What is the meaning of Buyback of Shares?
Buyback is a mechanism that enables the company to approach the existing shareholders to repurchase/buyback the shares they hold of the company. Compared to developed nations, it is relatively a fresh idea in India and came simultaneously with the introduction of buyback in other emerging markets. It was indeed a huge shift in corporate law because it gave Indian companies another window to restructure their capital requirements, allowing them to use capital more effectively.
Provisions regarding Buy-Back of Shares in Companies Act 2013:
Section 68 of Companies Act deals with Buyback of Shares by a company. This section corresponds to section 77A (Power of company to purchase its own securities) of the 1956 Act with no changes except that the definition of the free reserve has been modified and the penalty provisions have been enhanced. Unlike the provisions of section 67 which prohibits a company to buy-back its own shares unless reduction of capital is effected, this section dilutes this general prohibition and allows a company whether public or private, to purchase its own shares or other specified securities out of following sources according to Section 68(1) of the Companies Act, 2013:-
a) Its free reserves; or
b) The securities premium account; or
c )The proceeds of any shares or other specified securities.
However, buy-back of any kind of shares or securities shall not be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Shares Buyback Benefits:
a) Increase in Shareholder Value: Buyback are beneficial to shareholders. The decrease in the number of shares leads to rise in earning per share (EPS). Since earnings per share is calculated by dividing earnings by total number of outstanding shares, when the total number of shares decreases, earnings per share will increase.
b) Improve return on Equity: Since the company spends cash to repurchase the shares, the cash holdings in the balance sheet reduces. At the same time, the buyback will also reduce shareholders ' equity by the same amount in the liabilities side of the balance sheet. As a result subsequent to buyback the Return on Assets (ROA) and return on equity ROE( Return on Equity) also raises.
c) Approval of NLCT /Court not required: It constitutes an alternative way to reduce capital without the court /NCLT's approval.
d) Provides Exit opportunity: Buyback provides investors with exit opportunities when stocks are undervalued or sparsely traded.
Conditions for Buy-Back of Shares- Section 68(2)
No company shall purchase its own shares or other specified securities unless the following conditions are fulfilled [sub-section (2)].
a) its articles permit the buy-back ;
b) A Special Resolution has been passed at a general meeting of the company authorizing the buy-back where the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company. Board Resolution would authorize the buyback where the buy-back is10% or less of the total paid-up equity capital and free reserves of the company, a Board resolution would authorize such buy-back ;
c) the buyback is 25% or less of the aggregate of paid-up capital and free reserves of the company; Provided that in respect of the buy-back of equity shares in any financial year, the reference to 25% in this clause shall be construed with respect to its total paid-up equity capital in that financial year ;
d) DEBT EQUITY RATIO 2:1 :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.
e) FULLY PAID UP SHARES: all the shares or other specified securities for buy-back are fully paid-up;
f) the buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the regulations made by SEBI.
g) The buyback in respect of shares or other specified securities not listed on any recognized stock exchange is in accordance with Companies (Share Capital and Debentures)Rules, 2014.
Time Limit for buyback of shares- Section 68(4)
Every buy-back should be completed within ONE YEAR from the date of passing of the special resolution or the Board resolution, as the case may be [sub-section (4)].
S.68(6) DECLARATION OF SOLVENCY:
A declaration of solvency has to be filed by the company to the Registrar and SEBI before the buy-back is proposed. No declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognized stock exchange [sub-section (6)].
As per rule rule 17(3) declaration of solvency should be filed in the Form No. SH.9along with the fee and signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit as specified in the said Form.
Post buyback requirements:-
(i) FILING OF RETURN: a return in has to be filed with RoC and SEBI within 30 days of completion [sub-section (10)]. As per rule 17(13) The company, after the completion of the buy-back shall file with the Registrar, and in case of a listed company with the Registrar and the Securities AND Exchange Board of India, a return in the FORM NO. SH.11along with the fee.
(ii) EXTINGUISHMENT OF SHARES:- all the shares and securities so bought back shall be physically destroyed within seven days of the last date of completion of buyback [sub-section (7)].
The minimum gap between two buy-backs of securities shall be one year irrespective of whether the same is approved by the Board of directors or the shareholders. Under the 1956 Act, if the buy-back was undertaken pursuant to the approval of the Board of directors, no further offer of buy-back was permissible within 365 days of such buy-back approved by the Board of directors.
FROM WHERE CAN A COMPANY BUYBACK ITS SHARES? (SECTION 68(5)):
The buy-back under sub-section (1) may be:
a) From the existing shareholders 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.
PROHIBITION OF FURTHER ISSUE OF SHARES OR SECURITIES(SECTION 68(8):
When a company completes a buy-back of its shares it shall not make a further issue of the same kind of shares 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, sweat equity or
c) Conversion of preference shares or debentures into equity shares.
Buyback of Shares Procedure
- FILING OF LETTER OF OFFER WITH THE REGISTRAR (RULE 17(2)):
The company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a letter of offer in Form No SH 8,Such letter of offer shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director.
-DISPATCH OF LETTER OF OFFER TO SHAREHOLDERS(RULE 17(4)):
The letter of offer shall be dispatched to the shareholders immediately after filing the same with the Registrar of Companies but not later than 21 days from its filing with the Registrar of Companies.
-OFFER PERIOD RULE 17 (5):
As per Rule 17 (5) The offer for buy-back shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer. Provided that where all members of a company agree, the offer for buy-back may remain open for a period less than fifteen days.
-REGISTER OF BUYBACK OF SHARES :
The company, shall maintain a register of shares or other securities which have been bought-back in FORM NO. SH.10.[rule 17(12)]
-CERTIFICATION OF COMPLIANCE:
There shall be annexed to the return filed with the Registrar in Form No. SH.11, a certificate in Form No. SH.15signed by two directors of the company including the managing director, if any, certifying that the buy-back of securities has been made incompliance with the provisions of the Act and the rules made thereunder. [rule 17(14)]
PENALTY: Section 68(11) If a company makes any default in complying with the provisions 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
TRANSFER TO AND APPLICATION OF CAPITAL REDEMPTION RESERVE ACCOUNT(SECTION 69):
When 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. 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.
Circumstances under which Buyback of Shares is Prohibited
1. No company shall directly or indirectly purchase its own shares:-
a) Through any subsidiary company including its own subsidiary companies;
b)Through any investment company
c) If a default, is made by the company, in the repayment of deposits interest payment thereon, the 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:
However, 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.
2. No company shall, directly or indirectly, purchase its own shares in case such company has not complied with the provisions of Section:-
• 92 Annual Return,
• 123(Declaration of Dividend),
• 127(punishment for failure to distribute dividend) and
• 129(Financial Statement).
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- Buyback of Shares as per Companies Act 2013 and its latest Amendments
- Dematerialized Rights Entitlements
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