Company Law Blog

TOPIC: BUY BACK OF SHARES
INTRODUCTION:
Buy-back is that the process by which an organization Company buy-back its Shares from the
present Shareholders usually at a price above the value. When the Company buy-back the
Shares, the quantity of shares outstanding with in the market reduces/falls. Its the choice
available to shareholders to exit from the corporate business. Its governed by section 68 of
the Companies Act, 2013.
Competitive forces unleashing the liberalization policies have made corporate restructuring a
necessity for survival & growth. Operational, financial, and managerial strategies are
employed to keep up a competitive edge and turn around a sickening performance. Financial
restructuring involves either internal or external restructuring (i.e. Mergers and Acquisitions).
MEANING:
“A Procedure which enables the corporate to travel back to a holder of its shares (or)
specified securities and offer to the purchase from them the shares/specified securities that
they hold.”
COMPARATIVE ANALYSIS OF THE COMPANIES ACT, 1956 AND THE COMPANIES

ACT, 2013
1. The 1956 Act that clearly requires that every buy-back should be completed within 12
months from date of passing the special resolution or the Board resolution as the case may be.
The 2013 Act replaces the time limit of 12 months or with a limit of 1 year.
2. Penalties for violation of section 68 of the 2013 Act are a lot heavier than penalties for
violation of section 77A of the 1956 Act.
Share Buy-back may be a financial tool for financial re-engineering. It is described as a
procedure that enables a company to purchase shares from shareholders. The rationale behind
the buy-back of shares is to boost demand by reducing supply, which theory should push the
price up. The repurchase of shares reduces the no. of shareholders, which in turn enhances the
earnings per share (EPS), thus improving investors’ sentiment.
Reasons for Buy-back:-
To improve Earning per Share;
To use the mode of ideal cash;
To administer confidence to Shareholders at the time of price falling
To extend the promoter's shareholding to reduce the chances of the takeover
To boost return on capital, and the return on net worth
To return the excess cash to Shareholder.
Modes of Buy-back:
A Company may be to buy back its shares or the other specified Securities by any following
methods - From the prevailing shareholders or other specified holders on a proportionate
basis through the tender offer:-
From the open market through the following process:-
1. Book-Building process
2. Stock Exchange Provides that no buy-back for every fifteen percent or more of the paid-up
capital & reserves of the Company can made only through the open market.
Sources of Buy-back:-
A Company should purchase its own shares and other specified securities out of its free
reserve; or the securities premium account; or the proceeds of the problem of any shares or
other specified securities.
A Company can purchase its own shares and other specified securities out of
• Its free reserve; or
• The securities premium account; or
• The proceeds of the difficulty of any shares or other specified securities. However, Buy-
back of any reasonably shares or other specified securities can not be made out of the
proceeds of the earlier issue of same kind of shares or same kind of other specified securities.
Conditions of Buy-back
As per Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are-
• Articles must authorise otherwise Amend the Article by passing Special Resolution in
Generally Meeting.
• For buy-back we need to pass Special Resolution in General Meeting, but if the buy-back is
upto 10%, then a Resolution at Board Meeting need to be passed.
• Maximum number of Shares that can be brought back in a financial year is twenty-five
percent of its paid up share capital.
• Maximum amount of Shares that can be brought back in a financial year is twenty-five
percent of paid up share capital and free reserves (where paid up share capital includes equity
share capital and preference share capital; & free reserves includes securities premium).
• Post buy-back debt-equity ratio cannot exceed 2:1.
• Only fully paid up shares will be brought back in a financial year.
• Company must declare its insolvency in Form SH-9 to Register of Companies, signed by
Atleast 2 Directors out of which one must be a Managing Director if any.
• The notice of the meeting for which the Special Resolution is proposed to be passed shall be
accompanied by a explanatory statement stating
1. A full and complete disclosure of all the material facts;
2. The need of buy-back;
3. The category of shares intended to be bought back;
4. The amount invested under the buyback;
5. The time limit for completion of buyback;
• The Company must maintain a Register of buy-back in Form SH-10.
• Now, Submit Return of buy-back in Form SH-11 Annexed with Compliance Certificate in
Form SH-15, Signed by 2 Directors out of which One must be a Managing Director, if any.
• A Company should extinguish and physically destroy shares bought back within 7 days of
completion of the buy-back.
• Observe 6 months cooling period i.e. no fresh issue of share is allowed.
• No offer of buy-back should be made by a company within a period of one year from the
date of the closure of the preceding offer of buy-back.
• The buy-back should be completed within a period of one year from the date of passing of
Special Resolution or Board Resolution, as the case may be.
Transfer of certain sum to Capital Redemption Reserve Account (CRR)
According to section 69 of the Companies Act, 2013, where a Company brought back shares
out of free reserves or out of the securities premium account, then an capable the nominal
value of the shares have to be transferred to the Capital Redemption Reserve Account. Such
transfer detailed to be disclosed in the Balance sheet.
Restrictions on Buy-back of Securities in certain circumstances
According to section 70 of the Companies Act, 2013, A Company should not buy-back its
securities or other specified securities, directly or indirectly –
• Through any subsidiary including its own subsidiaries;
• Through investment or group of investment Companies; or
• When Company has defaulted in repayment of deposits or interest payable thereon, or in

