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What is Buy-Back of Securities?

Buyback of shares is a financial strategy implemented by a company in order to realign and restructure its financial resources and also to achieve its optimum shareholder value and to prevent unwanted takeovers. Further, Buyback strategy has several advantages such as it is an alternative mode of the reduction in capital without requiring any approval of the Court or CLB(NCLT), improves earnings per share (EPS), return on capital (ROC), return on net worth, returns surplus cash to the concerned shareholders, also provides for an additional exit route to the current investors, enhances the management stake in the company, supports share prices during the bear market and lastly serves the equity more efficiently and effectively.

Buyback of shares is the repurchase of its outstanding shares by a company. In order to reorganize its share capital, the company generally does Buyback of securities for enhancing shareholder’s value. buy-Back of Securities Registration is an important mode of Capital Restructuring. It is the method of Financial Restructuring of a Company involving a re-arrangement of its financial structure to make the Company’s finances more balanced.

Buyback leads to a reduction in an outstanding number of equity shares, which may lead to an increase in earnings per equity shares and subsequently enhanced return on net worth and creation of long-term value of continuing shareholders. Buy Back of securities simply implies purchase of its own shares & other specified securities by a Company.

A Company generally opts for buy-back of its own shares for the following reasons: –

• To improve shareholders net worth value resulting in higher EPS.
• As a defense Mechanism, Buy Back provides a safeguard against hostile take-overs bids by increasing promoters’ shareholding.
• To return surplus cash to shareholders.
• When shares are thinly traded/ undervalued, to provide an additional exit route to Shareholder.

Sources of Buyback of Securities:

According to section 68(1) of the Companies Act, 2013, a company whether private or public, may purchase its own shares or other specified securities out of

• Its Free Reserves
• Securities Premium Account
• The proceeds of any shares or other specified securities.

However, Method for buy-back of shares or other specified securities can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Methods of buyback:

The buyback may be

• from existing shareholders;
• or from the open Market;
• By purchasing the securities issued to employees of the company in pursuant to a scheme of stock option or sweat equity Employee stock option purchase scheme (ESOP).

Conditions required to be fulfilled for the Buyback of Securities

1. Buyback must be authorized by Article of Association (AoA);
2. If the percentage of buyback shall not exceed 10% of total paid-up equity capital and free reserves, it is to be authorized by board by way of Board Resolution not by circulation or; if percentage is exceeded by 10% but not more than 25% of its aggregate total paid-up share capital and free reserves, then shareholders resolution is required by way of Special Resolution;
3. Buyback should not exceed 25% of its paid-up equity share capital in one Financial Year;
4. Post-Buy-back, the Debt Equity Ratio of the company should not exceed 2:1;
5. Equity Shares to be brought back must be fully paid up;
6. Buy-back should be completed within 1 year of passing of the resolution.

Prohibition for buyback in certain circumstances

A company can’t directly or indirectly buy back its securities: –

• Through any subsidiary company including its own subsidiary companies
• Through an investment company or group of investment companies

A company can’t buy back its securities if it commits the following defaults to: –

1. Repayment of deposits and payment of interest thereon;
2. Redemption of debentures or preference shares;
3. Payment of dividend;
4. Repayment of any term loan or interest payable thereon.

A Company also can’t buy back its securities if it has not complied with the following provisions of Companies Act, 2013: –

1. Section 92: Annual Return;
2. Section 123: Declaration and payment of Dividend;
3. Section 127: Failure to pay Dividend;
4. Section 129: Failure to give a true and fair statement in the Financial Statement of the Company.

The process of Buyback: 

A buyback process starts with passing a resolution in the board of the meeting or shareholders resolution through postal ballot which contains buyback offer and ends with the public announcement in a national daily on the successful completion of the buyback. A broad process of the buyback is as under:

• Appointment of Merchant Bankers/ Registrar: whenever a company wants to do a buyback of securities, the Board has to appoint a Merchant Banker who must be registered with SEBI. He has to comply with the whole procedure of buyback with concerned authority.
• Filing the resolution with SEBI/ Exchange: After passing board’s resolution or shareholder’s resolution as the case may be, Merchant Banker License has to send a copy of the resolution to SEBI and Recognized Stock exchanges where the registered office is situated.
• Public Announcement: the public announcement is to be made within seven working days from the passing of Resolution. Simultaneously with the issue of such public announcement, the company shall file a copy of public announcement with the Board i.e. SEBI and stock exchange where securities are listed along with fees as prescribed by Schedule.
• Determination of offer price, opening, and closure of buyback offer: The buy-back offer shall open not later than seven working days from the date of public announcement.
• Acceptance and payment to security holders: Company has to accept the payment and deposit in a separate escrow account.
• Extinguishment of security: The Company shall extinguish and physically destroy the security certificates within seven working days and intimate to the stock
• Filing the return with Roc and SEBI: The company, after the completion of the buy-back under these rules, shall file with the Registrar, and in case of a listed company with the Registrar and the Securities and Exchange Board of India, a return in the Form SH – 11 along with the fee.
• The issue of public advertisement: After the completion of Buy Back Process, the Merchant Banker has to issue advertisement in the National Daily Newspaper for the closure of the issue.

