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BUY-BACK OF SECURITIES / SHARES UNDER COMPANIES ACT 2013


Buy Back of Securities and shares is a tool for Companies intending to reduce their Share Capital. Buy Back is governed by Section 68, 69 and 70 of the Companies Act, 2013.

In this regard, security includes ESOP or other security as notified by Central Government. Free Reserves means 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.

Advantages:
It is an alternative mode of reduction in capital without requiring approval of the Court/CLB (NCLT),
·to improve the earnings per share;
·to improve return on capital, return on net worth and to enhance the long-term shareholder value;
·to provide an additional exit route to shareholders when shares are undervalued or thinly traded;
·to enhance consolidation of stake in the company;
·to prevent unwelcome takeover bids;
·to return surplus cash to shareholders;
·to achieve optimum capital structure;
·to support share price during periods of sluggish market condition;
·to serve the equity more efficiently.

EPS gets improved as can be seen with the following illustration
Particulars
Pre Buy - Back
Post Buy - Back
Profit
100
100
Number of Shares
10
5
EPS
10
20

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 the same 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; Where: Debt is aggregate of secured and unsecured debts owed by the after buy-back, Equity: is aggregate of the paid-up capital and its free reserves:
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; and
g) the buy-back in respect of unlisted shares or other specified securities is in accordance Share Capital and Debentures Rules, 2014.
h)  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:
The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement stating—
a) a full and complete disclosure of all material facts;
b) the necessity for the buy-back;
c)  the class of shares or securities intended to be purchased under the buy-back;
d) the amount to be invested under the buy-back; and
e) the time-limit for completion of buy-back.
As per the rules, following more details is to be included in the Explanatory Statement:
f) the date of the board meeting at which the proposal for buy-back was approved by the board of directors of the company;
g) the number of securities that the company proposes to buy-back;
h) the method to be adopted for the buy-back;
i) the price at which the buy-back of shares or other securities shall be made;
j) the basis of arriving at the buy-back price;
k) the maximum amount to be paid for the buy-back and the sources of funds from which the buy-back would be financed;

l) Shareholding:
 i. 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;
 ii. the aggregate number of equity shares purchased or sold by persons mentioned in sub-clause (i) 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;
 iii. the maximum and minimum price at which purchases and sales referred to in sub-clause (ii) were made along with the relevant date;

m) if the persons mentioned in l(i) intend to tender their shares for buy-back –
 i.   the quantum of shares proposed to be tendered;
ii.  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;

n) 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;

o) a confirmation:
 i. 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- 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 1 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

p) 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 specified in point ‘o’ 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.

(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.

(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.

(10) Return of Buy Back & a Declaration:
A company shall, after the completion of the buy-back under this section, file with the Registrar a return in Form No. SH.11 containing such particulars relating to the buy-back within thirty days of such completion. There shall be annexed to the return, 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 thereunder.

(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.

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) 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.
h) The company shall within seven days of the time specified in sub-rule (7)-
 i. make payment of consideration in cash to those shareholders or security holders whose securities have been accepted; or
 ii. 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.
i) The company shall ensure that—
i. 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;
ii. 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;
iii. 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;
iv. the company shall not withdraw the offer once it has announced the offer to the shareholders;
v. the company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares; and
vi. 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.

Time Schedule Summarised:
Time Taken
Procedure
Starting Day say ‘T’
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.
T + 2
Issue of notice with Explanatory Statement (along with disclosures mentioned below) to all members.
T + 23
Holding EGM and passing special resolution, if required.
T + 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.
Within 15 days from the closure of offer
Verification 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 offer
Open a Special Bank Account with Schedule Bank.
Within 7 days from completion of Verification
Making payment in cash to those shareholders whose offer has been accepted or returns the share certificates to the shareholders forthwith.
Within 7 days from completion of Acceptance
Extinguish and physically destroy the share certificates of shares bought back.
After completion of buy back
File 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

Tax Summarized:
Tax
Company
Shareholder
DDT (Section 115-O)
NO Since here payment is made as per Section 77A of Companies Act and not from accumulated profits.
NA
Additional Tax (Chapter XII-DA)(w.e.f 01.06.2013)
YES 20% of (Consideration received by shareholder – amount received by a company for issue of such shares)*
NA
Capital Gain
NA
No (w.e.f 01.06.2013)
Stamp Duty
NO Shares are cancelled by buy back and therefore are not transferred.
NA

* This tax of 20% is increased by 10% surcharge (if applicable) and EC & SHEC which makes it equivalent to 22.66%. This levy is mandatory irrespective of whether the company is liable to tax or not on its income. The tax shall be deposited with the Government within 14 days from the date of payment of any consideration to the shareholder. The aforesaid taxes are not creditable by any person under the provisions of the Indian income-tax law; and in case of failure to deposit taxes on time, the principal officer or the company:
Shall be deemed to be ‘assessee in default’; and will be subject to simple interest at the rate of 1% of every month or part thereof.

Accounting Treatment:

In case Investment are sold for Buy Back:

Bank…………………………Dr
                To Investment Account
(The difference if any will be credited to Profit on Sale of Investment Account or debited to Loss on Sale of Investment Account which in turn will be transferred to Profit and Loss Account)

In case proceeds of Fresh Issue are issued for Buy Back:

Bank Account……………….……………………Dr
To Debentures/Other Investment Account
To Security Premium Account (if any)

For Buy Back of Shares:

Equity Shareholders Account……..Dr
To Bank Account
(With the amount paid)

For Cancellation of Shares Bought Back:

Equity Share Capital A/c…………………Dr    (Nominal Value)
Free Reserve/Security Premium A/c……..Dr.      (With the excess amount)
To Equity Shareholders A/c (Amount Paid)   (Amount Paid)

If Shares are bought back at a discount:

Equity Share Capital Account……………Dr.
To Equity Shareholders A/c
To Capital Reserve A/c

For transfer of nominal value of shares purchased out of free reserves/Security Premium to Capital Redemption Account:

Free Reserves…………………………….……….Dr
Security Premium A/c………………………….…Dr
To Capital Redemption Reserve Account

For Expenses incurred in Buy Back:

Buy Back Expenses A/c……………..Dr
To Bank

Profit & Loss A/c……..Dr


 To Buy Back Expenses A/c

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This blog is Created by CA Anil Kumar Jain.