Subject – Corporate &

SHARES Information Technology Law

Semester VI, B. Com (Hons.)
Unit 9
MEANING AND NATURE OF A SHARE
- Section 2(84) of the Act defines a share as a share in the share capital of a company, and includes stock
- Halsbury's Laws of England - A share is a right to a specified amount of the share capital of a company,
carrying with it certain rights and liabilities while the company is a going concern and in its winding up.
- A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of
liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered
into by all the shareholders inter se.
- A share is a right to participate in the profits made by a company, while it is a going concern and declares a
dividend and in the assets of company when it is wound up
- A share is not a sum of money but a bundle of rights and liabilities; it is an interest measured by a sum of money.
These rights and liabilities are regulated by the articles of a company.
- Section 44 of the Companies Act provides that a share or other interest of any member in a company is a
movable property transferable in the manner provided by the articles of the company.
- In India, a share is regarded as goods. According to the Sale of Goods Act, 1930, “Goods” means any kind of
movable property other than actionable claim and money, and includes stock and shares.
 KINDS OF SHARES
- Section 43 of the Companies Act, 2013 permits a company limited by shares to issue two classes of shares,
namely:
(a) Equity share capital
(i) With voting rights; or
(ii) With differential rights as to dividend, voting or otherwise in accordance with such rules as may be
prescribed.
(b) Preference Share Capital.
Stock
- Stocks are financial securities that represent part-ownership in one or more companies. Upon buying a company’s
stock, the person become a shareholder of that company.
- The stock certificate serves as proof of ownership and mentions the number of stocks held by that person.
- One may buy stocks of a single company or several companies. There is no limit on the number of stocks that can
be held in a person’s portfolio.
Share
- A share is the smallest denomination of a company’s stock. So, each unit of stock is a share, and each share of
stock is equal to a piece of the company’s ownership.
STOCK VS SHARE: KEY DIFFERENCES
Definition: ‘Stock’ represents the holder’s part-ownership in one or several companies. Meanwhile, ‘share’
refers to a single unit of ownership in a company. For example, if X has invested in stocks, it could mean that
X has a portfolio of shares across different companies. But if X has invested in shares, the next questions
should focus on ‘shares of which company’ or ‘how many shares’.
­ Ownership: When an individual owns shares of several companies, you can say that they own stocks. But
if someone bought shares of a specific company, they only own shares.
­ Denomination: Individuals who own stocks have the option to choose different stocks of different values.
Those who own shares in a specific company can, of course, own multiple shares. But the shares will only
be of the same or equal value.
­ Paid-up value: Stocks are always fully paid-up in nature. However, shares could be either partly or fully-
paid up.
­ Kind of investment: Shares can refer to a large group of financial instruments known as securities. They
can include mutual funds, exchange-traded funds (ETFs), limited partnerships, real estate investment trusts,
etc. But stocks particularly refer to corporate equities and securities traded on a stock exchange.
PREFERENCE SHARES
- These are shares which are preferred over equity shares in payment of dividend
- the preference shareholders are the first to get dividends if the company decides to distribute or pay dividends.
- Preference shares are shares having preferential rights to claim dividends during the lifetime of the company
and to claim repayment of capital on winding up.
- In case of preference shares, the percentage of dividend is fixed i.e. the holders get the fixed dividend before
any dividend is paid to other classes of shareholders except in case of adjustable preference shares
- Preference shares are one important source of hybrid financing because it has some features of equity shares
and some features of debentures.
- Preference shareholders do not enjoy voting rights like their common shareholder counterparts do
- Companies incur higher issuing costs with preferred shares than they do when issuing debt.
- The dividends earned on these shares are significantly higher than ordinary shares.
- Preference shares can be convertible into ordinary shares as well as nonconvertible
The preference shareholders vote only on such resolutions:
1. that directly affect their rights as preference shares
2. During a resolution for the winding-up of the company
3. for the repayment or reduction of its share capital.
4. where the preference dividend is not paid for two years or more, the preference shareholders get voting
right on every resolution placed before the company.
