Buy Back of Shares by Private and Public unlisted Companies under the Companies Act, 2013

1. What is Buy Back?

A share of an incorporated company is a property transferable between people entitled to hold the same, by following a set of procedures. Shares are of different types – Equity, Preference, Convertible, quasi debt, having differential voting rights, etc. These shares when issued provide a bundle of rights to the Subscriber, Purchaser or Registered Holder of shares as the case may be. These rights include, right to receive dividend, right to participate in the decision making of the Company to the extent permitted by Law.

Buy back is a term specifically used when shares are repurchased by the issuing Company. Buy back reduces the number of shares outstanding; it increases earnings per share and tends to increase the market value of the remaining shares.

2. What are the statutory provisions related to buy back of shares?

The provision related to buy back were introduced in the Companies Act, 1956 u/s. 77A, 77AA and 77B vide Companies (Amendment) Act, 1999 with retrospective effect from 31-10-1998. These provisions have been incorporated in the Companies Act, 2013 effective from 1st April, 2014 in sections 68, 69 and 70. Apart from the said sections 68 to 70 which provide for pre-conditions, limits, prohibitions and post buy- back compliance, Rule 17 of the Companies (Share Capital and Debentures) Rules 2014 mandates the procedure to be followed to carry out buy-back of shares.

3. What are the broad conditions of the Act on buy-back?

Any company undertaking a buy-back has to have its compliance up-to-date. Mainly such compliance falls in two categories (i) pre-conditions facilitating buy-back and; (ii) conditions on the basis of which buy-back is actually carried out. These conditions are like pre-operative check-up :

(i) pre-conditions facilitating buy-back:

i) Express provision in the Articles of Association of the Company empowering buy-back. It is well known fact that provisions of the Act override the provisions of Memorandum of Association- MoA and Articles of Association-AoA (section 6 of the Companies Act, 2013), but wherever the Act requires a specific provision in the Company’s constitutional document i.e. MoA AoA, it is necessary that the Company’s AOA should contain the same. It is therefore advisable that the Company should check that its AoA contains clear provision for buying back its securities. In the event the buy-back is not authorised by the Articles, steps should be taken to amend the same. A simple provision in the Articles which merely states “the Company may be subject to following requisite procedure of law can buy-back its securities” is sufficient empowerment for the Company to initiate buy-back.

ii) Up-to-date submission of returns with Registrar: The Company should check that all its returns mandatorily required to be filed every year i.e. Annual Accounts, Auditors report with Directors Report and other enclosure and Annual Returns have been submitted. With 100% e-filing of MCA returns, it is easy for the Registrar to check at a click of a mouse about e-filing position of every Company. Therefore, if the Registrar flags this matter as pending, the process of buy-back will be in question.

iii) Strict compliance with the provisions of the Act related to acceptance of deposits and repayment of Loans taken from Bank and Financial Institutions: The Company should ensure that it has adhered to the strict compliance related to acceptance of deposits as envisaged in section 73 to 76 (as applicable) and Companies (Acceptance of Deposits) Rules 2014. Any violation pertaining thereto or any default in respect of payment of interest on deposits or debentures or default in redemption of principal amount or any default in repayment of installment of loan or interest thereon will be termed as violation of the provisions of the Act and such Company will not be allowed to undertake buy-back.

Though the Act provides for prohibition of buy-back by Companies who have defaulted in repayment of loan or interest thereon, it will have to be viewed on a case-to-case basis. In case of a Company availing cash credit and overdraft facility, it is not a term loan or there is no default which can be linked, unless the Company has no turnover or is unable to, in time, convert its debtors into cash.

iv) Compliance with the provisions related to declaration and payment of dividend: The Company undertaking buy-back should ensure that, it has complied with conditions for issue of dividend and has not violated the timeline for issuing dividend payment instruments. In case of a question raised by any shareholder entitled for dividend about non-receipt of dividend, the Company should be in a position to prove beyond doubt that, it has adhered to the procedure u/s. 123 and 127 read with Rules pertaining to declaration and payment of dividend.

v) Adherence to provisions related to Financial Statement as provided in section 129 of the Act: The Company should ensure that provisions related to Financial Statements, disclosure requirements, approval and adoption thereof by the Board and the Members at AGM, disclosure about subsidiary, associate and joint venture Companies as applicable are adhered to, before commencing buy-back.

In our view, adherence to the compliance of this section is possible when a Company maintain its accounts according to standards set by ICAI and that there are no material adverse comments by the Auditors in its report.

vi) Indirect buy-back: The Company undertaking buy-back should not carry out the same though its’ subsidiary and/or through investment Company or group of investment companies.

