Analysis of Buy Back of shares

Restriction on purchase of own shares

(Nov. 2015)

Penalty

Exceptions to this Provision

i.e. When company can purchase its own share

• No company Limited by Shares or Limited by Guarantee having a share capital shall buy its own shares, except as provided by the Act.
• Even Company can't finance any person directly or indirectly, by way of Loans & Advances or Guarantee to Purchase shares of company or of its holding company.
• On Company: Rs. 1,00,000 to Rs. 25,00,000
• On Defaulting Officer: Imprisonment upto 3 years and Fine Rs. 1,00,000 to Rs. 25,00,000
• Lending of money by a banking company in the ordinary course of its business, but such lending can't provide loans on the securities of its own shares or debentures.
• A company may provide financial assistance:
• For the purchase of fully paid shares by trustees to be held for the benefit of employees of the company including directors holding salaried posts.
• To bona fide employees of the company to enable them to purchase fully paid shares for amount not exceeding 6 months salary.
• Loans by a company to persons in the employment of the company other than its Directors or KMP's, for an amount not exceeding their salary or wages for a period of 6 months with a view to enabling them to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership.
• Redemption of Preference Share
• A company may buy its shares from any member in pursuance of a court order.
• As provided u/s 68 i.e. Buy Back of Shares

Buy Back of Shares and Sources of Fund

Note:

1. Buy Back means purchase of its own share by Company.
2. Sources of Fund for Buy Back:

• Free Reserves; or
• Security premium account; or
• The proceeds of any shares or other specified securities issued for Buy Back purpose.
• No buy-back of any shares or specified securities shall be made out of proceeds of earlier issue of the same kinds of share or specified securities.

Specified Securities means security issued under ESOP or of Central Government.

Conditions in relation to Buy Back

(Nov. 2002, 2010, 2013, May 2018)

Company has to submit a Declaration of Solvency to SEBI & ROC before Buy-Back

Note:

1. Buy-back is Authorized by its Articles;
2. A Special Resolution is passed. Provided no special resolution is necessary if:

• The buy-back is not more than 10% of the total paid-up equity capital and free reserves of the company; and
• Such buy-back has been authorized by the board by means of a resolution passed at its meeting.
• Buy-Back can be upto 25% of the Total Paid up Capital and Free Reserve.
• Buy Back cannot exceed 25% of the total paid equity capital in that financial year.
• Debt Equity Ratio after Buy Back should not be more than 2:1.

Provided Central Government may prescribe for higher ratio.

• All the shares or other specified securities are fully paid up.
• The buy-back of listed securities is in accordance with the regulations made by the SEBI.
• The buy-back in respect of shares not listed on Recognized Stock Exchange is in accordance with the guidelines as may be prescribed.
• Such Buy Back securities must be destroyed within 7 days from completion of Buy-Back.

Time Limit for Buy Back of Shares

• Every Buy-Back shall be completed within 12 months from the date of passing the Special Resolution, and
• Between two Buy Backs there must be difference of at-least 12 months.

Procedure before Buy Back

Every Company Buy Backing its shares has to sent a notice specifying Special Resolution to its members, and such notice should be accompanied by a Explanatory Statement containing:

• Full Disclosure of all material facts in relation to Buy Back.
• Necessity for Buy Back.
• The class of securities to be Buy Back.
• Estimated Amount required for Buy Back.
• Estimated Time for completion of Buy Back.

From whom to Buy Back

• From the exiting security holders on proportionate basis; or
• From the open market; or
• From employees to whom issued under ESOP / Sweat Equity.

Cooling Period

Restriction on Further issue after Buy Back is Cooling Period i.e. No further issue of same kind of Security for next 6 month except:

• Bonus Issue
• ESOP
• Conversion of Debentures or Preference Shares.

Register of Buy Back and Buy Back Return

• Company has to maintain Register of Buy Back.
• Company has to file a return of Buy Back to ROC & SEBI (if listed) within 30 days
• Penalty: Fine upto Rs. 50,000 or imprisonment upto 2 years or both

Transfer to CRR

[Section 69]

• When Buy Back is made out of Free Reserve then an amount equal to nominal value of shares should be Transfer to CRR, and details is to be disclosed in Balance Sheet.
• CRR can be used to issue fully paid up bonus shares

Penalty

• On Company: Rs. 1,00,000 to Rs. 3,00,000
• On Defaulting Officer: Imprisonment upto 3 years or Fine Rs. 1,00,000 to Rs. 3,00,000 or Both

Prohibition for Buy-Back

(Nov.2014)

In the following cases Buy Back is Prohibited:

1. Through any Subsidiary Company including its Own Subsidiary Companies or
2. Through any Investment Company or group of Investment Companies; or
3. Default is made by company in repayment of deposits or interest payment thereon, redemption of debentures, redemption of preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institutions or banking company.
4. But where the default is made good and a period of three years has lapsed after such default ceased to subsist, then buy-back is not prohibited.
5. Company has not complied with provisions of:

• Annual Report u/s 92
• Declaration of dividend u/s 123
• Punishment for failure to distribute dividends u/s 127
• Financial Statements u/s 129