Buy-back of Shares and other Specified Securities

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Buyback of Shares: Everything You need to Know | IndianMoney

This post has been written by Vanshika Darbari, a third year law student of Maharaja Agrasen Institute of Management studies, GGSIPU.

The buy-back of shares and other specified securities was allowed by the Government by propagating an Ordinance on 31st October, 1998. This provision was made effective from 31st October, 1998. The provision relating to buy back of shares in the companies act, 2013 are sections – 68,69 and 70 read with Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014. The companies are allowed to buy – back their own shares and other securities subject to certain conditions. SEBI has also issued certain guidelines regulating the buy back of shares in case of listed companies.

The buy-back of shares is a strategy  used by the management of the company to increase its stake, percentage wise. It reduces the outstanding number of shares as the shares which are bought back are cancelled and increases per share assuming that there is no dilution in the company’s earnings.

According to section 68(1) of the Companies Act, 2013 a company may purchase its own shares or other specified securities out of :

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

Thus, the company must have at the time of buy-back, sufficient balance in any or more of these accounts to accommodate the total value of the buy-back.

Conditions for buy-back

(1)The Buy-back of shares can only be made if the articles of association of the company allows so. In case, no such provision is mentioned in the articles then the company is required to alter the articles of association in order to authorize the buy-back of shares.

(2) Buy-back can only be made with the approval of the Board of directors or by a special resolution passed by shareholders in the general meeting, depending upon the quantum of buy-back.

  1. The Board of directors can approve buy-back upto 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 the resolution passed in the meeting.
  2.  Shareholders by a special resolution can approve buy-back upto 25% of the total paid-up capital and free reserve of the company.

(3) The ratio of the aggregate of secure and unsecured debts owed by the company after buy-back is not more than twice the paid-up and it’s free-reserve.

(4) All the shares or other securities at the time of buy-back should be fully paid-up.

(5) No offer of buy-back under this section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy back.

(6) The buy-back in respect of the shares not listed on the any stock exchange must be in accordance with the guidelines as may be prescribed.

Methods of Buy-back

The methods of buy-back  mentioned under section 68(5) are :-

  1. From the existing shareholders or security holders on a proportionate basis;
  2. From the open Market;
  3. By purchasing the securities issued to employees of the company pursuant to a scheme mf stock option or sweat equity.

Completion of Buy-back

Every Buy-back must be completed within 12 months from the date of passing of the resolution.

Extinguishment of securities

The company must extinguish and destroy its securities bought back within seven days of the last date of completion of buy-back.

Return of Buy-back

A company shall, after the completion of the buy-back under this section, file with the registrar and SEBI a return containing such particulars relating to buy-back within thirty days of such completion, as may be prescribed.

Default

If the company fails to comply with the statutory requirements of buy-back or any rules made, then the company or any other officer of the company who is in default shall be punishable with the imprisonment for a term which may extend to three years, or with fine which may extend to 3,00,000 rupees or with both.

Circumstances prohibiting Buy-back

No company shall directly or indirectly purchase its own shares or other specified securities-

  • Through any subsidiary company including its own subsidiary companies;
  • Through any investment company or group of investment companies; 
  •  In case of default by the company, in the repayment of deposit 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 payment 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 the period of three years has lapsed after such default ceased to subsist.
  •  If the company fails to comply with the provisions of section 92,123 and 129.
  • In case the company has punished for failure to distribute dividend.

REFERENCES

[1] http://mca.gov.in/SearchableActs/Section68.htm

[2] Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.

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