Buy-Back of Shares | Company Law - CLAT PG PDF Download

Definition

Buy-back refers to the process where a company repurchases its own shares from existing shareholders, typically at a price higher than the current market value.

Key Points:

• When a company buy-backs shares, the total number of shares available in the market decreases.
• This process offers shareholders an option to exit their investment in the company.
• Buy-back of shares is regulated by Section 68 of the Companies Act, 2013.

Reasons for Buy-back

• Improve Earnings per Share (EPS): Enhancing the company's EPS by reducing the number of shares outstanding.
• Utilize Excess Cash: Effectively using surplus cash available with the company.
• Boost Shareholder Confidence: Reassuring shareholders during periods of falling stock prices.
• Increase Promoters' Shareholding: Raising the promoters' shareholding to lower the risk of a takeover.
• Enhance Return on Capital and Net-Worth: Improving financial metrics such as return on capital employed (ROCE) and return on equity (ROE).
• Return Surplus Cash to Shareholders: Distributing excess cash to shareholders.

Modes of Buy-back

From Existing Shareholders or Specified Holders

• Tender Offer: Buy-back from existing shareholders or specified holders on a proportionate basis through a tender offer.

From the Open Market

• Book-Building Process
• Stock Exchange

Note: No buy-back for fifteen percent or more of the paid-up capital and reserves of the company can be made through the open market.

Sources of Buy-back

• A company can buy back its own shares and specified securities using:
• Free Reserves
• Securities Premium Account
• Proceeds from Issuance of Shares or Specified Securities

However, shares or securities cannot be bought back using proceeds from the earlier issuance of the same kind of shares or securities.

Conditions of Buy-back

According to Section 68 of the Companies Act, 2013, the following conditions must be met for a buy-back of shares:

Articles of Association

• The company’s articles must authorize buy-back. If not, they need to be amended by passing a special resolution in a general meeting.

Special Resolution

• A special resolution must be passed in a general meeting for the buy-back. However, if the buy-back is up to 10%, a resolution at a board meeting is sufficient.

Maximum Limit

• The maximum number of shares that can be bought back in a financial year is 25% of its paid-up share capital.
• The maximum amount of shares that can be bought back in a financial year is 25% of paid-up share capital and free reserves. Paid-up share capital includes equity and preference share capital, while free reserves include securities premium.

Debt-Equity Ratio

• Post buy-back, the debt-equity ratio cannot exceed 2:1.

Fully Paid-Up Shares

• Only fully paid-up shares can be bought back in a financial year.

Notice of Meeting

• The notice for the meeting proposing the special resolution must include an explanatory statement disclosing:
• Material Facts: Full disclosure of all material facts.
• Necessity of Buy-back: Reasons for the buy-back.
• Class of Shares: The class of shares intended for buy-back.
• Investment Amount: The amount intended to be invested in the buy-back.
• Timeline: The time limit for completing the buy-back.

Register of Buy-back

• The company must maintain a Register of buy-back in Form SH-10.

Return of Buy-back

• Submit the Return of buy-back in Form SH-11, along with a compliance certificate in Form SH-15.
• The forms must be signed by two directors, including one managing director, if applicable.

Extinguishment of Shares

• Shares bought back must be extinguished and physically destroyed within 7 days of completion of the buy-back.

Cooling Period

• A cooling period of 6 months must be observed, during which no fresh issue of shares is allowed.

Offer Restrictions

• No offer of buy-back should be made within one year from the closure of the preceding offer of buy-back.

Completion Timeline

• The buy-back should be completed within one year from the date of passing the special resolution or board resolution, as applicable.

Transfer to Capital Redemption Reserve Account

• According to Section 69 of the Companies Act, 2013:
• If a company buys back shares using free reserves or the securities premium account, an amount equal to the nominal value of the shares must be transferred to the Capital Redemption Reserve Account (CRR).
• This transfer must be disclosed in the balance sheet.
• The CRR can be used for issuing fully paid bonus shares to members from unissued shares of the company.

Restrictions on Buy-back of Securities in Certain Circumstances

• As per Section 70 of the Companies Act, 2013, a company is prohibited from buying back its securities or specified securities directly or indirectly under the following circumstances:
• Through Subsidiaries: Buy-back through any subsidiary, including its own subsidiaries, is not allowed.
• Through Investment Companies: Buy-back through investment or group of investment companies is prohibited.
• Default in Repayment: Buy-back is restricted if the company has defaulted in repayment of deposits or interest payable thereon, redemption of debentures or preference shares, or repayment of any term loan.
• Default in Filing: Buy-back is also restricted if the company has defaulted in filing of Annual Return, declaration of dividend, and financial statement.
• The prohibition is lifted if the default has been remedied and a period of three years has elapsed after the default ceased to exist.

SIEL Ltd., In re.

• In the case of SIEL Ltd., the Delhi High Court (2008) 144 Com Cases 469 (Del) held that the reduction of a company's share capital is primarily a domestic matter. The decision of the majority, typically through a special resolution, should prevail.
• The court emphasized that the majority has the right to decide not only to reduce the share capital but also how this reduction should be implemented.
• Companies are allowed to extinguish certain shares without treating all shares of the same class identically. This selective reduction is legal within the framework of the law for companies limited by shares.

Indian National Press (Indore) Ltd., In re.

• In the case of Indian National Press (Indore) Ltd., the need for reducing capital can arise due to various circumstances such as trading losses, heavy capital expenses, or assets of reduced or doubtful value.
• These situations may lead to the original capital being lost or the company having more resources than it can use profitably.
• In either case, there may be a necessity to adjust the relationship between capital and assets.

Elpro International Ltd., In re.

• In the case of Elpro International Ltd., the company proposed to extinguish and cancel 8,89,169 shares held by shareholders, constituting 25 percent of the issued and paid-up share capital.
• The plan involved returning capital to these shareholders at Rs. 183 per equity share of Rs. 10 each, in accordance with Section 100 of the Act (corresponding to section 66 of the Companies Act, 2013).
• The scheme, approved by shareholders, stipulated that the reduction of 25 percent of the issued and paid-up capital would occur from among 3,835 shareholders, including 112 shareholders who voted for the resolution and 3,723 shareholders who did not object to the resolution.
• The court ruled that selective reduction of share capital is legally permissible. Shareholders who did not cast their votes were those who abstained from voting at the meeting, and there was no objection from any of the shareholders to the proposed reduction.