Buy back of its own shares by a company is nothing but reduction of share capital. After the recent amendments in the Companies Act, 1956 buy back of its own shares by a company is allowed without sanction of the Court. It is nothing but a process which enables a company to go back to the holders of its shares and offer to purchase from them the shares that they hold.
There are three main reasons why a company would opt for buy back :-
1.To improve shareholder value, since with fewer shares earning per share of the remaining shares will increase.
2.As a defense mechanism against hostile take-overs since there are fewer shares available for the hostile acquirer to acquire.
3.Public Signaling of the Management’s Policy.
A company may purchase its own shares or other specified securities out of :-
1.its free reserves; or
2.the securities premium account; or
3.the proceeds of any shares or other specified securities:
No buy-back of any kind of shares or other specified securities can be made out of the earlier proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
No company can purchase its own shares or other specified securities unless :-
1.the buy-back is authorized by its articles;
2.a special resolution has been passed in general meeting of the company authorizing the buy-back;
3.the buy-back is of less than twenty five per cent of the total paid-up capital and free reserves of the company:
4.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
5.the ratio of the debt owned by the company is not more than twice the capital and its free reserves after such buy-back. However, the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies.
6.all the shares or other specified securities for buy-back are fully paid-up;
7.the buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf;
8.the buy-back in respect of shares or other specified securities other than those specified in clause (g) is in accordance with the guidelines as may be prescribed.
The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating
1.a full and complete disclosure of all material facts
2.the necessity for the buy-back
3.the class of security intended to be purchased under the buy-back
4.the amount to be invested under the buy-back and
5.the time limit for completion of buy-back.
Every buy-back must be completed within twelve months from the date of passing the special resolution.
The buy-back may be :-
1.from the existing security holders on a proportionate basis;
2.from the open market or
3.from odd lots, that is to say, where the lot of securities of a listed 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;
4.by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Where a company has passed a special resolution to buy-back its own shares or other securities under this section, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board 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 of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any:
Such a declaration of solvency need not be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.
Where a company buys back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy-back.
Where a company completes a buy-back of its shares or, other specified securities under this section, it shall not make further issue of the same kind of shares or other specified securities within a period of twenty four months except by way of bonus issue or 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.
Where a company buys back its securities under this section it shall maintain a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other particulars as may be prescribed.
A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion as may be prescribed. However such return need not be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.
If a company makes default in complying with the provisions of this section or any rules or any regulations, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.
For the purposes of buy back, “specified securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time;
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 account and details of such transfer shall be disclosed in the balance sheet.”
No company shall directly or indirectly purchase its own shares or other specified securities –
(a) through any subsidiary company including its own subsidiary companies; or
(b) through any investment company or group of investment companies; or
(c) if a default, by the company, in repayment of deposit or interest payable 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 bank, is subsisting.
No Company can, directly or indirectly, purchase its own shares or other specified securities in case such company has not filed its annual returns with the Registrar of Companies, or has not paid the dividends declared by it within 42 days from the date of declaration or has not prepared its annual accounts in the prescribed manner.