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Process for Buyback of Shares as per Companies Act 2013

Buyback of shares can be done to write off the accumulated loss or reduce the overflow of capital in the market. In this article, we will discuss the process for buyback of shares as per companies act 2013.

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.

Modes for the Buyback of Shares

Following listed are the ways by which a private company can go for the option of Buyback of shares –

1. Taking shares back from the existing shareholders on the proportionate basis
2. The Open Market; and
3. Buying shares from the employees working in the company under the Scheme called Sweat Equity shares or the ESOP (Employee Stock Option)

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.

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.

Other Necessary Provisions

1. Each buy-back must be completed within a period of one year starting from the date of passing of Special Resolution of the Board Resolution as the case may be.
2. After the completion of the process of buy-back, the company concerned is not allowed to create from the new issue of the same shares at least for a period of six months. However, there is no prohibition or restriction on the issue of bonus shares or the issue of shares within the discharge of existing obligations such as the conversion of warrants, options, equity or the conversion of preferred stock or debentures into the equity shares.
3. The company that has been allowed by a special resolution shall, before starting the process of buy­back of shares, must file with the Registrar of Companies a letter of offer or intent in the Form No. SH. 8.
4. File with the Registrar of Companies(ROC) a declaration of the economic condition duly signed by a minimum of one director of the concerned corporate, one amongst the all shall be the Managing Director (MD), if any, in the Form No. SH. 9.
5. Provision for the buy-back of shares shall stay open for a period not less than fifteen days and not more than thirty days from the date of the dispatch of the letter of offer.
6. No provision concerning the Buy-back shall be created for one year from the closure of the preceding Buy-back.
7. Extinguish and physically destroy all the shares or securities. Thus, the same must be done within seven days from the completion of the process of the buyback.
8. Maintain a register in the prescribed format for all the shares or securities, therefore, bought back, where one has acquired the shares or securities, the date of cancellation of such shares or securities, along with the date of extinction and physically destroying the shares or securities in the Form No. SH. 10.
9. File with the Registrar of Companies a return in the Form No. SH. 11 within a period of about thirty days starting from the date of the completion of Buy-back.

Provisions relating to the Buyback of Shares

A company is not allowed to purchase shares or securities from the following listed –

1. By way of any company, along with its own subsidiary company;
2. By way of any investment trust or the cluster of investment companies;
3. If the default is caused by the company, within the compensation of deposits accepted, interest paid on it, the redemption of debentures or the preferred stock or the payment of dividend to any stockholder, or the reimbursement of any term loan or the interest collectable on it to any financial organization or the financial institution. However, the buyback is not prohibited, if the default caused is remedied and after a period of three years has completed once such default has ceased to exist
4. If it is not obeyed with the provisions of Section 92, 123, 127 and Section 129 of the Companies Act, 2013

Advantages of the Process of Buyback of Shares

1. Buyback of shares might increase the confidence of the investors on the company’s board of directors (BOD) as they know directors are always willing to return surplus cash if it is not able to earn above the company’s cost of capital.
2. Buyback assists a company in reducing its excessive share capital that is not needed for the time being and also helps the company to make use of its large sum of free reserves.
3. Buyback of shares can lead to an increment in the returns on equity. It has a greater effect when a greater number of undervalued shares are repurchased. This is the most profitable passage of action for the company.
4. Companies may buy back their own shares for providing protection against the unfriendly takeovers from other companies.
5. The buyback is recognised as the quickest way for the reduction of share capital. It involves a lower cost transaction.
6. It acts as an outstanding tool for financial re-engineering. In the case of profit-making, the companies having high-dividend payments, buy back can upgrade their bottom lines since the dividends attract taxes.

If you are willing to complete the Buyback of shares, here are steps need to follow –

• Step 1: Convene a Board Meeting after giving notice to all the directors as per the Act to pass the necessary resolution & to approve the letter of offer.

• Step 2: File Form MGT-14 within 30 days of passing board resolution.

• Step 3: File a Declaration of solvency in Form No. SH.9 with Registrar of Companies (ROC) & SEBI, if listed, together with the letter of offer as well as verified by affidavit to the effect as may be prescribed.

Note: the Declaration of solvency shall be signed by at least 2 of the directors one of whom shall be the Managing Director (M.D) if any.

• Step 4: Dispatch of the Letter of an offer to shareholders OR security holders within 21 days from its filing with (ROC) Registrar of Companies making sure the matters as prescribed of The Companies (Share Capital & Debentures) Rules, 2014.

• Step 5: The offer for Buyback of shares will remain open for at least 15 days but not more than 30 days from the date of dispatch of a letter of offer.

• Step 6: In case the number of shares or other specified securities offered by shareholders or security holders is over and above the total number of shares or securities to be brought back by a company, the acceptance per shareholder shall be on the proportionate basis out of total shares offered for being brought back.

• Step 7: Complete the verifications of offers received within 15 days from the date of closure of the offer.

• Step 8: Open the separate bank account immediately after the date of closure of offer & deposit such sum as would make the entire sum due & payable as consideration for shares to be brought –back

• Step 9: Within 7 days from the date of verification of offers:

1. Make payment of consideration in cash to those shareholders or securities whose securities have been accepted.
2. Return a share certificate to those shareholders or security holders whose shares/securities aren’t accepted at all or balance of securities in case of part acceptance.

• Step 10: Extinguish & physically destroy the shares/ other specified securities bought back within 7 days of the last date of completion of a buyback.

• Step 11: File Return of Buyback with the Registrar in Form No SH.11 & SEBI, if listed, on completion of buyback along with certificate in Form No SH.15 signed by 2 Directors one of whom shall be Managing Director (M.D), if any, certifying that a buy-back of securities have been made in compliance with provisions of the Act as well as rules within 30 days of such completion.

• Step 12: Maintain the register of bought- back Shares or other securities in Form No SH-10 at the registered office of the Company and keep in the custody of company secretary or any other person authorized by the Board in this behalf & the entries shall be authenticated by company secretary or any other person authorized by the Board.

Applicable Legal Compliances post Process for buyback of Shares-

1. A company shall not be allowed to make a further issue of the same kind of shares/other securities including allotment of new shares under section 62 (1) (a) or other specified securities within a term of 6 months excluding by way of bonus issue or in the discharge of subsisting obligations such as the conversion of warrants, STOCK OPTION schemes, issue of sweat equity shares or conversion of preference shares or debentures into equity shares.
2. The Company shall not issue any new shares comprising bonus shares from the date of passing special resolution till the date of closure of offer for buyback excluding those arising out of any convertible instruments.

Conclusion

The process of buyback of shares is an effective way for the management to boost up the company’s undervalued share price and reduction in share capital. Further, this process requires the management to show confidence in their business operations and affairs. Furthermore, it is not obligatory that every buyback must automatically benefit the shareholders. It is significantto note that being an investor one should scale the purpose and the timing of a buyback and must also have a look at the overall financial situation of the concerned company. Lastly, a shareholder must reconsider all his views priorto purchasing shares of that company which is indulged in the process of a buyback.