Introduction

Buy back of shares, or other specified securities means buying back of its own shares or other specified securities by the company from the holder thereof and cancelling them. After the enactment of the companies act, 2013 section 68, 69 and 70 read with rule 17 of the companies (share capital and debentures) Amendment Rules,2016 deal with buy back of shares.

The companies are allowed to buy back their own shares and other specified securities subject to certain conditions. SEBI has also issued certain guidelines regulating the buy-back of shares in case of listed companies. Section 68 of the Companies Act, 2013 empowers a company to purchase its own shares or other securities in certain cases. Section 69 of the Companies Act,2013  relates to Accounting treatment of the proceed of Buyback. Sections 70 of the Companies Act, 2013 imposes restriction on buy back of shares in certain circumstances.

A company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of—

(a) its free reserves;

(b) the securities premium account; or

(c) the proceeds of the issue of any shares or other specified securities:

I. Satisfaction of Pre-requisites for Buy-Back or Conditions of Buy-back

1) Buy back of shares must  be authorized by its Articles of Association (AOA) of the company, if no provision in AOA then first alter the AOA.

2) If the shares to be bought back amount to

1. Up to 10% of Paid-up capital + Free Reserves + Securities Premium – Pass Board Resolution.
2. Up to 25% of Paid-up capital + Free Reserves + Securities Premium – Pass Special Resolution.

3) Buy-back should not be more than 25% of the total paid up capital and free reserves of the company.

4) Buy-back of equity shares in any financial year must not exceed 25% of its paid up equity capital.

5) Debt-equity ratio should not fall below 2:1 after buy-back.

6) The shares and the specified securities should be fully paid up.

7) Company must follow the SEBI guidelines in case of listed shares and prescribed guidelines in case of others.

8) The buy-back should be completed within a period of one year from the date of passing of Special Resolution or Board Resolution, as the case may be.

9) Shares must be physically destroyed within 7 days of completion of buy-back.

10) No fresh issue is allowed within 6 months from buy-back, except by way of issue of    bonus shares, ESOPs, sweat equity and conversion of debt/preference shares into equity.

11)  No withdrawal of offer is allowed once it is announced to the shareholders.

12)   The company shall not utilize any money borrowed from banks and financial institutions for a buyback.

II. Restrictions on Buy-Back :

According to section 70 of the Companies Act, 2013, A Company should not buy-back its securities or other specified securities, directly or indirectly

• through any subsidiary company including its own subsidiary companies;

• through any investment company or group of investment companies; or

• If there is any default in payment of deposits or interest due, redemption of debentures/preference shares or payment of dividend.

• When Company has defaulted in filing of Annual Return, declaration of dividend & financial statement.
  
  

III. Objectives/Advantages of Buy-Back of Shares:

• To increase the promoters holding as the shares which are bought are cancelled.
• To increase EPS, if there is no dilution in companies earnings as the buy-back reduces the outstanding number of shares.
• To support the share price when the share price, in the opinion of the management is less than its fair value.
• To pay surplus cash to the shareholders when the company does not need it for the business.
• To reward shareholders by Buy-back of shares at much higher price than ruling market price.
• It safeguard against a hostile takeover by increasing promoters holding.

IV. Procedure for Buy-back of shares for unlisted Companies: 

1. Convene the meeting of the Board of Directors of the Company to propose offer of buy-back

2. Notice of General Meeting: Send Notice of General Meeting at which special resolution to be passed accompanied by Explanatory statement in which the particulars required to be mentioned as per section 68(3) [a to e] and Rule 17(1)[a to n] of Companies (Share Capital and Debentures) Rules, 2014 should be disclosed and Notice must include the details regarding all the materials facts, the necessity of the buy back, class of the securities intended to be bought back, amount to be invested under the buy back and the time limit for the completion of the buy back.

3. Filling form MGT-14 with Registrar of Companies notifying (with in 30 days) of passed the special resolution passed at the EGM altering the AOA together with amended the AOA.

4. Letter of Offer (Form SH-8): Before the buy-back of shares, the company shall file with the Registrar of Companies a Letter of Offer in e-form SH-8 and the Letter of Offer shall be dispatched to the shareholders immediately after filing the same with the Registrar of Companies, ensuring the matters as prescribed in the Sub-rule 10 of Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014.

5. Offer Period: The offer for buy back shall remain open for a minimum period of 15 days but not more than 30 days from the date of dispatch of letter of offer. (Period may be less than 15 days, if all the members agree).

