Corporate Law PSDA

TOPIC
Shares and Debentures (Buy Back of Securities)

SUBMITTED TO:

Ms. Bhavna Rao

Assistant Professor,
Corporate Law

SUBMITTED BY:

Harsh Kumra
Enrolment No.- 08310303816
3-B
What is buy-back of securities?

Buy-back is a procedure that enables a company to purchase its shares from its existing
shareholders, usually at a price near to or higher than the prevailing market price. When a
company buys back, it reduces its outstanding shares in the market, which increases the
percentage shareholding for the remaining shareholders.

In a buy-back, the company generally offers its shareholders an option to tender a portion of their
shares within a certain time frame and at a specified price (maybe at a premium to the current
market price). This price compensates the shareholders for tendering their shares rather than
holding on to them. Sometimes, companies buy back shares on the open market over an extended
period of time.

Why buy back of securities?

The reasons for buy-back are obvious — they improve the earnings per share and long-term
shareholder value, provide an exit route to shareholders when shares are undervalued or are
thinly traded, help achieve optimum capital structure and, of, course, help return surplus cash to
the shareholders.

Another reason why this mode of capital reduction is preferred by Indian corporates is that it
does not require any approval of the court or the National Company Law Tribunal (NCLT).
Another reason why this mode of capital reduction is preferred by Indian corporates is that it
does not require any approval of the court or the National Company Law Tribunal (NCLT).

Share buy-back is also considered more tax-efficient than dividends to distribute a company’s
earnings: While companies have to pay dividend distribution tax (DDT) on the total amount
distributed and dividends above INR10 lakh are taxable in the hands of the shareholders, listed
companies are exempt from buy-back tax (BBT) and there is no capital gains tax in the hands of,
even large, shareholders in case shares are held for more than one year and the buy-back is
routed through a stock exchange where Securities Transaction Tax has been paid. Further, in
case of unlisted companies, BBT is chargeable in the hands of the company on the “net amount
distributed” (i.e., after reducing the amount received by the company for the issue of such

Harsh Kumra Buy Back of Securities 08310303816

shares), while the amount received is exempt in hands of the shareholders. So, there is a clear tax
benefit to the extent of the amount received by the unlisted company from its shareholders
(including securities premium), as it is not subject to BBT.

This raises the question: If buybacks are so advantageous, why does every company not follow
this path instead of dividend distribution? Well, nothing comes easy in this world or without its
own riders. The process of buy-back can be undertaken only subject to the satisfaction of
conditions as prescribed under Sections 68, 69 and 70 of the Companies Act, 2013, Rules 17 of
the Companies (Share capital and Debenture) Rules 2014 and relevant SEBI regulations in
respect of buy-back, which, for instance, restrict companies’ ability to raise further capital for a
period of six months from the closure of buy-back, except by way of bonus shares or in
discharge of subsisting obligations.

Buy Back of Securities vis-à-vis Companies Act, 2013

Traditionally, subject only to a few exceptions specified in Section 67, companies were not
permitted to purchase their own shares. Section 77-A, brought in by the Companies
(Amendment) Act, 1999 caused this structural change in the theme and philosophy of Company
Law that, subject to the restrictions envisaged in the section, a company may buy back its own
shares. Now, this power is contained in Section 68 of the 2013 Act. According to Section 68(1)
of the Companies Act, 2013 a company may purchase its own shares or other specified securities
(hereinafter referred to as “buy-back”) out of:

(i) its free reserves; or

(ii) the securities premium account; or
(iii) the proceeds of the issue of any shares or other specified securities.

However, no buy-back of any kind of shares or other specified securities can be made out of the
proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Thus, the company must have at the time of buy-back, sufficient balance in any one or more of
these accounts to accommodate the total value of the buy-back.

Harsh Kumra Buy Back of Securities 08310303816

Free reserves has been defined under section 2(43) of the Act as such reserves which, as per the
latest audited balance sheet of a company, are available for distribution as dividend: Further it
has been provided that the following shall not be treated as free reserves:

(i) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity,
including surplus in profit and loss account on measurement of the asset or the
liability at fair value, shall not be treated as free reserves.

Authorisation (Section 68(2))

The primary requirement is that the articles of association of the company should authorise
buyback. In case, such a provision is not available, it would be necessary to alter the articles of
association to authorise buyback. Buy-back can be made with the approval of the Board of
directors at a board meeting and/or by a special resolution passed by shareholders in a general
meeting, depending on the quantum of buy back. In case of a listed company, approval of
shareholders shall be obtained only by postal ballot.

