PROJECT REPORT

ON
BUY BACK OF SHARES
(COMPANIES ACT 2013 AND SEBI)

SPONSORED BY
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

SUBMITTED BY
MEGHA VINOD KORLUR
STUDENT REGN NO: 340055167/02/2014

VERIFIED BY
MRS. GAURI SURENDRA BALANKHE
COMPANY SECRETARY IN PRACTICE
MEMBERSHIP NO: 7786
CP NO: 8588
 ACKNOWLEDGEMENT

I am very much grateful to Mrs. Gauri Surendra Balankhe, Practicing Company Secretary and staff members
of Gauri Balankhe, PCS, Bangalore where I got the privilege to complete my training and I’m very thankful
to them for their constant encouragement and guidance throughout my training period.

I express my sincere gratitude to the Institute of Company Secretaries of India for permitting me to
undergo this project on Buy Back of shares.

______________________________
Megha Vinod Korlur
Regn No: 340055167/02/2014
 CERTIFICATE

This is to certify that the project titled “BUY BACK OF SHARES” has been carried out by Ms. Megha Vinod
Korlur (Student Regn No:340055167/02/2014), under my guidance in the event of fulfilment of 36 months
of practical training under me.

Place: Bangalore Gauri Surendra Balankhe

Date: Practicing Company Secretary
Membership No:7786
CP No:8588
 PREFACE

This report is prepared as per the requirement of my regular curriculum as prescribed by the Institute of
Company Secretaries of India.

Preparation of this report has helped me in gaining the theoretical and practical knowledge of Buy Back of
shares.

The report emphasizes the procedural details of buy back in corporate world as per Companies Act, 2013
and Securities and Exchange Board of India (SEBI).

The data contained herein has been collected from study materials, Companies Act 2013 and articles issued
by SEBI.
 TABLE OF CONTENTS

SERIAL TOPIC PAGE NO

NO

A. INTRODUCTION TO BUY BACK OF SHARES 1

B. MEANING OF BUY BACK OF SHARES 1

C. REASONS FOR BUY BACK OF SHARES 1

D. MODES OF BUY-BACK

E. SOURCES OF BUY-BACK

F. PROCEDURE FOR BUYBACK OF SHARES

G. CONDITIONS OF BUY BACK OF SHARES UNDER COMPANIES ACT, 2013 AND

SEBI:-

H. ADVANTAGES OF BUY BACK OF SHARES

I. DISADVANTAGES OF BUY BACK OF SHARES

J. PROHIBITION FOR BUY-BACK IN CERTAIN CIRCUMSTANCES

INTRODUCTION TO BUY BACK OF SHARES

Buyback is also termed as a share purchase. When a firm purchases its own outstanding shares to bring
down the number of shares which are available in the open market. Firms buy back shares for several
reasons including to raise the value of remaining shares which are available by bringing down the supply
or blocking other shareholders from taking over the control.

With a buyback, firms will be permitted to invest in themselves. When the number of outstanding shares in
the market is reduced, the proportion of shares that are owned by investors increases. A firm might feel
that its shares are being undervalued and perform a buyback with an aim to provide investors with a
return.

The share repurchase brings down the number of existing shares which makes each share worth a greater
percentage of the corporation. The stock's Earning per Share (EPS) thus raises while the Price-to-Earnings
ratio (P/E) goes down or the stock price elevates. A buyback indicates to investors that the firm has enough
cash kept aside for emergencies, and there are fewer chances of economic troubles.

MEANING OF BUY BACK OF SHARES

“The term buy-back implies the act of purchasing its own shares/securities by a Company. This facility
enables the Company to go back to the holders of its own shares/securities and make an offer to purchase
such shares/securities from them.”

REASONS FOR BUY BACK OF SHARES

 To boost shareholder value, buying back offers a way of using the surplus funds of companies with
unattractive alternative capital options. A reduction in the capital base resulting from buying back will
typically produce higher earnings per share (EPS).

 It is used as a defensive mechanism in an environment in which the threat of company takeovers is

real. Buy-back offers insurance from a hostile takeover by increasing the assets of promoters.

 It will encourage businesses to reduce their equity base, injecting much-needed flexibility.

 The intrinsic value of the shares is increased by a reduced floating stock ratio.

