Buy Back of Securities
09 Oct 2015
Buy Back of Securities
Introduction
Buy-back of shares relates to the company buying back its shares which it has issued earlier, from the market. Buy-back of shares is purchase of its own shares orother specified securities (Specifiedsecurities includes ESOP or any other security as notified by CentralGovernment) by a company. It is important for companies who want to reducetheir share capital. In buy-back a company offers to take back its shares ownedby the investors at a specified price and this price is generally determined onthe basis of the average price of the shares in the past few months. Buy-backis one of the prominent modes of capital restructuring.
Section 68, 69 and 70 of the Companies Act, 2013 andRule 17 of Companies (Share Capital and Debentures) Rules, 2014 deal with buyback of Securities. Section 68 defines powerof company to purchase its own securities. Section 69 deals with the accounting treatment on account of Buy back of Securities and Section 70 states prohibition for buy-back in certain circumstances.
Sources for Buy-back
According to Section 68(1) of the Companies Act, 2013 a company may purchase its own shares or securities out of:-
a) Its free reserve;
b) Thesecurities premium account; or
c) The proceeds of the issue of any shares or other specified securities.
Provided that no buy-back of shares of any kind or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Pre-requisitesof a valid buy-back
Section 68(2)of the Companies Act, 2013 provides pre-requisites for a valid buy-back, accompany can buy-back its shares only when-
(a) It is authorised by its articles of association.
(b) A special resolution hasbeen passed in general meeting of the company authorizing the buy-back.
Nothing contained in the above clauseshall apply to case where-
(i) The buy-back is 10% orless of the total paid-up equity capital and free reserve of the company; and
(ii) Such buy-back has beenauthorised by the Board by means of resolution passed at its meeting;
(c) The limit of buy-back of securities by a company is restricted to 25% or less of the aggregate of paid-up capital and free reserves of the company.
(d) The debt-equity ratio should be 2:1. The Central Government is empowered to relax the debt-equity ratio in respect of a class of companies but not in respect of any particular company.
(e) All the shares for buy-back are fully paid-up.
(f) The buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the SEBI.
(g) The buyback of unlisted shares or other specified securities is in accordance with Companies (Share capital and debenture) Rules 2014.
No offer of Buy-back shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.
As per Section 68(3) of the Companies Act, 2013 the notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement pursuant to section 102 stating:-
(a) A full and complete disclosure of all material fact;
(b) The date of board meeting at which the proposal for buy-back was approved by the board of directors of the company;
(c) The necessity for the buy-back;
(d) The class of shares or securities intended to be purchased under the buy-back;
(e) The amount to be invested under the buy-back;
(f) Time limit for completion of buy-back;
(g) The basis of determining the buy-back price and the price at which it shall be made;
(h) Number of securities that the company proposes to buy-back; and
(i) The sources of fund from which the buy-back would be done and the maximum amount to be paid;
Time Limit for Buy-back
As per Section 68(4) of the Companies Act, 2013 every buy-back shall be completed within a period of 1 year from the date of passing of the special resolution or the resolution passed by the board as the case may be.
Options for Buy-back
As per Section 68(5) of the Act there are few options for Buy-back:-
(a) From existing shareholder or security holder on a proportionate basis;
(b) From the open market;
(c) By purchasing the securities issued to employees of the company under a scheme of stock option or sweat equity.
Solvency declaration in Form No.SH.9
According to Section 68(6), when a company proposes to buy-back its own shares or other specified securities, then before making such buy-back it shall file with the registrar a declaration of solvency signed by at least two directors of the company, one of whom shall be managing director, if any, in Form No. SH.9 and it must be verified by an affidavit to the effect that the Board of director of the company has made full inquiry into the affairs of the company as a result of which they have formed an opinion that the company is capable of meeting its liabilities and will not be insolvent in the duration of 1 year from the date of declaration adopted by the board.
Note: - No declaration of solvency shall be filed with SEBI by company whose shares are not listed on any recognised stock exchange.
Extinguishment of shares bought-back Section 68(7)
Within seven days of the last date of completion of buying back of its share or other specified securities by a company, it shall extinguish and physically destroy those shares or securities bought back.
Further Issue Section 68 (8)
No further issue of same kind of shares or other specified securities including allotment of new shares shall be made by any company completing Buy-back of its shares within a period of Six months except by way of bonus issue or in discharge of any subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
Maintenance of Registers Section 68 (9)
Company shall maintain a register of the shares or securities which have been bought back in Form No.SH.10. The register of shares or securities bought-back shall be maintained at the registered office of the company and shall be kept in the custody of the secretary of the company or any other person authorized by the board in this behalf. The register shall contain the necessary information regarding the date of extinguishing and physically destroying the shares, consideration paid for the shares or securities bought back, the date of cancellation of shares or securities.
