Introduction:
Company shares buybacks have emerged as a pivotal strategy in corporate finance, offering companies a flexible mechanism to deploy excess capital and optimize their capital structure. In this definitive guide, we explore every facet of company share buybacks, from the legal framework to the intricate process, benefits, implications for stakeholders, and regulatory considerations.
1. Legal Framework:
Under the provisions of Sections 68 to 70 of the Companies Act, companies can engage in share buybacks subject to specific conditions and regulatory oversight.
Section 68: Empowers companies to buy back their own shares or specified securities under certain circumstances, including authorization by articles, shareholder resolutions, and compliance with debt capital ratios.
Conditions under which a company can buy back its shares or specified securities.
Authorization requirements, including special resolutions and board approvals.
Restrictions on the source of funds for buybacks.
Disclosure and reporting obligations.
Section 69: Mandates the transfer of funds equivalent to the nominal value of repurchased shares to the capital redemption reserve account, allowing for the subsequent issuance of bonus shares.
Transfer of Certain Sums to Capital Redemption Reserve Account
Requirement to transfer a sum equal to the nominal value of shares bought back to the capital redemption reserve account.
Permissible use of the capital redemption reserve account, such as issuing bonus shares.
Section 70: Imposes prohibitions on buybacks through subsidiaries, investment companies, or in case of defaults in repayment obligations, ensuring regulatory compliance and financial stability.
Prohibition for BuyBack in Certain Circumstances
Restrictions on buybacks through subsidiaries or investment companies.
Conditions related to defaults in repayment of deposits, interest, dividends, or loans.
2. Benefits of Company Share Buybacks:
Company shares buybacks offer several compelling advantages for both the company and its shareholders:
Enhanced Shareholder Value: By reducing the number of outstanding shares, buybacks can increase earnings per share (EPS) and return on equity (ROE), thereby enhancing shareholder value.
Optimized Capital Structure: Buybacks allow companies to utilize excess cash or idle resources to optimize their capital structure, striking a balance between debt and equity financing.
Market Signal: Share buybacks can signal management's confidence in the company's future prospects, bolstering investor sentiment and potentially attracting new investors.
3. Impact on Company, Shareholders, and Investors:
The ramifications of share buybacks extend beyond financial metrics, impacting various stakeholders:
Company Impact: Buybacks can improve financial ratios, such as leverage and liquidity, and mitigate dilution from employee stock options. However, excessive buybacks may divert funds from productive investments, potentially hindering longterm growth.
Shareholder Impact: Shareholders benefit from increased EPS and potential capital gains resulting from share price appreciation. However, they may also experience reduced liquidity and diminished voting power due to the decreased number of outstanding shares.
Investor Perception: Investors closely monitor buyback activities as they provide insights into management's capital allocation priorities and the company's financial health. Prudent buybacks executed at opportune times can enhance investor confidence.
Source of Buy Back | a company may purchase its own shares or other specified securities
(a) its free reserves; (b) the securities premium account; or (c) the proceeds of the issue of any shares or other specified securities:
However, no buy-back of any kind of shares can be made out of the proceeds of an earlier issue of the same kind of shares
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Method of Buy Back | Buyback of shares from existing shareholders on a proportionate basis
Buyback of shares from an open market
Buy-back of securities issued to employees under ESOP or sweat equity |
Prohibition of Buy Back
Under Section 70 of the Companies Act, 2013, stringent restrictions are placed on companies with regards to the repurchase of their own shares or specified securities. These regulations serve as a protective measure, aimed at preserving the financial stability and integrity of the company. The following conditions outline the circumstances under which companies are prohibited from engaging in buyback activities:
Prohibition through Subsidiary Companies:
Companies are barred from conducting buybacks through any subsidiary entity, including their own subsidiary companies. This provision aims to prevent potential conflicts of interest and maintain transparency in corporate transactions.
Prohibition through Investment Companies:
Similarly, companies are prohibited from executing buybacks through any investment company or group of investment companies. This restriction aims to prevent undue influence or manipulation of market dynamics through intermediary entities.
