THE PROCEDURE OF BUY-BACK OF SHARES OR SECURITIES

Buy-Back refers to purchase of own Securities by a Company. The provisions of buy-back are regulated by Section 68 of the Companies act, 2013. The provisions related to buy-back are elucidated below.

1. BENEFITS OF BUY-BACK

Increase the Promoters’ Shareholding
Increase the Earnings Per Share (EPS)
Prevent the hostile takeover

2. MODES OF BUY-BACK

From the existing shareholders or security holders on a proportionate basis.

From open market.

By purchasing the securities issued to employees of the company pursuant to a stock option or sweat equity.

3. SOURCES OF BUY-BACK

The payment for buy-back of securities should be made out of:

Free Reserves
Securities Premium Account
The proceeds of the issue of any shares or other specified securities. However, buy-back of any kind of shares or other specified securities shall not be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

4. CONDITIONS FOR BUY-BACK

The buy-back of only fully paid-up shares is allowed.

The buy-back should be authorized by the Articles of Association.

The Buy-back should be completed within 1 year.

The shares/securities should be extinguished/physically destroyed within 7 days from the completion of Buy-Back.

Further issue of shares/securities (either same kind or other) should not be made for 6 months after buy-back. However, shares may be issued on account of conversion or Bonus Shares may be issued.

No further buy-back is allowed for a period of 1 year after expiry of buy-back.

5. PROHIBITIONS ON BUY-BACK

Buy-back should not be made through any subsidiary company including its own subsidiary companies;

Buy-back should not be made through any investment company or group of investment companies; or

Buy-back is not allowed if a default, is made by the company, in the repayment of deposits including interest, redemption of debentures or preference shares or dividend payment to any shareholder, or repayment of any term loan or interest thereon to any financial institution or banking company, however, the buy-back is not prohibited, if the default is made good and a period of 3 years has passed after such default has ceased to subsist.

Buy-back should not be made if the company has not complied with the provisions of:

Section 92 (Annual Return),
Section 123 (Declaration of Dividend),
Section 127 (punishment for failure to distribute dividend) and
Section 129 (Financial Statement)

6. MAXIMUM AMOUNT OF SECURITIES TO BE BOUGHT BACK

By board Resolution (BR):

10 % of [Total Paid-up Equity Capital + Free Reserves]

By Special Resolution (SR):

25 % of [Total paid-up capital + free Reserves]

Note: Total paid-up capital includes Equity & Preference both.

7. STEPS FOR BUY-BACK

Check authorization of buy-back in Articles of Association.
Convene a Board Meeting and pass Board Resolution.
Convene Extra-ordinary General Meeting and pass special Resolution (only if Buy-back is more than 10% of the Total Paid-up Equity Capital + Free Reserves and up to 25 % of the Total paid-up capital + free Reserves).
File MGT-14 within 30 days of passing BR or SR, as the case may be.
Prepare Letter of offer. The offer period should be minimum 15 days and maximum 30 days
File Letter of Offer in Form SH-8. (Attachments: Details of Promoter, Declaration by auditor, Copy of BR, copy of Notice of EGM with Explanatory Statement, Audited Financial Statements of last 3 years, Buy-back details of last 3 years, List of Holding & Subsidiary Companies)
A Declaration of Solvency in Form SH-9 (Attachments: Copy of BR, Statements of Assets and Liabilities, Auditor’s Report, Affidavit that the Board of Directors of the company has made a full inquiry into the affairs of the company and that the company is capable of meeting its liabilities and will not be declared insolvent within a period of 1 year from the date of declaration) is to be filed along with the form SH-8.
Dispatch of Letter of Offer within 20 days of filing the same with registrar.
File form SH-11 (Return of Buy-Back) within 30 days from the completion of buy-back. Attachments: Copy of BR, Copy of SR, Balance Sheet, A certificate in Form No. SH-15 signed by 2directors of the company (including the managing director, if any) certifying that the buy-back of securities has been made in compliance with the provisions of the Act and the rules made thereunder.
Maintain SH-10 (Register of Securities Bought-Back).

Disclaimer:

The information provided in this content is for general informational purposes only. You should always seek the advice of expert before making any decisions based on the information provided. We do not warrant or guarantee the accuracy, completeness, or usefulness of the information provided. Any reliance you place on such information is strictly at your own risk. We shall not be liable for any damages, losses, or expenses arising out of or in connection with the use of this content.