- Voting rights of a preference shareholder, on a poll, shall be in proportion to his share in the paid-up preference
share capital of the company
Advantages of Preference shareholders:
1. The dividend amount paid to them may be calculated at a fixed rate
2. during the winding-up of the company the preference shareholders get a right to be paid, i.e., amount paid
up on preference shares must be paid back before anything is paid to the equity shareholders.
Preference shares can be bifurcated into six kinds, namely,
a. cumulative preference shares
b. non – cumulative preference shares
c. participating preference shares
d. non – participating preference shares
e. redeemable preference shares
f. non – redeemable preference shares.
Cumulative Preference Shares
- Shares having right of dividend even in those years in which it makes no profit are known as cumulative preference
shares.
- In case the companies do not declare dividends for a particular year then they are treated as arrears and are
carried forward to next year.
- When the arrears pertaining to dividend are cumulative in nature and such arrears are cleared before any
dividend payment to equity shareholders then it is said to be as cumulative preference shares.
Non Cumulative Preference Shares
- A non-cumulative preference share does not accumulate any dividend.
- In case the dividend by the company is not paid then they have the right to avail dividends from the profits
earned from the particular year.
- Dividends are paid only from the net profit of each year.
Participating preference shares :
- The shares which are entitled to a fixed preferential dividend are known as Participating preference shares.
- They have a right to participate in the surplus profits along with equity shareholders after dividend at a certain rate
has been paid to equity shareholders.

For example - after 20% dividend has been paid to equity shareholders, the preference shareholders may share
the surplus profits equally with equity shareholders.
- In the event of winding-up - if after paying back both the preference and equity shareholders, there is still some
surplus left, then the participating preference shareholders get additional share in the surplus assets of the company.
- It is pertinent to note that Participating Preference Shareholder’s right to participate shall be provided either in
the MOA or AOA or by virtue of their terms of issue.

Non-participating Preference Shares:

- Preference shares having no right to participate in the surplus profits or in any surplus on liquidation of the company
are referred to as non-participating preference shares.
- Receive only stated dividend and nothing more.
Redeemable Preference Shares :
- Redeemable preference shares refer to those shares where the shareholders can be repaid after an estimated period
of time.
- This act of repayment is referred to as redemption of preference shares.
- Therefore, in cases where the shareholder is issued a redeemable preference share, they are entitled to receive
that amount after the completion of the stipulated period.
- Section 55, Companies Act, 2013 - a company that is limited by shares cannot issue irredeemable preference
shares. Nonetheless, it may only issue redeemable preference shares if authorized by the AOA of the said
company, and are liable to be redeemed within a period that does not go beyond 20 years from the date of
their issue.
- However, subject to certain conditions given in the provisions of the Companies Act and the Rules and Regulations,
a company may issue such preference shares for infrastructure projects for a period exceeding 20 years.
Irredeemable Preference Shares :
- Where the amount cannot be redeemed even after the completion of the stipulated period, such shares will be
referred to as irredeemable preference shares
- These shares can only be redeemed by the company at the time of liquidation or when the company winds up
operations
- referred to as shares that cannot be redeemed during the lifetime of the company.
- Companies in India are not allowed to issue irredeemable preference shares
- irredeemable preference shares are part of equity therefore, any return paid on such shares is treated
as distribution of profits and reported in statement of changes in equity.
Section 55.Issue and redemption of preference shares
- No company limited by shares shall issue any preference shares which are irredeemable
- A company limited by shares may, if so authorised by its articles , issue preference shares which are liable to
be redeemed within a period not exceeding twenty years from the date of their issue subject to such
conditions as may be prescribed:
­ No such shares shall be redeemed except out of the profits of the company which would otherwise be
available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such
redemption;
­ No such shares shall be redeemed unless they are fully paid;
­ Where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such
profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be
called the Capital Redemption Reserve Account
- Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such
shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference
shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the
approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal
to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue
of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been
redeemed
- The capital redemption reserve account may, notwithstanding anything in this section, 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.
