POWER OF COMPANY TO PURCHASE ITS OWN SECURITY

The ability of a corporation to buy its own securities is covered in Section 68 of the Companies Act of 2013 and the Companies (Share Capital and Debentures) Rules, 2014.

Buyback sources include: 

  • A corporation may use the profits from the sale of any shares or other specified securities,
  • its free reserves,
  • the securities premium account,
  • or the free reserves to buy its own shares or other securities.

The proceeds of a previous issue of the same kind of shares or other specified securities may not be used to purchase any kind of shares or other specified securities. Employee stock options and other securities that the Central Government may occasionally notify are considered “specified securities.” Securities premium account is included in “free reserves.”

Conditions: –

  • Its articles should authorize the buy-back;
  • The company’s general meeting approved a special resolution authorizing the buyback:

If the buy-back represents 10% or less of the total paid-up equity capital and free reserves of the company, and if the buy-back has been authorized by the Board through a resolution adopted at its meeting, or the buy-back represents 25% or less of the total paid-up equity capital and free reserves of the company, a special resolution is not necessary.

The reference to 25% refers to the buy-back of equity shares during any financial year. Be construed with respect to its total paid-up equity capital for that financial year under this clause.

After the buyback, the company’s total secured and unsecured debt obligations cannot exceed twice its paid-up capital and free reserves.

The Central Government may, by decree, notify a class or classes of firms of a greater debt to capital and free reserve ratio.

  • All of the shares or other specified securities up for purchase are completely paid;
  • the Securities and Exchange Board’s corresponding regulations are followed when buying back shares or other specified securities listed on any recognized stock exchange;
  • Buybacks of shares or other specified securities other than those listed in subsection (f) are subject to any applicable regulations.

No offer of buy-back under this subsection may be made within a year of the date on which the last offer of buy-back, if any, was closed.

Disclosures: 

The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following disclosures, namely: –

  • the buy-objective,
  • back’s the class of shares or other securities planned to be purchased under the buy-back,
  • the date of the board meeting at which the request for the buy-back was approved by the company’s board of directors;
  • how many securities the corporation plans to repurchase;
  • the buy-back procedure to be used;
  • the price at which shares or other securities will be repurchased; the methodology used to determine the buy-back price;
  • the maximum price to be paid for the buy-back and the funding sources that would be used to finance the buy-back;
  • the deadline for finishing the buyback;
  • the total number of shares held by the promoters, the promoter’s directors, and key managerial employees as of the date specified in the notice calling the general meeting, if the promoter is a company;
  • the total number of equity shares that were bought or sold by individuals throughout a 12-month period ending on the date the board approved the buy-back and continuing through the date the notice for the general meeting was issued;
  • the highest and lowest price that was paid for purchases and transactions, along with the appropriate date;
  • the number of shares that are proposed to be tendered, as well as the specifics of their recent transactions and holdings, including information about how many shares they purchased, at what price, and when, within the twelve months prior to the board meeting when the buy-back was approved;
  • a declaration that there are no outstanding defaults regarding the repayment of deposits, interest payments on deposits, the redemption of debentures or the payment of interest on debentures, the redemption of preferred shares or the payment of dividends due to shareholders, or the repayment of any term loans or the payment of interest on term loans to any financial institution or banking company;
  • certification that the Board of Directors has thoroughly investigated the company’s affairs and future prospects and that they have arrived at the conclusion that-
  • that there won’t be any circumstances that could lead to the firm being declared unable to pay its debts within one month of the general meeting’s convening;
  • as regards its prospects for the year immediately following that date, that, having regard to their intentions with respect to the management of the company’s business during that year and to the amount and character of the financial resources which will in their view be available to the company during that year, the company shall be able to meet its liabilities as and when they fall due and shall not be rendered insolvent within a period of one year from that date; and
  • the directors have taken into account the liabilities (including prospective and contingent liabilities), as if the company were being wound up under the provisions of the Companies Act, 2013
  • A report addressed to the Board of directors by the company’s auditors stating
  • they have looked into the company’s financial situation;
  • the amount of the permissible capital payment for the securities in question is, in their opinion, properly determined;
  • the audited accounts used to calculate the buyback are not older than six months as of the offer document date; and the Board of Directors has formed the opinion based on reasonable grounds and that the company is in good financial standing.

Time Limit:

Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board. 

Modes of Buy-Back:

The securities may be purchased on the open market, proportionately from the current owners or security holders, or by purchasing the securities granted to firm employees under a stock option or sweat equity programme.

Period of buy-back

From the date of dispatch of the letter of offer, the buy-back offer must be accepted for at least fifteen days and a maximum of thirty days. The acceptance per shareholder shall be on a proportionate basis out of the total shares offered for being bought back if the number of shares or other specified securities offered by the shareholders or security holders exceeds the total number of shares or securities to be bought back by the company.

Verification of offer:

The shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty-one days from the date of closure of the offer. The company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer.

Open a Separate Bank Account:

As soon as the offer is closed, the firm must open a separate bank account and deposit the necessary funds there to cover the whole amount due and payable as consideration for the shares offered for buy-back under these regulations.

Payment to security holders: 

The company shall-

(a) make payment of consideration in cash to those shareholders or security holders whose securities have been accepted; or

(b) return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance 

Obligations of the Company:

  The company shall ensure that—

•       the letter of offer shall contain true, factual and material information and shall not contain any misleading information and must state that the directors of the company accept the responsibility for the information contained in such document;

•       the company shall not issue any new shares including by way of bonus shares from the date of passing of special resolution authorizing the buy-back till the date of the closure of the offer under these rules, except those arising out of any outstanding convertible instruments;

•       the company shall confirm in its offer the opening of a separate bank account adequately funded for this purpose and to pay the consideration only by way of cash;

•       the company shall not withdraw the offer once it has announced the offer to the shareholders;

•       the company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares;

•       and the company shall not utilize the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities for the buy-back.

Filing of Return:

The company, after the completion of the buy-back, shall file with the Registrar, and in case of a listed company with the Registrar and the Securities and Exchange Board of India, a return in the Form No. SH.11 within 30 days of such completion along with the fee.

There shall be annexed to the return filed with the Registrar in Form No. SH.11, a certificate in Form No. SH.15 signed by two directors of the company including the managing director, if any, certifying that the buy-back of securities has been made in compliance with the provisions of the Act and the rules made there under.

No return shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognized stock exchange.

References-

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