Buy Back and Companies Act 1956
Buy back refers to buying back its own securities by a company. The provisions regulating buy back of shares and specified securities are contained in Section 77A, 77AA and 77B of the Companies Act, 1956 and Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999. The provisions regarding buy back is as follows:
1. Pre and Post Buy Back Conditions:
The following terms and conditions are required to be fulfilled by a company in order to become eligible to buy-back its own securities:—
(i) There must be a provision in the Articles of Association authorizing the company to buy-back its own shares and specified securities; otherwise the Articles must be amended by a special resolution to incorporate a suitable provision.
(ii) All the shares or other specified securities involved for buy-back must be fully paid-up.
(iii) After the buy-back, the debt (secured and unsecured) of the company namely the amount of secured and unsecured debts shall not be more than twice the paid-up capital and free reserves.
(iv) In terms of section 77AA, where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause (d) of the proviso sub-section (1) of section 80 and details of such transfer shall be disclosed in the balance sheet.
(v) The buy back shall be completed within 12 months from the date of passing the Board Resolution or Shareholders Resolution as the case may be.
2. Modes of Buy Back.
The buy back may be:
(a) from the existing security holders on a proportionate basis; or
(b) from the open market; or
(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
3. Sources of buy back:
As per section 77A (1) buyback of shares and specified securities can be made only out of the following sources:
i. free reserves of the company; or
ii. the securities premium account; or
\ iii. by the proceeds of any shares or other specified securities:
Further as per the provisions of section 77A (1) buy-back of any kind of shares or other specified securities shall be not be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
4. Buy Back ceiling per financial year:
In terms of clause (c) of sub section (2) of section 77A the Company can buy back its own shares and specified securities, up to 25% of its paid up capital and free reserves in a financial year provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year.
It is pertinent to note further that as per clause (b) of sub section (2) of section 77A, no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back, if any.
5. Approval Required:
The buyback can be made with the approval of the Board of Directors and Shareholders.
(i) The company can buy back its own shares up to a maximum of 10% of its paid up capital and free reserves by passing a resolution only in the Board Meeting.
(ii) If the Buy Bank is more than 10% and up to a maxim of 25% of it’s paid up capital and free reserves, it required the consent of Shareholders by way of Special Resolution to authorizing the directors for buy back.
6. Prohibition for buy-back in certain circumstances.—
Section 77B provides that a company shall not, directly or indirectly purchase its own shares or other specified securities—
i. through any subsidiary company including its own subsidiary companies; or
ii. through any investment company or group of investment companies; or
iii. If a default, by the company, in repayment of deposit or interest payable thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institution or bank, is subsisting.
iv. In case such company has not complied with the provisions of sections 159, 207 and 211. i.e defaulted in filing annual return, defaulted in distributing dividends within thirty days of its declaration and default in filing profit and loss account and balance sheet with the Registrar of Companies.
7. Procedural Aspect of Buy Back of Shares and Specified Securities:
The following steps shall be taken for buying back the securities of a company:
i. Holding Board Meeting or Shareholders Meeting as the case may be and Passing Board Resolution/ Shareholder’s Special Resolution:
If the proposed buy back is not more than 10% of the total paid up equity share capital and free reserves of the company, Board Meeting shall be held to approve the scheme of buy back. If buy back is more than 10% of the total paid up equity share capital and free reserves of the company, the Board Meeting shall be conducted to decide about the date time and place for calling extra ordinary general meeting (“EGM”) of the company and finalizing the notice for calling EGM. Board Resolution shall be passed to convene an extraordinary general meeting. The EGM shall be convened by serving a notice and annexing an explanatory statement thereto. An explanatory statement shall have to be annexed to the said notice pursuant to Section 173 of the Act stating the following:
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of security intended to be purchased under the buy-back;
(d) the amount to be invested under the buy-back; and
(e) the time limit for completion of buy-back.
In the EGM the special resolution approving the buy back and authorizing directors shall be passed.
(ii) Filing of the special resolution approving the Buy-back with the Registrar of Companies.
The copy of special resolution shall be filed along with Form No. 23 within 30 days of passing special resolution.
In addition to form 23 there are certain other filings to be made with the ROC. There is no statutory time period prescribed for the same. However, we recommend that such filings be made within the same period as prescribed for the filing of the special resolution. Such other filings are:
(a) Draft letter of offer (“LoF”) containing disclosures in the form as prescribed in Annexure C. Please note that once the draft letter of offer has been filed with the ROC, it shall not be withdrawn.
(b) Declaration of solvency in Form- 4A prescribed under the Companies (Central Government General Rules and Forms), 1956 and Section 77A (6) of the Act.
(iii) Dispatch of Letter of Offer (“LoF).
LoF shall be dispatched to the shareholders immediately after filing the same with RoC.
(iv) Offer period for the members.
The offer shall remain open for a period of not less than 15 (fifteen) days and not exceeding 30 (thirty) days from the date of dispatch of LoF. Further the offer shall also testify that the company has sufficient funds available for the Buy-back.
(v) Acceptance/Rejection of offer.
The company shall not issue any shares including by way of bonus till the date of the closure of the offer.
The company shall, immediately after the date of closure of the offer, open a special bank account and deposit therein, such sum as would make up the entire sum due and payable as consideration for the Buy-back.
Further verification of the offers received to be completed within 15 days from the date of closure of the offer. The shares lodged till such time shall be deemed to be accepted unless a communication of rejection has been made within 21 days of the closure of the offer.
(vi) Payment to the shareholder (s) for the Buy-back
Make payment from the special bank account in cash or bank draft / pay order to the shareholder (s) whose offer has been accepted or return the share certificate to the shareholder (s) forthwith within 7 days of the closure of offer. Company shall also maintain a register of shares bought back by the company in the form as prescribed.
(vii) Extinguishment of share certificate (s)
Extinguish and physically destroy the share certificates so bought back in the presence of company secretary in whole time practice and maintain a record of the same in the form as prescribed.
(viii) Filing of certificate of compliance as to the extinguishment of share certificate.
File the certificate duly verified by 2 (two) whole time directors including the managing director and company secretary in whole time practice to this effect.
(ix) Filing of return with the RoC as to the Buy-back.
Return is to be filed in the form as prescribed within 30 (thirty) days of payment to the shareholders (s).