Under Section 68of the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014
A. REASONS/BENEFITS OF BUY-BACK:
There are many reasons & benefits to buy-back its shares by a company, some of them are produced below:-
To Increase Earnings Per Share (EPS) of the Company;
To pay the surplus funds to the shareholders;
To prevent the company from takeover bids by holding the capital in the hands of promoters;
To maintain the debt-equity ratio;
To provide an exit route to the shareholders;
To service the equity of the company in a more efficient manner;
To increase the return on capital & return on net worth;
B. SOURCES OF BUY-BACK:
A company may purchase its shares out of:-
its free reserves;
the securities premium account; or
the proceeds of the issue of any shares or other specified securities.
However, no buy-back of any kind of shares can be made out of the proceeds of an earlier issue of the same kind of shares.
C. PROHIBITIONS ON BUY-BACK:
No company shall directly or indirectly purchase its own shares:-
through any subsidiary company including its own subsidiary companies;
through any investment company or group of investment companies; or
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, 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;
The Company shall not buy-back its shares If the company has not complied with the provisions of Section 92 (Annual Return), 123 (Declaration of Dividend), 127 (punishment for failure to distribute dividend) and section 129 (Financial Statement);
D. PROVISIONS FOR BUY-BACK OF SHARES: (i) Authorization for Buy-Back:- Articles of Association(AOA) of the company should authorize Buy-Back if no provision in AOA then first alter the AOA. (ii) Approval:- The Buy-back can be made with the approval of the Board of directors at a board meeting and/or by a special resolution (SR) passed by shareholders in general meeting, depending on the quantum of the buyback.
Approval of Board of Directors- up to 10% of the total paid-up equity capital and free reserves of the company;
Approval of Shareholders-up to 25% of the aggregate of paid-up capital and free reservesof the company.
(iii) Notice of General Meeting:-The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an 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. File MGT-14. (iv) Methods of Buy-Back:- The Buy-back of shares of private & unlisted public companies may be –
from the existing shareholders on a proportionate basis;
by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
(v) 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 but not later than 20 days from its filing 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. (vi) 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. (vii) 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 members agreed).
(viii) Debt-equity Ratio:- The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and its free reserves. (ix) Fully Paid-up Shares:- Shares to be bought back must be fully paid up. (x) Time limits:- Buy-back shall be completed within a period of 1 (one) year from the date of passing of SR or Board Resolution, as the case may be. 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.
(xi)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. (xii) 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 lodged shall be deemed to be accepted unless a communication of rejection is made within twenty-one days from the date of closure of the offer. (xiii) 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. (xiv) Payment:- Within 7 days from the date of verification of the offers:
Make payment of consideration in cash to those shareholders whose shares have been accepted.
Return the share certificates to those shareholders whose shares are not accepted at all or the balance of shares, if partly accepted.
(xv) Extinguishment of Shares certificates:- The company shall Extinguish and physically destroy the shares certificates bought back within 7 days of the last date of completion of buy back. (xvi) Prohibition on further issue of shares:- The company shall not make a further issue of the same kind of shares including allotment of new shares under clause (a) of sub-section (1) of section 62 within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares. (xvii) Register of Buy-Back (SH-10):- The Company shall maintain a register of shares which has been bought back in Form SH-10. (xviii) Return of Buy-Back (SH-11):-The Return of Buy back with the Registrar in Form SH-11 on completion of buyback along with the certificate in Form SH-15 certifying that the buy-back of shares has been made in compliance with the provisions of the Act and rules within 30 days of such completion. (xix) Capital Redemption Reserve Account:- If the buy-back of shares is made 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 and the amount of the said reserve 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. (xx) Punishment:- If a company makes any default in complying with the provisions of section 68, then the punishment shall be as follows:-
Fine, not less than one lakh rupees but which may extend to three lakh rupees
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
* Note: before buy back the entire promoter/directors and KMP’s shares of the unlisted public companies must be in D-mat mode.
E. BASIS OF VALUATION OF BUY-BACK PRICE:
The Companies (Share Capital & Debentures) Rules, 2014 has not defined any basis of valuation of buy-back price to be complied with by Private companies and unlisted public companies. Company is free to make a valuation of buy-back price on any relevant basis. A company can also make a valuation on the basis of the current book value of the shares or Net Asset Value (NAV). However, the company needs to give complete disclosure about the basis of valuation in Explanatory Statement and also in the offer letter which needs to send to the Shareholders.
F. TAX TREATMENT FOR BUYBACK OF SHARES:
As per the Indian Income Tax Act, 1961 any sum paid from accumulated profit to the shareholders of the company is treated as a dividend under Section 2(22)(a). In case of buyback any payment made by a company on purchase of own shares from a shareholder in accordance with the provisions of Section 68 of the Companies Act, 2013 will not be treated as dividend hence Dividend Distribution Tax (DDT) under Section 115-O will not be applicable in this case.
Section 46A of the Income Tax Act, 1961 says that where a shareholder or a holder of other specified securities receive any consideration from any Company for purchase of its own shares or specified securities held by such shareholders or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholders or the holders of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholders or the holders of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company.
Further, the company is not liable to pay any DDT but shareholders who are receiving consideration are liable to pay Capital Gain Tax as per the Income Tax Act, 1961.
G. APPLICABILITY OF STAMP DUTY:
No Stamp Duty is payable in case of buyback of shares as the company is buying back its own shares and hence, the same does not result in any transfer.
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