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Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013

Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013

Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013 :Buy Back of Securities is a very important tool for Companies who wants to reduce their Share Capital. First of all, here are few preliminary notes of Buy Back:

Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013

Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013 :

Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013

Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013

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Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013

Governing Sections of Companies Act
Specified Security
Free Reserves
Advantages of Buy Back

1.Governing Sections of Companies Act:

a) Section 68

b) Section 69

 c) Section 70

2.Specified Security: Includes ESOP or other security as notified by Central Government.

3.Free Reserves: ‘Reserves which, as per latest audited balance sheet of the company are free for distribution as dividend and shall include balance to the credit of Security Premium A/c but shall not include Share Application Money’.

4. Advantages of Buy Back:

1. It is an alternative mode of reduction in capital without requiring approval of the Court/CLB(NCLT),

2. To improve the earnings per share;

3. To improve return on capital, return on net worth and to enhance the long-term shareholders value;

4. To provide an additional exit route to shareholders when shares are undervalued or thinly traded;

5. To enhance consolidation of stake in the company;

6. To prevent unwelcome takeover bids;

7. To return surplus cash to shareholders;

8. To achieve optimum capital structure;

9. To support share price during periods of sluggish market condition;

10. To serve the equity more efficiently.

EPS gets improved as can be been with the below mentioned example:

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Relevant Sections(modified according to rules):

Section 68”:

(1) Purchase can be made out of:

a) Its free reserves;

b) The securities premium account; or

c) The proceeds of the issue of any shares or other specified securities:

No buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

(2) Preliminary Conditions:

a) Must be authorized by its articles;

b) A special resolution has been passed at a general meeting of the company  authorizing the buy-back, but special resolution is not required when:

i. The buy-back is 10% or less of the total paid-up equity capital and free reserves of the company; and

ii. Such buy-back has been authorized by the Board by means of a resolution passed at its meeting;

c) The buy-back is twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company. But in case of Equity Shares, the same  shall be taken as 25% of paid up equity capital only.

d) Debt equity ratio should be 2:1

e) All the shares or other specified securities for buy-back are fully paid-up;

f) If shares or securities are listed, buy back will be in accordance with the regulations made by the Securities and Exchange Board in this behalf;

g) The buy-back in respect of unlisted shares or other specified securities is in accordance Share Capital and Debentures Rules, 2014.

No offer of buy-back shall be made within a period of one year from the date of the closure of the preceding offer of buy-back, if any.

(3) Explanatory Statement (Disclosures):

The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following disclosures, namely:-

  • 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;
  • 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;
  • The aggregate number of equity shares purchased or sold by persons 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;
  • The maximum and minimum price at which purchases and sales were made along with the relevant date;
  • The quantum of shares proposed to be tendered and 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;
  • Ø  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;

(4) Time Limit:

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.

(5) Options for Buy back:

The buy-back can be from:

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.

(6) Solvency Declaration:              

Before making such buy-back, file with the Registrar, a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, Form No. SH.9 may be prescribed 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.

No declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange

(7) Extinguishment of Certificate:

Company shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.

(8) No further issue till 6 months:

Where 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 or other specified securities within a period of six months except by way of:

a) a bonus issue or

b) 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.

(9) Register to be maintained:                                   

Company 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.

The register of shares or securities bought-back shall be maintained at the registered office of the company and shall be kept in the custody of the secretary of the company or any other person authorized by the board in this behalf.

The entries in the register shall be authenticated by the secretary of the company or by any other person authorized by the Board for the purpose.

Particulars of Register :

• the consideration paid for the shares or securities bought back,

• the date of cancellation of shares or securities,

• date of passing of special resolution at the meeting of the members authorizing buy-

back of securities

• date of approval by the board

• number, price and amount of shares or other specified securities authorized to buy      back

• date of opening and closing of buy-back offer

• date by which buy-back was completed

• description of shares or other specified securities bought back by the company:

i. Folio No/DP Id/client ID number or certificate number of securities bought              back

ii. Name of last holder of securities

iii. Category to which they belong

iv. Date of Buy-back

v. Number of securities bought back

vi. Mode of buy-back

vii. Nominal value of securities

viii. Price at which securities are bought back

(10) Return of Buy Back & a Declaration:

The company, after the completion of the buy-back , shall file with the Registrar, and in case of a listed company with the Registrar and the Securities and Exchange Board of India, a return in the Form No. SH.11 within 30 days of such completion along with the fee

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 there under.

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) Punishment for any Default:      

If a company makes any default in complying with the provisions of this section, 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.

