A Company having excess fund and doesn’t have any good investment solution and considering it that unused Cash is costly for the Company thus by using that Cash Company can Bay back their shares from the Market, though Companies do buybacks for various reasons, including company consolidation, equity value increase, and to look more financially attractive.
A buyback of shares is a process where a company buying back their own shares that was issued earlier. It can be count as a corporate action event in which a company makes a public announcement for the buyback offer to get the shares from existing shareholders within a given timeframe. The company make an announcement for an offer price for the buyback that is usually higher than the current market price.
Statutory provisions of Buy Back:
- Companies Act, 2013- Section 68- empowers a company to purchase their own shares or other securities in few cases
- Companies Act,2013- Section 69 – Accounting treatment of the proceed of Buyback
- Companies Act, 2013- Sections 70- imposes restriction on buy back of shares in certain circumstances
Therefore, these section of the Companies Act, 2013 read together with the rule 17 of the Companies (share capital and debentures) Amendment Rules, 2016 regulates the process of Buyback of shares by an unlisted company.
Sources of Buy-Back:
A company may purchase their own shares or other “specified securities”
- its free reserves;
- the securities premium account; or
- The proceeds of the issuuance of any shares or other specified securities.
“Specified Securities” include employee stock ownership plan or other securities as may be notified by the Central Government from time to time.
Buyback of Shares Reasons:
There are various reasons associated with it where a company to announce a buyback.
Undervalued Stock
- Excess cash with not many project opportunities
- Strengthening promoter holding in the Company
- To achieve optimum capital structure
Methods of Buyback of shares:
Buyback of shares may be done in following process:
- On the basis of proportionate Buyback of shares from existing shareholders
- Buyback of shares from an open market
- Buy-back of securities issued to employees under ESOP.
Condition of Buy-back:
According to the Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are:
- Authorization for Buy-Back: AOA of the company should authorize Buy-Back, if no provision in AOA then first alter the AOA.
- Approval:
Approval of BoD- up to10% of the total paid-up equity capital and company’s free reserve; or
- Approval of Shareholders- up to25% of the aggregate of paid-up capital and company’s free reserve.
- Post buy-back debt-equity ratio may not exceed 2:1.
- Only fully paid up shares can be brought back in a FY.
- Time limits: The buy-back need to be completed within a period of 1 year from the date of passing of Special Resolution or Board Resolution.
- Cooling Period: from the date of Buy-back completion the Company cannot issue same kind of shares including right issue of shares within a period of 6 month except Bonus issue or discharge of subsisting obligations.
- Offer Withdrawal: there is no any offer of withdrawal of offer is allowed once it is announced to the shareholders.
- Computation of Buy-back needs to be done on the basis of :
- Audited account which is not more than six month old from the date of offer document; or
- Unaudited account not older than six month from offer document subject to limited review by Auditor of the Company
What is the Procedure for Buy-back of shares for unlisted Companies?
These process should be followed by the Company intending for Buy-back:
- Call in the meeting of the company’s Board of Directors,
- Notice of General Meeting: Send Notice of GM at which special resolution to be passed accompanied by Explanatory statement in which the particulars required to be mentioned as per section 68(3) [a- e] and Rule 17(1) [a- n] of Companies (Share Capital and Debentures) Rules, 2014 should be disclosed.
- Letter of Offer (Form SH-8): Before the buy-back of shares, the company will file with the Registrar of Companies a Letter of Offer in e-form SH-8 and the Letter of Offer will be dispatched to the shareholders immediately after filing the same with the RoC, ensuring the matters as prescribed in the Sub-rule 10 of Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014.
- Offer Period: The offer for buy back will remain open for a minimum period of 15 days but not more than 30 days from the date of dispatch of letter of offer.
- Declaration of Solvency (Form SH-9): The company will file with the RoC, along with the letter of offer, a declaration of solvency in e-Form SH-9 and verified by affidavit
- Offer Acceptance: In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the company, the acceptance per shareholder will be on proportionate basis out of the total shares offered for being bought back.
- Separate Bank Account: After the closure of the buy-back offer, the company will immediately open a separate bank account and deposit therein.
- Verification: The Company will complete the verifications of the offers received within15 days from the date of closure of the offer and the shares or other securities lodged will be perceive to be accepted unless a communication of rejection is made within 21 days from the date of closure of the offer.
- Payment: Within 7 days from the date of offer’s verification:
- Make payment of consideration to those shareholders whose shares has been accepted in cash
- Whose shares are not accepted then return the share certificate to those
- Shares Extinguishment: A Company should extinguish and physically destroy shares bought back within completion of seven days of the buy-back.
- Return of Buy-Back: Submit Return of buy-back in Form SH-11.
- Register of Buy-Back: The Company need to maintain a register of shares which has been bought back in Form SH-10.
Restriction on Buy-back:
According to the Companies Act, 2013- section 70, A Company should not buy-back their securities or other specified securities, directly or indirectly –
- Through any subsidiary including their own subsidiaries; or
- By investment or group of investment Companies; or
When Company has defaulted in repayment of deposit, or in redemption of debentures repayment of any term loan. The prohibition is lifted if the default has been remedied and a period of three years has passed after such default ceased to subsist.
When Company has found defaulted in filing of Annual Return, declaration of dividend & financial statement.
Punishment:
- Company and officer in default: punishable with fine which shall not be less than INR 1 lac but which may extend to INR 3 lacs.