Structured Biiz

BUYBACK OF SECURITIES

Buy-back is a process followed by Companies to buyback its own Shares from the existing Shareholders / Security-holders usually at a price higher than the market price. When the Company buys-back the Shares, the number of shares outstanding in the market reduces/falls. It is an option available to the existing Shareholders to exit from the Company’s business. The Company is required to follow the buy-back process as prescribed under Section 68, 69, 70 and other relevant sections of the Companies Act, 2013 and the rules framed thereunder.

What are the benefits of buyback of securities?

Modes of buyback

What are the sources of the buyback?

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

However, buyback of any kind of shares or other specified securities cannot be made out of the proceeds of the earlier issue of the same kind of shares or the same kind of other specified securities. (Section 68 (1))

What are the conditions of the buyback?

Articles of Association (AOA) of the Company must contain clauses regarding Buy-back of shares. If a provision is not there for buy-back in AOA, then the Company needs to alter its AOA first.

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:

Only 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 Reserves of the Company.

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 are as follows:

a complete disclosure of all material facts;

– the necessity for the buy-back;

– the class of shares or securities intended to be purchased under the buy-back;

– the amount to be invested under the buy-back; and

– the time limit for completion of buy-back.

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.

Only fully paid-up shares can be brought back.

Company must declare its insolvency in prescribed manner to the concerned Register of Companies, signed by at least 2 (Two) Directors out of which one must be a Managing Director, if any, and verified by an affidavit to the effect that the Board of Directors of the Company has made a full inquiry into the affairs of the Company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 (One) year from the date of the declaration adopted by the Board.

Provided that no declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any Recognised Stock Exchange.

The Company shall Extinguish and physically destroy the shares bought back within 7 days of the last date of completion of buyback.

Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make a further issue of the same kind of shares or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as the conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares. 

The Company has to maintain a register of shares/securities which is brought back in prescribed Format.

The Return of Buy-back with the Registrar in Form SH-11 on completion of buy-back 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. 

Every buy-back should be completed within 1 Year (ONE YEAR) from the date of passing of the special resolution or the Board resolution, as the case may be.

Where 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 and details of such transfer shall be disclosed in the Balance Sheet.


What is the prohibition for buyback in certain circumstances?

Company shall not purchase its own shares or securities —

  1. Through any Subsidiary Company including its own Subsidiary Companies or
  2. Through any Investment Company or group of Investment Companies; or
  3. If a default, is made in the repayment of deposits accepted, 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 (provided that 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); or
  4. In case such Company has not complied with the provisions of Section 92 (Annual Returns), Section 123 (Declaration and payment of dividend), Section 127 (Punishment for failure to distribute dividend) and Section 129 (Financial Statements)

Default / Punishment

If a Company makes any default in complying with the provisions as prescribed under the Companies Act, 2013 for buyback of securities, then the punishment shall be as follows:

– Company will be Fined, not less than Rs. 1 Lakh (Rupees One Lakh) but which may extend to Rs. 3 Lakh (Rupees Three Lakh).

– Every officer with a fine which shall not be less than Rs. 1 Lakh (Rupees One Lakh), but which may extend to Rs. 3 Lakh (Rupees Three Lakh).