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BUY BACK OF SECURITIES

Posted on by JKG

BUY BACK OF SECURITIES

APPLICABLE PROVISIONS:

Section 68, 69 & 70 of the Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014 are the provision concerned towards the Buy Back of Securities by the unlisted company; however, in addition to the companies act, 2013 the listed Company shall also comply with the SEBI (Buy Back of Securities) Regulations, 2018 as issued by Security Exchange Board of India (SEBI) in pursuance to Sec 68(2) (f) of the Companies Act, 2013.

MEANING:

Buy Back of Shares refers to the process by which a company re-purchase its shares and other specified securities from its existing shareholders at a price higher than the market price. It is a way of returning money to its investors. Buy-Back of its own shares by a company is nothing but reduction of share capital. Generally, the need for buyback arises when the management considers that the shares are undervalued or if the outstanding shares are falling.

SOURCES OF BUYBACK:

Pursuant to section 68 (1) of Companies Act, 2013, a company whether public or private, may purchase its own shares or other *specified securities* out of following sources: –

  • Its free reserves; 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 shall not be made out of the proceeds of an earlier issue of the same kind of shares or other specified securities.

** Specified Securities includes employees stock option or other securities as may be notified by the Central Government from time to time.

Author’s Comment:

  • A company cannot do buyback of debentures as debenture denotes a debt to the company and it is not included in specified securities.
  • There is no such restriction for buyback of securities out of proceeds of an earlier issue of different kind of securities.

METHOD OF BUY BACK:

A company may buy-back its shares by any of the following methods:

1. From the existing shareholders or security shareholders on a proportionate basis through the tender offer; or

2. From the open market: –

2.1. Book Building process

2.2 Stock Exchange

CONDITIONS FOR BUY-BACK:

Pursuant to section 68 (2) and 68 (7) of Companies Act, 2013, no company shall purchase its own shares or other specified securities unless the following conditions are fulfilled:

  • Buy-back is authorized by the Articles of Association of the Company.
  • Where Board Resolution is passed buy-back can be made up to 10% or less of the total paid-up equity capital and free reserves of the company; whereas, a  Special Resolution would be required at a General Meeting of the company where the buy-back is more than 10% of the total paid-up equity capital and free reserves of the company but up to 25% or less of the aggregate of paid-up capital (equity and preference) and free reserves of the company.

Provided that in respect of the buy-back of equity shares in any financial year, the reference to 25% in this clause shall be construed with respect to its total paid-up equity capital in that financial year.

  • Maximum number of shares that can be bought back in any financial year shall not exceed 25% of paid-up equity capital.
  • The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back cannot be more than 2:1 ratio i.e. twice the paid-up capital and its free reserves.
  • All the shares or other specified securities for buy-back should be fully paid-up.
  • the buy-back of the shares or other specified securities listed on any recognized stock exchange are in accordance with the regulations made by SEBI.
  • The buyback in respect of shares or other specified securities not listed on any recognized stock exchange are in accordance with Companies (Share Capital and Debentures) Rules, 2014.
  • No offer of Buyback under this sub section shall be made within a period of one year reckoned from the date of closure of the preceding offer of buy-back, if any.
  • A Company should extinguish and physically destroy shares bought back within 7 days of completion of the buy-back

Additionally, pursuant to SEBI (Buy Back of Securities) Regulations, 2018, a listed company shall also comply with the following:

  • No offer of Buyback for 25% or more of paid up capital and free reserves of the company shall be made from open market. (Based on the standalone or consolidated financial statements of the company, whichever sets out a lower amount)
  • In case of Buyback from open market, company shall ensure that at least 75% of amount earmarked for buyback as specified in Board Resolution/ Special Resolution is utilized for buying back shares or other specified securities.
  • In case of Buyback from open market, company shall ensure that a minimum of 40% of amount earmarked for buyback as specified in Board Resolution/ Special Resolution is utilized within the initial half of the specified duration.
  • A company shall not buy-back its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions or through any private arrangement.
  • No insider shall deal in shares or other specified securities of the company on the basis of unpublished price sensitive information relating to buy-back of shares or other specified securities of the company.

Author’s Comment: There is no such limit of maximum 25% of paid-up capital on buyback of preference shares in any financial year.

TIME LIMIT FOR COMPLETION OF BUYBACK:

Pursuant to section 68 (4) of Companies Act, 2013, every buy-back shall be completed within one Year from the date of passing of the Special Resolution or the Board Resolution, as the case may be.

