Power of
company to Purchase its own securities
CS M.KurthalaNathan
Section 68 of the companies act
2013 and Rule 16
and 17 of Companies (Share capital and Debentures) Rules,2014
deals with the power of company to purchase its own securities.
Sources of Buy Back:
A
company may purchase its own shares or other specified securities out of;
·
its free reserves;
·
the securities premium account; or
·
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.
“specified
securities” includes employees’ stock option or other securities as may be
notified by the Central Government from time to time.
“free reserves” includes
securities premium account.
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Conditions:
·
the buy-back is authorised by its articles;
·
a special resolution has been passed at a
general meeting of the company authorising the buy-back:
Special
Resolution is not required- if;
(i) the buy-back is, ten per
cent. or less of the total paid-up equity capital and free reserves of the
company; and
(ii) such buy-back has been
authorised by the Board by means of a resolution passed at its meeting;
·
the buy-back is twenty-five per cent. or less of the aggregate of paid-up capital
and free reserves of the company
In respect of the buy-back of equity shares in any financial
year, the reference to twenty-five per cent. in this clause shall be construed
with respect to its total paid-up equity capital in that financial year
·
the ratio
of the aggregate of secured and unsecured debts owed by the company after
buy-back is not more than twice the
paid-up capital and its free reserves
The Central Government may, by order, notify a higher ratio of
the debt to capital and free reserves for a class or classes of companies
·
all the shares or other specified securities
for buy-back are fully paid-up;
·
the buy-back of the shares or other specified
securities listed on any recognised stock exchange is in accordance with the
regulations made by the Securities and Exchange Board in this behalf; and
·
the buy-back in respect of shares or other
specified securities other than those specified in clause (f)
is in accordance with such rules as may be prescribed:
No offer of buy-back under this sub-section shall be made within
a period of one year reckoned from the date of the closure of the preceding
offer of buy-back, if any.
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;
·
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;
·
a
confirmation that the Board of directors have made a full
enquiry into the affairs and prospects of the company and that they have formed
the opinion-
(i) that immediately
following the date on which the general meeting is convened there shall be no grounds on which the company could be found unable to pay its
debts;
(ii) as regards its prospects for the
year immediately following that date, that, having regard to their intentions
with respect to the management of the company’s business during that year and
to the amount and character of the financial resources which will in their view
be available to the company during that year, the company shall be able to meet its liabilities as and when they fall
due and shall not be rendered insolvent within a period of one year from that
date; and
(iii) the
directors have taken into account the liabilities(including prospective and
contingent liabilities), as if the company were being wound up under the
provisions of the Companies Act, 2013
·
a report
addressed to the Board of directors by the
company’s auditors stating that-
(i) they have inquired into the
company’s state of affairs;
(ii) the amount of the
permissible capital payment for the securities in question is in their view
properly determined
iii) that the audited accounts on the basis of which calculation with reference to buy back is done is not more than six months old from the date of offer document
and
iv) the Board of directors have formed
the opinion as on reasonable grounds and
that the company, having
regard to its state of affairs, shall not be rendered
insolvent within a period of
one year from that date.
Provision of money by company for purchase
of its own shares by employees or by trustees for the benefit of employees
The company shall not make a
provision of money for the purchase of, or subscription for, shares in the
company or its holding company, if the purchase of, or the subscription for,
the shares by trustees is for the shares to be held by or for the benefit of
the employees of the company.
Conditions:
·
the
scheme of provision of money for purchase of or subscription for the shares as
aforesaid is approved by the members by
passing special resolution in a general meeting
·
such purchase
of shares shall be made only through a recognized stock exchange in case
the shares of the company are listed and not
by way of private offers or arrangements;
·
where shares
of a company are not listed on a recognized stock exchange, the valuation at which shares are to be
purchased shall be made by a registered
valuer
·
the value of shares to be purchased or subscribed in the aggregate together
with the money provided by the company shall
not exceed five per cent. of the aggregate of paid up capital and free reserves
of the company;
Disclosures:
·
the class of employees for whose benefit the scheme is being
implemented and money is being provided for purchase of or subscription to shares;
·
the particulars of the trustee or employees in whose favor such shares
are to be registered;
·
the particulars of trust and name, address, occupation and nationality of
trustees and their relationship with the promoters, directors or key managerial
personnel, if any;
·
the any interest of key managerial personnel, directors or promoters in
such scheme or trust and effect thereof;
·
the detailed particulars of benefits which will accrue to
the employees from the implementation of the scheme;
·
the details about who
would exercise and how the voting rights
in respect of the shares to be purchased or subscribed under the scheme would be exercised;
Appointment of Trustee:
A person shall not be appointed as a trustee
to hold such shares, if he-
·
is a director,
KMP or promoter of the company or its holding, subsidiary or associate
company or any relative of such director, KMP or promoter; or
·
beneficially holds 10% or more of the paid-up share capital of the company
Disclosure in BoD’s Report:
Where the voting rights are not
exercised directly by the employees in respect of shares to which the scheme
relates, the Board of Directors shall, inter alia, disclose in the
Board’s report for the relevant financial year the following details, namely:-
·
the names
of the employees who have not exercised the voting rights directly;
·
the reasons
for not voting directly;
·
the name
of the person who is exercising such
voting rights;
·
the number
of shares held by or in favour of, such employees and the percentage of such shares to the total paid up share capital of the
company;
·
the date
of the general meeting in which such voting power was exercised;
·
the resolutions
on which votes have been cast by persons holding such voting power;
·
the percentage
of such voting power to the total voting power on each resolution;
·
whether the votes were cast in favour of or against the resolution.