Applicability of Stamp Duty:

Since stamp duty is payable on “transfer” of shares, Buy-back cannot be equated with ‘transfer”. No Stamp Duty is payable in case of buyback of shares as the company is buying back its own shares.

When can a Company come up with Buyback offer?

A company can use a maximum of 25 per cent of the aggregate of its available free reserves and paid-up capital for the process ofthe buyback. Further, for the process of the buyback, there is a need to pass a special resolution at the general meeting. However, if in case the concerned company plans to use less than 10 per cent of its reserves, then,in this case,only a board resolution is required.

Further, a company cannot go for a second buyback offer within the period of one year starting from the date of the closure of the last buyback. Furthermore, there are some time-bound limitations also applicable tothe further share issuances like the preferential allotment or the bonus issue post a buyback. Lastly, the main reason behind keeping these checks was to ensure that companies do not misuse the prescribed buyback mechanism.

No Further Issue of Securities

No further issue of securities is allowed within 6 Months of buy back except for following listed cases –

1. Issue of Bonus Shares
2. Conversion of Warrants
3. Employee Stock Option Scheme
4. Sweat Equity Shares

Transfer of Certain Amount to Capital Redemption Reserve Account (CRR)

As per section 69 of the Companies Act, 2013, if a Company wants to brought back it shares out of free reserves orout of the SPA (securities premium account), then in this case an amount equal to the nominal value of the shares is required to be transferred to the CRR (Capital Redemption Reserve Account). Such transfer in detailed form is required to be disclosed in the Balance sheet. Further, the amount transferred in the Capital Redemption Reserve (CRR) Account may be utilized for paying company’s unissued sharesto the concerned members as the fully paid bonus shares.

Companies Act, 1956 v. Companies Act, 2013

Particulars	Provisions of the Companies Act, 1956	Provisions of the Companies Act, 2013
Definition of the Free Reserves has now been changed.	Free Reserves comprises of	Free Reserves comprises of
Free reserves for the distribution as dividend + Credit of the SPA (securities premium account)	Free reserves for the distribution as dividend + SPA (Securities premium account)
Gap between 2 buyback offers is now clearly defined in the New Act, i.e. the Companies Act, 2013	Minimum gap of 365 days is required from the date of the preceding offer of buy back.	Minimum gap of 1 year is required from the date of the closure of the preceding offer of buy back.
Buy back from an odd lot has now been dispensed with in the Companies Act, 2013.	Buy back could be done from: Existing shareholdersOpen marketOdd lotsemployees	Buy back can now be done from Existing ShareholdersOpen marketemployees
Penalty has now been increased in the New Act, i.e. Companies Act, 2013	For company and any other officer in default: fine – INR 50,000, orImprisonment upto 2 years, Or both	For Company:Fine – INR 1,00,000 which may extend up to 3,00,000 Officer in default:Imprisonment upto 3 yearsFine – INR 1,00,000 which may extend up to 3,00,000 Or both

Examples of Buyback of Shares

1. Firstly, Between the period of 1 February, 2012, and 19 January, 2013, Reliance Industries carried out their biggest buyback of shares worth Rs 10,440 crores. However, Reliance Industries bought back their shares worth only over Rs 3,900 croresby way of open market purchases and achieving about 38 per cent of the total target. Lastly, the stock gained 8 per cent during the said buyback period.
2. Next, in the year 2005, Reliance Industries again bought back 28,69,495 of their shares in a Rs 3,000 crore buyback by way of open market purchases. However, the stock value had increasedby 39 per cent during this period.
3. In the year 2016, state-run NMDC came out with a buyback offer of Rs 7,527 per share by way of a tender offer. Further, the offer period started on September 19 and then closed on the 30, and moreover, it is significant to note that it mopped up 99.11 crores shares, or 123.77 per cent valid bids against 80.08 crores shares kept in the buyback. Further, the shares were bought back effectively at an offer price of Rs 94 per share. During this period the stock value rose 2.2 per cent.
4. The Cairn India, from the time period, starting from 23 January, 2014, and ending on 22 July, 2014, carried out a process of buy back of shares worth Rs 5,725 crore. But the company bought back only 36,703,839 equity shares comprising only 21.48 per cent of the maximum target of 170,895,522. Further, the company paid a maximum of Rs. 335 per equity and the lowest price of Rs. 318 per equity share for the issue priced at Rs. 335 per share. So, the total amount invested in the buyback process was Rs 12,254 crore. That omitted any transaction costs and is representing 21.41 per cent of the total buyback size.  During this time, the stock value gained 5.7 per cent.
5. The Coal India in the year 2016, announced a buy back process of Rs 3,650 crore by way of a tender route on a proportionate basis. The offer was opened between October 3 and October 18, and the company was able to buy back only a total of 10.9 crore shares. During this times company’s stock value fell 4.6 per cent.

Conclusion:

The buyback is nothing but the reorganization of share capital which results in a reduction of share capital in their capital structure. If you are looking for complying with the process of Buy-back of your company, Enterslice can help you out with the end to end process. For details, please visit our website www.enterslice.com or email your queries at info@enterslice.com