- Preference Shares are generally not traded on secondary market but they are one of the best primary market
instrument for investors
- A private limited company or limited company in India can issue preference shares, subject to approval by the
articles of association of the company and the Board of Directors
- As per section 55 of the Act, a company can issue only redeemable preference shares i.e. a company is not
allowed to issue irredeemable preference shares. On this note, it is mandatory for every company issuing
preference shares to redeem them within a period of 20 years from the date of issue
- Preferred stock is often referred to as a hybrid because preferred shares share characteristics of both common
stock and the debt represented by bonds.
- Preference shares carry a high risk because minimum application size is Rs10 Lack
EQUITY SHARES/COMMON SHARES
- The most common kind of shares are equity shares.
- Equity shares are defined as those shares that are not preference shares, this simply means that shares which do
not enjoy any preferential right in the matter of payment of dividend or repayment of capital, are known as equity
shares.
- After the rights of preference shareholders are done, the equity shareholders get their share in the remaining
amount of distributable profits of the company.
- But there may be times when the company may not accrue any profits as dividend to its equity shareholders
even when it has distributable profits. The dividend on equity shares is not fixed and may differ every year
depending on the profits available.
- Equity shareholders of a company limited by shares get a right to vote on every resolution placed before the
company and their voting rights on a poll are in proportion to the share in the paid-up equity share capital of
the company.
Features of Equity Shares
- Equity shareholders have the right to vote on various matters of the company.
- The management of the company is elected by equity shareholders.
- The equity share capital is held permanently by the company and returned only upon winding up.
- Equity shares give the right to the holders to claim dividend on the surplus profits of the company. The rate of
dividend on the equity capital is determined by the management of the company.
- Equity shares are transferable in nature.
- Equity shareholders are the actual owners of the company and they bear the highest risk.
- Dividend payable to equity shareholders is an appropriation of profit.
- Even though equity shares are not repaid until a business closes down, equity shares already issued can be
traded in the secondary capital market. Thus, investors can withdraw funds from a company upon their
discretion. This ensures massive wealth creation through capital appreciation of such shares.
- The liability of equity shareholders is limited to the extent of their investment.
Equity Shares with Differential Rights
- Differential voting rights ("DVR") refer to equity shares holding differential rights as to dividend and/or voting.
- Section 43 enables companies to issue a variety of equity shares with differential rights etc.
- Introduced for the first time in 2000, DVRs are seen as a viable option for raising investments and retaining
control over the company at the same time
- It is like an ordinary equity share which provides fewer voting rights to the shareholders.
- As compared to the ordinary equity shares, DVR shares can have a higher or a lower voting right.
- But as per Indian regulations, companies are not allowed to issue equity shares with higher voting rights, resulting
lower voting rights in DVR shares in India when compared to ordinary shares
- The basic difference between DVR shares and Ordinary shares is with respect to voting rights. Also, DVR shares
can receive higher dividend.
- These shares are listed on stock exchange and are traded the same way as ordinary shares are traded, but
DVR are mostly traded at a discount
- DVRS are those shares in which equity shares are allotted to the shareholders, however the 1 (one) voting right
per share rule is deviated. Hence, either less than 1(one) or nil voting rights per equity shares or more than 1
(one) voting right per share is issued. It is logical to follow that the investor investing through DVRS will
compromise on the voting rights only with the prospect of earning higher rate of dividends.
- DVRS go a long way in the protection of the rights of the minority stakeholders.
- The management of company does not get diluted by increasing number of shareholders.
- The management and control remain in the hands of handful of skilled members and yet the company can
satisfy its ever-increasing capital requirements without much complexity.
- It straightaway affects the structuring of the company in a positive manner.
- DVRS are an ideal investment strategy for those who want to earn more dividends
- The first DVR shares were issue by Tata Motors in 2008 which was later followed up by other companies like
Gujarat NRE Coke, Future Enterprises and Jain Irrigation.
Conditions for the issuance of DVRS in India are enumerated below:
- The company shall have a consistent track record of distributable profit for the last 3 (three) years;
- The company shall have obtained the approval of shareholders in General Meeting by passing ordinary
resolution
- The company shall not have defaulted in filing financial statements and annual returns for the last 3 (three)
financial years immediately preceding the financial year in which it was decided to issue such shares.