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.
Modes of Buy-Back:
The
buy-back may be—
·
from the existing shareholders or security
holders on a proportionate basis;
·
from the open market;
·
by purchasing the securities issued to
employees of the company pursuant to a scheme of stock option or sweat equity.
Letter of offer (LO):
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.
The 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.
Declaration of Solvency:
The company shall file
with the Registrar, along with the letter of offer, and in case of a listed
company with the Registrar and the Securities and Exchange Board, a declaration
of solvency in Form No. SH.9 along with the fee and signed by at least two directors of the company, one of whom shall be
the managing director, if any, 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
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
Obligations of the Company:
The
company shall ensure that—
·
the letter of offer shall contain true,
factual and material information and shall not contain any misleading
information and must state that the directors of the company accept the
responsibility for the information contained in such document;
·
the company shall not issue any new shares
including by way of bonus shares from the date of passing of special resolution
authorizing the buy-back till the date of the closure of the offer under these
rules, except those arising out of any outstanding convertible instruments;
·
the company shall confirm in its offer the
opening of a separate bank account adequately funded for this purpose and to
pay the consideration only by way of cash;
·
the company shall not withdraw the offer
once it has announced the offer to the shareholders;
·
the company shall not utilize any money
borrowed from banks or financial institutions for the purpose of buying back
its shares; and
·
the
company shall not utilize the proceeds of an earlier issue of the same kind of
shares or same kind of other specified securities for the buy-back.
Extinguishing the certificate:
Where
a company buys back its own shares or other specified securities, it shall
extinguish and physically destroy the shares or securities so bought back within seven days of the last date of
completion of buy-back.
Restriction:
Where
a company completes a buy-back of its shares or other specified securities under
this section, 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.
Exceptions:
·
by way of a bonus issue or
·
conversion of warrants, stock option schemes,
sweat equity or
·
conversion of preference shares or debentures
into equity shares.
Register of shares or securities bought back:
The
company, shall maintain a register of shares or other securities which have
been bought-back in Form No. SH.10.
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:
·
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:
v
Folio No/DP Id/client ID number or
certificate number of securities bought back
v
Name of last holder of securities
v
Category to which they belong
v
Date of Buy-back
v
Number of securities bought back
v
Mode of buy-back
v
Nominal value of securities
v
Price at which securities are bought back
v
Date of payment
v
Amount paid for bought back of securities
v
Cumulative total of securities bought back
v
Date of cancellation/extinguishment and physical
destruction of securities bought back
v
Reference to entry in ROM
v
Remarks, if any
Filing of Return:
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.
Penalty:
Company
|
Fine which shall not be
less than Rs.1,00,000/- but which
may extend to Rs3,00,000/-
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Officer
|
§ Imprisonment for a term which may
extend to 3 years or
§ Fine
which
shall not be less than Rs.1,00,000/-
but which may extend to Rs.3,00,000/- or
§ with both.
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Buy back – Companies Act,1956 Vs
Companies Act,2013
S.No
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CA,1956
|
CA,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.
|
Buy Back Activity:
Buyback
activity in the Indian stock market touched a five-year high in 2013-14, with a
total of 31 offers involving an acquired
amount of Rs. 4,426 crore concluded during the financial year. Previously,
the maximum number of buybacks concluded in a single year was seen in 2009-10,
when 44 such offers were closed. But compared to 2009-10, buybacks in the
previous financial year witnessed a greater degree of success, with 78 per cent
of the target of Rs. 5,704 crore achieved.
Number of Buy-Back closed:
( Rs. In Crs.)
Year
|
No.of offers
|
Offer amount
|
Acquired amount
|
2008-09
|
19
|
1,891
|
1,763
|
2009-10
|
44
|
4,146
|
1,192
|
2010-11
|
23
|
4,181
|
4,008
|
2011-12
|
19
|
2,582
|
1,152
|
2012-13
|
26
|
12,532
|
4,746
|
2013-14
|
31
|
5,704
|
4,426
|
Source : SEBI
SEBI
amendment in Buy-Back:
In August 2013, market regulator SEBI tightened the rules for
buyback of shares to prevent instances of promoters attempting to drive up
share prices.
·
a minimum buyback of 50 per cent of the
targeted amount within six months of the offer, as against the earlier norm
of 25 per cent in 12 months.
·
The company
has to forfeit up to 2.5 per cent of the money
earmarked for the buyback, if it is failed to achieve the 50 per cent mark
·
a minimum
buyback of 15 per cent of the share capital under the mechanism has been mandated
by SEBI
·
Prohibiting the
companies from raising capital or making a further buyback offer within a year
from the date of closure of the buyback.
Disclaimer:
The entire
contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Though utmost efforts has made to provide authentic information, it is
suggested that to have better understanding kindly cross-check
the relevant sections, rules under the Companies Act,2013