Default on Financial Obligations:
Companies are forbidden from initiating buybacks if they are in default regarding various financial obligations. This includes defaults in the repayment of deposits, interest payments, redemption of debentures or preference shares, dividend payments to shareholders, or repayment of term loans or interest to financial institutions or banking companies.
Conditions of Buy Back
Authorization by Articles of the Company (Section 68(2)(a)):
The buyback must be duly permitted by the Articles of Association of the Company.
Any restrictions or provisions related to buyback must be in compliance with the Articles.
1.Shareholder Approval through Special Resolution (Section 68(2)(b) & (c)):
Shareholders' permission for buyback must be obtained through a special resolution passed in a General Meeting.
Exception: Buyback of up to 10% of the Company’s PaidUp Equity Capital and Free Reserves may be approved by the Board via a Board Resolution, without requiring shareholder approval through a special resolution.
2. Maximum Limit of BuyBack:
The aggregate value of the shares bought back should not exceed 25% of the paid up Share Capital and Free Reserves of the Company.
3.DebtEquity Ratio Post BuyBack (Section 68(2)(d)):
Following the buyback, the ratio of the aggregate of debts (secured and unsecured) owed by the Company should not be more than twice the PaidUp Capital and its Free Reserves.
4.Full PaidUp Status (Section 68(2)(e)):
Shares or other specified securities bought back must be fully paid up by the shareholders.
5. Completion Period (Section 68(4)):
Every buyback transaction must be completed within 1 year from the date of passing the Special Resolution or Board Resolution, as applicable.
6. Minimum Gap Between BuyBack Offers (Section 68(2)(g)):
There must be a minimum gap of 1 year between two successive buyback offers conducted by the Company.
7. Extinguishment of Shares (Section 68(7)):
The shares or other specified securities bought back must be extinguished or physically destroyed within 7 days of the last date of completion of the buyback.
8. Waiting Period for New BuyBack Offers (Section 68):
After completing one buyback offer, the Company must wait for at least 1 year before initiating another buyback offer.
9. Post BuyBack Restrictions
on Issuance of Shares or Other Specified Securities (Section 68(8)): The company is prohibited from issuing the same kind of shares for the prescribed periods.
Duration: The company is prohibited from issuing the same kind of shares or specified securities for 6 months after completing a buyback.
Exceptions:
Bonus Shares: Issuance of bonus shares to shareholders is permissible during the restricted period.
ESOPs: Shares can be issued to employees under ESOP schemes despite the restriction.
Sweat Equity: Issuance of shares to employees as part of sweat equity arrangements is allowed during this period.
Conversion: The company may convert debts or preference shares into equity despite the restriction
StepbyStep Guide to BuyBack Procedure for Private Companies
Buyback of shares or specified securities by private companies involves a systematic process regulated by the Companies Act, of 2013. Below is a detailed step-by-step procedure for executing a buyback:
1. Authorization by the Articles (Section 68(2)):
Ensure the company's Articles of Association authorize the buyback.
If not authorized, amend the Articles in accordance with the Companies Act, 2013.
2. Convene Board Meeting (Section 68(2)):
If the buyback is 10% or less of the total PaidUp Equity Share Capital and Free Reserves, the Board of Directors can authorize it through a Board Resolution.
Follow the provisions of the Companies Act, 2013 and Secretarial Standard on Meeting of Board of Directors (SS1) while calling the Board Meeting.
3. Convene General Meeting (Section 68(2)):
For buyback exceeding the 10% threshold, obtain approval from members through a Special Resolution in a General Meeting.
Adhere to the provisions of the Companies Act, 2013 and Secretarial Standard on General Meetings (SS2) while convening the General Meeting.
4. File Form MGT14 with Registrar:
Submit a copy of the Board Resolution and Special Resolution passed in the Board and General Meetings, respectively, in Form No. MGT14 to the Registrar of Companies (ROC) within 30 days of passing such resolutions.
5. File Letter of Offer (Rule 17(2)):
If authorized by a Special Resolution, file a Letter of Offer in Form No. SH8 with the ROC along with stipulated fees and required documents.
Mandatory documents include a declaration by auditors and a copy of the Board Resolution authorizing buyback.
