The term Buyback of Shares means the purchase of own shares by the Company. Buy Back of shares is an imperative way of doing capital restructuring. It is basically a corporate financial strategy which includes capital restructuring and is prevailing globally with the primary objectives of increasing EPS (Earnings per Share), improving returns to the stakeholders, averting hostile takeovers and realigning the capital structure. Hence, Buy Back of shares is an alternative way of Reduction of Capital. Legal Framework for the Buyback of Shares Companies Act, 2013Companies (Share Capital and Debentures) Rule, 2014SEBI (Buyback of Securities) Regulation, 2013 and SEBI (Buyback of Securities) Regulation, 1998 Regulations for the Unlisted Public and Private Company Section 68, 69 and 70 of the Companies Act, 2013Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014 Regulations for the Listed Companies Section 68, 69 and 70 of the Companies Act, 2013Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014SEBI (Buyback of Securities) Regulation, 2013 and SEBI (Buyback of Securities) Regulation, 1998 Definition of buyback of shares According to the Companies Act, 2013 a company whether public or private, may purchase its own shares or other specified securities (hereinafter referred to as “buy-back” or "buyback of shares") out of: (i) its free reserves; or (ii) the securities premium account; or (iii) The proceeds of any shares or other specified securities. However, no buy-back of any kind of shares or any other specified securities can be made out of proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. Thus, a company must have at the time of buy-back, sufficient balance in any one or more of these accounts to accommodate the total value of buyback of shares. Advantage of Buyback of Shares A company usually opts the option of Buyback of shares due to the following Reasons – To Improve the Shareholder Value - Buyback of shares usually results in the higher EPS (earnings per share).As a Defence Mechanism – By increasing promoters shareholding, buyback of shares helps in providing a safeguard against hostile takeovers.Provide an Exit Route - Whenever the shares are either undervalued or thinly traded, buyback of shares helps in providing an additional exit route to the shareholders.To return surplus cash to the shareholder Authorization The prime requirement is that the articles of association (AOA) of the company should authorize the buyback of shares. In case, such provision isn’t available, it would be compulsory to alter the articles of association to authorize buyback. Buyback of shares can be done or carried out with the approval of Board of directors at a meeting and/or by a special resolution passed by shareholders in a general meeting, depending on the quantum of the buyback. In case of a listed company, approval of shareholders shall be obtained only by the way of postal ballot. Quantum of Buyback of Shares under Companies Act 2013? (a) The Board of directors will approve buy-back up to 10% of total paid-up equity capital & free reserves of the company & such buyback have to be authorized by the board of directors by means of a resolution passed at the meeting. (b) Shareholders by the special resolution can approve buy-back up to 25% of total paid-up capital & free reserves of the company. With respect to any financial year, the shareholders can approve by special resolution up-to 25% of total equity capital in that year. Post buy-back debt-equity ratio A ratio of an aggregate of secured & unsecured debts owed by the company after buy-back should not be more than twice the paid-up capital & its free reserves i.e the ratio shall not exceed 2:1. However, the Central Government may, by order, notify a higher ratio of debt to capital & free reserves for the class or classes of companies; all the securities/shares or other specified securities for buy-back are required to be fully paid-up. Buy-back by listed/unlisted companies The buy-back of shares or other specified shares listed on any of the recognized stock exchange is in accordance with regulations made by the Securities and Exchange Board (SEBI) in this behalf; & The buy-back in respect of shares or other specified securities other than listed securities in is in accordance with such rules of the Companies Act, 2013 Time gap Between Two Buyback No offer of buy-back shall be made within a term of 1 year reckoned from the date of closure of the preceding offer of buy-back. Explanatory statement of notice The notice of meeting held at which a special resolution is proposed to be passed shall be accompanied by the explanatory statement stating— A full and complete disclosure of all material facts;The necessity for buy-back;The class or classes of shares or securities intended to be purchased under the buy-back;The amount to be invested under buy-back; &The time-limit for the completion of buy-back. Additional disclosure in explanatory statement The date of board meeting at which proposal for buyback was approved by board of Directors of the company; The objective of buy-back; The class of shares or other securities intended to be purchased under the buy-back;The number of securities that a company proposes to buyback;The method which is to be adopted for buy-back;The price at which buy-back of shares or other securities shall be made;The basis of arriving at buy-back price;The maximum amount to be paid for buy-back & the sources of funds from which buy-back would be financed;The time-limit for the completion of buy-back; The aggregate shareholding of the promoters and of the directors of the promoter, where the Promoter is a company & of directors & key managerial personnel as on a date of the notice convening the general meeting;The aggregate number of equity shares purchased or sold by persons mentioned in sub-clause: During the period of 12 