 It would allow businesses to use buyback stock, without expanding their capital base, for subsequent
utilization in the process of mergers and acquisitions.

 Share buying is used as a financial engineering tool.

 It is used to report the impact of buyback on the share price

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MODES OF BUY-BACK:-

A Company may buy back its shares or other specified securities by any of the following Methods:-

(a) From the existing shareholders or other specified securities holders on a proportionate basis
through the tender offer;

(b) From the open market through;

i. Book-building process,
ii. Stock exchange

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

SOURCES OF BUY-BACK:-

A Company can purchase its own shares and other specified securities out of –

 Its free reserve; or

 The securities premium account; or
 The proceeds of the issue of any shares or other specified securities.

However, Buy-back of any kind of shares or other specified securities cannot be made out of the proceeds
of the earlier issue of same kind of shares or same kind of other specified securities.

PROCEDURE FOR BUYBACK OF SHARES

 Step 1: Convene the Board Meeting:

Firstly, the applicant needs to call a board meeting. For the same, a notice must be sent to the directors
of the company at least 7 days prior to the date of the meeting.

 Step 2: Approval for EGM:

In the board meeting, the applicant company needs to approve the buy-back, fix the date of the EGM
(Extra-Ordinary General Meeting), and approve the EGM’s notice along with the explanatory statement
under Section 102 which shall contain the following disclosures:-

a. The date of the board meeting at which the proposal for buy-back was approved by the board of
directors of the company.
b. The objective of the buy-back.
c. The class of shares or other securities intended to be purchased under the buy-back;

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d. The number of securities that the company proposes to buy-back;
e. The method to be adopted for the buy-back;
f. The price at which the buy-back of shares or other securities shall be made;
g. The basis of arriving at the buy-back price;
h. The maximum amount to be paid for the buy-back and the sources of funds from which the buy-back
would be financed;
i. The time-limit for the completion of buy-back;
j.
I. The aggregate shareholding of the promoters and of the Directors, of the promoter where the
promoter is a company and of the directors and key managerial personnel as on the date of the
notice convening the general meeting;
II. The aggregate number of equity shares purchased or sold by persons mentioned in sub-clause (I)
during a period of twelve months preceding the date of the board meeting at which the buy-back
was approved and from that date till the date of notice convening the general meeting;
III. The maximum and minimum price at which purchases and sales referred to in sub-clause (ii) were
made along with the relevant date;

k. If the persons mentioned in sub-clause (I) of clause (j) intend to tender their shares for buy-back –

I. the quantum of shares proposed to be tendered;

II. the details of their transactions and their holdings for the last twelve months prior to the date of the
board meeting at which the buy-back was approved including information of number of shares
acquired, the price and the date of acquisition;

l. A confirmation that there are no defaults subsisting in repayment of deposits, interest payment
thereon, redemption of debentures or payment of interest thereon or redemption of preference shares
or payment of dividend due to any shareholder, or repayment of any term loans or interest payable
thereon to any financial institution or banking company;

m. A confirmation that the Board of Directors have made a full enquiry into the affairs and prospects of
the company and that they have formed the opinion-

I. that immediately following the date on which the general meeting is convened there shall be no
grounds on which the company could be found unable to pay its debts;
II. as regards its prospects for the year immediately following that date, that having regard to their
intentions with respect to the management of the company’s business during that year and to the
amount and character of the financial resources which will in their view be available to the
company during that year, the company shall be able to meet its liabilities as and when they fall due
and shall not be rendered insolvent within a period of one year from that date; and

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 III. the Directors have taken into account the liabilities (including prospective and contingent
liabilities), as if the Company were being wound up under the provisions of the Companies Act,
2013

n. A report addressed to the Board of directors by the company’s auditors stating that-

I. They have inquired into the company’s state of affairs;

II. The amount of the permissible capital payment for the securities in question is in their view
properly determined;
III. That the audited accounts on the basis of which calculation with reference to buy back is done is
not more than six months old from the date of offer document; and
[Provided that where the audited accounts are more than six months old, the calculations with
reference to buy back shall be on the basis of un-audited accounts not older than six months from
the date of offer document which are subjected to limited review by the auditors of the company.”]
IV. The Board of directors have formed the opinion as specified in clause (m) on reasonable grounds
and that the company, having regard to its state of affairs, shall not be rendered insolvent within a
period of one year from that date.