6. File Declaration of Solvency (Section 68(6) and Rule 17(3)):
Submit a declaration of solvency in Form No. SH9 along with the Letter of Offer.
The declaration, signed by at least 2 directors, affirms the company's solvency for the next year.
7. Dispatch of Letter of Offer (Rule 17(4)):
Dispatch the Letter of Offer to shareholders or security holders within 20 days from the filing date with the ROC.
8. Offer Period (Rule 17(5)):
Keep the buyback offer open for at least 15 days and not more than 30 days from the dispatch date of the Letter of Offer.
Shorter offer periods can be agreed upon by all members of the company.
9. Verification of Offers (Rule 17(7)):
Complete verification of received offers within 15 days from the offer closure date.
Shares or securities lodged are considered accepted unless a rejection communication is made within 21 days from the offer closure date.
10. Open a Separate Bank Account (Rule 17(8)):
Open a separate bank account immediately after the offer closure to hold funds for the buyback.
11. Extinguishment of Shares/Securities (Section 68(7)):
Destroy the boughtback shares or securities within 7 days of the buyback completion.
12. Closure of Offer (Rule 17(9)):
Within 7 days of the specified time, make payments to accepted shareholders or return securities to those not accepted.
13. File Form SH11 (Section 68(10) and Rule 17(13)):
File a return in Form No. SH11 with the Registrar within 30 days of completing the buyback, along with required documents.
14. Maintain the Statutory Register (Section 68(9) and Rule 17(12)):
Maintain a register of boughtback shares or securities in Form No. SH10 at the registered office.
Conclusion:
To wrap it up, company share buybacks, regulated by the Companies Act, 2013, are a strategic tool for improving capital structure and pleasing shareholders. While they signal confidence to investors, careful execution and balance with other investments are key for longterm success.
FAQ:
Is there a limit to the amount of shares a company can buy back?
Yes, the aggregate value of the shares bought back should not exceed 25% of the Paid-Up Share Capital and Free Reserves of the Company. This limitation is in place to ensure responsible capital management and prevent excessive buyback activities.
What are the consequences of defaulting on financial obligations for conducting a buy-back?
If a company defaults on financial obligations such as repayment of deposits, interest payments, or dividend payments to shareholders, it is prohibited from conducting a buy-back until the default is rectified. Additionally, a waiting period of three years is required after rectification before a buy-back can be initiated.
Can a company issue new shares immediately after completing a buy-back?
After completing a buy-back, the company is prohibited from issuing the same kind of shares or other specified securities for a period of six months, except in specific circumstances such as issuing bonus shares, ESOPs, sweat equity, or converting debts/preference shares into equity. This restriction aims to maintain the integrity of the market and prevent market manipulation.
Is there any reporting requirement after completing a buy-back?
Yes, the company must file a return in Form No. SH-11 with the Registrar of Companies within 30 days of completing the buy-back. This return includes details such as the description of shares bought back, particulars of shareholders before buy-back, and copies of resolutions authorizing the buy-back.
What is the role of the Registrar of Companies (ROC) in the buy-back process?
The ROC plays a crucial role in overseeing the buy-back process and ensuring compliance with regulatory requirements. Companies are required to file various forms and documents with the ROC at different stages of the buy-back process, such as Form MGT-14, Form SH-8, and Form SH-11. This helps maintain transparency and accountability in buy-back transactions.
Can a company initiate a buyback offer without obtaining shareholder approval?
Yes, a company can initiate a buyback offer without obtaining shareholder approval if the buyback does not exceed 10% of the company’s Paid-Up Equity Capital and Free Reserves. In such cases, approval from the board of directors via a board resolution is sufficient.
What are the implications of conducting a buyback through subsidiary companies? Conducting a buyback through subsidiary companies is prohibited under certain circumstances, such as default on financial obligations. This prohibition aims to prevent potential conflicts of interest and maintain the financial stability of the company and its subsidiaries.
What are the consequences of failing to adhere to the timeline for completing a buyback? Failure to complete a buyback within the specified timeline can result in regulatory non-compliance, leading to penalties and legal consequences for the company and its directors. It is essential to meticulously follow the timeline to avoid such issues.
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