redemption of debentures or preference shares or repayment of any term loan. The
prohibition is lifted if the default has been remedied and a period of three has elapsed after
such default ceased to subsist.
• When Company has defaulted in filing of Annual Return, declaration of dividend &
financial Statement.
Conclusion:
Thus, it may be concluded that Indian companies announce buyback in response to

undervaluation position of their stocks in capital markets and that they are well supported by
availability of sufficient cash balance available for the same. Thus, on one hand, premium
offered in terms of buyback prices announced offers an exit opportunity for shareholders and
on the other hand, it offers an opportunity for the company to use its liquidity position to
extinguish its shares today and issue them again in future. It prevents takeovers and mergers
thus preventing monopolization and aiding the survival of consumer sovereignty. On the
other hand Buy back can help in manipulating the records in flatting share prices Price-
Earning Ratio, Earning per share, thus misleading shareholders. Thus, knowledge of the
impacts of Buy-back becomes vital and each shareholder must reconsider all his views before
purchasing the shares of companies involved within the process of Buyback.
FOOT NOTES:
1.https://www.icsi.edu/media/filer_public/4e/f1/4ef1d2d3-2122-4baf-b7b7-1de3d6d13277/
article_on_buyback.pdf
2. https://in.linkedin.com/in/rashida-yamani-17658ba4
3. https://www.legalserviceindia.com/legal/article-6063-buy-back-of-share-company-law-
2013.html
4. https://www.taxmann.com/post/blog/what-is-a-share-buyback/

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TOPIC: BUY BACK OF SHARES

COMPARATIVE ANALYSIS OF THE COMPANIES ACT, 1956 AND THE COMPANIES

Reasons for Buy-back:-

To improve Earning per Share;

To use the mode of ideal cash;

To administer confidence to Shareholders at the time of price falling

To extend the promoter's shareholding to reduce the chances of the takeover

To boost return on capital, and the return on net worth

To return the excess cash to Shareholder.

From the open market through the following process:-

• Its free reserve; or

• The securities premium account; or

• Post buy-back debt-equity ratio cannot exceed 2:1.

• Only fully paid up shares will be brought back in a financial year.

1. A full and complete disclosure of all the material facts;

2. The need of buy-back;

3. The category of shares intended to be bought back;

4. The amount invested under the buyback;

5. The time limit for completion of buyback;

• The Company must maintain a Register of buy-back in Form SH-10.

• Observe 6 months cooling period i.e. no fresh issue of share is allowed.

Transfer of certain sum to Capital Redemption Reserve Account (CRR)

• Through any subsidiary including its own subsidiaries;

• Through investment or group of investment Companies; or

• When Company has defaulted in repayment of deposits or interest payable thereon, or in

Thus, it may be concluded that Indian companies announce buyback in response to

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