What are the provisions of post Buyback of shares?
Introduction : -
Buy-Back is the method in which a Company approaches its existing shareholders for repurchasing or buying-back the shares held by them. In India, Buy-Back is gradually gaining recognition and is being resorted to by many corporates.
The introduction of Buy-Back in India has been a breakthrough since it has given the corporates a simplified method of capital restructuring. The companies can now utilize their capital way more efficiently.
Buy-Back gives a company an option to invest in itself. The Company’s outstanding shares in the market are reduced, leading to an increase in the proportion of shares owned by an investor. It also helps in giving an excellent return to investors when the company assumes its shares are getting undervalued.
With the help of buy-back, a company can raise its stock price if the same P/E Ratio (Price-Earnings ratio) is maintained.
Buyback of Shares - An Overview
Buy-Back of shares gets regulated under the provision of Section 68 of the Companies Act, 2013. This section replaced section 77A of the Companies Act, 1956, which dealt with the power of a company to repurchase its shares.
The company, whether it is a Private or a Public one, is allowed to repurchase its shares out of the following sources as per Section 68(1):
- Free Reserve
- Securities Premium Account
- Proceeds of any other shares or securities.
Note: Buy-Back of any share or security cannot be made from the proceeds of an earlier issue of shares of the same kind.
Earnings per share (EPS) of stock get increased with a decrease in the Price Earnings Ratio (P/E) ratio. Also, the stock prices of the company increase when the company repurchases its shares.
Share repurchase depicts a right image of the company in front of the investors as it demonstrates sufficient fund availability with the company for emergencies and the fact that it can handle a financial crisis.
Methods of Buyback of Shares
There are two ways to buyback the shares:
a) Shareholders are presented with the tender offer to submit or bid the tender of either all or any proportion of their shareholding in a given time frame at a current market price on premium. Premium is an amount of compensation for giving or tendering their shares to the company instead of holding the same.
b) The company can buy-back its shares through the open market over some time or may even conduct an outlined share repurchase program for repurchasing its shares over a regular period.
Note: A company can arrange the fund for buy-back by taking debt, with cash in hand or even with its cash flow operations.
Mandatory Conditions for Buyback
Following are the conditions as per Section 77A (2), which are to be adhered to by the company willing to buy-back its shares:
a) Buy-back has to be authorized in its Article. If the Article of the company doesn’t authorize the same, it should be amended before the buy-back.
b) The company has to take authorization from its shareholders by passing the Special Resolution in General Meeting of members.
c) Provisions of authorization through special resolution is not required in case the company’s buy-back is not exceeding 10% of its paid-up equity and free reserves and it has passed the Board resolution for authorization of such buy-back.
d) The company has to complete the procedure of buy-back of its shares within one year from the date of passing a special resolution or board resolution (as the case may be) for authorizing the buy-back.
e) The amount of buy-back in any financial year shall not exceed 25% of the aggregate of its paid-up equity capital and free reserves.
f) The company shall extinguish securities to be bought back within 7 days of completion of buyback.
g) The ratio of debt to equity capital plus free reserves after buy-back cannot exceed 2:1.
h) Buy-back can be done only of fully paid shares. The partly paid-up shares qualify for the buyback.
i) In case the company repurchases its share through the free reserves, it has to transfer a sum equal to the nominal value of shares to be bought back in a separate account known as Capital Redemption Reserve Account.
j) In the case of Listed Companies, a declaration of solvency and an affidavit in the prescribed format has to be filed. This has to be signed by at least 2 directors declaring that the company has made a full inquiry into its affairs and that they are capable of meeting the obligations and liabilities.
Restrictions on BuyBack of Shares
Following are the restrictive conditions under Section 77(B) on buy-back of shares:
a) No company is allowed to repurchase its share through its subsidiary.
b) No company is allowed to buy-back from investment or group of Investment Company.
c) Company is prohibited to buy back its shares if it defaults in any of the following:
- Repayment of deposit
- Payment of interest on deposit
- Redemption of debentures
- Redemption of redeemable preference shares
- Payment of dividend
- Repayment of term loan taken from any bank or financial institution.
- Payment of interest on the term loan.
d) In case the company fails to comply with the provisions of filing of annual return, distribution of dividends, and the form and content of the balance sheet and P&L account.
e) The company cannot make a new offer for buyback within a year from the date of the last buy-back.
f) In case the company completes the buyback of shares or securities, it shall not make a further issue of the same kind of shares within 6 months.
Read Also : —
- Buyback Tax: Everything you Need to Know About It
- Advantages and Disadvantages of Public Issue — A Complete Guide
- How Preferential Allotment can Increase your Profit?
Liberalization in Buyback through an order of Finance Minister
Union Cabinet has approved the proposal of the Finance Minister for relaxing the norms of buyback, and an amendment bill was passed in both the houses of Parliament for liberalizing the methods of buyback. The government has provided following relaxations for buy-back of shares:
● Prohibition on the new issue of shares for a period of 24 months after completing the buyback has been reduced to 12 months.
● Companies are now allowed to buy-back up to 10% of their paid-up equity and free reserves without seeking any authorization by passing a special resolution in the general meeting of members.
● Buy-back of the shares can be done once a year by the approval of directors only through board resolution passed in a duly conducted board meeting.
Guidelines for the Post Buyback of shares
Following are the guidelines to be followed by the company after completing the buy-back of shares:
● The company shall extinguish its shares and securities that are repurchased within 7 days of buy-back.
● The company cannot make a further fresh issue of shares of a similar kind within 6 months of completion of buy-back except by way of:
✔ Bonus issue
✔ Stock option scheme
✔ Sweat equity
✔ Conversion of convertible preference shares or debentures into equity shares.
● The company has to maintain the register after completing the buy-back containing the details such as consideration paid for securities, date of physically destroying of securities, date of cancellation of shares, etc.
● The company has to file a return with SEBI and ROC within 30 days of completion of such buy-back. The unlisted companies need not file a return with SEBI.
● In case a company defaults in complying with any rules or regulations of buy-back, the company or any officer in default shall be liable for a fine up to INR 50,000 and/or imprisonment for a term of 2 years.
Advantages of Buyback
Following are the various advantages of buyback:
● Buy-back is beneficial for shareholders as it reduces the overall holding of shares with an increase in Earnings per Share.
● The company spends the cash to buy back its shares that reduce the cash in the balance sheet with the reduction of the same amount on the liability side of the balance sheet under the head shareholder’s equity.
● Return on assets and return on equity increases after the buyback.
● It is one of the simplified methods of restructuring the capital with no prior approval of NCLT.
● In case when the stocks are undervalued in the market, it provides a great exit opportunity to the shareholders.
Conclusion
Buy-Back of Shares has been advantageous for the companies in India as they now have another method of restructuring their capital and controlling the overall shareholding of the company. The procedure is not too complex due to which it is in high demand among Indian corporate. Nevertheless, some mandatory procedures have to be abided by the companies to undertake buy-back.
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