- The Company shall not have defaulted in payment of declared dividend to its shareholders or repayment of its
matured deposits.
- The Company shall not have defaulted in redemption of its preference shares/debentures that have become
due for redemption.
- Additionally, the company shall not have defaulted in repayment of any term loan or statutory dues
The following details need to be disclosed by the Board of Directors of the
company in the Board's Report for the financial year in which DVRS issuance
was completed:
­ The total number of DVRS allotted
­ The details of the differential rights relating to voting and dividends
­ The percentage of the shares with differential rights to the total post issue equity share capital with differential
rights issued at any point of time
­ The percentage of voting rights which the DVRS shall carry to the total voting right of the aggregate equity
share capital
­ The price at which such shares have been issued
­ The particulars of promoters, directors or key managerial personnel to whom such shares are issued
­ The change in control, if any, in the company consequent to the issue of equity shares with differential voting
rights
­ The diluted earnings per share pursuant to the issue of each class of shares, calculated in accordance with the
applicable accounting standards
­ The pre and post issue shareholding pattern along with voting rights in the format specified under the Rules
DVR shares are different from ordinary shares in two distinct ways –
1. DVRs offer lower voting rights compared to ordinary shares. These DVR shares are therefore very useful for
companies that want to raise money in the market without diluting effective control of the company.
2. To compensate for the lower voting rights, these DVR shares are paid a dividend premium of 10-20%. This
ideally should make sense for the small and retail shareholders as they normally do not participate in the
voting process. Giving away part of their voting rights for higher dividends is a good ploy for these
shareholders. Additionally, since DVRs have always quoted at a discount of 30-40% in the Indian context,
the higher dividend pay-out makes the DVR a lot more attractive in terms of dividend yields.
SWEAT EQUITY SHARES
- Sweat equity shares refers to equity shares given to the company’s employees on favourable terms, in
recognition of their work.
- Sweat equity shares is one of the modes of making share based payments to employees of the company.
- The issue of sweat equity shares allows the company to retain the employees by rewarding them for their
services.
- Sweat equity shares rewards the beneficiaries by giving them incentives in lieu of their contribution towards the
development of the company.
- Further, Sweat equity shares enables greater employee stake and interest in the growth of an organization as it
encourages the employees to contribute more towards the company in which they feel they have a stake.
- Such security is allotted to the employee (directly or indirectly) either free of cost or at a concessional rate.
- Section 54, Companies Act, 2013 - a company can issue sweat equity shares to its own employees or directors.
Such shares are generally issued at a discount. Such shares might also be issued for consideration other than cash
like for rendering know how or making some Intellectual Property Rights available for the company, etc. All
limitations, restrictions and other provisions that are applicable to equity shares are also applicable to sweat
equity shares.
- Section 2(88) - sweat equity shares mean equity shares issued by a company to its directors or employees at a
discount or for consideration, other than cash for providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.
- According to Explanation to Rule 8(1) of Companies (Share Capital and Debentures) Rules, 2014 –
(i) the expressions ‘‘Employee’’ means-
(a) a permanent employee of the company who has been working in India or outside India, for at least last
one year; or
(b) a director of the company, whether a whole time director or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside
India, or of a holding company of the company;
(ii) the expression ‘Value additions’ means actual or anticipated economic benefits derived or to be derived
by the company from an expert or a professional for providing know-how or making available rights in the
nature of intellectual property rights, by such person to whom sweat equity is being issued for which the
consideration is not paid or included in the normal remuneration payable under the contract of
employment, in the case of an employee
 Employee Stock Option Plan
- Section 2(37), Companies Act, 2013 - employees stock option is the option given to the directors, employees or
officers of the company or of its holding or subsidiary company, the right to purchase or benefit or subscribe for
the shares of the company at a predetermined price on a future date.
- ESOP is a scheme where a company proposes to increase its subscribed share capital by issuing further shares
to its employees at a predetermined rate
- Rule 12(1) of Companies (Share Capital and Debentures) Rules, 2014 states that ESOP can be issued to the
following employees-
­ A permanent employee of the company who is working in India or outside India.