months preceding the date of board meeting at which the buyback was approved & from that date till a date of notice convening the general meeting;The maximum & minimum price at which purchases & sales referred to in sub-clause (ii) were made along with the relevant date;In case the persons mentioned in above (1) of clause (10) intend to tender their shares for buy-back – The quantum of shares proposed to be tendered;The details of their transactions as well their holdings for last 12 months prior to date of the Board meeting at which buy-back was approved containing the information of number of shares acquired, the price & the date of acquisition; A confirmation that there aren’t any defaults subsisting in repayment of deposits, interest payment thereon, redemption of debentures or payment of interest thereon or redemption of preference shares or payment of dividend due to any shareholder, or repayment of any term loans or interest payable thereon to any financial institution or banking company; A confirmation that Board of directors has made full inquiry into affairs & prospects of the company & that they have formed the opinion - That immediately following the date on which the general meeting is convened there shall be no grounds on which the company could be found unable to pay its debts;The directors have to be taken into account the liabilities (together with prospective and Contingent Liabilities), as if the company was being wound up under provisions of the Companies Act, 2013. A report addressed to Board of directors by the company’s auditors stating that- They have inquired into the company’s state of affairs;The amount of the permissible capital payment for the securities in question is in their view properly determined;That the audited accounts on the basis of which calculation with reference to buying back is done are not more than 6 months old from date of offer document; &The Board of directors has formed the opinion as specified in clause (m) on reasonable grounds and that the company, having regard to its state of affairs, shall not be considered insolvent within a period of a year from such date. Forms Involved Following are the Forms included in the Process of Buyback of shares – MGT- 14 -Filing of the Special Resolutions to the ROC (Registrar of Companies)SH -8 – Letter of OfferSH – 9 -Declaration of SolvencySH –11 – Return in respect of the Buyback of SecuritiesSH – 10 – Register of the Buyback of Securities Purpose Of Filing Of Forms MGT -14 – The companies concerned are required to fill the said form within thirty days of passing the Special Resolution. Further, this requirement is mandatory for all types of companies, including Private Limited Company.SH – 8 – The company which has been authorised by the Special Resolution, shall before going for buyback of securities, need to file the Letter of Offer with the ROC (Registrar of Companies).SH -9 – The concerned company is needed to file a declaration of solvency along with the prescribed fee to the Registrar of Company.SH – 10 – The company is required to maintain a register concerning buyback of securities by including all the particulars as may be prescribed by the law.SH – 11 – The concerned company is required to file a Return along with the prescribed fee to the Registrar of Companies once the process of buyback of securities is duly complete. Capital Redemption Reserve (CRR) Whenever a company decides to purchase its own shares out of the free reserves or from the securities premium account, an amount equal to the nominal share value so purchased shall require to be transferred to the Capital Redemption Reserve (CRR) account. Further, all the details and particulars of such transfer shall also be disclosed in the balance sheet. Utilization of the Capital Redemption Reserve (CRR) Account The Capital Redemption Reserve (CRR) account may be applied by the company,in the paying up of the unissued shares to be issued to the members of the company as a fully paid bonus share. Restriction on Buyback of Share No company either directly or indirectly shall purchase its own shares or any other specified securities— by any of the subsidiary company together with its own subsidiary companies, by any of the investment company or a group of investment companies, orif in the case a default, is made by the concerned company, in the repayment of the deposits accepted either prior to or after the commencement of this Act, or interest payment thereon, the redemption of the debentures or the preference shares or the payment of dividend to any shareholder, or repayment of any kind of term loan or the interest payable thereon to any of the financial institution or the banking company. Provided that, the process of buy-back of shares is not prohibited if the default caused is remedied and a period of 3 years has elapsed after such default ceased to exist. When the Process of Buyback is not Allowed? No company, either directly or indirectly, shall purchase its own shares or any other specified securities, if in case such company has not duly complied with the provisions of – Section 92 – Annual ReturnSection 123 – Declaration and the Payment of DividendSection 127 – Failure to Pay DividendSection 129 – Failure in providing True and Fair Statement Punishment in case of Default Also, Read: Process for Buyback of Shares as per Companies Act 2013. If in case a company makes any default in complying with the provisions provided of this section, then the company shall be punishable with a fine which shall not be less than rupees one lakh, but which may extend up to rupees three lakh. Further, every officer of the concerned company who is in default shall also be punishable with imprisonment for a term which may extend up to three years or with a fine which shall not be less than rupees one lakhbut which may extend up to three lakh rupees, or with both.