Buy Back of Shares of a Company

Buy-back is one amongst the numerous provisions of the Companies Act, 2013 that permits a company to buy its own shares or other securities with inherent advantages to the corporate and its shareholders. In this article, we look at the reasons for buyback of shares, methods of buy-back and other necessary provisions related to share buy-back schemes.

Role of Buy-Back

A share buy-back program can help a company achieve the following:

Achieve a specified capital structure
Return surplus money to shareholders/security holders
Ensure the underlying price of shares/security is correctly reflected
Control unwarranted fall in share or security value

Methods of Buy-Back

Funds for buy-back of shares are usually from free reserves or securities premium account. Shares can be bought back from existing shareholders on an impartial basis or open market transaction.

Pre-requisites

The buy-back must be permitted by 1 of the corporate.
A special resolution has been passed enabling the corporate authorizing buy-back. However, if the buy-back is 100% or less of the paid Capital and Free Reserves, the board resolution can fulfil the same.
The buy-back is 25% or less of the combination of paid-up capital and free reserves of the corporate. As long as the buy-back of equity shares in any fiscal year shall not exceed 25% of its total paid-up equity capital in the fiscal year.
The magnitude in relation to the combination of secured and unsecured debts owed by the corporate and is not over double the paid capital and its free reserves once the buy-back.
All the shares or different given securities for buy-back are totally paid up.

Other Necessary Provisions

Each buy-back ought to be completed about one year from the date of passing of Special Resolution or Board Resolution as the case may be.
Once the completion of buy-back the corporate cannot create from now on the issue of the same shares for a period of six months. However, there’s no prohibition for the issue of bonus shares or issue of shares within the discharge of subsisting obligations like conversion of warrants, options, equity or conversion of preferred stock or debentures into equity shares.
The corporate that has been licensed by a special resolution shall, before the buyback of shares, file with the ROC a letter of offer in Form No. SH. 8.
File with the ROC a declaration of economic condition signed by a minimum of one director of the corporate, one amongst whom shall be the MD, if any, in Form No. SH. 9.
Provision for buy-back shall stay open for a period of not less than fifteen days and not letter thirty days from the date of dispatch of the letter of offer.
No provision of Buy-back shall be created about one year from the closure of preceding Buy-back.
Extinguish and physically destroy the shares or securities, therefore, bought back about seven days of the last date of completion of buy-back.
Maintain a register of the shares or securities therefore bought, where one has obtained the shares or securities bought back, the date of cancellation of shares or securities, the date of extinction and physically destroying the shares or securities in Form No. SH. 10.
File with the ROC a return in Form No. SH. 11 within a period of about thirty days of the completion of Buy-back.

Prohibitions Relating to Buy-back of Shares

A company shall not purchase its shares or different securities:

Through any company, together with its own subsidiary company;
Through any investment trust or cluster of investment companies;
If the default is created by the corporate, within the reimbursement of deposits accepted, interest payment on it, the redemption of debentures or preferred stock or payment of dividend to any stockholder, or reimbursement of any term loan or interest collectable on it to any financial organization or financial institution. However, buy-back isn’t prohibited, if the default is remedied and after a period of 3 years has completed once such default has ceased to subsist.
If it is not complied with the provisions of Section 92, 123, 127 and Section 129 of the Companies Act, 2013.

