Buy Back of Securities (Unlisted Public Company and Private Limited Company)
[Section 68, 69&70 of the Companies Act, 2013 and read with Rule 17 of (Share Capital and Debentures) Rules, 2014]
Meaning of Buy-Back: Buy-Back of shares is a method of financial restructuring. In the case of over-capitalized Company buy-back is a popular route of re-engineering of Capital Structure.
Need of Buy-Back:
üTo increase proportionate holding of Promoters
ü Reduce the number of shares in circulation in order to
improve the share price
ü To increase the earning per share (EPS)
ü To make the optimum combination of debt-equity ratio
ü Return the surplus cash to the shareholders which are
not required by business
ü To prevent the hostile takeover
Pre-Conditions of Buy- Back of Equity Shares:
For the purpose of buy- back following conditions must be satisfied:
ü Buy-back is authorized by Article of Association of
the Company.
ü All the shares for buy-back should be fully paid-up.
ü 10% of aggregate of paid-up equity capital and free reserve
may be approved board resolution.
ü If Company want to buy-back more than 10% of aggregate
of paid-up equity Capital and Free Reserve but upto 25% of aggregate of paid-up
capital (equity & preference) and free reserve, then Special Resolution in General Meeting (EGM) required. [This is the
condition for Monetary Limit]
ü In the case of buy-back of equity shares only, the
buy-back in any financial year shall not exceed 25% of paid-up equity capital. [ This limit is applied on number of shares
to be bought back]
ü After buy-back, the debt equity ratio shall be less
than or equal to 2 i.e. the debt should not be more than twice of the equity
capital.
ü No offer of
buy-back under this section shall be made within a period of one year reckoned from the date of preceding
offer of buy-back, if any.
ü File Form SH-8 (a
letter of offer) to the Registrar of Companies before the buy-back of
shares.
Buy-Back and FEMA:
As per the Foreign Direct Investment (FDI) in India - Issue/Transfer of Shares
or Convertible Debentures - Revised pricing guidelines dated 15th July
2014, and bearing no. RBI/2014-15/129 A. P. (DIR Series) Circular
No. 4 , the price of shares transferred by way of sale, by non-resident to
resident shall not be more than the minimum price at which the transfer of
shares can be made from a resident to a non-resident. i.e. where the shares of
an Indian company are not listed on a recognized stock exchange in India, the
transfer of shares shall be at a price not less than the fair value worked out
as per any internationally accepted pricing methodology for valuation of shares
on arm’s length basis which should be duly certified by a Chartered Accountant .
ü Documentation and other guidelines governing buy-back
of securities are provided in RBI/2014-15/6 Master Circular No. 15/2014-15
dated July 01, 2014 (Amended upto February 09, 2015).
ü Prior approval of transfer of shares from a Non
Resident to Resident under the FDI scheme where the pricing guidelines under
FEMA, 1999 are not met provided that :-
ü The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation, etc.;
1. Hold the Board meeting
ü Pass the board resolution for
authorizing buyback and related matters. (if limit of buy-back is aggregate of 10% of paid-up equity capital and free
reserve)
ü If special resolution is required
for authorizing buy back then hold board meeting for:
1. Approving terms and conditions of
buyback
2. Deciding day, date, time, place
of general meeting.
3. Approving the notice of general
meeting (explanatory statement must be annexed to the notice and provide
required disclosures as per Section 102 of the Companies Act, 2013)
2. Hold General meeting and pass
Special Resolution for authorizing buyback and file MGT-14 with ROC within 30
days of passing Special Resolution.
3. After being authorised by a
special resolution file a letter of offer with ROC in Form SH-8 along
with prescribed fee. Such letter of offer shall be dated and signed (by at
least 2 directors one of whom shall be M.D(if any)
o
Along
With such offer letter file declaration of solvency in SH-9 signed
by 2 director (one MD, if any) and verified by and affidavit (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.
4. Dispatch the letter of offer to
shareholders immediately after filing with ROC but not later than 20
days after filing with ROC.
5. Offer for buy back shall remain
open for a period of not less than 15 days and not exceeding 30 days from
dispatch of letter of offer.
6. Immediately after closure of
offer open separate bank account and deposit sum equal to sum due and payable
as consideration for shares tendered for buy back.
7. Complete the verifications of
offer received during the offer period within 15 days of closure of offer and
securities tendered during such period shall deemed to be accepted if no
communication of rejection is made within 21 days from closure of offer.
8. Company shall within seven days
of the time limit of verification:
o
Make
payment in cash to those shareholder whose securities are accepted; OR
o
Return
the share certificates to the shareholders whose securities are not accepted.
Post Conditions of Buy-Back:
ü Destroy the bought back securities within 7 days from last date of completion of buy back.
ü Within 30 days of completion of buyback file a return in form SH-11 to ROC with prescribed fee.
ü Along with SH-11, a certificate in SH-15 signed by two directors (one shall be MD, if any) certifying that all the provisions of companies act and rules are complied with.
ü Company shall not issue, allot
same kind of shares/ securities (including Right Issue) within a period
of 6 months from the date of completion of buy-back except
following issues:
o
Bonus
issue;
o
Conversion
of warrants,
o
Stock
option schemes,
o
Sweat
equity;
o
Conversion
of preference shares or debentures into equity shares.
ü Company shall maintain a register
of shares or securities bought -back in form SH-10 with following details:
o
Consideration
paid
o
Date of
cancellation of shares
o Date of
physical destruction and extinguishment of shares/securities
o
Such
other information as may be prescribed
Some important Points of Buy-Back:
1. As per section 68(1) of the Companies Act, 2013 a Company may purchase its own shares/specified securities out of –
ü Its free reserve;
ü the Securities premium account;
or
ü the proceeds of an earlier issued of shares or other specified securities; (but proceeds of earlier issued should not be same kind of shares/securities)
2. Section 70 of the Companies Act, 2013 prohibit the buy-back in certain circumstances, No Company shall directly or indirectly purchase its own shares or other specified securities –
ü Through any Subsidiary Company
including its own subsidiary;
ü Through any Investment Company or
group of Investment Companies;
ü 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.
Author:- Author of this Article is CS Vinay Pandey
About CS Vinay Pandey:- CS Vinay Pandey is Associate Member of Institute of Company Secretaries of India and Law Graduate from VBSPU, Jaunpur. He is Co-Founder of Professional Study Point and faculty of Financial Management Paper of CS Professional Programme.
CS Vinay Pandey
(Company Secretary & Writer)
(CS, LLB, B.Com)
cs.vinaypandey@gmail.com
Mob/Whatsapp: 9911473074
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at cs.vinaypandey@gmail.com
Very knowledgeable 👍
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