Buyback is a financial strategy adopted by a company in order to restructure and realign its financial resources in order to achieve optimum shareholder value and prevent unwanted takeovers. Buyback strategy has numerous advantages: It is an alternative mode of reduction in capital without requiring approval of the Court/CLB (NCLT), improves earnings per share, return on capital, return on net worth, returns surplus cash to shareholders, provides for an additional exit route to current investors, enhances management stake in the company, supports share prices during bear market and serves the equity more efficiently.
Under Section 68 of the Companies Act, 2013, a company can purchase its own shares out of either its free reserves, its securities premium account. Such purchase can be made from the existing shareholders, open market or from ESOP (Employee Stock Options) where the company has issued securities to its employees pursuant to the sweat equity scheme. The company can also use the proceeds of the issue of any other shares than the proceeds generated from the sale of shares company intends to purchase or buyback. A clear and express proviso has been provided in this regard which clearly states, “no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.”1
However, a way out for this share is also provided. If in the general meeting of the company, a special resolution is passed which authorises such buyback. But, when the quantum of such buyback of shares is up to ten percent of the total paid-up equity capital and company’s free reserves, no such special resolutions from a general meeting of the board is required. Another way out is when the buyback goes from one-tenth or ten percent to one- fourth or twenty – five percent of company’s free reserves and paid-up capital, a special resolution has to be passed by the general meeting of the company which authorises suck kind of buyback. It also comes with a proviso, which states that, “in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent. in this clause shall be construed with respect to its total paid-up equity capital in that financial year”.1 On a careful reading, the time at which a decision of buyback is made, twenty – five percent must be considered from the previously completed financial year.
The notice has to be given at least 7 days in advance for such meeting, where a resolution is intended to be passed in the favour of buy-back of shares must also be accompanied by a statement consisting a full and complete disclosure of all related material fact necessary to move forward with such buy-back. It should also mention the necessity for buy–back move. The class of shares intended to be purchased along with the amount to be invested and the time period required for such buy-back plan. The Act makes it mandatory to complete to buy – back process within a period of one year, starting from the date of passing of a special resolution in general meeting.
In the board meeting, a resolution is passed for buy back, corresponding date is fixed for EGM, and notice for calling EGM is approved at least 21 days in advance. In EGM, special resolution is passed. Within 30 days, MGT14 form along with letter of offer in form SH-8, which is signed by minimum 2 directors (including MD), with ROC is filed. After passing of such resolution at the meeting, the company is required to file a declaration of solvency in Form SH – 9, signed by at least two directors of the company, one of who shall be the managing director and such declaration must also be verified by the Board of Directors with a statement that the company has made a full enquiry of the affairs and is of the opinion that after the buy – back the company would be in a position of meeting its liabilities and won’t turn insolvent within a period of one year starting from the date of such declaration. In case the company is not listed, there is no need to file such a declaration with Securities and Exchange Board. The letter of offer is dispatched within 20 days. Offer stays from 15 to 30 days. After completion of buy back, Register of shares/securities bought back in form SH-10 has to be maintained. Within 30 days of Completion of Buy-Back, return of Buy-Back with ROC in form SH-11 is filed.
Also, after making such a purchase, a company is required to maintain its debt – equity levels below 2 :1. This is what the provision means when it says,” 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”. Further, this ratio can be modified by the central government at any point of time by way of order.
All such shares for buyback must be fully paid up and in case the company is listed on any stock exchange, such buy – back of shares must be in accordance with the regulations made by the Securities and Exchange Board in this regard. An important fact to note is that there must be a period of at least one year between two successive buy backs.
After the company successfully accomplishes the process of buy – back of its own shares, it shall also undertake to physically destroy and extinguish such securities within seven days. The company, if listed, has to file with the Securities and Exchange Board the related particulars of the buy – back. But in any case, it has to file the particulars with the Registrar and maintain every related detail with it of such an event.
In case of a default in regard to any of the provision of the Act, the Company can be made liable to a fine in the range of one to three lakh rupees and any officer related to such default and found guilty can be made to serve a sentence of up to three years along with a fine ranging from one to three lakhs to be paid by such officer in individual capacity.
Also, under the provisions Section 70 of Companies Act,1 there is an express prohibition upon the companies in order to purchase its own shares or other specified securities either directly or indirectly. Such a move made by the company can be made by three major ways. First, through any subsidiary company including its own subsidiaries. Second, through any investment company or a group of companies. Third, if the company makes a default in repayment process in respect of any creditor, that is, a default occurred in repayment of deposits accepted, related interest payments, preference shares or debenture redemption, or payment of dividends, or any loan or interest payable on that loan.
But if a company has rectified a default and has not repeated the same for a period of three consecutive years, the buyback by such company that made a default earlier is permitted.This prohibition will, however, continue to stay if such company has not complied with the provisions of Section 92 (Annual return), 123 (Declaration of dividend), 127 (Punishment for failure to distribute dividends) and 129 (Financial Statement).1
http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf, April 30, 2018 02: 39 IST
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