Introduction
Originally there was no provision for buy-back of shares in the Companies Act, 1956. But there had been a persistent demand for buy-back of own shares from the corporate sector. The Central Government approved the buy-back of shares by companies and Ordinance to this effect was issued by the President of India on 31st October, 1998. Consequent to this the Companies (Amendment) Act, 1999 was passed which became effective w.e.f. 31st October, 1998, the date of the Ordinance, whereunder the companies were permitted to buy-back their own shares and other specified securities subject to compliance of certain conditions. SEBI also framed certain regulations for buy-back of securities in case of listed companies in the year 1999. Section 68 of the Companies Act, 2013 gives power to a company to purchase its own shares and other specified securities.
Definition
Buy-back is the process where a company buy-back it’s own shares from the existing Shareholders at a price higher than the market price. When the Company buy-back the Shares, the number of Shares outstanding in the market reduces/fall. It is the option available to Shareholder to exit from the Company.
PROVISIONS RELATED TO BUY BACK OF SHARES UNDER COMPANIES ACT, 2013
The provisions of buy-back of shares are governed under section 68 to 70 of the Companies Act, 2013.
Buy back of shares by a Listed Company:
As per section 68(6)where a company proposes to buy-back its own shares or other specified securities under this section in pursuance of a special resolution, it shall before making such buy-back, file with the Registrar of Companies (“ROC”) and the Securities and Exchange Board of India (“SEBI”), a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, in Form SH-9 and verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board.
Reasons of Buy-back:-
Buyback of shares is used where a company buy back its own shares for a multiple reason like:
- when a company has substantial cash resources, it may like to buy its own shares from the market, especially when the prevailing rate of its shares in the market is much lower than its true value; or
- where the threat of corporate takeover has become real, share buyback acts as a defence mechanism for an entity, it safeguards against a hostile takeover by increasing promoter’s holdings.
Further some more reasons for a Buy Back may be as under;
- To improve Earning Per Share;
- To use idle cash;
- To give confidence to the Shareholders at the time of falling price;
- To increase promoters shareholding to reduce the chances of takeover;
- To improve return on capital and return on net-worth;
- To return surplus cash to the Shareholders
SEBI GUIDELINES FOR SHARE BUYBACK
When a Listed Company plans to opt for buyback of shares, it needs to adhere to certain guidelines outlined by the SEBI.
1. Maximum limit of share buyback
Paid-up capital and free reserves of the company are important factors in any share buyback. The amount of money received from the shareholders in exchange for stock constitutes the paid-up capital of a company. Free reserves include reserves, except those pre-specified in the Companies Act 2013, that a company may use freely for distribution of dividend.
The SEBI guidelines indicate that the upper limit of share buyback is 25% or less than the total of the paid-up capital and free reserves of the company.
2. The ratio of the aggregate of secured and unsecured debts
Share buyback is not approved by the SEBI, if the ratio of the aggregate of secured and unsecured debts of a company are more than twice the paid-up capital and free reserves.
For example, a company has paid-up capital and free reserves amounting to Rs. 1,00,000 and secured and unsecured debts amounting to Rs. 2,50,000. This company has proposed buyback of 1000 shares at Rs. 100 each, which will amount to Rs. 1,00,000. In this case, the buyback will not be approved by SEBI because the debt-to-equity ratio of the company will exceed 2:1 post buy back.
3. Fully paid back securities
As per SEBI guidelines, buy back of only fully paid-up shares and securities is permitted.
4. Share buyback for decreasing share capital
Typically, share cancellation and share repurchase are two methods for reducing the share capital of a company. As per SEBI norms, no company has the power to buy back its shares unless the consequent reduction of its share capital is effected under section 67 of the Companies Act, 2013.
5. Modes of buyback:
The buyback of shares can be done via the following means:
(a) Free reserves- If the buyback of shares is made from free reserves, a sum equal to the nominal value of shares must be transferred to the Capital Redemption Reserve.