Procedure for Buy-Back of Shares

Buy-Back of Shares Step 1: A company can buy back its own share by providing the Articles of Association (AOA) which authorise such buy-back. Step 2: If the buy-back is 10% or less than the total paid-up equity capital of the company, the Board of Directors will approve the same by passing Board resolution without obtaining the member's approval. Step 3: If the buy-back is up to 25% of the paid-up capital of the company, a special resolution at the members meeting is required to be passed. Passing of Special Resolution Step 4: In case of passing a special resolution, notice for the same has to be issued to the shareholders within 21 days from the date of passing a special resolution. Step 5: The explanatory statement should be provided by explaining the purpose of buy-back of shares along with the notice. Step 6: Alternatively, form MGT-14 along with the applicable fee should be filed to the Registrar of Companies (ROC) in 30 days from the day of passing the special resolution. Letter of Offer Step 7: Upon special resolution, the company should file a letter of the offer along with the applicable fee to the Register of Companies (ROC), and at least two directors must sign that one should be the managing director. Step 8: The letter of offer should be dispatched to the shareholders within 20 days from filing with the Registrar of Companies (ROC). Declaration of Solvency Step 9: In case of listed companies along with the letter of offer, the declaration of solvency in form SH-9 should be filed with ROC and signed by the at least two directors, and one should be the managing director Step 10: The offer for buy-back will remain for a period of 30 days from the date of dispatch of the letter of such offer. Step 11: If buy-back by the company is oversubscribed, then the total number of shares to be returned back, the acceptance per shareholder should be on proportionate basis out of the total shares offered for being returned back. Acceptance of offer Step 12: The company has to complete the verification of the offers received within 15 days from the cessation of the offer and the shares lodged will be accepted unless a Communication rejection made within 21 days from the date of cessation of the offer. Opening of Bank Account Step 13: After the closure of the offer, the company should open a separate bank account and deposit the total amount payable as consideration for the shares offered for the buy-back. Step 14: Further, the consideration should be paid within seven days of verification. Therefore, shares that are to be returned back should be destroyed within seven days of the completion of buy-back. Step 15: After completion of the buy-back, every company should maintain the register of shares which have been bought back. This registered should be maintained at the registered office of the company or any other person authorised by the board. Return of Buy-Back Step 16: Finally, the return of buy-back has to be filed in form SH-11 with Register of Companies (ROC) in 30 days from the completion of buy-back.

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Frequently Asked Questions

Common questions about Buy Back of Shares Regulations and Procedures.

A share buyback, also known as a share repurchase, is a process where a company buys back its own outstanding shares from the existing shareholders. This reduces the number of shares available on the market and can help the company achieve specific goals like returning surplus cash to shareholders or adjusting its capital structure.

Companies may initiate share buybacks for several reasons, such as returning surplus cash to shareholders, achieving a desired capital structure, increasing the underlying value of the remaining shares, or preventing an unwarranted fall in the share price. It can also be a way to signal confidence in the company's future prospects.

There are two primary methods for companies to buy back shares: through open market transactions or by making a tender offer directly to existing shareholders on an impartial basis. The funds for the buyback typically come from the company's free reserves or securities premium account.

For a company to initiate a share buyback, it must meet certain prerequisites, such as having the buyback permitted by its Articles of Association, passing a special resolution or board resolution authorizing the buyback, ensuring the buyback amount does not exceed certain limits, and having fully paid-up shares or securities intended for the buyback.

Companies must comply with various legal requirements for a share buyback, including filing a letter of offer with the Registrar of Companies (ROC), maintaining a register of shares bought back, filing returns with the ROC within a specified period, and physically destroying the bought-back shares within a stipulated time frame.

No, a company is prohibited from buying back its shares or securities through any of its subsidiary companies or investment trusts under the Companies Act, 2013.

Yes, there are limits on the amount of shares a company can buy back. The buyback in any fiscal year should not exceed 25% of the company's total paid-up equity capital for that year. Additionally, the buyback amount should not exceed twice the paid-up capital and free reserves of the company.

The share buyback process must be completed within one year from the date of passing the special resolution or board resolution authorizing the buyback. The offer for buyback should remain open for a period of 15 to 30 days from the date of dispatch of the letter of offer.

No, a company cannot issue the same kind of shares for a period of six months after completing a share buyback. However, it can issue bonus shares or shares to discharge existing obligations like conversion of warrants, options, or debentures into equity shares.

The shares bought back by the company must be extinguished and physically destroyed within seven days of the completion of the buyback process. The company must maintain a register of the shares bought back and file a return with the ROC within 30 days of completing the buyback.