According to one view, the condition of Company buying-back its shares through its subsidiary is not possible now in view of the provisions of section 19, which prohibits a subsidiary Company from holding shares of its Holding Company.

(ii) Conditions on the basis of which buy-back is actually carried out. After the Company has confirmed that it complies with all pre-conditions empowering itself for undertaking a buy back, the following aspects should be ensured by the Company;

• Authorisation by the members in the General Meeting by way of special resolution for carrying out buy-back with complete details of shares to be bought back and other aspects as mentioned in Rule 17 of the Cos (Share capital & Debentures) Rules 2014.
• Shares to be bought back should be fully paid up;
• No further issue of shares by the Company whether by way of rights issue, preferential issue or bonus shares after getting authorisation for buy-back from members, till the issue process is complete. However, any quasi–debts instrument issued by the Company, which are convertible into equity are exempt from this condition. Thus, conversion by third party on the basis of pre-granted rights is possible.
• Shares to be bought back can be from:

(i) existing shareholders or security holders on a proportionate basis;
(ii) from open market;
(iii) securities issued under Employee Stock Option Scheme/Plan (ESOS/ESOP) or sweat equity

• Funding for buy-back can be made from any one or combination of following sources:

a) Free reserves;
b) Balance in securities premium account; or
c) Proceeds of the issue of any shares or other specified securities.

However, the Company cannot issue shares for buying back shares of same type or issue specified securities for buying-back the same type of securities

4. What are the limits on buy-back of shares by the Company?

The Company buying back its shares has two options;

a) Buy-back on the basis of only resolution of the Board:- A buy-back on the basis of Board Resolution can be upto 10% of the paid up capital and free reserves;

b) Buy-back on the basis of Members’ Special resolution : A buy-back on the basis of Members ‘special resolution can be upto 25% of the paid up capital and free reserves.

5. Gist of other terms and conditions for buyback. A Company undertaking a buy-back has to keep in mind the following terms and conditions:

• Every buy-back authorised by the Members or Board shall be completed within a period of one year from the date of passing the relevant resolution;
• Once the offer of buy-back is announced to the shareholders, the same cannot be withdrawn;
• A minimum period of one year should have elapsed from the closure date of previous buyback and date of offer of present buy-back;
• The debt to equity ratio of a Company post buyback should not be more than 2:1; or such other ratio as may be prescribed by the Govt. for that class of Companies; It is to be noted here that debt includes secured and unsecured debts;
• If the Company has used its free reserves or securities premium account for funding buyback consideration, then a sum equal to nominal value of the shares so purchased is required to be transferred to the capital redemption reserve account;
• Company buying back its shares is required to make complete disclosure of information in the Explanatory statement issued to members and is required to follow process and documentation as provided in rule 17 of the Companies (Share Capital and Debentures) Rules 2014;

6. What is Letter of Offer (L of O) and Compliance related thereto?

Letter of Offer is a document which is issued to shareholders disclosing all information about buy-back process, schedule and mandatory information which will help the shareholder to take a decision on exercising his buy-back option. The Company is required to electronically file this document with the RoC in format SH-8, before offer opens for shareholders. The Letter of Offer shall be dispatched to all shareholders immediately after the same is filed with the RoC but not later than 21 days of filing.

7. What are the other obligations on the Part of Company once Letter of Offer is filed with RoC?

Once the Letter of Offer is filed with the Registrar, it is information in the public domain and the Company has to adhere to disclosures made therein to complete the process of buy-back. Broad obligations of the Company are as follows;

(i) Keep open offer for buy-back for minimum period 15 days but not more than 30 days from the date of dispatch of Letter of Offer to shareholders;

(ii) Verification of details of shareholders on the basis of KYC data to be completed by the Company within fifteen days. If Company wishes to communicate the rejection of shares offered, the same should be communicated with 21 days of closure of offer. This also means that in case of pro-rata buy-back the Company is required to communicate to the shareholder accordingly.

(iii) Separate Bank account to be opened for depositing total consideration payable to all shareholders whose offer has been accepted.

8. What is the post buy-back closure compliance?

(i) The Company shall destroy securities certificate/ share certificates for the securities bought back or where the securities are in a dematerialised form, it should place a request through Depository for cancellation for the same. The company should keep record of securities destroyed in Register in form SH-10

(ii) File Return of Buy-back in Form SH-11 along with Certificate signed by 2 Directors confirming compliance with the provisions of Act and Rules pertaining to buy back in Form SH-15