Buy-back is one of the preferred ways by which a company provides an exit route to the shareholders of the company i.e. the requisite number of shares are extinguished, agreed amount is paid to the shareholders. Buy-backs of shares may be preferred for improving certain financial ratios of the company, improving valuation of companies, providing tax-effective means of rewarding the shareholders, providing an exit to shareholders, etc. This article is a compilation of a checklist for buy-back of equity shares by private company or unlisted public companies. Section 68 of the Companies Act, 2013 (“the Act”) and the Rules made thereunder are the relevant provisions. The provisions provide for buy-back of shares or any specified securities. Here ‘specified securities’ includes ESOPs or other securities as may be notified by the Central Government from time to time.
- Sources of buy-back: A company may purchase its own shares or other specified securities out of: (a) its free reserves, (b) securities premium account, or (c) proceeds of the issue of any shares or other specified securities. However, buy-back of any kind of shares or other specified securities shall not be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. The company shall not utilise any money borrowed from banks or financial institutions for the purpose of buying back its shares.
- Authority to buy-back shares: A company can buy-back its own shares if the same is authorised by its articles of association. All the shares for buy-back are fully paid-up.
- Buy-back – from whom? The buy-back may be: (a) from the existing shareholders or security holders on a proportionate basis, (b) from the open market, (c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. In case the number of shares or other specified securities offered by the shareholders or security holders is more than the total number of shares or securities to be bought back by the company, the acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.
- Limits on buy-back (board approval): Buy-back of shares may be authorised by the board of directors by means of a resolution passed at its meeting. In such case, the buy-back shall be 10% or less of the total paid-up equity capital and free reserves of the company. The said decision cannot be taken by the board of directors by passing a circular resolution.
- Limits on buy-back (shareholders’ approval): Buy-back of shares may be authorised by passing a special resolution at a general meeting of the company. In such case, the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company. Also, in respect of the buy-back of equity shares in any financial year, the reference to 25% shall be construed with respect to its total paid-up equity capital in that financial year. In case of shareholders’ approval, the notice of the meeting shall be accompanied by an explanatory statement stating: (a) full and complete disclosure of all material facts, (b) necessity for the buy-back, (c) class of shares or securities intended to be purchased under the buy-back, (d) amount to be invested under the buy-back; and (e) time-limit for completion of buy-back. The company shall make further disclosures as stated in Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.
- Debt-equity ratio (post buy-back): The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and its free reserves. For government companies which carry on non-banking finance institution activities and housing finance activities, the debt to capital and free reserves ratio shall be 6:1.
- Declaration of Solvency: Where a company proposes to buy-back its own shares or other specified securities, it shall, before making such buy-back, file with the Registrar of Companies and SEBI (if company is listed), a declaration of solvency (Form No. SH-9) signed by at least 2 directors, one of whom shall be Managing Director, if any, and verified by an affidavit to the effect that the board of directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the board of directors.
- Offer letter: 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 which has been authorised by a special resolution shall, before the buy-back of shares, file the letter of offer in Form No. SH-8 with the Registrar of Companies. The letter of offer shall be dated and signed on behalf of the board of directors of the company by not less than 2 directors of the company, one of whom shall be the Managing Director, where there is one.
- Offer period: The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar but not later than 20 days from its filing with it. 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 the letter of offer. However, where all members of a company agree, the offer for buy-back may remain open for a period less than 15 days.
- Post buy-back activities: (i) The company shall complete the verifications of offers received within 15 days from the date of closure of offer and shares or other securities 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; (ii) The company shall immediately after the date of closure of the offer, open a separate bank account and deposit therein, such sum, as would make up the entire sum due and payable as consideration for the shares tendered for buy-back; (iii) The company shall within 7 days of the time: (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; (iv) 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.
- Time-limit for completion of buy-back: Every buy-back shall be completed within a period of 1 year from the date of passing of the special resolution, or as the case may be, the resolution passed by the board of directors of the company.
- Maintenance of Register: Where a company buys back its shares under Section 68 of the Act, it shall maintain a register (in Form No. SH-10) of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities. Such register shall be maintained at the registered office of the company and shall be kept in the custody of the company secretary or any other person authorised by the board in this behalf. The entries in the register shall be authenticated by the company secretary or by any other person authorised by the board for the purpose.
- Return of completion of buy-back: A company shall, after the completion of the buy-back under Section 68 of the Act, file with the Registrar of Companies and SEBI (if the company is listed) a return (in Form No. SH-11) containing such particulars relating to the buy-back within 30 days of such completion, as may be prescribed. There shall be annexed to the return, a certificate (in Form No. SH-15) signed by two directors of the company including 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 thereunder.
- Certain restrictions on buy-back of shares: The offer of buy-back shall not be made within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back, if any. The company shall not withdraw the offer once it has announced the offer to the shareholders.
- Destruction of share certificate: Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within 7 days of the last date of completion of buy-back.
- Restriction on further issue of shares post-buy-back of shares: Where a company completes a buy-back of its shares, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under rights issue [clause (a) of sub-section (1) of Section 62 of the Act] within a period of 6 months. However, such restriction is not applicable to bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
- Buy-back for listed companies: The buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by SEBI in this behalf.
*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com