ADVANTAGES OF BUYBACK:

There are several advantages of buyback such as:

  • Increase in Earnings per share: With the reduction in the number of shares in the market due to Buy Back, the earnings per share (EPS) increases Since EPS is calculated by dividing earnings by total number of outstanding shares, when the total number of shares decreases, earnings per share will increase.
  • Maintaining shareholders value in a situation of poor state of secondary market by a return of surplus cash to the shareholders.
  • Countering a Hostile Takeover: Buyback can be used as an effective defence strategy to prevent hostile takeover.
  • Approval of NLCT not required: Company can reduce the capital of company without the approval of NCLT.
  • Increase in Promoter Holding: Buyback increases the holding of promoters by purchasing back shares from their shareholders.
  • Reduction in Unutilized Cash in Hand: Since the company spends cash to buys its stock, the cash assets on its balance sheets reduce. This increases the RoE (return on equity).
  • Provides Exit opportunity: It enables the company to buy the shares of dissatisfied or dissenting shareholders of the company

PROHIBITION OF FURTHER ISSUE OF SHARES OR SECURITIES:

Pursuant to section 68 (8) of Companies Act, 2013, When a company completes a buy-back of its shares it shall not make a further issue of the same kind of shares within a period of six months except by way of:

  • Bonus issue or
  • In the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or
  • Conversion of preference shares or debentures into equity shares.

Author’s Comment: There is no restriction on issue of different kind of securities after completion of buyback.

FILING OF LETTER OF OFFER AND DECLARATION OF SOLVENCY WITH THE REGISTRAR:

Pursuant to Rule 17(2) of The Companies (Share Capital & Debentures) Rules, 2014, the unlisted 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. It 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 (if any).

Pursuant to Regulation 8 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall:

Within two working days from the record date, file the following in electronic mode with the board: –

  • a letter of offer
  • certificate in the form specified by the board, issued by a merchant banker who is not associated with the company
  • declaration of solvency as per Sec 68(6) of Companies Act

Pursuant to section 68 (6) of Companies Act, 2013 read with Rule 17(3) of The Companies (Share Capital & Debentures) Rules, 2014, a declaration of solvency has to be filed by the company to the Registrar and SEBI (if listed) along with the aforesaid letter of offer. As per aforesaid rule, declaration of solvency shall be filed in the Form No. SH.9 along with the fee and signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit to the effect that the Board of Directors of the company has made an opinion that company is capable of meeting its total liabilities and that the company will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the Board as specified in the said Form.

Author’s Comment:

  • No declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognized stock exchange.
  • the listed company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the Board or public announcement of the offer to buy-back is made

DISPATCH OF LETTER OF OFFER TO SHAREHOLDERS:

Pursuant to Rule 17(4) of The Companies (Share Capital & Debentures) Rules, 2014, the letter of offer shall be dispatched to the shareholders of unlisted company immediately after filing the same with the Registrar of Companies but not later than 20 days from its filing with the Registrar of Companies.

Pursuant to Regulation 9 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall dispatch the letter of offer along with the tender form to the securities holders who are eligible to participate in the buy-back offer not later than two working days from the record date and in case of receipt of request from any shareholder to receive a copy of letter of offer in physical form, the same shall be provided.

OFFER PERIOD:

Pursuant to Rule 17(5) of The Companies (Share Capital & Debentures) Rules, 2014, the offer for buy-back for an unlisted company shall remain open for a period of not less than fifteen days and not exceeding thirty 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.

Pursuant to Regulation 9 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall make sure that:

  • The date of the opening of the offer shall be not later than four working days from the record date.
  • The offer for buy-back shall remain open for a period of five working days.

VERIFICATIONS OF THE OFFERS RECEIVED:

Pursuant to Rule 17(7) of the Companies (Share Capital & Debentures) Rules, 2014, an unlisted company shall complete the verifications of the offers received within fifteen 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 twenty-one days from the date of closure of the offer.

Pursuant to Regulation 10 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall complete the verification of offers received within five working days of the closure of the offer.

PAYMENT TO SHAREHOLDERS/RETURN SHARE CERTIFICATE:

Within 7 days of time specified in aforesaid Rule 17(7), an unlisted company shall:

  • make payment in cash to those shareholders or security holders whose securities have been accepted; or
  • 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.