Company

Fine which shall not be less than Rs.1,00,000/- but which may extend to Rs. 3,00,000/-

Officer

a. Imprisonment for a term which may extend to 3 years or

b. Fine which shall not be less than Rs.1,00,000/- but which

may extend to Rs.3,00,000/- or

c. with both.

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OTHER REQUIREMENTS:

Dispatch of LO to shareholders:

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 twenty days from its filing with the Registrar of Companies.

Period of Buy- back:

The offer for buy-back shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer.

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.

Verification of offer:

The company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty one days from the date of closure of the offer.

Open a Bank Account:

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 in terms of these rules.

Payment to security holders:

The company shall-

(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

Section 69:

(1) Capital Redemption Reserves:

Where 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.

(2) Utilization of Capital Redemption Reserves:

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 bonus shares.

 

 

Section 70”:

(1) Restriction on Buy Back:

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. Provided that 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.

(2) No Buy Back if:

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:

a) Sections 92: Annual Return

b) Section 123: Declaration and Payment of Dividend

c) Section 127: Failure to pay Dividend

d) Section 129: Failure to give True and Fair Statement

Other Conditions:

a) 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.

b) Provided that 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.

c) 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 twenty days from its filing with the Registrar of Companies.

d) The offer for buy-back shall remain open for a period of not less than fifteen days and  not exceeding thirty days from the date of dispatch of the letter of offer.

e) 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.

f) The company shall complete the verifications of the offers received within fifteen days   from the date of closure of the offer and the shares or other securities lodged   shall be deemed to be accepted unless a communication of rejection is made within             twenty one days from the date of closure of the offer.

g) 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 in terms of these rules.

Time Schedule Summarised:       

Time TakenProcedure
Starting Day say ‘A’Obtaining:

•Auditors Report stating maximum amount permissible for buy back

•Board of Directors Affidavit regarding Solvency of company for one year.

•Then holding Board Meeting for considering proposal of buy back, getting resolution passed and determine price for such buy back.A + 2 Issue of notice with Explanatory Statement (along with disclosures mentioned below) to all members.A + 23 Holding EGM and passing special resolution, if required.A + 24 Obtaining:

•Declaration of Solvency (verified by an affidavit in e-form SH9)

•Filing draft letter of Offer with the ROC along with declaration of Solvency and e-form SH8

•Filing of e-form for registration of such resolution with MCA21.A + 44Maximum time for dispatch of letter of offer to all membersWithin 15 days from the closure of offerVerification of offer to be completed.

Note: Offer for buy back shall remain open to the members for a period not less than 15 days and not exceeding 30 days from the date of dispatch of letter of offer.

The shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty one days from the date of closure of the offer.Immediately on Closure of offerOpen a Special Bank Account with Schedule Bank.Within 7 days from completion of VerificationMaking payment in cash to those shareholders whose offer has been accepted or return the share certificates to the shareholders forthwith.Within 7 days from completion of AcceptanceExtinguish and physically destroy the share certificates of shares bought back.After completion of buy backFile requisite return in e-form SH 11 with MCA21 and a declaration signed by 2 directors, one of whom shall be Managing Director, if any in e-form SH 15

Buy back – Companies Act,1956 Vs Companies Act,2013:

Sr.No

Companies Act,1956

Companies Act, 2013

1

The expression offer of buy back was defined as buyback by resolution of board of directors within the 10% limit.It omits the definition of the expression offer of buy-back

2

Every buy-back to be completed within 12 months from the date of passing the special resolution or the Board resolution as the case may be.It replaces the 12 months time limit with 1 year.

3

No offer of buy-back shall be made within a period of 365 days reckoned from the date of the preceding offer of buy-back.It has changed the 365 days period to 1 year period .The period of 1 year under the 2013 act has to be reckoned from the date of the closure of the preceding offer of buy-back

4

Section 77A(5)(c) of the 1956 Act provides that the buy back may be from holders of odd lots of shares.Section 68(5) of the 2013 Act omits this provision.

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The article is written by

Piyush Joshi (CS Final)

Piyush new pic 32kb

I am Piyush Joshi, Student of CS Professional(Final), presently undergoing my internship with Simplex Castings Ltd(on of the listed co. with BSE & MPSE), i am looking forward for my future in the field of FEMA & Customs Acts.

Buy Back of Securities (Unlisted Public Co. & Private Co.) as per Companies Act, 2013

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1 comments
  1. Sam says:

    Hi Piyush, if you could explain what does the expression ‘specified securities’ mean?
    Thanks,
    Sam

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