­ A Director of the company, including a whole-time or part-time director but not an independent director.
­ A permanent employee or director of a subsidiary company in India or outside India, or holding company, or an
associate company.
A company cannot issue ESOP to the following employees-
­ An employee who is belonging to the promoter group or is a promoter of the company.
­ A director who either himself or through any body corporate or through his relative holds more than 10% per cent
of the outstanding equity shares (A company's shares outstanding or outstanding shares are the total number of
shares issued and actively held by shareholders, outstanding shares are the shares with the shareholders) of the
company, whether directly or indirectly.
BONUS SHARES
- A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares.
- The issue of bonus shares by a company is a common feature.
- When a company is prosperous and accumulates large distributable profits, it converts these
accumulated profits into capital and divides the capital among the existing members in
proportion to their entitlements.
- Members do not have to pay any amount for such shares. They are given free.
- Issue of bonus shares is a bare machinery for capitalizing undistributed profits.
- The vesting of the rights in the bonus shares takes place when the shares are actually allotted and
not from any earlier date
- Bonus issues are given to shareholders when companies are short of cash and shareholders expect a
regular income.
- Shareholders may sell the bonus shares and meet their liquidity needs.
- Issuing bonus shares does not involve cash flow.
- It increases the company’s share capital but not its net assets.
- Bonus shares are issued according to each shareholder’s stake in the company.
Sources for issue of Bonus shares
- According to section 63(1), a company may issue fully paid-up bonus shares to its members, in any manner
whatsoever, out of—
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account. (Capital redemption reserve account is a type of reserve maintained
by a company limited by shares and as the name suggests, this reserve deals with shares which are
redeemable. The shares which are purported to be redeemed are paid out of the profits of a company.)
ØRule 14 states that the company which has once announced the decision of its Board recommending a bonus issue,
shall not subsequently withdraw the same
Advantages of Issuing Bonus Shares
1. Fund flow is not affected adversely.
2. Market value of the Company’s shares comes down to their nominal value by issue of bonus shares.
3. Market value of the members’ shareholdings increases with the increase in number of shares in the company.
4. Paid-up share capital increases with the issue of bonus shares.
Conditions for issue of Bonus Shares
- In terms of section 63(2), no company shall capitalise its profits or reserves for the purpose of issuing fully
paid-up bonus shares, unless—
(a) it is authorised by its articles;
(b) it has, on the recommendation of the Board, been authorised in the general meeting of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities
issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to
provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;
Pre-emptive Rights under Companies Act 2013
- are any rights where shareholders are offered shares in a company before they are made available to
anyone else.
- They can arise on the allotment, transfer or transmission of shares.
- is a right of existing shareholders in a corporation to purchase newly issued shares before it is offered to
others.
- The right is meant to protect current shareholders from dilution in value or control
- help early investors cut their losses if those new shares are priced lower than the original shares they
bought.
- Common shareholders may be given preemptive rights.
RIGHTS ISSUE
- ‘Right Issue’ can also be defined as the pre-emptive right that a shareholder has in the Company in
preference to an outsider.
- whenever a Company is in requirement of capital, then it shall offer its shares to its existing shareholders first in
proportion to the shares held by them already and if they refuse or renounce the offer, then the Company can
offer it to an outsider.
- A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
- This type of issue gives existing shareholders securities called rights.
- With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future
date.
- The company is giving shareholders a chance to increase their exposure to the stock at a discount price.
- No prospectus is required for 'right issue' to existing members, even if the members have right to renounce
the right to a third person, who may or may not be a member.
Application for Right Issue – Section 62
- A company can issue right shares to its existing shareholders in proportion to their shareholdings by sending them
a letter of offer.
- However, a company needs to fulfil the following conditions for issuing rights shares:
­ A company needs to send a letter of offer to the shareholders specifying the number of shares offered. The shareholders must accept the
offer in a minimum of 15 days and a maximum of 30 days;
­ If the shareholders do not accept the offer within the prescribed period, the same offer stands declined;
­ The letter of offer also includes a right to renounce the shares offered in favour of some other person;
­ After the expiry of the prescribed period or on receipt of an intimation from the shareholder regarding their rejection to the shares offered,
the BOD may dispose of the shares in a manner advantageous to both the company and shareholders.
