Buyback of Shares – Key Considerations under Corporate Law

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 –

1.      Companies Act, 2013

2.      Companies (Shares Capital & Debenture) Rules 2014

3.      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?

For the purpose of Buyback of shares following pre-requisites conditions are required to be fulfilled-

1. Authorized by the Articles of Association^[1].
2. 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.
3. 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.

However, 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 Shares

For buyback of shares, a company may purchase it’s own shares/other specified securities out of its –

• Free Reserves,
• Securities Premium Account,
• Receipts of an earlier issue of shares or other specified securities.

Methods used for Buyback of Shares

The process of buy-back may be done from the

• Open market,
• Existing shareholders on a proportionate basis,
• To 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 equity.

SH-9 (Declaration of Solvency)

Before 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 Shares

The 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

1. 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.
2. 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 required.
3. 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 –

1. 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.
2. 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 –

1. 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.
2. 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.
3. 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.
4. The company cannot let buyback of its shares unless the resultant reduction of its share capital is affected.
5. A company cannot purchase its own shares or any other specified securities either directly or indirectly
6. By way of any subsidiary company comprising of its own subsidiary companies;
7. By way of any investment company or group of investment companies; or
8. 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

The 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 shares).

Exceptions on the further issue of Buy-Back of Securities

• Bonus Issue
• Stock option Scheme
• Sweat equity
• Conversion of warrants and conversion of shares/debentures into equity shares.

Under what circumstances buyback of shares is prohibited in the company?

1. A company shall not directly or indirectly purchase its own shares/specified securities through-
2. Any subsidiary company (which includes its own subsidiary)
3. Any investment company (Also includes a group of investment companies),
4. If 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.

• 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.