Company Registration

Method for Buyback of Shares as per Company Act

In companies act 2013, there are several methods for buyback of shares, however, before initiating the buyback process, you need to buy-back process. In this article, we will discuss the method for buyback of shares.

Section 68 of the Companies Act, 2013 indicates that any company which is limited by shares or guarantees with share capital can easily opt for Buyback of Shares and any other specified securities. Whether it is a listed or an unlisted company, both can opt for the process of buy-back of shares

Initially, the concept of buyback of shares was not covered under the Companies Act, 1956 until it got amended in the year 1999. Besides this, section 68, 69 and 70 of the new Companies Act, 2013 read together with the Rule 17 of the Companies (Shares Capital and Debentures) Rules, 2014 regulates the process of buyback of shares by an unlisted company.

What is Buy-back of Shares? Enterslice Advisory on Method for Buyback of shares?

As per the Rule 17(2), the company that has been authorized by a special resolution shall, prior to the buyback of shares, file with Registrar of Companies (ROC) a letter of offer in Form No.SH-8, together with the fee as prescribed. Such A letter of offer shall be dated & signed on behalf of Board of directors of the company by a minimum of 2 directors of the company, one of whom shall be the managing director (M.D), where there is one.

Is there any time limit for completion for buy-back of shares?

Every buy-back shall be completed within a period of 1 year from date of passing of a special resolution, or as the case may be, the resolution passed by the Board.

What are the Methods of buy-back of Shares?

The buy-back may be done in any of the following manners-

• Buy-back of shares from existing shareholders or security holders on the proportionate basis:
  

As per the Regulations, a company might buy back its securities from its existing security-holders on the proportionate basis in line with the provisions of the Regulations. It may be noted that 15% of the number of securities that company proposes to buy back or a number of securities entitled as per their shareholding, whichever is higher, shall be reserved for small shareholders.

• Buy-back of shares from an open market:

Regulation 14 of a Regulations lay down that Buyback of shares or other specified securities from the open market may be in any of the following methods:

• Buy-back of Shares from the book-building process:
  

A company can buy-back its securities through the book-building process as provided hereunder:

1. The special regulation should specify the maximum price at which the buy-back will be made.
2. The company should appoint the merchant banker.
3. The public announcement of the same shall be made at least 7 days prior to the commencement of buy-back.
4. Subject to the provisions of Sub-clauses (i) and (ii), the provisions regarding escrow account are applicable:
5. The deposit in escrow account should be made before the date of public announcement.
6. The amount to be deposited in escrow account should be determined with reference to maximum price as specified in the public announcement containing detailed methodology of a book-building process, a manner of acceptance, a format of acceptance to be sent by the security-holders pursuant to public announcement & details of bidding centers.
7. A copy of public announcement must be filed with SEBI^[1] within 2 days of the announcement together with the fees as specified in Regulations. The Public announcement shall also contain the detailed methodology of the book-building process, the manner of acceptance, to be sent to security holders pursuant to public announcement & the details of bidding centers.
8. The book-building process should be made through the electronically linked transparent facility.
9. The number of bidding centers shouldn’t be less than 30& there should be at least 1 electronically linked computer terminal at all the bidding centers.
10. The offer for buy-back should be kept open to the security-holders for a period of not less than 15 days & not exceeding 30 days.
11. The merchant banker & the company should determine buy-back price based on the acceptances received as well as the final buy-back price, which should be the highest price accepted should be paid to each holder’s securities have been accepted for such buy-back.
12. As per the provisions pertaining to verification of acceptances & the provisions pertaining to the opening of special account & payment of consideration shall be applicable mutatis mutandis.

