{"id":25153,"date":"2019-10-01T09:44:16","date_gmt":"2019-10-01T04:14:16","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=25153"},"modified":"2020-03-23T19:13:32","modified_gmt":"2020-03-23T13:43:32","slug":"buyback-of-shares-key-considerations-under-corporate-law","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/buyback-of-shares-key-considerations-under-corporate-law\/","title":{"rendered":"Buyback of Shares \u2013 Key Considerations under Corporate Law"},"content":{"rendered":"<p class=\"has-drop-cap\">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.<\/p>\n\n\n\n<p>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 <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>market<\/a>. Further, there are various reasons for which the option of buyback can be availed by a company.&nbsp; Some of the reasons are as follows &ndash;<\/p>\n\n\n\n<ul><li>To raise the value of the remaining shares which are available in the market by bringing down the supply<\/li><li>To block other shareholders from taking over the control.<\/li><li>To provide investors with a return<\/li><\/ul>\n\n\n\n<p>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.<\/p>\n\n\n\n<p>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.<\/p>\n\n\n\n<p>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 <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Shareholder&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A shareholder is an individual or entity that owns at least one share of a company&amp;#039;s stock, granting them partial ownership of the company. This status allows them certain rights, including(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/shareholder\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>shareholder<\/a> 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&rsquo;s money and reduction of the floating stock of the company&rsquo;s securities in the market. <\/p>\n\n\n\n<p><strong>Further, it also results in creating the value for the remaining entity.<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Regulatory Framework for the Buyback of Shares<\/h3>\n\n\n\n<p>Following listed are the legal framework that regulates and governs\nthe&nbsp;concept of buy-back of shares and other specified securities&nbsp;&ndash; <\/p>\n\n\n\n<p>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;\nCompanies Act, 2013<\/p>\n\n\n\n<p>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;\nCompanies (Shares Capital &amp; Debenture)\nRules 2014<\/p>\n\n\n\n<p>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;\nSEBI (Buy-back of Securities <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Amendment&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;An &amp;quot;amendment&amp;quot; refers to the formal change or correction of a legal document, often involving additions, variations, or deletions to address irregularities or clarify points in an agreement.(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/amendment\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>Amendment<\/a>)\nRegulations, 2013 along with the subsequent amendments thereafter<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>What are the important\nprovisions and Legal Framework for the Buyback of Shares?<\/strong><\/h3>\n\n\n\n<p><strong><em>For\nthe purpose of Buyback of shares following pre-requisites conditions are\nrequired to be fulfilled-<\/em><\/strong><\/p>\n\n\n\n<ol><li>Authorized by the <strong>Articles of Association<\/strong><sup><a href=\"https:\/\/en.wikipedia.org\/wiki\/Articles_of_association\">[1]<\/a><\/sup>.<\/li><li>In case of buy-back is up to <strong>10% of the aggregate of the paid-up share capital (Equity) and free reserve<\/strong>, a Company is required to pass a <strong>Board resolution<\/strong> at a Board meeting.<\/li><li>In case of buy-back is <strong>more than 10%<\/strong> of the aggregate of the paid-up share capital (Equity) and free reserve, but <strong>up to 25%<\/strong> of the aggregate of the paid-up capital(equity and preference) and free reserve a Company is required to pass a <strong>Special resolution<\/strong> in the Annual General Meeting.<\/li><\/ol>\n\n\n\n<p><strong>Explanatory statement<\/strong> &ndash; 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<\/p>\n\n\n\n<ul><li>In the case of buy-back of equity shares only, the buyback of shares in any financial year <strong>shall not exceed 25% of the paid-up equity capital.<\/strong><\/li><li>The <strong>equity-debt ratio<\/strong> after buy-back shall be <strong>less than or equal to 2:1<\/strong>. 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.<\/li><li>For the buy-back process, all the shares and securities are <strong>fully paid-up<\/strong>.<\/li><li>Legal Framework for Buy-back &ndash; In case of <strong>Listed Companies, SEBI (Buy-Back of Securities Regulation) 1998 <\/strong>and Companies Act 2013 must be followed.<\/li><\/ul>\n\n\n\n<p>However,\nin the case of <strong>Unlisted and Private\nCompanies<\/strong>, <strong>Companies Act 2013 and\nRule 17 of Companies (Share capital and debentures) Rules, 2014 <\/strong>must be followed.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Sources for the Buyback of\nShares<\/strong><\/h2>\n\n\n\n<p><strong><em>For buyback of shares, a company may purchase it&rsquo;s own shares\/other specified securities out of its &ndash;<\/em><\/strong><\/p>\n\n\n\n<ul><li>Free\nReserves,<\/li><li>Securities\nPremium Account,<\/li><li>Receipts\nof an earlier issue of shares or other specified securities.<\/li><\/ul>\n\n\n\n<div class=\"shadow1\"><strong>Note &ndash;<\/strong> No buy-back can be done out of proceeds of an earlier issue of the same kind of shares\/securities. <\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Methods used for Buyback\nof Shares<\/strong><\/h2>\n\n\n\n<p><strong>The process of buy-back may be done from\nthe<\/strong><\/p>\n\n\n\n<ul><li>Open\nmarket,<\/li><li>Existing\nshareholders on a proportionate <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a>,<\/li><li>To\nbuy back the shares\/securities from the employees of the company to whom\nshares\/securities have been issued under a scheme of stock option or as sweat\nequity.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>SH-9 (Declaration of\nSolvency)<\/strong><\/h2>\n\n\n\n<p>Before\nstarting the buy-back process, the company is required to file SH-9 i.e.