(b) Securities premium account- This is the extra money obtained when a company sells shares above their fair value. The money in this account can be used for share buyback.
(c) Proceeds of an earlier issue- A company cannot buy back its shares/securities out of the proceeds of the earlier issue of the same type of share/securities.
6. Restrictions on the purchase of own shares or securities
As per SEBI norms, a company may not be allowed to purchase its own shares through any subsidiary company and any investment company.
Also, a company with an unhealthy liquidity position may not be permitted to buy back own shares. That is, companies which have defaulted in:
– Repayment of fixed deposits or interest on these deposits taken from investors or individuals, – Redemption of debentures or preferred shares, or – Repayment of term loans or interest from banks and any financial institution or banking company will not be allowed to buy back shares.
7. Approval for buyback
The company shall not authorise any buyback unless:
a) The buy- back is authorised by the Articles of association of the Company.
b) In case if it is a listed company, a special resolution has to be passed in the general meeting of the company authorising the buy-back.
Moreover, the buy back shares should be free from the lock-in period. If the quantity of buy back is equal to or less than 10% of the paid-up capital and free reserves, then the buy- back can be made only by passing a Board resolution.
8. Maximum tenure to complete the buyback process
The process of buyback of shares shall be completed within a period of one year from the date of the passing of the resolution by the board of directors of the company.
9. Clarification on the timeline for a public announcement
The company authorised to do the buy -back of shares shall make a public announcement within two working days of its declaration.
Two days will be from the date of declaration of results of the postal ballot in the case of a special resolution or the board of director’s resolution.
10. Completion of the buyback
Within 30 days of completion of the buyback of shares, the company shall file a return containing particulars relating to the buyback with the Registrar of Companies and the SEBI according to the format specified in the Companies Act, 2013.
11. Seeking shareholder’s approval
Two types of resolutions, namely an ordinary resolution and a special resolution, are involved in obtaining approval for buyback from the shareholders. An ordinary resolution is where at least 51% members present and voting are in favour, and a special resolution is where at least 75% members present and voting are in favour of the buyback.
An ordinary resolution is sufficient when the buyback amount is up to 10% of the total paid-up equity capital and free reserves of the company but a special resolution needs to be passed when the buy -back amounts to 25% of the total paid-up capital and free reserves.
12. Mode of dispatch
a) The company shall dispatch its Letter of Offer through electronic means in accordance with the provisions of the Companies Act, 2013.
b) A physical copy of the Letter of Offer should also be provided on receipt of the request from any shareholder to receive such a copy.
13. Participation of an eligible public shareholder who does not receive the tender offer/offer form.
To safeguard the interest of the bonafide shareholders, an eligible public shareholder who does not receive the tender offer or offer form, can participate in the buyback and tender shares in the manner as provided by the Board.
14. Rights of an unregistered shareholder to participate in the buyback process.
To safeguard the interest of the shareholders, an unregistered shareholder may also tender his shares for buyback by submitting the duly executed transfer deed for transfer of shares in his name, along with the offer form & other documents as required for transfer.
15. SEBI’s power to allow tendering of shares and settlement of the same through the stock exchange mechanism
SEBI has introduced a stock exchange mechanism for tendering and settlement of shares through stock exchanges.
The companies shall facilitate the tendering of shares by the shareholders and settlement of the same through the stock exchange mechanism in the manner as provided by the Board.
Where a company buys back its shares/specified securities under this section, it shall maintain-
- a register of the shares/securities bought,
- the consideration paid for the shares/securities bought back
- the date of cancellation of shares/securities- the date of extinguishing & physically destroying the shares/securities and such other as prescribed in sub-section (9) of section 68 of the Companies Act, 2013.
16. Interest-bearing Escrow account
In order to ensure that the merchant banker’s funds are available at the time of making payment to shareholders, the cash component of the Escrow account shall be held in an interest-bearing account.
17. Deletion of certain provisions
All provisions related to:
- Power of the Board to order an investigation
- Duty to produce records, etc.