 Step 3: Send the notice for EGM:

Once the notice for EGM is approved, the applicant must send it at least 21 days before the date of the
meeting.

 Step 4: Passing of Special Resolution for Buy-Back of Shares:

In the EGM, a special resolution must be passed for the approval of the Buy-back of shares.

 Step 5: File SH-8:

After the resolution has been passed, one must file the Letter of Offer in Form SH-8 with the Registrar.
Furthermore, the form must contain the signature of two directors of the company.

 Step 6: Declaration of Solvency:

Along with the form SH-8, you need to annex form SH-9 which is the declaration of solvency. Again, the
form must be signed by the two directors of the company.

 Step 7: Letter of Offer to the Shareholders:

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 Within 20 days of the filing of SH-8 with the Registrar, the applicant needs to dispatch the ‘Letter of
Offer’ to the shareholders of the company. Moreover, the Letter of Offer needs to be kept open for at
least 15 days and a maximum of 30 days from the date of dispatch of the letter of offer.
[“Provided that where all members of a company agree, the offer for buy-back may remain open for a
period less than fifteen days.”]

 Step 8: Acceptance of Offer:

The Offer will be considered as accepted if there’s no communication of rejection within 21 days of offer
closure.

 Step 9: Opening of a Bank Account:

So, if the shareholders have accepted the offer, the applicant company has to open a separate bank
account. Besides, the total consideration amount for the shares offered to be paid in Buy-back should be
deposited in a separate bank account.

 Step 10: The company shall within seven days of the time specified in sub-rule (7)-

(a) make payment of consideration in cash to those shareholders or security holders whose securities
have been accepted; or
(b) return the share certificates to the shareholders or security holders whose securities have not been
accepted at all or the balance of securities in case of part acceptance.

 Step 11: The company shall ensure that—

a. 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;
b. the company shall not issue any new shares including by way of bonus shares from the date of
passing of special resolution authorizing the buy-back till the date of the closure of the offer under
these rules, except those arising out of any outstanding convertible instruments;
c. the company shall confirm in its offer the opening of a separate bank account adequately funded for
this purpose and to pay the consideration only by way of cash;
d. the company shall not withdraw the offer once it has announced the offer to the shareholders;
e. the company shall not utilize any money borrowed from banks or financial institutions for the
purpose of buying back its shares; and
f. the company shall not utilize the proceeds of an earlier issue of the same kind of shares or same kind
of other specified securities for the buy-back.

 Step 12: Maintaining of Registers:

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 The company, shall maintain a register of shares or other securities which have been bought-back in
Form No. SH.10.

a. The register of shares or securities bought-back shall be maintained at the registered office of the
company and shall be kept in the custody of the secretary of the company or any other person
authorized by the board in this behalf.

b. The entries in the register shall be authenticated by the secretary of the company or by any other
person authorized by the Board for the purpose.

 Step 13: Return to be filed:

The company, after the completion of the buy-back under these rules, shall file with the Registrar, and in
case of a listed company with the Registrar and the Securities and Exchange Board of India, a return in
the Form No. SH.11 along with the fee.

 Step 14: Annexure to Form No SH.11:

There shall be annexed to the return filed with the Registrar in Form No. SH.11, a certificate in Form No.
SH.15 signed by two directors 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.

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CONDITIONS OF BUY BACK OF SHARES UNDER COMPANIES ACT, 2013 AND SEBI:-

 The buy-back should be authorised by its Articles of association of the Company.

 A special resolution has been passed at a general meeting of the Company authorising the buy-back.

 The buy-back is Twenty-Five percent or less of the aggregate of paid-up capital and free reserves of the
company.
(Provided that in respect of the buy-back of equity shares in any financial year, the reference to
twenty-five percent in this clause shall be construed with respect to its total paid-up equity capital in
that financial year)

 The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not
more than twice the paid-up capital and its free reserves:
(Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and
free reserves for a class or classes of companies).

 All the shares or other specified securities for buy-back are fully paid-up;

 The buy-back of the shares or other specified securities listed on any recognised stock exchange is in
accordance with the regulations made by the Securities and Exchange Board in this behalf.

 No offer of buy-back under this sub-section shall be made within a period of one year reckoned from the
date of the closure of the preceding offer of buy-back, if any.