Quantum (Section68(2))

Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free
reserves of the company and such buy back by means of a resolution passed at the meeting.
Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital
and free reserves of the company, in respect of any financial year.

The notice of the meeting at which the special resolution is proposed to be passed shall be
accompanied by an explanatory statement stating—

 a full and 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.

Harsh Kumra Buy Back of Securities 08310303816

Conditions to be fulfilled before buyback of securities:

1. First of all AOA should provide authorization to the Company to Buy Back its own share.
2. Buy back can be done only upto 25% or less than its paid up share capital & free reserves
(In case of Equity Shares – 25% of paid up equity share capital only.
3. It can be done either from : Existing shareholder or Open Market or Employees to whom
shares are offered through ESOP
4. It can be done either through Free Reserves Security Premium Out of proceeds of fresh
issue of shares ( not out of earlier issued same kind of securities)
5. After buyback, debt equity ratio should not exceed 2:1 (Secured and unsecured debts
after buy back shall not be more than twice of paid up capital & free reserves)
6. All the shares shall be fully paid up.
7. In case Buy Back is only upto 10% of the total paid-up Equity capital and free Reserves,
only ordinary resolution will be required.
8. In case Buy Back is up to 25% of the total paid-up capital and free Reserves, Special
Resolution is required.
9. Minimum time Gap between two buy backs should be one year.
10. Within 6 months from date of completion of buy back, company shall not issue fresh
shares (Except Bonus shares/conversion of warrants/stock option/sweat
equity/conversion of preference shares/conversion of debentures) u/s 62(1)
11. Once the offer to buyback has been announced to shareholders, same cannot be
withdrawn.
12. Company shall not utilize any money borrowed from banks/ financial institutions for buy
back

Prohibitions for buy back:

Under following conditions, buy back is prohibited:

1. Company cannot directly or indirectly purchase its own shares or other specified
securities through any subsidiary company including its own subsidiary companies.
2. Company cannot directly or indirectly purchase its own shares or other specified
securities through any investment company or group of investment companies.

Harsh Kumra Buy Back of Securities 08310303816

 3. In case company has made any default in
i. in the repayment of deposits accepted either before or after the commencement of
this Act
ii. interest payment thereon,
iii. redemption of debentures or preference shares
iv. payment of dividend to any shareholder, or
v. Repayment of any term loan or interest payable thereon to any financial
institution or banking company.
vi. Noncompliance of Sec 92 (Annual return), 123 (Declaration of dividend), 127
(Punishment for failure of distribution o dividend) and Sec 129 (Financial
statement).

Procedure of buy-back

According to rule 17(2) before the buy-back the company shall file a letter of offer in form SH-8
with the registrar of companies along with fee. Such letter of offer shall be dated and signed by
not less than two directors of the company on behalf of the board of directors of the
company. When a company propose buy-back its own shares or other specified securities under
this sec then it shall before making such buy-back, file an declaration of solvency in form SH-9
with the registrar of the company and shall be signed by the at least two director one of whom
shall be managing director. The letter of offer shall be dispatched to the shareholders
immediately after filing the same with the registrar of companies but not later than 21 days from
its filing with the registrar of companies.

The letter of offer shall contain true, factual and material information and shall not contain any
misleading information and must state that the directors of the company accept the responsibility
for the information contained in such document. The offer for buy-back shall remain open for a
period of not less than 15days and not exceeding 30days from the date of dispatch of the letter of
offer.

Acceptance on Proportional basis [rule 17(6)]

In case the number of shares or other specified securities offered by the shareholders is more
than the total number of shares or securities to be bought back by the company, the acceptance

Harsh Kumra Buy Back of Securities 08310303816

per shareholder shall be on proportionate basis out of the total shares offered for being bought
back.

The company shall complete the verifications of the offers received within 15 days from the date
of closure of the offer and the shares or other securities lodged shall be deemed to be accepted
unless a communication of rejection is made within 21 days from the date of closure of the offer.

Payment of consideration

The company shall within seven days of the time limit of verification:

1. Make payment of consideration in cash to those shareholders whose securities have been
accepted.
2. Return the share certificate

Harsh Kumra Buy Back of Securities 08310303816