- Submission of report to the Board, have been deleted by SEBI under Regulation 1998.
Modes of Buy-back:-
A Company may buy-back its Shares or other specified Securities by any of the following method-
- From the existing shareholders or other specified holders on a proportionate basis through the tender offer;
- From the open market through
1. Book-Building process
2. Stock Exchange
Provided that no buy-back for fifteen percent or more of the paid up capital and reserves of the Company can be made through open market.
- From odd-lot holders.
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.
CONDITIONS OF BUY-BACK OF SHARES UNDER COMPANIES ACT, 2013 :-
As per Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are-
- Articles of Association of the Company must authorise buy back of its shares otherwise Amend the Articles by passing Special Resolution in General Meeting of the Company.
- For buy-back we need to pass Special Resolution in General Meeting, but if the buy-back is upto 10% of the paid up share capital and free reserves, then only a Resolution at Board Meeting need to be passed by the Company .
- Maximum number of Shares that can be brought back in a financial year is twenty-five percent of it’s paid up share capital.
- Maximum amount of Shares that can be brought back in a financial year is twenty-five percent of paid up share capital and free reserves (where paid up share capital includes equity share capital and preference share capital; & free reserves includes securities premium).
- Post buy-back debt-equity ratio cannot exceed 2:1.
- Only fully paid up shares can be brought back in a financial year.
- Company must declare its Solvency in Form SH-9 to Register of Companies, signed by at least by Two Directors out of which one must be a Managing Director, if any.
- The notice of the meeting for which the Special Resolution is proposed to be passed shall be accompanied by a explanatory statement stating
- a full and complete disclosure of all the material facts;
- the necessity of buy-back;
- the class of shares intended to be bought back;
- the amount invested under the buyback;
- the time limit for completion of buyback;
- The Company must maintain a Register of buy-back in Form SH-10.
- Now, Submit Return of buy-back in Form SH-11 Annexed with Compliance Certificate in Form SH-15, Signed by Two Directors out of which One must be a Managing Director, if any.
- A Company should extinguish and physically destroy shares bought back within 07 days of completion of the buy-back.
- Observe 6 months cooling period i.e. no fresh issue of share is allowed.
- No offer of buy-back should be made by a company within a period of one year from the date of the closure of the preceding offer of buy-back.
- The buy-back should be completed within a period of one year from the date of passing of Special Resolution or Board Resolution, as the case may be.
Transfer of certain sum to Capital Redemption Reserve Account under Section 69 of Companies Act, 2013,
Where a Company brought back shares out of free reserves or out of the securities premium account, then an amount equal to the nominal value of the shares need to be transferred to the Capital Redemption Reserve Account. Such transfer details are required to be disclosed in the Balance sheet. The Capital Redemption Reserve account may be utilized for paying unissued shares of the company to the members as fully paid bonus shares.
Restrictions on Buy-back of Securities in certain circumstances.
According to section 70 of the Companies Act, 2013, a Company should not buy-back its securities or other specified securities, directly or indirectly –
- Through any subsidiary including its own subsidiaries; or
- Through investment or group of investment Companies; or
- When Company has defaulted in repayment of deposits or interest payable thereon, or in redemption of debentures or preference shares or repayment of any term loan. The prohibition is lifted if the default has been remedied and a period of three years has elapsed after such default ceased to subsist.
- When Company has defaulted in filing of Annual Returns, declaration of dividend & financial statement.
JUDICIAL DECISIONS
Buyback of share- Evasion of Tax
A landmark judgement in Re: Capgemini India Private Limited [2015(4) TMT1069- Bombay High Court which was decided in April 2015.
Capgemini India Private Limited (“ Company ) decided to buyback 221,231 equity share in accordance with provision of Section 391 read with section 100 to 103 of Companies Act 1956, which constitute 30% of issued, Subscribed and paid up capital of the Company.