Return of Buy-Back Section 68 (10)
Within thirty days of completion of buy-back, a company shall file with the registrar and the SEBI (in case of listed companies) a return containing particulars of buy-back in the Form No. SH.11 along with thefee. A certificate in Form No. SH.15 shall be annexed to the return filed with the Registrar in Form No. SH.11. The certificate shall be 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 Companies Act 2013 and the rules made there under.
Penalty Section 68 (11)
According to section 68 (11) if a company makes any default in complying with the provisions of this section or any regulation made by the SEBI then the company shall be punishable with fine which shall not be less than rupees one lakh but which may extend to rupees three lakh and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than rupees one lakh but which may extend to rupees three lakh, or with both.
Accounting Treatment of Buy-back (CRR account and its utilization) Section 69
As per Sub section 1 of Section 69, where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account. The details of such transfers to CRR account must be disclosed in the balance sheet.
As per Sub section 2 of Section 69, a company may utilize the amount so transferred in CRR account in paying up un-issued shares of the company to be issued to members of the company as fully paid bonus shares.
Prohibition for Buy-Back Section 70
As per Sub section 1 of Section 70, no company shall directly or indirectly purchase its own shares or other specified securities:
(a) Through any subsidiary company including its own subsidiaries company;
(b) Through any investment company or group of investment company;
(c) If the company has made any default in the repayment of deposit accepted either before or after the commencement of this Act, interest payment thereon,redemption of debenture and preference share or payment of interest thereon,payment of dividend to any shareholder, repayment of term loan or interest thereon to any financial institution or banking company:
Provided that the buyback is not prohibited if the default is remedied and period of 3 years has lapsed after such default ceased to subsist.
As per Sub section 1 of Section 70, 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 certain sections as follows:
§ Section 92: Annual Return
§ Section 123: Declaration and payment of Dividend
§ Section 127: Punishment for Failure to pay Dividend
§ Section 129: Financial Statement of the Company
Other Pre-requisites as per Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014
§ As per Sub-rule 2, where a company has been authorised by a special resolution before the buy-back of shares then it shall file with the Registrar of Companies a letter of offer in Form No. SH.8, along with the fee and the offer letter shall be dated and signed on behalf of the Board of Directors of the company by not less than two directors of the company.
§ According to Sub-rule 4 the letter of offer shall be dispatched to the shareholders immediately after filing the same with the ROC but not later than twenty days from its filing with the ROC.
§ Sub-rule 5 states that the offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of letter of offer.
§ Aas per Sub-rule 6, if number of shares offered by the shareholders is more than the shares to be bought back by the company then the shares shall be accepted on proportionate basis out of the total shares offered.
§ Aas per Sub-rule 7, the company has to complete the verification of the offers received within 15 days from the date of closure of offer and the shares lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of the offer.
§ tThe company shall immediately open a separate bank account after the closure of the offer as per Sub-rule 8. The Company shall deposit therein, the entire sum which is due and payable as consideration for the shares bought back.
§ Aas per Sub-rule 9, within seven days of the time specified in sub-rule 7,the company shall make payment of consideration in cash to those shareholders whose shares have been accepted. Where the shares have not been accepted, the company shall return the share certificates to the shareholders or the balance of securities where shares are partly accepted.
§ Sub-rule 10 states that the company shall ensure the following:
Ø That the letter of offer shall contain true and factual information and it must state that the director of the company accept the responsibility for information contained in such offer letter.
Ø That the company shall not issue any new shares including by way of bonus shares from the date of passing of special resolution authorizing Buy-back till the date of closure of offer.
Ø That the company has mentioned in its offer letter the opening of separate bank account and that it is adequately funded for the purpose of buy- back and to pay consideration only by way of cash.
Ø Once the offer has been announced to the shareholders then the company shall not withdraw it.
Ø For the purpose of buy-back company shall not utilize any money borrowed from financial institution.
Ø Proceeds of an earlier issue of same kind of shares shall not be utilized for the purpose of Buy-back.
For any clarification and professional assistance on Buy Back of Securities, please email to Mr. Hemant Paliwal, Practicing Company Secretary at: [email protected]
Kumar Vineet
HPACS Team