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).
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