Conditions of Rights Issue:
1. Notice must specify the number of shares offered, price and time period of rights issue. Minimum time – 15
days, Maximum time – 30 days
2. Unless AOA mentions otherwise, the existing shareholders who are offered shares through rights issue shall
have the right to renounce the shares
3. In case the original shareholder neither accepts nor renounces the shares, it accounts for his rejection which
gives the company a right to dispose off the shares in such a manner NOT disadvantageous either to the
company or the shareholders
Procedure For Rights Issue – Section 62(1)

1. Board Meeting
- Give notice to BOD minimum 7 days prior to BOD meeting, specify agenda.
- Hold meeting, pass resolution for rights issue
- The rights issue does not require the approval of shareholders, and hence the board can proceed towards the
issue.
2. Issue Letter of Offer:
- On the passing of the resolution, the letter of offer is issued to all shareholders
- For shareholders to accept the offer a window period of 15 – 30 days is given
- The offer is considered declined if it is not accepted before the expiry period.
3. File MGT – 14:
- After the passing of board resolution, the company must file the MGT -14 within 30 days of passing of the
Board Resolution. The form MGT 14 is mandatory for a public limited company. A true certified copy of the
Board Resolution needs to be attached to MGT 14.
4. Receive application money - The shareholders must send the accepted application along with application
money.
Procedure For Rights Issue – Section 62(1)
5. Convene the Second Board Meeting:
- The company must convene the second board meeting, the notice of which must be sent 7 days prior to the
board meeting.
- The required quorum must be present, and the resolution for the allotment of shares must be passed.
- On passing the resolution for allotment of shares, the allotment of shares must be done within 60 days of
receiving the application money for the same.
6. File the forms with ROC:
- The company must file the Form PAS -3, within 30 days from the allotment of the shares with the Registrar of
Companies.
- The certified true copy of the Board Resolution and the list of the allottees must be attached to the form.
- Additionally, the MGT – 14 must be filed for both the allotment and issue of shares.
7. Issue of Share Certificates:
- The share certificates must be issued; if the shares are in Demat form, then the company must inform the
depository immediately on allotment of shares.
- If the shares are held in physical form, then the share certificates must be issued within 2 months from the date
of allotment of shares.
- The share certificate must be signed by at least 2 directors. The share certificates must be issued in Form SH -1.
Exceptions of Rights Issue:
(Here shares can be offered directly to new shareholders without offering the same to existing shareholders)
- Shares allotted under ESOP
- Shares issued for consideration other than cash
- Option provided to convert debt instruments into equity shares of the company at a pre specified price
- Government issues orders to convert debts provided by government into equity shares if it is in public interest.
Buy-back of shares as per Companies Act, 2013
- A buyback of shares is a process where a company buys back their own shares that was issued earlier.
- It can be counted as a corporate action event in which a company makes a public announcement for the
buyback offer to get the shares from existing shareholders within a given timeframe.
- The company makes an announcement for an offer price for the buyback that is usually higher than the current
market price.
- Buyback reduces the assets on the balance sheet (cash for example) which leads to increased Return on Assets.
- Also, reduced outstanding shares result in increased Return on Equity thereby resulting in healthy financials for
the company.
