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

1. The buy-back must be permitted by Articles of Association of the corporate.
2. 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.
3. 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.
4. 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.
5. All the shares or different given securities for buy-back are totally paid up.

Other Necessary Provisions

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. No provision of Buy-back shall be created about one year from the closure of preceding Buy-back.
7. Extinguish and physically destroy the shares or securities, therefore, bought back about seven days of the last date of completion of buy-back.
8. 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.
9. 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:

1. Through any company, together with its own subsidiary company;
2. Through any investment trust or cluster of investment companies;
3. 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.
4. If it is not complied with the provisions of Section 92, 123, 127 and Section 129 of the Companies Act, 2013.