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Saturday, September 12, 2020

Buy Back of Shares Comprehensive Article | Corporate Accounts | B.Com | CA - CS - CMA Notes | Procedure of Buy Back | Advantages of Buy Back


BUY BACK OF SHARES AND PROVISIONS RELATING TO BUY BACK OF SHARES (UPDATED Aug' 2020)
Meaning of Buy back of Shares:
Buy-back means the repurchase of its own shares by the company. When a company has substantial cash resources, it may like to buy its own shares from the market, particularly when the prevailing rate of its shares in the market is much lower that the book or what the company perceives to be its true value. This is known as buy back of shares. Buy back procedure thus enables a company to go back to the holders of its shares and offers to purchase from them the shares they hold. The shares thus bought back have to be cancelled. 
Objectives/Purposes/Reasons of Buy Back: Shares may be bought back by the company on account of one or more of the following reasons: 
a.       To increase promoters share holding.
b.      To Increase earnings per share and return on equity.
c.       Rationalise the capital structure by writing off capital not represented by available assets.
d.      To Support market price of the share of the company during periods of temporary weakness.
e.      To utilise surplus cash not required by business.
f.        To prevent hostile take-over bids.

Advantages of buy-back of shares

(a) A company with excess cash balance, which cannot be profitably employed, may get rid of it by resorting to buy-back, and re-structure its capital. 
(b) Free reserves which are utilized for buy-back instead of dividend enhance the value of the company’s shares and improve earnings per share. 
(c) Surplus cash may be utilized by the company for buy-back and avoid the payment of dividend tax. 
(d) Buy-back may be used as a weapon to prevent any undesirable take-over of the company by undesirable persons.
(e) Buy back provides capital appreciation to investors which may otherwise be not available.
Disadvantages of buy back of shares:
(a) Buy back of shares creates shortage of shares in the market.
(b) Utilisation of cash in buy back of shares may limit the scope of expansion of companies.
(c) Instead of buying back its own share, a company can use cash in buying shares of another company which are available at a much discounted price.
(d) Buy back of shares makes no difference to the shareholders whether the companies return cash in the form of increased dividends or by way of repurchase.
Provisions of the Companies Act, 2013 relating to buy back of shares (Sec.68)
1. A can buy back its shares of the following Resources: 
a.       Free reserves; Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance-sheet; or
b.      Securities premium account; or
c.       Proceeds of any shares or other specified securities. 
2. No company shall purchase its own shares or other specified securities under sub-section (1), unless
a) The buy-back is authorised by the Articles of association of the Company. A special resolution has been passed in the general meeting of the company authorising the buy-back. The buy-back can be made by a Board resolution If the quantity of buyback is or less than ten percent of the paid up capital and free reserves. 
b) The buy-back is of less than twenty-five per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year;
c) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back.
d) The shares to be bought back must be fully paid.
e) Buy back of listed shares should be in accordance with the regulations made by the Securities and Exchange Board of India.
3. Buy back must be completed within 12 months from the date of passing of the special resolution or resolution passed by the board.
4. 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.
5. Before buy back a company must file with the Registrar and the Securities and Exchange Board, a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director.
6. A company after buy back shall not make a further issue of the same kind of shares or other securities.
7. A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board a return containing such particulars relating to the buy- back within thirty days of such completion, as may be prescribed. Provided that no return shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange. 
(11) If a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, the company shall be punishable with fine which shall not be less than one lakhs rupees but which may extend to three lakhs 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 lakhs rupees but which may extend to three lakhs rupees, or with both.
Disclosure Requirements relating to Buy-Back of Shares or Other Securities in Explanatory Statement to be Annexed to the Notice of the General Meeting 
(a) the date of the board meeting at which the proposal for buy-back was approved by the board of directors of the company; 
(b) the objective of the buy-back; 
(c) the class of shares or other securities intended to be purchased under the buy-back; 
(d) the number of securities that the company proposes to buy-back; 
(e) the method to be adopted for the buy-back; 
(f) the price at which the buy-back of shares or other securities shall be made; 
(g) the basis of arriving at the buy-back price; 
(h) the maximum amount to be paid for the buy-back and the sources of funds from which the buy- back would be financed; 
(i) the time-limit for the completion of buy-back
Prohibition for Buy-Back in Certain Circumstances [Section 70] 
1. No company shall directly or indirectly purchase its own shares or other specified securities:
(a) through any subsidiary company including its own subsidiary companies; 
(b) through any investment company or group of investment companies; or 
(c) 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. 
SEBI Guidelines regarding Buy back of shares In India:
1. Modes of Buy-Back: Buy-back is permissible: 
(a) from the existing security holders on a proportionate basis through the tender offer; or 
(b) from the open market through i. Book-building process, ii. stock exchange; 
(c) from odd lots, that is to say, where the lot of securities of a public company whose shares are listed on a recognized stock exchange is smaller than such marketable lot as may be specified by the stock exchange: or 
(d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. 
2. Where a company proposes to buy-back its own shares, It shall after passing the special resolution or resolution of its Board of Directors make a public announcement in at least one English National Daily one Hindi National Daily and Regional Language Daily with wide circulation at the place where the registered office of the company is located. The public announcement shall specify a date which shall be the ‘specified date’ for the purposes of determining the names of the shareholders to whom the letter of offer shall be sent. The specified date cannot be earlier than 30 days and not later than 42 days from the date of such public announcement. 
3. The letter of offer shall be dispatched not earlier than 21 days from the submission of its draft with SEBI through the merchant banker. The date of opening of the offer shall not be earlier than 7 days or later than 30 days after the specified date. Companies buying back through the tender offer have to open an escrow account. 
4. A company cannot buy-back its shares from any person: 
a. through negotiated deals whether on or off the stock exchange; or 
b. through spot transactions; or 
c. through any private arrangements. 
5. Price at which shares shall be bought back has to be determined by shareholders through a special resolution.
6. Buy-back offer shall remain open for not less than 15 days and not more than 30 days. 
7. Escrow Account: A company shall, as and by way of security for performance of its obligations on or before the opening of the offer of re- purchase, deposit in an escrow account such sum specified in the law below:
a) If the consideration payable does not exceed 100 crores: 25% of the consideration; 
(b) If the consideration payable exceeds 100 crores, 25% up to 100 crores, and 10% thereafter.

Procedure for buy back of Shares

a.       Where a company proposes to buy back its shares, it shall, after passing of the special/Board resolution make a public announcement at least one English National Daily, one Hindi National daily and Regional Language Daily at the place where the registered office of the company is situated.
b.      The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.
c.       A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations.
d.      A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.
e.      A copy of the Board resolution authorising the buyback shall be filed with the SEBI and stock exchanges.
f.        The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date.
g.       The buyback offer shall remain open for a period of not less than 15 days and not more than 30 days.
h.      A company opting for buy back through the public offer or tender offer shall open an escrow Account.

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