• Buyback of Shares via Stock exchange :
  

Regulation 15 of the Regulations provides that a company should buy-back its specified securities through the stock exchange as provided hereunder:

1. The special resolution/ board resolution as under Regulation 5 and 5A respectively, should specify the maximum price at which the buy-back will be made;
2. The buy-back of securities shouldn’t be from promoters or persons in control of the company;
3. The company should appoint the merchant banker & make a public announcement as referred to in Regulation 8 within 7 days from the date of passing the resolution;
4. The public announcement shall be made within 7 working days from the date of passing a special resolution;
5. Concurrently with the issue of public announcement, a company shall file the copy of public announcement with the Board.
6. The company shall submit the information as regards to the shares or other specified securities bought back, to the stock exchange on the daily basis in such a form as may be specified by the Board & stock exchange shall upload the same on its official website immediately;”
7. The company shall upload the info regarding shares or other specified securities bought back on its website on a daily basis;”
8. The buy-back offer shall open not later than 7 working days from the date of public announcement and shall close within six months from the date of opening of the offer.”
9. The buy-back should be made only on stock exchanges having Nationwide Trading Terminal facility and only through the order matching mechanism except for ‘all or none’ order matching system;
10. The company shall submit information regarding the shares or other specified securities bought back, to the stock exchange on a daily basis in such form as may be specified by the board;
11. The identity of a company as a purchaser would appear on the electronic screen when an order is placed.
12. The company shall upload information regarding the shares or other specified securities bought back, on its website on a daily basis.
13. The company shall make sure that the minimum 50% of the amount earmarked for Buyback of shares, as specified in resolutions (Board/special resolution) is utilized for buying back shares & other specified securities.
14. By purchasing securities issued to the employees of a company pursuant to a scheme of stock option or sweat equity.
15. It may be noted that no offer of buyback for 15% or more of paid-up capital and free reserves, shall be made from the open market.

Is there any Circumstance prohibiting Buyback of shares?

As per Section 70 of Companies Act, 2013, no company shall directly or indirectly purchase its own shares or other specified securities-

• through any of its subsidiary company including its own subsidiary companies;
• through any investment company or group of investment companies; or
• in case of default if any is made by the company, in repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or the preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company: However, the buy-back isn’t prohibited, if a default is remedied & a period of 3 years has elapsed after such default ceased to exist.

No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company hasn’t complied with provisions of sections 92(Annual Return), 123(Declaration of Dividend), 127(punishment for failure to distribute dividend) and section 129 (Financial Statement) of companies Act, 2013.

Reasons behind the Buyback of Shares

A buyback share program can assist a company in achieving the following listed –

1. Assist in achieving a specified capital structure
2. Return surplus money to the shareholders or security holders
3. Ensure that the underlying price of shares or security is correctly reflected
4. Control unwarranted fall in the value of share or security.

Legal Framework for the Buyback of Shares

• Companies Act, 2013
• Companies (Share Capital and Debentures) Rule, 2014
• SEBI (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, 2013
• Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014

Regulations for the Listed Companies

• Section 68, 69 and 70 of the Companies Act, 2013
• Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014
• SEBI (Buyback of Securities) Regulation, 2013 and SEBI (Buyback of Securities) Regulation, 1998

No Further Issue of Securities

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

• Issue of Bonus Shares
• Conversion of Warrants
• Employee Stock Option Scheme
• Sweat Equity Shares

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.

Perquisites of the Buyback of Shares

1. The buyback of shares should be permitted by the Articles of Association (AOA) of the concerned company.
2. There is a need to pass a special resolution in the company’s annual general meeting enabling the corporate authorizing buy-back. It is significant to note that, if in case the buyback is 100 per cent or less of the paid-up capital and Free Reserves available, the board resolution can fulfil the same.
3. The buyback is 25 per cent or less of the combination of the company’s paid-up capital and free reserves. Further, the buy-back of equity shares in any financial year shall not exceed 25 per cent of its total paid-up equity capital in the financial year.
4. The degree in relation to the combination of the secured and unsecured debts owed by the company and is not over double the paid-capital and its free reserves once the buy-back.
5. All the shares or different given securities for the buy-back are totally paid up.

Forms Involved

Following are the Forms included in the Process of Buyback of shares –

1. MGT- 14 – Filing of the Special Resolutions to the ROC (Registrar of Companies)
2. SH -8 – Letter of Offer
3. SH – 9 – Declaration of Solvency
4. SH – 11 – Return in respect of the Buyback of Securities
5. SH – 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.

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 Return
• Section 123 – Declaration and the Payment of Dividend
• Section 127 – Failure to Pay Dividend
• Section 129 – Failure in providing True and Fair Statement

Punishment in case of Default

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.