Buy-back of Securities

Buy-back of securities/Buy-back of shares:-

What is buy-back of shares?

Buy-back of shares means purchase of its own shares by the company from existing shareholders.

Buy-back represents cancellation of shares and decrease of share capital. It means when company buy back of its own shares then, the purpose is to cancel the already issued shares and decrease the share capital and company can not buy its own shares for the purpose of investment.

Advantages/Objectives of Buy-back

1. To increase the earnings per share.
2. To reduce the capital.
3. To increase promoters holding.
4. To enhance consolidation of stake in the company.
5. To prevents others to make bid for take over the company.
6. To support the share price on stock exchange.
7. To improve return on capital and return on net worth.
8. To return surplus cash to shareholders.
9. To achieve optimum capital structure.
10. To enhance the long-term value for shareholders.

According to section 68(1) of the Companies Act 2013, companies are allowed to buy-back their own shares and other specified securities out of: –

1. Its free reserves: or
2. the securities premium account; or
3. the proceeds of the issue of any shares or other specified securities.

Note: – No buy-back of any kind of shares or other specified securities shall be made out of the proceeds
of an earlier issue of the same kind of shares or same kind of other specified securities.

The important conditions for buy back

According to section 68(2) of the Companies Act, 2013, following conditions must be satisfied if the companies purchase its own shares or other specified securities:

(a). The buy back must be authorized by its articles of association.

(b). A special resolution has been passed at a general meeting relating to the buy back.

however, the above conditions do not apply when the buy back is 10% or less of the paid up equity capital and free reserves and authorized by a board resolution.

(c). The buy back must be ≤ 25% of total paid up capital and free reserves of the company.

(d). The buy back must not be >25% of total paid up capital and free reserves in any financial year.

(e). After buy back, the debt equity ratio should be 2:1, it means the debt should not be more than twice of its equity [paid up capital and its free reserves].

(f). All the shares or other specified securities for buy-back are fully paid-up.

(g). The buy back of listed shares or other specified securities will be in accordance with the regulations made by the Securities and Exchange Board of India.

(h). Buy back in respect of shares or other specified securities other than those specified specified in (f) will be in accordance with the guidelines as may be prescribed.

Note: -The buy back can not be more than in one year.

Explanatory Statement

As per section 68(3), additional requirements are as follows: –

The notice of meeting at which the special resolution is supposed to be passed must be accompanied by an explanatory statement stating: –

• (a) a full and complete disclosure of all material facts.
• (b) the necessity for the buy-back
• (c) the class of shares or securities intended to be purchased under the buy-back.
• (d) the amount to be invested under the buy-back.
• (e) the time-limit for completion of buy-back.

3. Every buy back shall be completed within 12 months from the date of passing the special resolution.

4. The buy back may be:

(a) from the existing shareholders or security holders on a proportionate basis; or

(b) from the open market; or

(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.

5. Solvency declaration– Before making such buy-back, it has to be filed with the Registrar a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, and Form as may be prescribed 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 one year from the date of declaration adopted by the Board of Directors.

Note: – Company whose shares are not listed on any recognized stock exchange shall not be filled declaration of solvency with Securities and Exchange Board of India.

6. When a company buys-back its own securities, 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.

7. When a company completes a buy-back of its shares or other specified securities, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares or other specified securities within a period of six months except by way of:

a. issue of bonus ; or

b. in discharging of subsisting obligations, such as conversion of warrants, stock option schemes, sweat
equity or conversion of preference shares or debentures into equity shares.

8. When company buys-back its securities, company shall maintain a register of the shares or securities
so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares
or securities, the date of extinguishing and physically destroying the shares or securities.

9. A company shall, after the completion of the buy-back under this section, file with the Registrar a return containing such particulars relating to the buyback within thirty days of such completion.

Note: – Companies whose shares are not listed on any recognized stock exchange, no return shall be filled.

10. If a company makes a default in complying with the provisions of this section, company shall be punishable with a fine which shall not be less than one lakh rupees and which may extend to three lakh rupees and every officer of the company who defaults shall be punishable with imprisonment for a term which may extend to three years or with a fine which shall not be less than one lakh rupees and which may extend to three lakh rupees, or with both.

11. 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 reserves account and details of such transfer shall be disclosed in the balance sheet.

12. Buy-back shares must be fully paid-up.

13. The capital redemption reserve account may be applied by the company, in paying up unissued
shares of the company to be issued to its members as fully paid bonus shares.