Legal provisions of buy back:
- Section 68- empowers a company to purchase their own shares or other securities in few cases
- Section 69 – Accounting treatment of the proceed of Buyback
- Sections 70- imposes restriction on buy back of shares in certain circumstances
- Therefore, these sections of the Companies Act, 2013 read together with the Rule 17 of the Companies (share
capital and debentures) Amendment Rules, 2016 regulates the process of Buyback of shares
Legal conditions for Buyback
1. The shares to be bought back shall be fully paid up.
2. The Buyback may be done by Company’s Free reserves or Securities Premium account, proceeds of issue of any
shares or other specified securities. (Provided that 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)
3. If the shares to be bought back amount to Up to 10% of Paid-up capital + Free Reserves + Securities Premium –
Pass Board Resolution required
- Up to 25% of Paid-up capital + Free Reserves + Securities Premium – Pass Special Resolution
4. The maximum Buyback that can be done in a Financial year is 25%.
5. The Debt Equity ratio post Buyback shall be 2:1. (The government may by order, notify a higher ratio)
6. Sources of Buyback: Tender offer to Existing Shareholders (Promoters can participate) From the Open market
Purchasing securities issued to employees under a scheme of stock option or sweat equity.
 7. Timelines: Buyback shall be completed within 1 year from the date of passing Board Resolution or Special
Resolution as the case may be.
- Where Company completes a Buyback, it shall not make a further issue of the same kind of securities, including
allotment of shares under section 62(1)(a) (i.e Right issue) within 6 months
- No new Buyback shall be done within 1 year from the closure of the preceding offer of buyback if any.
8. No withdrawal of offer is allowed once it is announced to the shareholders.
9. The company shall not issue any shares, including bonus issues from the date of passing resolution till
the date of closure of buyback
10. The company shall not utilize any money borrowed from banks and financial institutions for a buyback.
Buyback Pre-requisites:
1. Articles of Association shall authorize Buyback
2. Check restrictions u/s 70 of the Companies Act, 2013 –
­ no company shall directly or indirectly purchase its own shares or securities through any subsidiary company or
through investment company.
­ if company has committed a default
3. Check the date of the previous Buyback, as more than one buyback cannot be done within one year of the preceding
Buyback.
4. Decide the percentage of shares to be bought back, so accordingly we have to pass Board Resolution or Special
Resolution.
5. Prepare offer letter
6. Decide the Record Date for Share entitlement
7. Decide the offer period of the Buyback
8. Calculation of Buyback Price ( Valuation has to be done in case of Private Company)
9. Calculation of the Buyback needs to be done based on: Audited accounts not older than 6 months from the date of
the offer document Or Unaudited accounts not older than 6 months from the offer document are subject to limited review
by the Auditor of the Company.
Buyback Procedure:
1. Convene a meeting of the board of directors and pass a resolution for the proposal of buyback if
the % of the buyback is less than 10% Or If the % of the buyback is up to 25% pass the resolution for
convening an Extraordinary general meeting and pass a special resolution in the meeting. As per
section 110 read with Rule 22(16)(g), consent of shareholders can also be obtained by the means of
a Postal ballot
2. File MGT-14 within 30 days of passing of Board Resolution/ special resolution as the case may be.
3. After the passing of the Board Resolution/ special resolution but before the Buyback starts, file with
the ROC SH-8 i.e Letter of Offer SH-9 i.e Declaration of Solvency.
4. Immediately but not later than 21 days after the filing of SH-8 with ROC, dispatch a letter of offer
to the shareholders.
5. An offer shall be open for a minimum of 15 days and maximum 30days from the date of dispatch
of an offer letter
6. On closing of the offer period, immediately open a separate bank account and deposit the entire
sum due
7. Within 15 days of the end of the offer period, complete the verification of the offer received
8. Within 7 days of verification, Make a payment of consideration to shareholders Or Return share
certificates of shareholders, whose shares are not accepted Shares lodged shall be deemed to be
accepted unless a communication of rejection is made within 21 days from the date of closure of the
offer
9. Within 7 days of the last day of completion of buyback, extinguish or physically destroy the shares
bought back
Restrictions on Buy Back:
- Section 70 - No company shall directly or indirectly purchase its shares Through Subsidiary companies or An
investment company or group of investment companies If the company has not complied with provisions of Sec
92, annual return Sec 123, declaration of dividend Sec 127, punishment for failure to distribute dividend Sec
129, financial statement.
- If there is a default made by the company in Repayment of deposits accepted, interest payment thereon
Redemption of preference shares or debentures Payment of dividend to any shareholder Repayment of any
term loan or interest payable to a financial institution or banking company
THANK YOU Ruchi Bharda Jain