The Regional Director further stated that, if the Company effected buyback of share via Section 77a/ Section 68 of Companies Act 2013 than distributed income of would be chargeable to tax in accordance with Section 115Q of Income Tax Act, thus the Scheme shall be rejected as it would amount to evasion of income tax and outflow of foreign exchange amounting to rs 248 crore.
The company i.e Petitioner contended, Regional Director has no locus standi in respect of tax matter particularly when Income Tax authorities have not broached any objection. Further it was argued that it is open for the Company to follow either of the procedure out of two available to effectuate Buy Back of share and since the Company wants to buyback 30% paid up capital and free reserve it would not be possible under Section 77A/ Section 68 as it is only permissible to buyback 25% of paid up capital and reserve of the Company, thus the Company can buyback only by following the procedure under section 391 read with 100-104 of the 1956 Act.
The Petitioner placed reliance upon the case of High Court Bombay, SEBI vs Sterlite Industries (India) Ltd. [2002(7) TMT728- High Court of Bombay. Wherein it was held that The Legislative intention behind the introduction of Section 77A is to an alternative method by which a Company may Buyback upto 25 percent of its paid up equity capital in any financial year subject to compliance with Subsection (2) (3) and (4) section 77A is a facilitating provision which enables companies to buy back their share without having to approach the court and Prior to the introduction of section 77A, the only manner in which a company could buy back its share was by following procedure set out under sections 100-104 and section 391 of Companies Act 1956.
The Hon’ble High court sanctioned the scheme of arrangement with clarification the issue relating to Income tax that may arise out of the Scheme are left open to be dealt with and decided by the Income tax authorities in accordance with law.
Buyback of shares- Unilateral purchase of share
In the case of Ritu Bhargeva vs Godrej Industries Ltd &Ors, adjudicated on 23 january 2014 at National Consumer Dispute Redressal Commission, Godrej Industries Limited (“GIL”) laid down a scheme for buyback of 40% of paid up capital of GIL . After sanction from High Court, GIL sent letter of offer to all its shareholders.
The complainant held 45 shares. Paid up value of Rs 810 (45 shares of Rs 18 each ) but was returned. The Complainant than sent a letter to GIL stating the she did not receive any buyback offer and nor did she exercised any option of buyback of shares. The Complainant further stated such an act amounted to a unilateral purchase of share and amounted to compulsory acquisition of share.
The Complainant had stated that option from stated by GIL has not been received thus question of intimation would not arise and there is no evidence of actual delivery of the form. The Complainant’s counsel further argued that holding share in Company is similar to possessing a property and the same could not be purchased by GIL in the manner, stated by them. They further stated that after Scheme was sanctioned no public notice was issued and implied consent for Buy-Back.
GIL counsel referring to scheme of Arrangement stated unless the shareholder expressed its desire in written intimation to the Company to reject the offer of the Company to Buy Back the shares within 30 days of record date it is presumed that consent is accorded for buyback of shares. They further stated that meeting of shareholders was convened via publication of notices and still the Complainant did not prefer any objection to the scheme. GIL further contended that The Company had, therefore, acted in accordance with provision of the Scheme and the procedure laid down in the Companies Act.
The decision was in favour of GIL wherein it was directed to make payment along with interest to the shareholder.
Conclusion
Thus, it can be concluded that Indian companies announce buyback in response to undervaluation position of their stocks in capital markets and they are well supported by availability of sufficient cash balance for the same. Thus, on one hand, premium offered in terms of buyback prices announced offers an exit opportunity for shareholders and on the other hand, it offers an opportunity for the company to use its liquidity position to extinguish its shares today and issue them again in future. It prevents takeovers and mergers thus preventing monopolization and aiding the survival of consumer sovereignty. On the other hand Buy back can help in manipulating the records in flatting share prices, Price- Earnings Ratio, Earning per share, thus misleading the shareholders. Thus, knowledge of the impacts of Buy-back becomes vital and every shareholder must reconsider his decision before purchasing the shares by the companies involved in the process of Buyback.
End Notes
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