Buy Back of Shares

Buy-back is the process by which Company buy-back it’s Shares from the existing Shareholders usually at a price higher than the market price. When the Company buy-back the Shares, the number of Shares outstanding in the market reduces/fall. It is the option available to Shareholder to exit from the Company business. It is governed by section 68 of the Companies Act, 2013

Why Buy Back of Shares:

To improve Earning per Share;
To use ideal cash;
To give confidence to the Shareholders at the time of falling price;
To increase promoters shareholding to reduce the chances of takeover;
To improve return on capital, return on net-worth;
To return surplus cash to the Shareholder

Modes of Buy-back:

A Company may buy-back its Shares or other specified Securities by any of the following method-

From the Existing Shareholders or other specified holders on a proportionate basis through the tender offer;
From the Open Market through-
Book-Building Process
Stock Exchange Provided that no buy-back for 15% or more of the Paid Up Capital and Reserve of the Company can be made through open market.
From odd-lot holders..

Sources of Buy-back:

A Company can purchase its own shares and other specified securities out of –

Its free reserve; or
The securities premium account; or
The proceeds of the issue of any shares or other specified securities.

However, Buy-back of any kind of shares or other specified securities cannot be made out of the proceeds of the earlier issue of same kind of shares or same kind of other specified securities.

Specified Securities includes employees stock option or other securities as may be notified by the Central Government from time to time.

Points to be taken care of:

As per Section 68 of the Companies Act, 2013:

Article of Association must authorize the Buy Back of Shares.
The Buy-back can be made with the approval of the Board of directors at a board meeting and/or by a special resolution (SR) passed by shareholders in general meeting, depending on the quantum of buy back-
Approval of Board of Directors- up to 10% of the total paid-up equity capital and free reserves of the company
Approval of Shareholders- up to 25% of the aggregate of paid-up capital and free reserves of the company.
The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and its free reserves.
Maximum no. of Shares that can be brought back in a financial year 25% of its paid up share capital.
Maximum amount of Shares that can be brought back in a financial year is twenty-five percent of paid up share capital and free reserves (where paid up share capital includes equity share capital and preference share capital; & free reserves includes securities premium).
Company must declare its insolvency in Form SH-9 to Register of Companies, signed by at least 2 Directors out of which one must be a Managing Director, if any.
The notice of the meeting for which the Special Resolution is proposed to be passed shall be accompanied by an explanatory statement stating-

A full and complete disclosure of all the material facts;
the necessity of buy-back;
the class of shares intended to be bought back;
the amount invested under the buyback;
the time limit for completion of buyback;

The Company must maintain a Register of buy-back in Form SH-10.
Submit Return of buy-back in Form SH-11 Annexed with Compliance Certificate in Form SH-15, Signed by 2 Directors out of which One must be a Managing Director, if any.
A Company should extinguish and physically destroy shares bought back within 7 days of completion of the buy-back.
6 months cooling period shall be there. Hence, No fresh issue of share is allowed
No offer of buy-back should be made by a company within a period of one year from the date of the closure of the preceding offer of buy-back.
The buy-back should be completed within a period of one year from the date of passing of Special Resolution or Board Resolution, as the case may be.

According to section 69 of the Companies Act, 2013, where a Company brought back shares out of free reserves or out of the securities premium account, then an amount equal to the nominal value of the shares need to be transferred to the Capital Redemption Reserve Account. Such transfer detailed to be disclosed in the Balance sheet. The Capital Redemption Reserve account may be utilized for paying unissued shares of the company to the members as fully paid bonus shares.

Restrictions on Buy-back of Securities in certain circumstances

According to section 70 of the Companies Act, 2013, A Company should not buy-back its securities or other specified securities , directly or indirectly –

Through any subsidiary including its own subsidiaries; or
Through investment or group of investment Companies; or
When Company has defaulted in repayment of deposits or interest payable thereon, or in redemption of debentures or preference shares or repayment of any term loan. The prohibition is lifted if the default has been remedied and a period of 3 years has elapsed after such default ceased to subsist.
When Company has defaulted in filing of Annual Return, declaration of dividend & financial statement.