According to section 68 of the Companies Act, 2013, any company which is limited by shares or guarantee with share capital can go for the option of Buyback of Shares and other specified securities. Further, both the listed and unlisted companies are eligible to go for buy-back of shares.
The term Buyback is also named as a share purchase. In this process, a company decides to purchase its own outstanding shares in order to bring down the count of shares available in the open market. Further, there are various reasons for which the option of buyback can be availed by a company. Some of the reasons are as follows –
- To raise the value of the remaining shares which are available in the market by bringing down the supply
- To block other shareholders from taking over the control.
- To provide investors with a return
By availing the option of buyback, the firms or the organizations will be allowed to invest in themselves. Whenever the number of outstanding shares available in the market is reduced, the proportion of the shares owned by the investors increases immediately.
Earlier, the concept of buyback was not included in the provisions of the Companies Act, 1956 until the said act was amended in the year 1999. Besides this, section 68, 69 and 70 of the Companies Act, 2013 read with the Rule 17 of the Companies (Shares Capital and Debentures) Rules, 2014 administers the process of buyback by the unlisted company.
Hence, Buyback of shares is the process whereby a company reduces its share capital. It is nothing but a process to enable a company to go back to the shareholder and offer to purchase from them the shares that they hold in the company. The Buy-Back process results in the return of the shareholder’s money and reduction of the floating stock of the company’s securities in the market.
Further, it also results in creating the value for the remaining entity.
Regulatory Framework for the Buyback of Shares
Following listed are the legal framework that regulates and governs
the concept of buy-back of shares and other specified securities –
Companies Act, 2013
Companies (Shares Capital & Debenture)
SEBI (Buy-back of Securities Amendment)
Regulations, 2013 along with the subsequent amendments thereafter
What are the important
provisions and Legal Framework for the Buyback of Shares?
the purpose of Buyback of shares following pre-requisites conditions are
required to be fulfilled-
- Authorized by the Articles of Association.
- In case of buy-back is up to 10% of the aggregate of the paid-up share capital (Equity) and free reserve, a Company is required to pass a Board resolution at a Board meeting.
- In case of buy-back is more than 10% of the aggregate of the paid-up share capital (Equity) and free reserve, but up to 25% of the aggregate of the paid-up capital(equity and preference) and free reserve a Company is required to pass a Special resolution in the Annual General Meeting.
Explanatory statement – The notice of the meeting at which the special resolution is proposed to be passed in the annual general meeting shall be accompanied by the explanatory statement which in
- In the case of buy-back of equity shares only, the buyback of shares in any financial year shall not exceed 25% of the paid-up equity capital.
- The equity-debt ratio after buy-back shall be less than or equal to 2:1. The Central Government may, by order to notify the higher ratio of the debt to capital and free reserve for the class/classes of companies.
- For the buy-back process, all the shares and securities are fully paid-up.
- Legal Framework for Buy-back – In case of Listed Companies, SEBI (Buy-Back of Securities Regulation) 1998 and Companies Act 2013 must be followed.
in the case of Unlisted and Private
Companies, Companies Act 2013 and
Rule 17 of Companies (Share capital and debentures) Rules, 2014 must be followed.
Sources for the Buyback of
For buyback of shares, a company may purchase it’s own shares/other specified securities out of its –
of an earlier issue of shares or other specified securities.
Note – No buy-back can be done out of proceeds of an earlier issue of the same kind of shares/securities.
Methods used for Buyback
The process of buy-back may be done from
shareholders on a proportionate basis,
buy back the shares/securities from the employees of the company to whom
shares/securities have been issued under a scheme of stock option or as sweat
SH-9 (Declaration of
starting the buy-back process, the company is required to file SH-9 i.e.
Declaration of Solvency with the ROC. In the case of listed Company, the
company is also required to file with SEBI. SH-9 shall be signed by at least 2
directors of the company; however, one of the directors shall be the managing
director of the company.
Completion of Buyback of
process of buy-back shall be completed within 1 year from the date of passing
Board resolution/Special Resolution.
Provisions related to After
Buyback of Shares Process
- The company shall extinguish and physically destroy the shares bought back within 7 days from the last date of
completion of the buy-back process.
- The company shall maintain a register of shares/securities bought back in
Form-SH-10 giving the following details
which include – Consideration paid, date of cancellation, date of
extinguishment and physical destruction and any other details as may be
- The Company shall file with the ROC and in
case of a listed company with SEBI, return in the form SH-11 signed by two
directors of the company with a certificate
in Form SH-15, certifying that the buy-back of securities has been made in
compliance with the provisions of the Act.
Provisions regarding the Buyback of Shares under Section 68
If in any case, the concerned company is found guilty of making any default in the process mentioned under Section 68 of the Companies Act, 2013, or any listed company of any regulation issued by the SEBI, then –
- Such a company would be liable to a fine imposed of not less than Rs 1 lakh. In fact, it would exceed up to Rs 3 lakhs.
- Further, every such officer involved in the process, who is in default, shall also be punishable for a period that could extend up to 3 years or fine with an amount not less than Rs 1 lakh.
Restrictions on Buyback of Shares
Together with the above-mentioned conditions, there are some restrictions imposed on the companies opting for buy-back of shares. Following listed are the conditions imposed on a company opting for the buyback of shares –
- A company cannot buy-back its shares or any other specified securities from any individual by way of negotiated deals, whether on or off the stock exchange or by means of any private arrangement or through spot transactions.
- Companies are not eligible to buy-back their shares or other specified securities from any recognized stock exchange for the reason of delisting their shares or any other specified securities.
- Companies cannot offer any buy-back of shares within a period of one year starting from the date of the expiry of buyback period of the preceding offer of the buyback if any.
- The company cannot let buyback of its shares unless the resultant reduction of its share capital is affected.
- A company cannot purchase its own shares or any other specified securities either directly or indirectly
- By way of any subsidiary company comprising of its own subsidiary companies;
- By way of any investment company or group of investment companies; or
- In case any company has made a default in the process of repayment of the deposits accepted either prior to or after the commencement of the Companies Act, 2013, interest payment thereon, the redemption of the debentures or preference shares or the payment of dividend to any shareholder, or the repayment of any term loan or interest payable thereon to any financial institution or banking company.
Restrictions on further
issue of Buyback of Shares
company shall not make any issue of the same kind of securities within a period
of 6 months from the date of completion of buy-back. Shares also include (right
on the further issue of Buy-Back of Securities
of warrants and conversion of shares/debentures into equity shares.
Under what circumstances
buyback of shares is prohibited in the company?
- A company shall not directly or indirectly
purchase its own shares/specified securities through-
subsidiary company (which includes its own subsidiary)
investment company (Also includes a group of investment companies),
the company has made default in the repayment of deposits, interest payment
thereon, the redemption of debenture/preference shares, payment of dividend,
repayment of term loan and interest payable thereon.
Note –If the above default is remedied and a period of 3 years has elapsed after such default ceased to exist.
- A company shall not directly or indirectly purchase its own share/specified securities if the company has not complied with the provisions of-
- Annual Return
- Declaration of Dividend
- Failure to distribute dividend.
- Financial statement.