Regulatory Compliance Consulting

BUY-BACK OF SECURITIES
By:Suneera Nerissa Madhok

INTRODUCTION:

The provisions  concerning buy-back of securities by an Indian company are provided in the Companies Act, 1956 of India (“Act”) namely Section 77A and if a company is listed in any registered stock exchange in the country then the SEBI (Buy Back of Securities) Regulations, 1998 are applicable.

OBJECTIVE:

This article endeavours to elucidate the procedure applicable to company wishing to Buy-back its securities.

MAIN TEXT:

The articles of association of the company intending to buy-back its securities must specifically empower the company to do so.

A.    Modes of Buy Back
Permitted modes of buy-back by private and unlisted public companies:
(a)    from the existing shareholders on a proportionate basis through private offers;
(b)    by purchasing the securities issued to employed of the company pursuant to a scheme of stock option or sweat equity.

In addition a Special Resolution by the shareholders in a general meeting authorizing the buyback is required.
[Provided if, the buyback is more than 10% of the total paid up capital or free reserves of the company then such buy-back has to be authorized by the board by means of a resolution passed at its meeting.]
The notice sent to the shareholders convening the general meeting at which the special resolution is proposed to be passed has to be accompanied by an explanatory statement which must include the following:

(i)     a full and complete disclosure of all material facts;
(ii)    reasons for the necessity for the buy-back;
(iii)   the class of security intended to be purchased under the buy-back;
(iv)   the amount to be invested under the buy-back; and
(v)    the time limit for completion of buy-back (not exceeding 12 months from the date of passing of the special resolution).

B.    Letter of Offer
•      A draft letter of offer containing particulars specified in Schedule- II of the rules has to be filed with the Registrar of Companies (ROC).
•      A declaration of solvency has to be filed in form No. 4A has to be filed with the ROC alongwith the letter of offer.
•      (the declaration of solvency verified by an affidavit by the board that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration and has to be signed by at least two directors.)
•      A declaration of solvency has to be filed in form No. 4A with the ROC along with the letter of offer.

C.    Offer Procedure
(i)     Letter of offer to be dispatched within 21 days from the date of its filing with ROC.
(ii)    Offer to remain open from 15 to 30 days from date of dispatch of letter of offer.
(iii)   Acceptance to be on a proportionate basis if shares offered by members are more than the total number of shares to be bought back
(iv)   Offers lodged deemed to be accepted unless rejection is communicated within 21 days of date of closure.

D.    Payment Procedure    
Immediately after conclusion of the date of offer, the company has to open a special account and deposit the entire amount to be paid as consideration for the buy-back.

E.    Extinguishment of Share Certificate
•    The share certificates bought back have to be physically destroyed in the presence of the Company Secretary in whole time practice within 7 days from the date of completion of buyback.
•    The company has to furnish to the ROC a certificate duly verified by two directors including the managing director and the whole time Company Secretary regarding compliance with the abovementioned rule.

F.        A return on buy-back of securities has to be filed by the company with the ROC in a form specified in Annex- A to the Rules within 30 days of completion.

G.        The company has to maintain a Register on shares bought back in a form supplied in Annex- B of the rules.

PROVISIONS WITH REGARDS TO SHAREHOLDERS RESIDENT OUTSIDE INDIA

In case any shareholders are persons resident outside India, the price at which the buy-back can take place has to be in compliance with the pricing guidelines stipulated by the Reserve Bank of India. The price at which the shares can be bought back by an Indian company from its shareholders who are resident outside India must be at a price which is lower of two independent valuations of the shares, one by statutory auditors of the company and the other by a chartered accountant or by a merchant banker in Category 1 registered with the Securities and Exchange Board of India.

OTHER FEATURES

•    Buy-back is permitted only for the equity shares and preference shares, employees’ stock options and sweat equity shares, of a company.

•    A company can use only the following to Buy-back its shares:
(a)    its free reserves;
(b)    any money lying in the securities premium account
(c)    proceeds from the issue of any shares or other specified securities, except for proceeds from an earlier issue of shares or other specified securities of the same class that are being bought back.
A company cannot utilise any money borrowed from banks/ financial institutions for the purpose of buying back its shares.

•    Buy-back is permissible only for fully paid-up shares / securities of a company. Partly paid-up securities cannot be bought back.

•    The ratio of the debt (i.e. secured and unsecured debts) owed by the company, after the buy-back, should not be more than twice its paid-up capital and free reserves.

•      Quantum of buy-back
(a)    the over-all limit of buy-back of securities is restricted to 25% of the total paid-up capital (i.e. paid-up equity and preference share capital) and free reserves of the company.
(b)    buy-back of equity shares by a company in any financial year cannot exceed 25% of its total paid-up equity capital.

•      Time Restrictions
(a)    To be completed within 12 months of date shareholders meeting or meeting of the board of directors;
(b)    After a buy-back, an issue of similar kind of shares and/or securities, including by way of a preferential allotment, rights issue or public issue is prohibited for up to 6 months from the date of completion of buy back.
However, this does not preclude the company from issuing any bonus shares or issue of shares in pursuance of subsisting obligations (such as conversion of warrants, debentures or preference shares).

Conclusion:

Buy back is a mechanism through which the company pays of its investors and buys off its own shares. Once the buyback is completed, the shares that have been bought back do not rest with the company but are extinguished. It is usually employed when the stock value of the company is highly diluted or if the company has high amounts of free reserves or if the promoters of the company want to acquire a greater controlling percentage within the company.

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