Section 68 of the Companies Act 2013 deals with Buy Back of Shares and Securities. Buy back or Repurchase means companies will buy back shares either to increase the value of shares still available, or to eliminate any threats by shareholders who may be looking for a controlling stake. The repurchase of outstanding shares by a company in order to reduce the number of shares on the market. This is the clearly explains about how to Buy back of Shares/Securities. The article deals with the Sources for Buy Back,Methods of buy back, Authorisation for Buy Back etc. For more Information About Companies Act 2013.
According to Section 68(1) of the Companies Act, 2013 a company may purchase its own shares or other specified securities (hereinafter referred to as “buy-back”) out of:
- its free reserves; or
- the securities premium account; or
- the proceeds of any shares or other specified securities.
However, no buy-back of any kind of shares or other specified securities can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Thus, the company must have at the time of buy-back, sufficient balance in any one or more of these accounts to accommodate the total value of the buy-back.
The primary requirement is that the articles of association of the company should authorise buyback. In case, such a provision is not available, it would be necessary to alter the articles of association to authorise buyback.
Buy-back can be made with the approval of the Board of directors at a board meeting and/or by a special resolution passed by shareholders in a general meeting, depending on the quantum of buy back. In case of a listed company, approval of shareholders shall be obtained only by postal ballot.
- Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and such buy back has to be authorized by the board by means of a resolution passed at the meeting.
- Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves of the company. In respect of any financial year, the shareholders can approve by special resolution upto 25% of total equity capital in that year.
- Board can authorise buy back upto 10% equity capital and free reserves in a resolution passed at the Board Meeting
- Shareholders can authorize buy back by special resolution upto 25% of the total paid-up capital and free reserves of the company and in a financial year, upto 25% of total equity capital in that year.
Special Resolution to be accompanied by Explanatory Statement-Sec 68(3)
The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement stating—
- a full and complete disclosure of all material facts;
- the necessity for the buy-back;
- the class of shares or securities intended to be purchased under the buy-back;
- the amount to be invested under the buy-back; and
- the time-limit for completion of buy-back.
Rule 17(1) Companies (Share Capital and Debentures) Rules, 2014 states that explanatory statement to contain certain disclosures
Explanatory statement to the special resolution authorising buy-back, to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following disclosures:
- the date of the board meeting at which the proposal for buy-back was approved by the board of directors of the company;
- the objective of the buy-back;
- the class of shares or other securities intended to be purchased under the buy-back;
- the number of securities that the company proposes to buy-back;
- the method to be adopted for the buy-back;
- the price at which the buy-back of shares or other securities shall be made;
- the basis of arriving at the buy-back price;
- the maximum amount to be paid for the buy-back and the sources of funds from which the buy-back would be financed
- the time-limit for the completion of buy-back;
- (i) the aggregate shareholding of the promoters and of the directors of the promoter, where the promoter is a company and of the directors and key managerial personnel as on the date of the notice convening the general meeting; (ii) the aggregate number of equity shares purchased or sold by persons mentioned in (i) above during a period of twelve months preceding the date of the board meeting at which the buy-back was approved and from that date till the date of notice convening the general meeting; (iii) the maximum and minimum price at which purchases and sales referred to in (ii) above were made along with the relevant date;
- if the persons mentioned in sub-clause (i) of clause (j) intend to tender their shares for buy-back – (i) the quantum of shares proposed to be tendered; (ii) the details of their transactions and their holdings for the last twelve months prior to the date of the board meeting at which the buy-back was approved including information of number of shares acquired, the price and the date of acquisition.
