70 of the Companies Act, 2013 and
Share Capital and Debentures Rules, 2014 deals
with the buy back of securities by the companies.
• Buy-back is a procedure that enables a company
to purchase its own shares from its existing
shareholders, usually at a price near to or higher
than the prevailing market price or other
specified security holders.
 Cont ……
• According to Section S/67 there is a restriction
on purchase by company or loans by
company for purchase of its own shares or its
holding company’s shares.
• It will amount to ‘trafficking’ in its own shares
thereby enabling the company to influence
the price of the shares in an unhealthy
manner.
• According to S/67 – No company limited by
shares or guarantee and having a share capital
shall have the power to buy its own shares unless
consequent reduction of share capital is effected
under the provisions of the Act.
• Company cannot give directly or indirectly by way
of loan, security or otherwise any financial
assistance for/ connection with the purchase of
any share
• The prohibition in Section S/67 is subject to
the provisions of Section / 68,69,70 of the
2013 Act which permit companies to buy back
their own securities
• Sec 68 allows a company to purchase its own
shares or other securities subject to certain
conditions.
 Sources to buy- back
• Sec.68(1) provides that the Shares or other
securities may be purchased out of:
- Free reserves
- Securities premium account
- Proceeds of an earlier issue of shares
Proceeds of an earlier issue of the same kind of
securities cannot be used for buy- back of
shares as it will frustrate the purpose sought to
be achieved by such an issue.
 Conditions for buy back
• Sec 68 lays down the conditions:
a) must be authorized by its articles;
b) a special resolution has been passed at a
general meeting of the company authorizing the
buy-back, but the same is not required when:
i. the buy-back is 10% or less of the total paid-
up equity capital and free reserves of the company;
and
ii. such buy-back has been authorized by the
Board by means of a resolution passed at its
meeting;
 Conditions cont.
c) the buy-back is twenty-five per cent or less of
the aggregate of paid-up capital and free reserves
of the company, in case of Equity Shares, the same
shall be taken as 25% of paid up equity capital only.
d) the ratio of the aggregate of secured and
unsecured debts owed by the company after buy-
back is not more than twice the paid-up capital
and its free reserves:
Provided that the Central Government may, by
order, notify a higher ratio of the debt to capital
and free reserves for a class or classes of
companies).
e) all the shares or other specified securities for
buy-back should be fully paid-up;
 Conditions cont…..
f) the buy-back of the shares or other specified
securities listed on any recognized stock exchange shall
be effected in accordance with the regulations made by
the Securities and Exchange Board in this behalf; and
g) the buy-back in respect of unlisted shares or other
specified securities shall be in accordance Share Capital
and Debentures Rules, 2014.
h) No offer of buy-back shall be made within a period of
one year from the date of the closure of the preceding
offer of buy-back, if any.
 Conditions cont.
• 68. (3) Explanatory Statement:
• The notice of the meeting at which the
special resolution is proposed to be passed
shall be accompanied by an explanatory
statement stating—
a) a full and complete disclosure of all material
facts;
b) the necessity for the buy-back;
c) the class of shares or securities intended to
be purchased under the buy-back;
 Conditions cont.
d) the amount to be invested under the buy-
back; and
e) the time-limit for completion of buy-back.
As per the rules, following more details is to be
included in the Explanatory Statement:
• the date of the board meeting at which the
proposal for buy-back was approved by the
board of directors of the company;
 Condition cont.
• the number of securities that the company
proposes to buy-back;
• the method to be adopted for the buy-back;
• the price at which the buy-back of shares or
other securities shall be made;
• the basis of arriving at the buy-back price;
• the maximum amount to be paid for the buy-
back and the sources of funds from which the
buy-back would be financed;
 Condition cont.
• Explanatory statement as to Shareholding :
i. the aggregate shareholding of the promoters , directors
and key managerial personnel as on the date of the notice
convening the general meeting;
ii. the aggregate number of equity shares purchased or sold
by persons mentioned in sub-clause (i) during a period of
twelve months preceding the date of the board meeting at
which the buy-back was approved and from that date till the
date of notice convening the general meeting;
iii. the maximum and minimum price at which purchases
and sales referred to in sub-clause (ii) were made along with
the relevant date;
 Condition cont.
• if the abovementioned persons intended to
tender their shares for buy-back –
i. the quantum of shares proposed to be tendered;
ii. the details of their transactions and their
holdings for the last twelve months prior to the
date of the board meeting at which the buy-back
was approved including information of number of
shares acquired, the price and the date of
acquisition;
 Condition cont.
• Confirmation about no defaults:
a confirmation that there are no defaults
subsisting in repayment of deposits, interest
payment thereon, redemption of debentures or
payment of interest thereon or redemption of
preference shares or payment of dividend due to
any shareholder, or repayment of any term loans
or interest payable thereon to any financial
institution or banking company;
 Condition cont.
• Explanatory statement as to Confirmation about enquiry by Board of
Directors :
i. A Confirmation that the Board of directors have made a full enquiry into
the affairs and prospects of the company and that they have formed the
opinion, general meeting is convened, there shall be no grounds on which
the company could be found unable to pay its debts
ii. as regards its prospects for the year immediately following that date, that,
having regard to their intentions with respect to the management of the
company’s business during that year and to the amount and character of the
financial resources which will in their view be available to the company
during that year, the company shall be able to meet its liabilities as and
when they fall due and shall not be rendered insolvent within a period of 1
year from that date; and
iii. the directors have taken into account the liabilities(including prospective
and contingent liabilities), as if the company were being wound up under the
provisions of the Companies Act, 2013
 Condition cont.
• Report by company’s auditors to Board of directors :
a report addressed to the Board of directors by the company’s auditors
stating that-
i. they have inquired into the company’s state of affairs;
ii. the amount of the permissible capital payment for the securities in
question is in their view properly determined;
iii. that the audited accounts on the basis of which calculation with reference
to buy back is done is not more than six months old from the date of offer
document; and
iv. the Board of directors have formed the opinion as specified in earlier point
reasonable grounds and that the company, having regard to its state of
affairs, shall not be rendered insolvent within a period of one year from that
date.
 Condition cont.
• 68. (4) Time Limit:
Every buy-back shall be completed within a period of one
year from the date of passing of the special resolution, or
as the case may be, the resolution passed by the Board.

