Buy-back is a procedure by which company reduce its share capital by purchasing its own shares from the market. According to sec 68(1) of the Companies Act, 2013 a company whether private or public may purchase its own shares or other specified securities out of:-
its free reserves;
the securities premium account;
the proceed of any shares or other specified securities.
However no buy-back of any kind of shares or other specified securities can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
The primary requirement is that the article of association of the company should authorize buy-back. In case, such provision is not available, it would be necessary to alter the articles of association to authorize buy-back. Buy-back can be made with the approval of the board of directors at a meeting or by a special resolution passed by shareholders in general meeting, depending upon the quantum of buy-back. In case of a listed company, approval of shareholders shall be obtained only by postal ballot.
Quantum of Buy-back:-
Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and such buy-back has to be authorized by the board by means of a resolution passed at the meeting.
Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up equity capital and free reserves of the company.
Post buy-back debt-equity ratio:
The ratio of the aggregate of secured and unsecured debt owned by the company after buy back is not more than twice of the paid-up capital and free reserves i.e. the ratio shall not exceed 2:1. However, 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. No offer of buy-back shall be made within a period of one year reckoned from the date of closure of the preceding offer of buy-back, if any.
The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement:-
the class of shares or securities intended to be purchased under the buy-back;
the necessity of buy-back;
a full and complete disclosure of all material facts;
the amount to be invested under the buy-back;
the time limit for completion of buy-back.
Procedure of buy-back:
According to rule 17(2) before the buy-back the company shall file a letter of offer in form SH-8 with the registrar of companies along with fee. Such letter of offer shall be dated and signed by not less than two directors of the company on behalf of the board of directors of the company. When a company propose buy-back its own shares or other specified securities under this sec then it shall before making such buy-back, file an declaration of solvency in form SH-9 with the registrar of the company and shall be signed by the at least two director one of whom shall be managing director. 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.
The letter of offer shall contain true, factual and material information and shall not contain any misleading information and must state that the directors of the company accept the responsibility for the information contained in such document. The offer for buy-back shall remain open for a period of not less than 15days and not exceeding 30days from the date of dispatch of the letter of offer.
Acceptance on Proportional basis [rule 17(6)]
In case the number of shares or other specified securities offered by the shareholders is more than the total number of shares or securities 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.
The company shall complete the verifications of the offers received within 15 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 21 days from the date of closure of the offer.
Payment of consideration:
The company shall within seven days of the time limit of verification:
Make payment of consideration in cash to those shareholders whose securities have been accepted.
Return the share certificate to the shareholders whose securities have not been accepted at all or the balance of securities in case of part acceptance.
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.
Methods of buy-back:
The buy- back may be:-
From the existing shareholders on a proportionate basis;
From the open market;
By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
When a company buy-back its own shares, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
The company shall file a return in form SH-11 along with fee with the registrar of companies within 30 days of such completion. The return shall be annexed with a certificate in form SH-15 signed by two director of the company, certifying that the buy-back of securities has been made in compliance with the provisions of the act and rules.
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