Buy-Back Of Shares Under Companies Act 2013

Introduction

As per section 68 of the Companies Act 2013, Buy-Back of shares is a process by which the company purchase it’s shares from the existing shareholders usually at a price higher than the market price. It is the option available to the shareholders to take exit from the company’s business. It is an alternative mode of reduction of capital. It is one of the methods of capital restructuring. Sections 68 to Section 70 of the Companies Act, 2013 and Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 deals with buy-back of shares.

Objectives of Buy-Back

Buy-Back of shares is done by the company with an objective of Higher Earning Per share, in order to safeguard against hostile takeover and it becomes a medium for exit of shareholders.

Sources Of Buy-Back

The sources of Buy-Back of shares are as follows:

• Proceeds of any specified security
• Securities Premium Account
• Free Reserves

Buy-Back of Shares Can Be Made From Whom?

• From existing shareholders on proportionate basis
• From open market
• Book building process
• Stock Exchange

Note : No offer of buy-Back for 15℅ or more of paid up capital and free reserves shall be made from this category.

• By odd-lot holders

Key points to be kept in mind with regard to sec 68 of Buy-Back

• It must be authorised by articles if not then alter the articles accordingly.
• If the buy-back is equal or less than 10℅ of total paid up equity capital and free reserves, then it must be authorised by Board Resolution and in case it is  equal to or less than 25℅ of total paid up capital and free reserves then pass special resolution for it.
• No further buy-back can be made for a period of 1 year from preceding buy-back.
• Buy-back of equity shares in any financial year should not exceed 25℅ of the total paid-up equity capital of the company. A company can buy-back its entire securities other than equity shares as may be notified by the CG, in a financial year, subject to the overall limit of 25℅ of the total paid up capital and free reserves of the company.
• The debt equity ratio should be maintained at 2:1 after buy back however for government companies which carry on non-banking finance institution activities and housing finance activities shall maintain debt to capital and free reserve ratio at 6:1.
• Bought back share should be fully paid up else first make it fully paid and then buy-back.
• A declaration of solvency is required to be filed by the company in Form No. 4A with ROC and SEBI.
• The bought back securities should be physically destroyed within 7 days of completion of buy-back.
• The company shall not issue share of the same class after making such buy back for 6 months unless in case of bonus issue, in discharge of already existing obligation, conversion of warrants, sweat equity or of preference shares or debentures into equity shares.
• Register of bought back securities should be maintained in form SH-10.
• File the return of bought back securities in form SH-11 with ROC
• In case of default in complying with the provisions of Sec 68 the company or any officer in default shall be punishable with imprisonment extends to maximum 3years or fine of ₹100000 to ₹500000 or both.

Note- The term free reserves include-

Dividend equalization reserves, Foreign Currency Fluctuation Reserve, General Reserve, Securities Premium Account, Investment Fluctuation Reserve, Investment Allowance (Utilised) Reserve, Capital Reserve realised in cash, But it does not include-

• Capital Redemption Reserve
• Debenture Redemption Reserve
• Statutory Reserve

Provisions as per section 69

If the company purchases it’s shares out of free reserves then the sum equal to nominal value of the shares should be transferred to CRR account and details of such transfer should be disclosed in Balance Sheet.

Restrictions under buy-back (section 70)

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 of the subsidiary company including its own subsidiaries; or
• Through investment or group of investment Companies; or
• When Company has defaulted in repayment of deposits or interest payable thereon, or in redemption of debentures or preference shares Or repayment of any term loan however if the default has been remedied and a period of 3 years has elapsed after such default has taken place
• When Company has defaulted in filing of Annual Return, declaration of Dividend & financial Statement or punishment for failure to distribute dividend.

Process of buy-back of shares-

For the purpose of buy-back there are different sections applicable to both listed and unlisted companies which are summarised below-

• Articles of Association of the company should contain the power to buy back, if not then alter the articles accordingly.
• Take the required approval from directors and Members.
• Send a notice of Extra Ordinary General Meeting along with explanatory statement atleast 21 days before conducting such meeting.
• File MGT-14 with the registrar of companies within 30 days of passing of special resolution.
• File the letter of offer in signed by atleast 2 directors and one of the director signing it must be a Managing Director to ROC along with following documents-
  • Copy of Board Resolution.
  • Declaration by auditors
  • Details about promoters
  • Copy of the notice issued under section 68(3)
  • List of holding and subsidiary companies
  • Buy-Back details of the last 3 years
  • Statutory approvals received (if any);
  • Unaudited financial statement (if applicable);
  • Confirmation of opening of Separate Bank Account.
  • Details about the auditor, legal advisors, bankers and trustees (if any)
• From the date of filing the letter of offer with ROC, dispatch the letter of offer to shareholders within 20 days. The shareholders shall accept the offer within 15 to 30 days from the date the letter has been dispatched.
• The company shall open a separate bank account known as escrow account to deposit the due amount of those shareholders who have accepted such offer.
• The Offer will be considered as accepted if there’s no communication of rejection within 21 days of offer closure.
• Within 7 days of verification of the offer take the appropriate action-
  • To the shareholders who have accepted the offer- make full payment
  • To the shareholders who haven’t accepted- return the share certificate
  • To the shareholders who have accepted partly- return the balance share  certificate
• The bought back securities should be physically destroyed within 7 days of completion of buy-back.
• All the entries shall be recorded in the register which shall be kept in the safe custody of a Company Secretary or any other person as authorised. Such register shall contain all particulars as mentioned in SH-10.
• File the return of bought back securities in form SH-11 with ROC within 30 days.
• Along with SH-11 form, the company shall file with the registrar compliance certificate in form SH-15 which shall be annexed with form SH-11.The directors shall sign it and certify that the compliance of Companies Act and Companies ( Share Capital and Debenture) Rules have been taken care of.

Conclusion-

Thus it can be concluded that buy-back is typical form of capital restructuring and can be exercised only when the company has sufficient funds by following the rules as mentioned therein or amended from time to time. It prevents mergers and takeovers thus help company to safeguard its position in the market. It is beneficial for both the company and the shareholders thus knowledge of its provisions and rules is a must for both the company and its shareholders before they take their decision.

Lastly, in case of any doubt or dilemma, reach out to Legal Window, our proficient and skilled Chartered Accountants and Company Secretaries are always there to serve you with the best advice and guidance.