 Every buy-back shall be completed within a period of one year from the date of passing of the special
resolution or as the case may be the board resolution.

 The company which has been authorized by a special resolution shall, before the buy-back of shares, file
with the Registrar of Companies a letter of offer in Form No. SH.8, along with the fee:
Provided that such letter of offer shall be dated and signed on behalf of the Board of directors of the
company by not less than two directors of the company, one of whom shall be the managing director,
where there is one.

 Company must declare its insolvency in Form SH-9 to Register of Companies and the Securities and
Exchange Board signed by At least 2 Directors out of which one must be a Managing Director, if any.

 Where a company buys back its own shares or other specified securities, it shall extinguish and
physically destroy the shares or securities so bought back within 7 days of the last date of completion of
buy-back.

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 Cooling Period: from the date of completion of Buy-back Company cannot issue same kind shares
including right issue of shares within a period of 6month except Bonus issue or discharge of subsisting
obligations.

 The company, shall maintain a register of shares or other securities which have been bought-back in
Form No. SH.10.

 A company shall, after the completion of the buy-back under this section, file with the Registrar and the
Securities and Exchange Board a return containing such particulars relating to the buy-back within
Thirty days of such completion, in the Form No. SH.11 along with the fee.
(Provided that no return shall be filed with the Securities and Exchange Board by a company whose
shares are not listed on any recognised stock exchange.)

 If a Company makes any default in complying with the provisions of this section or any regulation made
by the Securities and Exchange Board shall be punishable with:

o Company – Fine :>1 lakh rupees may extend to 3 lakh Rupees.

o Officer in default – Fine :>1 lakh rupees may extend to 3 Lakh Rupees.

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ADVANTAGES OF BUY BACK OF SHARES

 Capital restructuring of the company is possible through buy back of share.

 The excess capital may be reduced to a suitable level.

 Earnings per share of the company may be raised through buy-back of shares.

 The buy-back can also be used by the company to prevent the hostile take-over of the company by
undesirable persons.

 It helps to avoid corporate dividend tax as cash resources are used for buy-back instead of declaration
of dividend.

 To increase the promoters holding as the shares which are bought are cancelled.

 To increase EPS, if there is no dilution in companies earnings as the buy-back reduces the outstanding
number of shares.

 To support the share price when the share price, in the opinion of the management is less than its fair
value.

 To pay surplus cash to the shareholders when the company does not need it for the business. For e.g.
TCS, Infosys, Wipro, HCL and Tech Mahindra are regularly conducting such programmes since 2014 as
part of their capital allocation policies.

 To reward shareholders by Buy-back of shares at much higher price than ruling market price.

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DISADVANTAGES OF BUY BACK OF SHARES

 There may be risk of manipulation of stock prices by management.

 There is the possibility of insider trading in case of buy-back of shares.

 The repurchase of its own shares may conversely have a negative signaling effect as the market place
may think that the company has fewer growth opportunities after a share buy-back, due to erosion of
cash resources.

 Management may not seek to utilize any existing excess cash effectively by acquiring new investments
or developing profitable markets.

 Possible mismanagement may arise if too high a price is paid for the repurchased shares, to the
detriment of remaining shareholders, or if cash resources are eroded to the level that could give rise to
a risk of insolvency at the expense of its creditors.

 If buy-back is undertaken by replacing shares with debt in cases where companies do not have
adequate funds for buy-back of shares, the proposal may misfire on the company.

 A return of funds by way of a share buy-back is less certain than an annual dividend stream.

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PROHIBITION FOR BUY-BACK IN CERTAIN CIRCUMSTANCES

1. No company shall directly or indirectly purchase its own shares or other specified securities—

(a) through any subsidiary company including its own subsidiary companies;

(b) through any investment company or group of investment companies; or

(c) if a default, is made by the company, in the repayment of deposits accepted either before or after the
commencement of Act, interest payment thereon, redemption of debentures or preference shares or
payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to
any financial institution or banking company

Provided that the buy-back is not prohibited, if the default is remedied and a period of three years has
lapsed after such default ceased to subsist.

2. No company shall, directly or indirectly, purchase its own shares or other specified securities in case
such company has not complied with the provisions of sections 92, 123, 127 and section 129.

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