• 68. (5) Options for Buy back/ by whom Buy can be:
The buy-back can be from:
a) from the existing shareholders or security holders on a
proportionate basis;
b) from the open market;
c) by purchasing the securities issued to employees of the
company pursuant to a scheme of stock option or sweat
equity.
 Condition cont.
• 2 (37) ―employees‘ stock option means the option
given to the directors, officers or employees of a
company or of its holding company or subsidiary
company or companies, if any, which gives such
directors, officers or employees, the benefit or right to
purchase, or to subscribe for, the shares of the
company at a future date at a pre-determined price;
• Sec. 2 (88) ―sweat equity shares means such equity
shares as are issued by a company to its directors or
employees at a discount or for consideration, other
than cash, for providing their know-how or making
available rights in the nature of intellectual property
rights or value additions, by whatever name called;
 Condition cont.
• 68. (6) Solvency Declaration with Registrar :
Before making such buy-back, file with the Registrar, a
declaration of solvency signed by at least two directors
of the company, one of whom shall be the managing
director, if any, Form No. SH.9 may be prescribed and
verified by an affidavit to the effect that the Board of
Directors of the company has made a full inquiry into the
affairs of the company as a result of which they have
formed an opinion that it is capable of meeting its
liabilities and will not be rendered insolvent within a
period of one year from the date of declaration adopted
by the Board.
 Condition cont.
• 68. (7) Extinguishment of Certificate:
Company shall extinguish and physically destroy the shares
or securities so bought back within seven days of the last
date of completion of buy-back.
• 68. (8) No further issue till 6 months:
Where a company completes a buy-back of its shares or
other specified securities, it shall not make a further issue of
the same kind of shares or other securities including
allotment of new shares or other specified securities within
a period of six months except by way of:
a) a bonus issue or
b) in the discharge of subsisting obligations such as
conversion of warrants, stock option schemes, into sweat
equity or conversion of preference shares or debentures into
equity shares.
 Condition cont.
• 68. (9) Register to be maintained:
Company shall maintain a register in Form No. SH.10 of the
shares or securities so bought, the consideration paid for the
shares or securities bought back, the date of cancellation of
shares or securities, the date of extinguishing and physically
destroying the shares or securities. The register of shares or
securities bought-back shall be maintained at the registered
office of the company and shall be kept in the custody of the
secretary of the company or any other person authorized by
the board in this behalf. The entries in the register shall be
authenticated by the secretary of the company or by any
other person authorized by the Board for the purpose.
 Condition cont.
• 68. (10) Return of Buy Back & a Declaration:
A company shall, after the completion of the buy-back
under this section, file with the Registrar a return in
Form No. SH.11 containing such particulars relating to
the buy-back within thirty days of such completion.
There shall be annexed to the return, a certificate in
Form No. SH.15 signed by two directors of the company
including the managing director, if any, certifying that
the buy-back of securities has been made in compliance
with the provisions of the Act and the rules made
thereunder.
 Condition cont.
• 68. (11) Punishment for any Default:
If a company makes any default in complying with
the provisions of this section, the company shall be
punishable with fine which shall not be less than
one lakh rupees but which may extend to three
lakh rupees and every officer of the company who
is in default shall be punishable with imprisonment
for a term which may extend to three years or with
fine which shall not be less than one lakh rupees
but which may extend to three lakh rupees, or
with both.
 Condition cont.
• 69. (1) Capital Redemption Reserves:
• Where a company purchases its own shares out of free
reserves or securities premium account, a sum equal to
the nominal value of the shares so purchased shall be
transferred to the capital redemption reserve account
and details of such transfer shall be disclosed in the
balance sheet.
• 69. (2) Utilization of Capital Redemption Reserves:
The capital redemption reserve account may be applied
by the company, in paying up unissued shares of the
company to be issued to members of the company as
fully paid bonus shares
 Condition cont.
• 70. (1) Restriction on 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 either before or after the commencement of this Act, 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.
Provided that 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.
• 70. (2) No Buy Back if:
No company shall, directly or indirectly, purchase its own
shares or other specified securities in case such company
has not complied with the provisions of:
a) Sections 92: Annual Return
b) Section 123: Declaration and Payment of Dividend
c) Section 127: Failure to pay Dividend
d) Section 129: Failure to give True and Fair Statement
 SEBI GUIDELINES FOR SHARE BUY BACK