Pursuant to Regulation 10 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall make payment of consideration to those holders of securities whose offer has been accepted and return the remaining shares or other specified securities to the securities holders within five working days of the closure of the offer.

REGISTER OF BUY BACK OF SHARES:

Pursuant to section 68 (9) of Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014, Where a company buys back its shares or other specified securities under this section, the company shall maintain a register of shares or other securities so bought-back the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed in FORM NO. SH.10.

RETURN AND CERTIFICATION OF COMPLIANCE:

Pursuant to section 68 (10) of Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014, the company shall file with the ROC & SEBI (in case of Listed Company) a return in form SH 11 signed by two directors out of which one shall be Managing director (if any) certifying the buy back of the securities has been made with compliance of the provisions of the Act and Rules made thereunder.

POST BUYBACK COMPLIANCES FOR LISTED COMPANIES:

Along with the aforesaid compliances (if applicable) and pursuant to SEBI (Buy Back of Securities) Regulations, 2018:

  • The company shall issue a public advertisement in a national daily within two working days of expiry of buy-back period, inter-alia, disclosing:
  • Number of shares or other specified securities bought.
  • price at which the shares or other specified securities were bought.
  • total amount invested in the buy-back; and
  • the consequent changes in the capital structure and the shareholding pattern after and before the buy-back.
  • details of security holders from whom the shares or other specified securities exceeding one percent of total shares or other specified securities bought back.
  • The merchant banker shall ensure that a final report in the electronic mode is submitted to the Board within fifteen days from the date of expiry of buyback period.

TRANSFER OF CERTAIN SUMS TO CAPITAL REDEMPTION RESERVE ACCOUNT:

Pursuant to section 69 of Companies Act, 2013, the company shall transfer the sum equal to the nominal value of shares bought back to the Capital Redemption Reserve Account when the said shares are bought back out of Free Reserve or Security Premium Account. The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

Author’s Comment: We transfer the amount to CRR account because we don’t want the company to pay dividend out of it. This is because they have already broken the creditor’s trust by paying the shareholders before the creditors. In return, these funds are now blocked.

CIRCUMSTANCES IN WHICH BUYBACK IS PROHIBITED:

Pursuant to section 70(1) of Companies Act, 2013, no company shall directly or indirectly purchase its own shares or other specified securities: –

  • Through any subsidiary company including its own subsidiary companies.
  • Through any investment company or group of investment companies
  • If a default, is made by the company, in the repayment of deposits or 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.

However, buyback is not prohibited in aforesaid case if default is remedied, and a period of three years has lapsed after such default ceased to subsist.

Pursuant to section 70(2) of Companies Act, 2013, no company shall, directly or indirectly, purchase its own shares or other specified securities if company has not complied with the provisions of Section 92 (Annual Return), 123 (Declaration of Dividend), 127 (Punishment for failure to distribute dividend) AND 129 (Financial Statements).

Author’s Comment: By interpreting the word “AND”, it can be said that if a company is in default of sec 123 only or of sec 92,123 and 127 but has complied sec 129, then sec 70(2) shall NOT be attracted.

SECURITIES WHICH CAN’T BE BOUGHT BACK:

The Company shall not buyback the following securities:

  • Lock-in securities: Any securities issued by a listed company to its promoters or group of employees, which subject to lock-in period are not available for buyback before expiry of lock-in period.
  • Partly paid-up shares: A company can’t buy-back its partly paid-up shares, on which call money is in arrears.
  • Non-transferrable securities: Those securities which are subject to lien or are pledged or restricted by a court can’t be bought-back by the company.

PENALTY:

Pursuant to section 68(11) of Companies Act, 2013, if a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.

CONCLUSION:

It can be concluded that Indian companies announce buyback in response to an over-capitalized company and their undervaluation position of their stocks in capital markets. Buyback can be termed as mixed bag. Buyback provides investors with exit opportunity when stocks are undervalued or sparsely traded. It can be used as an effective defence strategy to prevent hostile takeover. It offers an opportunity for the company to use its liquidity position to extinguish its shares today and issue them again in future. On the other hand, sometimes it may be used by the promoters to give a false signal about the company so as to increase the price of stocks so that promoters can sell their stocks, thus misleading shareholders. Therefore, every shareholder must reconsider all his views before purchasing the shares of companies involved in the process of buyback.

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