- a confirmation that there are no defaults subsisting in repayment of deposits, interest payment thereon, redemption of debentures or payment of interest thereon or redemption of preference shares or payment of dividend due to any shareholder, or repayment of any term loans or interest payable thereon to any financial institution or banking company;
- a confirmation that the Board of directors have made a full enquiry into the affairs and prospects of the company and that they have formed the opinion- (i) that immediately following the date on which the general meeting is convened there will be no grounds on which the company could be found unable to pay its debts; (ii) 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 will be able to meet its liabilities as and when they fall due and will not be rendered insolvent within a period of one year from that date; and (iii) in forming their opinion for the above purposes, 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 that:
- they have inquired into the company’s state of affairs;
- the amount of the permissible capital payment for the securities in question is in their view properly determined; that the audited accounts on the basis of which calculation with reference to buy back is done is not more than six months old from the date of offer document, and
- the Board of directors have formed the opinion as specified in clause (m) on reasonable grounds and that the company, having regard to its state of affairs, will not be rendered insolvent within a period of one year from that date;
Letter of Offer to be Filed with Registrar of Companies before Buy-Back
Rule 17(2) The company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a letter of offer in Form No SH 8, along with the fee as prescribed.
Such letter of offer shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director, where there is one.
The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than 21 days from its filing with the Registrar of Companies.
Offer for buy back open for(Rule 17(5)
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.
Post buy-back debt-equity ratio not to exceed 2:1(Section 68(2)(d)
The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves. However, the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies;
Shares/Securities being Bought Back are to be Fully Paid up(Section 68(2)
Time gap between two buybacks (proviso to Section 68(2)
No offer of buy-back under Section 68(2) 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.
Time limit for completion of buyback (Section 68(4))
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.
Methods of buy-back(Section 68(5))
The buy-back under sub-section (1) may be—
- from the existing shareholders or security holders on a proportionate basis;
- from the open market;
- by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Filing Declaration of Solvency with SEBI/ROC as the case may be (Section 68(6) read with Rule 17(3) of Companies Share Capital & Debentures) Rules, 2014.
When a company proposes to buy-back its own shares or other specified securities under this section in pursuance of a special resolution or board resolution as the case may be , it shall, before making such buyback, file with the Registrar and the Securities and Exchange Board(in case of listed companies), a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director.
If any, in Form No. SH.9 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 one year from the date of declaration adopted by the Board.
Extinguishment of securities bought back Section 68(7)
When 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 seven days of the last date of completion of buy-back.
When a a company completes a buy-back of its shares or other specified securities it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub-section (1) of section 62 or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
Register of buy-back(Section 68(9)
When a company buys back its shares or other specified securities under this section, it shall maintain a register 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 and such other particulars as may be prescribed.
Return of buyback(Section 68(10)
A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board (in case of listed companies) a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed:
Rule 17(14) of Companies(Share Capital and Debentures) Rules 2014 states that 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 thereunder.
If a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, in case of listed companies, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees 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 one lakh rupees but which may extend to three lakh rupees, or with both.
Transfer to and application of Capital Redemption Reserve Account(Sec 69)
When 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 and details of such transfer shall be disclosed in the balance sheet. The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bouns shares.
Circumstances prohibits buy-back(Section 70(1)
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; or
- 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: However, 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. (Proviso to Section 70(i)
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 92Annual Return), 123(Declaration of Dividend), 127(punishment for failure to distribute dividend) and section 129(Financial Statement).
- 1 Sources For Buy Back of Shares / Securities
- 2 Authorisation (Section 68(2) – Buy Back of Shares
- 3 Quantum (Section 68(2) – Buy Back of Shares
- 4 Special Resolution to be accompanied by Explanatory Statement-Sec 68(3)
- 5 Letter of Offer to be Filed with Registrar of Companies before Buy-Back
- 6 Dispatch of letter of offer to shareholders(Rule 17(4)
- 7 Offer for buy back open for(Rule 17(5)
- 8 Post buy-back debt-equity ratio not to exceed 2:1(Section 68(2)(d)
- 9 Time gap between two buybacks (proviso to Section 68(2)
- 10 Time limit for completion of buyback (Section 68(4))
- 11 Methods of buy-back(Section 68(5))
- 12 Extinguishment of securities bought back Section 68(7)
- 13 Prohibition of further issue of shares or securities(Section 68(8)
- 14 Register of buy-back(Section 68(9)
- 15 Return of buyback(Section 68(10)
- 16 Punishments(Section 68(11) – Buy back of Shares
- 17 Transfer to and application of Capital Redemption Reserve Account(Sec 69)
- 18 Circumstances prohibits buy-back(Section 70(1)