• The SEBI guidelines indicate that the upper limit of share buyback is
25% or less than the total of the paid-up capital and free reserves of
the company.
• buy back of Share not to be approved by the SEBI, if the ratio of the
aggregate of secured and unsecured debts of a company are more
than twice the paid-up capital and free reserves
For example, a company has paid-up capital and free reserves
amounting to Rs. 1,00,000 and secured and unsecured debts amounting
to Rs. 2,50,000. This company has proposed buyback of 1000 shares at
Rs. 100 each, which will amount to Rs. 1,00,000. In this case, the
buyback will not be approved by SEBI because the debt-to-equity ratio
of the company will exceed 2:1 post buy back
• As per SEBI guidelines, buy back of only fully paid-up shares and
securities is permitted.
• As per SEBI norms, no company has the power to buy back its shares
unless the consequent reduction of its share capital is effected
under section 67 of the Companies Act, 2013.
 SEBI GUIDELINES FOR SHARE BUYBACK

• Modes of buyback:
• The buyback of shares can be done via the following
means:
• (a) Free reserves- If the buyback of shares is made from
free reserves, a sum equal to the nominal value of shares
must be transferred to the Capital Redemption Reserve.
• (b) Securities premium account- This is the extra money
obtained when a company sells shares above their fair
value. The money in this account can be used for share
buyback.
• (c) Proceeds of an earlier issue- A company cannot buy
back its shares/securities out of the proceeds of the earlier
issue of the same type of share/securities.
 SEBI GUIDELINES FOR SHARE BUYBACK

• As per SEBI norms, a company may not be allowed to

purchase its own shares through any subsidiary
company and any investment company.
• Also, a company with an unhealthy liquidity position
may not be permitted to buy back own shares
• The company shall not authorize any buyback unless:
a) The buy back is authorized by the Articles of
association of the Company
b) A special resolution has been passed in the general
meeting of the company authorizing the buy-back. In
case if it is a listed company, then the approval should be
made by means of a postal ballot.
 SEBI GUIDELINES FOR BUY-BACK

• The process of buyback of shares shall be

completed within a period of 1 year from the
date of the passing of the resolution by the
board of directors of the company
• The company authorized to do the buy back of
shares shall make a public announcement
within two working days of its declaration
SEBI GUIDELINES FOR SHARE BUY BACK

• Within 30 days of completion of the buyback of

shares, the company shall file a return containing
particulars relating to the buyback with the Registrar
of Companies and the Board according to the format
specified in the Companies Act, 2013
• An ordinary resolution is sufficient when the buy back
amounts is up to 10% of the total paid-up equity
capital and free reserves of the company, but a
special resolution needs to be passed when the buy
back amounts to 25% of the total paid-up capital and
free reserves
 Advantages of Buy Back:
• It is an alternative mode of reduction in capital without
requiring approval of the Court/CLB(NCLT),
• to increase current share price of the Company;
• Support to share price when company activities are on a
reduced scale
• Maintaining a revised Capital structure
• Discourage unwelcome takeover bids
• to provide an additional exit route to shareholders when
shares are undervalued or thinly traded;
• Increase in dividend rate ;
• to return surplus cash to shareholders when paid up share
capital appears to be more than necessary ;
• Increase in earning per share;
• to support share price during periods of sluggish market
condition;