No company shall directly or indirectly purchase its own shares or other specified securities— through any subsidiary company including its own subsidiary companies; through any investment company or group of investment companies; & if a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment 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 banking company: Provided that the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist. No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of sections 92, 123, 127 and section 129.
Buy Back of Shares (Sec 68)
Buy back of shares, or other specified securities means buying back of its own shares or other ,specified securities by the company from the holder thereof and cancelling them. After the enactment of the companies act, 2013 section 68, 69 and 70 read with rule 17 of the companies (share capital and debentures) rules, 2014 deal with buy back of shares. The companies are allowed to buy back their own shares and other specified securities subject to
certain conditions. SEBI has also issued certain guidelines regulating the buy-back of shares in case of listed companies.
Conditions of Buy-back
1. Buy back of shares must be authorized by its articles
2. A special resolution passed at general meeting is needed to authorize buy-back. However, if buy-back is upto 10% of the total paid up equity capital and free reserves, the board of directors by passing a resolution at its meeting may authorize the companyfor such buy-back (only one such buy-back can be done in a year).
3. Buy-back should not be more than 25% of the total paid up capital and free reserves of the company.
4. Buy-back of equity shares in any financial year must not exceed 25% of its paid up equity capital.
5. Debt-equity ratio should not fall below 2:1 after buy-back.
6. The shares and the specified securities should be fully paid up.
7. Company must follow the SEBI guidelines in case of listed shares and prescribed guidelines in case of others.
8. Only one buy-back in a year is allowed.
9. Shares must be physically destroyed within 7 days of completion of buy-back.
10. No fresh issue is allowed within 6 months from buy-back, except by way of issue of bonus shares, ESOPs, sweat equity and conversion of debt/preference shares into equity.
Objectives/Advantages of Buy-back of shares:
1. To increase the promoters holding as the shares which are bought are cancelled. 2. To increase EPS, if there is no dilution in companies earnings as the buy-back reduces the outstanding number of shares.
3. To support the share price when the share price, in the opinion of the management is less than its fair value.
4. To pay surplus cash to the shareholders when the company does not need it for the business. For e.g. TCS, Infosys, Wipro, HCL and Tech Mahindra are regularly conducting such programmers since 2014 as part of their capital allocation policies.
5. To reward shareholders by Buy-back of shares at much higher price than ruling market price.
6. It safeguard against a hostile takeover by increasing promoters holding.
Sources of Buy-back:
1. Free reserves ( if used this source, Sec 69-an amount equal to the nominal value of shares bought back must be transferred to CRR)
2. Securities premium account
3. The proceeds of any shares or other specified securities. However, buy-back cannot be made out of the proceeds of an earlier issue of the same kind of shares.
Procedures for buy-back
Notice of the meeting to be accompanied by the explanatory statement- Notice must include the details regarding all the materials facts, the necessity of the buy back, class of the securities intended to be bought back, amount to be invested under the buy back and the time limit for the completion of the buy back.
2. Declaration of solvency- Before making the buy-back, the company is required to file with the registrar and SEBI a declaration of solvency in prescribed form and an affidavit declaring that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the board.
3. Completion of Buy-back- Every buy-back must be completed within 12 months from the date of passing the special resolution or the resolution passed by the board.
4. Extinguishment of securities- The Company must extinguish and physically destroy the securities bought back within 7 days of the last date of completion of buy-back.
5. Register of bought back of securities is to be maintained by the company.
6. Filling of return to be made with the registrar and SEBI (in case of listed company) within 30 days of such completion.
Prohibition of buy back (Sec 70)
No company shall directly or indirectly purchase its own shares or other specified securities:
a. Through any subsidiary company (including its own subsidiary)
b. Through any investment company or group of investment companies
c. If there is any default in payment of deposits or interest due, redemption of
debentures/preference shares or payment of dividend.
Sec 70 further provide that no company can buy back:
a. If it failed to file annual return
b. Failed in making payment of dividend within 30 days of declaration
c. Failed in preparation of statement of profit and loss and balance sheet in accordance with
schedule III. 70. (1) No company shall directly or indirectly purchase its own shares or other specified securities—
(a) Through any subsidiary company including its own subsidiary companies;
(b) Through any investment company or group of investment companies; or
(c) if a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment 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 banking company:
Provided that the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.
Section 70 in The Companies Act, 1956.
Section 70. Prohibition of allotment in certain cases unless statement in lieu of prospectus delivered to Registrar.
- A company having a share capital, which does not issue a prospectus on or with reference to its formation, or which has issued such a prospectus but has not proceeded to allot any of the shares offered to the public for subscription, shall not allot any of its shares or debentures unless at least three days before the first allotment of either shares or debentures, there has been delivered to the Registrar for registration a statement in lieu of prospectus signed by every person who is named therein as a director or proposed director of the company or by his agent authorised in writing, in the form and containing the particulars set out in Part I of Schedule III and, in the cases mentioned in Part II of that Schedule, setting out the reports specified therein, and the said Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule.
- Every statement in lieu of prospectus delivered under sub- section (1), shall, where the persons making any such report as aforesaid have made therein, or have without giving the reasons indicated therein, any such adjustments as are mentioned in clause 5 of Schedule III, have endorsed thereon or attached thereto a written statement signed by those persons, setting out the adjustments and giving the reasons thereof.
- This section shall not apply to a private company.
- If a company acts in contravention of sub- section (1) or (2), the company, and every director of the company who wilfully authorises or permits the contravention, shall be punishable with fine which may extend to one thousand rupees.
- Where a statement in lieu of prospectus delivered to the Registrar under sub- section (1) includes any untrue statement, any person who authorised the delivery of the statement in lieu of prospectus for registration shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to five thousand rupees or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did up to the time of the delivery for registration of the statement in lieu of prospectus believe, that the statement was true.
For the purposes of this section-
(a) a statement included in a statement in lieu of prospectus shall be deemed to be untrue if it is misleading in the form and context in which it is included; and
(b) where the omission from a statement in lieu of prospectus of any matter is calculated to mislead, the statement in lieu of prospectus shall be deemed, in respect of such omission, to be a statement in lieu of prospectus in which an untrue statement is included.
(7) For the purposes’ of sub- section (5) and clause (a) of sub- section (6), the expression” included”, when used with reference to a statement in lieu of prospectus, means included in the statement in lieu of prospectus itself or contained in any report or memorandum appearing on the face thereof, or by reference incorporated therein, or issued therewith.
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