6. Declaration of Solvency (Form SH-9): The company shall file with the Registrar of Companies, along with the letter of offer, a declaration of solvency in e-Form SH-9 and verified an affidavit to guarantee its solvency for at least a year after the completion of buy-back.

7. Acceptance of Offer: In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the company, the acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.

8. Separate Bank Account: After the closure of the buy-back offer, the company shall immediately open a separate bank account and deposit therein, such sum, as would make up the entire sum due and payable as consideration for the shares tendered for buy-back.

9. Verification: The company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty one days (21) from the date of closure of the offer.

10. Payment: Within 7 days from the date of verification of the offers.

11. Extinguishment of Shares: A Company should extinguish and physically destroy shares bought back within 7 days of completion of the buy-back.

12. Register of Buy-Back (Form SH-10): The Company shall maintain a register of shares which has been bought back in Form SH-10 and the same will be attached in Form SH-11.

13. Return of Buy-Back (Form SH-11): Return of buy-back in Form SH-11 Annexed with Compliance Certificate in Form SH-15 shall be filed with ROC and the form to be Signed by 2 Directors out of which One must be Managing Director, if any.
    
    

V. OTHER DOCS AS REQUIRED FOR BUYBACK OF SHARES:

1. Buyback Notice of EGM with Explanatory
2. Certified Copy of Special Resolution with Explanatory Statement
3. Affidavit as Declaration of Solvency
4. Audited Financial Details of Last 3 years
5. Auditors Report along with Responsibility statement as Certificate of Declaration
6. Details of Promoters of the Company
7. SH 10-Description of shares or other specified securities bought back
8. Particulars relating to holders of securities buyback
9. SH 15 – Compliance Certificate
10. Holders of securities before and after buy-back
11. Declaration by Directors on Completion of Buyback
12. Audited financial statements or provisional financial statements (is not more than six months old from the date of offer document)
13. Valuation Report for Buy back to be obtained either from Registered valuer or CA holding more than 10 years of practice.
    
    

IV. Contents of letter of offer to be annexed as explanatory statement

The notice of the meeting at which the special resolution is proposed to be passed under clause (b) of sub-section (2) shall be accompanied by an explanatory statement stating—

the date of the board meeting at which the proposal for buy-back was approved by the board of directors of the company;

(b) the objective of the buy-back;

(c) the class of shares or other securities intended to be purchased under the buy-back;

(d) the number of securities that the company proposes to buy-back;

(e) the method to be adopted for the buy-back;

(f) the price at which the buy-back of shares or other securities shall be made;

(g) the basis of arriving at the buy-back price;

(h) the maximum amount to be paid for the buy-back and the sources of funds from which the buy-back would be financed;

(i) the time-limit for the completion of buy-back;

(j) (i) the aggregate shareholding of the promoters and of the directors of the promoter, where the promoter is a company and of the 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;

(k) if the persons mentioned in sub-clause (i) of clause (j) intend to tender their shares for buy-back –

(i) the quantum of shares proposed to be tendered;

(iii) 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;

(l) 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;

(m) 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-

(i) that immediately following the date on which the 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 one 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

(n) 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

[Provided that where the audited accounts are more than six months old, the calculations with reference to buy back shall be on the basis of un-audited accounts not older than six months from the date of offer document which are subjected to limited review by the auditors of the company.”]

(iv) the Board of directors have formed the opinion as specified in clause (m) on 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.

(5) The buy-back under sub-section (1) may be—

(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.

VII. Statutory provisions

1. Section 68, 69 and 70 of the Companies Act, 2013
2. Rule 17 of the companies (share capital and debentures) Amendment Rules,2016 deal with buy back of shares
   
   

VIII. Penalty

In case of company contravenes the provisions of the section 68–

Fine- Min. 1 lakh and may extend to 25 lakh rupees.

For every officer of the company who is in default shall be punishable

Imprisonment for a term of 3 years and

Fine of Min. of 1 lakh and may extend to 25 lakh rupees

Conclusion: Share buybacks are a financial strategy that can benefit both companies and shareholders. They provide an avenue for companies to efficiently use excess cash and create value for their investors.

Disclaimer: This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover the specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice.

Please contact Chhota CFO to discuss these matters in the context of your particular circumstances.  Chhota CFO, Its Partners, Directors, Employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.