Buyback of Shares means that company which has issued shares repurchase the same from either open market or by providing an offer to existing shareholders to buy back at fixed price.
The buyback is normally done when the company thinks that shares are undervalued in the market and therefore, by buyback, company absorbs the repurchased stocks and no. of stocks in the market get reduced.
It is also one of the methods of giving funds to shareholders instead of giving dividends.
Conditions to be fulfilled before buyback of Shares:
- First of all, AOA should provide authorization to the Company to Buy Back its own share.
- Maximum limit: Buyback can be done only up to 25% or less than its paid-up share capital & free reserves (In a case of Equity Shares – 25% of paid up equity share capital only.
- Mode of Buy Back: It can be done either from:
- Existing shareholder or
- Open Market or
- Employees to whom shares are offered through ESOP
- How to Buy Back can be done: It can be done either through
- Free Reserves
- Security Premium
- Out of proceeds of fresh issue of shares ( not out of earlier issued same kind of securities)
- After buyback, debt-equity ratio should not exceed 2:1 (Secured and unsecured debts after buy back shall not be more than twice of paid up capital & free reserves)
- All the shares shall be fully paid up.
- In the case of BuyBack of Shares is only up to 10% of the total paid-up Equity capital and free Reserves, an only ordinary resolution will be required.
- In the case of Buy Back is up to 25% of the total paid-up capital and free Reserves, Special Resolution is required.
- Minimum time Gap between two buybacks should be one year.
- Within 6 months from date of completion of buy back, company shall not issue fresh shares (Except Bonus shares/conversion of warrants/stock option/sweat equity/conversion of preference shares/conversion of debentures) u/s 62(1)
- Once the offer to buyback has been announced to shareholders, same cannot be withdrawn.
- Company shall not utilize any money borrowed from banks/ financial institutions for buy back
What the Prohibitions are for buyback of Shares:
Under following conditions, buy back is prohibited:
- The company cannot directly or indirectly purchase its own shares or other specified securities through any Wholly owned subsidiary company including its own subsidiary companies.
- The company cannot directly or indirectly purchase its own shares or other specified securities through any investment company or group of investment companies.
- In case company has made any default in
- 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.
- Noncompliance of Sec 92 (Annual return), 123 (Declaration of dividend), 127 (Punishment for the failure of distribution o dividend) and Sec 129 (Financial statement).
Steps to be taken for Buy Back
- Notice of Board meeting has to be given – Minimum 7 days’ notice before the Board meeting.
- In the board meeting, pass resolution for buy back, fix date for EGM, approve notice for calling EGM with explanatory statements
- Send notice of EGM – Give minimum 21 days clear notice before date of EGM
- In EGM, pass special resolution
- Within 30 days of EGM, file form MGT14 with ROC
- After passing a special resolution, letter of offer in form SH-8 shall be filed with ROC which shall be signed by Min 2 directors one of whom shall be MD if any.
- Along with Form SH-8, a declaration of solvency in Form SH-9, signed by 2 directors, 1 of whom shall be MD if any should be filed ROC and (in case of listed companies)
- Within 20 days from the date of filing SH-8 with ROC, letter of offer should be dispatched to shareholders. The offer shall remain open for Min-15 days to a max- 30 days from the date of dispatch.
- Within 15 days from the date of closure of the 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.
- Separate Bank account should be opened after the closure of the offer.
- In the bank account, deposit the total amount payable as consideration for the shares offered for buy back.
- Within 7 days of verification/ acceptance, consideration should be paid in cash.
- Within 7 days from the last date of completion of Buy-Back, shares/ securities bought back should be physically destroyed
- After completion of buy back, Register of shares/securities bought back in form SH-10 has to be maintained.
- Within 30 days of Completion of Buy-Back, the return of Buy-Back with ROC in form SH-11 shall be filed.