\nDeclaration of Solvency with the ROC. In the case of listed Company, the\ncompany is also required to file with SEBI. SH-9 shall be signed by at least 2\ndirectors of the company; however, one of the directors shall be the managing\ndirector of the company.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Completion of Buyback of\nShares<\/strong><\/h2>\n\n\n\n<p>The\nprocess of buy-back shall be completed within 1 year from the date of passing\nBoard resolution\/Special Resolution.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Provisions related to After\nBuyback of Shares Process <\/strong><\/h2>\n\n\n\n<ol><li>The company shall <strong>extinguish and physically destroy the shares<\/strong> bought back <strong>within 7 days from the last date of\ncompletion<\/strong> of the buy-back process.<\/li><li>The company shall maintain a <strong>register of shares\/securities bought back <\/strong>in\n<strong>Form-SH-10<\/strong> giving the following details\nwhich include &ndash; Consideration paid, date of cancellation, date of\nextinguishment and physical destruction and any other details as may be\nrequired.<\/li><li>The Company shall file with the ROC and in\ncase of a <strong>listed company<\/strong> with SEBI, <strong>return in the form SH-11 <\/strong>signed by two\ndirectors of the company with a <strong>certificate\nin Form SH-15<\/strong>, certifying that the buy-back of securities has been made in\ncompliance with the provisions of the Act.<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\">Provisions regarding the Buyback of Shares under Section 68<\/h2>\n\n\n\n<p>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 &ndash;<\/p>\n\n\n\n<ol><li>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.<\/li><li>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.<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\">Restrictions on Buyback of Shares<\/h2>\n\n\n\n<p>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 &ndash;<\/p>\n\n\n\n<ol><li>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.<\/li><li>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.<\/li><li>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.<\/li><li>The company cannot let buyback of its shares unless the resultant reduction of its share capital is affected.<\/li><li>A company cannot purchase its own shares or any other specified securities either directly or indirectly<\/li><li>By way of any subsidiary company comprising of its own subsidiary companies;<\/li><li>By way of any investment company or group of investment companies; or<\/li><li>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.<\/li><\/ol>\n\n\n\n<div class=\"read\"><p><b>Read More:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/method-for-buyback-of-shares\/\" target=\"_blank\" rel=\"noopener noreferrer\">Method for Buyback of Shares as per Company Act<\/a><\/mark>.<\/p><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Restrictions on further\nissue of Buyback of Shares<\/strong><\/h2>\n\n\n\n<p>The\ncompany shall not make any issue of the same kind of securities within a period\nof 6 months from the date of completion of buy-back. Shares also include (right\nshares).<\/p>\n\n\n\n<p><strong><em>Exceptions\non the further issue of Buy-Back of Securities<\/em><\/strong><\/p>\n\n\n\n<ul><li>Bonus\nIssue<\/li><li>Stock\noption Scheme<\/li><li>Sweat\nequity<\/li><li>Conversion\nof warrants and conversion of shares\/debentures into equity shares.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Under what circumstances\nbuyback of shares is prohibited in the company?<\/strong><\/h2>\n\n\n\n<ol><li>A company shall not directly or indirectly\npurchase its own shares\/specified securities through-<\/li><li>Any\nsubsidiary company (which includes its own subsidiary)<\/li><li>Any\ninvestment company (Also includes a group of investment companies),<\/li><li>If\nthe company has made default in the repayment of deposits, interest payment\nthereon, the redemption of debenture\/preference shares, payment of dividend,\nrepayment of term loan and interest payable thereon.<\/li><\/ol>\n\n\n\n<div class=\"shadow1\"><strong>Note &ndash;<\/strong>If the above default is remedied and a period of 3 years has elapsed after such default ceased to exist.<\/div>\n\n\n\n<ul><li>A company shall not directly or indirectly purchase its own share\/specified securities if the company has not complied with the provisions of-<\/li><li>Annual Return<\/li><li>Declaration of Dividend<\/li><li>Failure to distribute dividend.<\/li><li>Financial statement.<\/li><\/ul>\n\n\n\n<div class=\"read\"><p><b>Recommended Article:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/process-for-buyback-of-shares-as-per-companies-act-2013\/\" target=\"_blank\" rel=\"noopener noreferrer\">Process for Buyback of Shares as per Companies Act 2013<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>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 [&hellip;]<\/p>\n","protected":false},"author":25,"featured_media":25176,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1427],"tags":[991],"acf":{"service_id":"296"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Buyback of Shares \u2013 Key Considerations Under Corporate Law - Enterslice<\/title>\n<meta name=\"description\" content=\"Buyback of shares is the process whereby a company reduces its share capital. 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Also, she has practical experience of almost 1.5 years in Legal compliance and secretarial work.","postViews":583,"readingTime":6,"nextPost":{"id":25206,"slug":"procedure-for-appeal-under-income-tax-act"},"prevPost":{"id":25154,"slug":"gratuity-definition-eligibility-calculation-and-exemption-a-complete-overview"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/Buyback-of-Shares-Key-Considerations-under-Corporate-Law.jpg","postTerms":"Authorized Share Capital","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/25153"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/25"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=25153"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/25153\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/25176"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=25153"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=25153"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=25153"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}