Buying back shares is to buy its own outstanding shares to prevent the number of shares available in the open market or Buying back by a company of its shares from an investor by a fixed agreement who put venture capital investment at the time of formation of the company.
Purpose of Buy-back –
- To increase shareholders value.
- EPS will increase
- EPS x P/E Ratio =Market Price
- To act as a corporate defence mechanism i.e. to prevent hostile takeover.
- To provide an exit route to dissenting shareholders.
- To return surplus cash to shareholders.
Sources of Buy-back –
- Free reserve
- Securities premium account
- Proceeds of issue of any shares but not out of proceeds of some kind of shares
- Other specified securities (ESOPs)
Methods of Buy-back –
- Tender Offer: From existing shareholders on a particular basis i.e. Directly & at a fixed price
- Open market : From open stock market Indirectly from existing shareholders Companies refer this route the most as a price cap is fixed for any buy back
- From ESOP issued to employees
Conditions to be fulfilled before announcing Buy-back
- Must be authorized by AOA.
- Up to 10% of total paid up equity capital and free reserves – Buy-back can be announced by BOD by passing a Board Resolution only.
iii. Beyond 10% but up to 25% of the total paid up equity capital & free reserves – Buy-back can be announced after passing a Special Resolution in General Meeting.
- However buy-back of equity shares in any financial year shall not exceed 25% of total paid up equity capital.
- Ratio of debt to equity after buy-back shall not exceed 2:1.
- Shares shall be fully paid up.
vii. Listed companies – SEBI Regulations, Other Companies – CG Rules
viii. Buy-back to be completed within 12 months from the date of passing Special Resolution.
- No buyback shall be made within 1 year from the date of closure of the proceedings of Buyback.
- BOD shall file with ROC & SEBI (for listed companies) – a declaration of solvency duly signed by at least 2 directors of which one shall be MD.
“BOD has made full enquiry into affairs of the company and are of the opinion that the company is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of declaration.”
Conditions to be complied after Buy-back is completed
- Extinguishment of securities – It shall extinguish & physically destroy shares / securities brought back within 7 days of the last date of completion of Buy-back.
- Cooling period – Company shall not make further issue of the same kind of shares including right shares within a period of 6 months except –
- Bonus issue
- Conversion of warrants
- Sweat equity
- Conversion of preference shares / debentures.
- Register of Buy-back – It shall maintain a register of securities so bought –
- Number of securities Buy-back
- Consideration paid
- Date of cancellation of securities
- Date of extinguishment
- other particulars as may be prescribed
- Return of Buy-back – To be filed with ROC & SEBI within 30 days of completion
Penalty for default
Company & Officer in default: Min 1 Lakh, Max 3 Lakhs.
Transfer to & application of Capital Redemption Reserve A/c (Sec 69) –
- Where a company purchases its own shares out of Free Reserve or Securities Premium Account a sum equal to the nominal value of the shares so purchased shall be transferred to CRR A/C.
- The details of the transfer shall be disclosed in balance sheet.
- CRR A/C can be used in issuing fully paid-up bonus shares
Circumstances prohibiting Buy-back –
- No company shall directly or indirectly purchase its own shares or other specified securities :
- Through any subsidiary company including its own subsidiary company
- Through any investment company.
- If default is made in –
- Repayment of deposit or interest thereon.
- Redemption of debentures or preference shares.
- Payments of dividend.
- Repayment of any term loan or interest thereon.
However once default is made good Buyback can be announce after a period of 3 years has lapsed.
- If company has failed :
- To file financial statements.
- To file an annual return.
- TO declare dividend as per Sec 123.
- To distribute dividend as per Sec 127.
Procedure of Buy-back for private and unlisted public companies –
- The company shall file with the ROC a letter of offer dated and signed by at least 2 directors (One of whom shall be MD)
- Dispatch the letter of offer – within 21 days to the shareholders from the date of its filing with ROC.
- Period of validity of the letter of offer
– Min 15 days.
– Max 30 days from the date of dispatch.
- Acceptance per shareholder shall be on a proportionate basis.
- The company shall complete the verifications of the offers received within 15 days from the date of closure of the offer.
- The company shall within seven days of the time limit of verification:
(a) Make payment of consideration in cash to those shareholders or security holders whose securities have been accepted, or
(b) Return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance.
- open a separate bank account and deposit there in the sum payable as consideration for Buy-back.
8.Company shall ensure that –
- Buy-back announced shall not be withdrawn
- Money is not borrowed from banks or Financial Institutions for the purpose of Buy-back.
- Proceeds of earlier issue of same kind of share is not utilized for Buy-back.
Buy back procedure for listed securities
As per SEBI (Buy-back of securities) Regulation, 2018 all the listed companies are required to comply following regulations broadly covering the aspects:
- Special resolution and Board Resolution –
- Explanatory statement shall be annexed to the notice for the General Meeting for the purpose of passing Special Resolution.
- Copy of special resolution passed at the general meeting shall be filed with the SEBI & Stock Exchange within 7 days from the date of passing of resolution.
iii. In case Buy-back is authorized by the Board Resolution itself, copy of the same shall be filed with SEBI & Stock Exchange within 2 days from the passing of resolution
- Additional disclosure requirement-
An explanatory statement annexed to the notice shall contain full and complete disclosure to the following material facts –
- Date of Board Meeting where Buy-back was approved.
- Necessity of Buy-back.
- Maximum amount required under Buy-back and its % of the total paid up capital & Free
- Maximum number of securities to be brought back & the maximum price at which to be brought back.
- Method to be adopted for Buy-back.
- Aggregate shareholding of the promoter and of the directors of the promoters, where the promoter is a company including details of any securities sold within 6 months preceding the date of board meeting and its details.
- A confirmation that there are no defaults as provided u/s 70.
- A confirmation that the Board of Directors have filed a declaration of insolvency.
- Auditor’s report on the company’s state of affairs addressed to the BOD.
- Methods of Buy-back –
- From existing shareholders by tender offer.
- From other specified security holders (i.e. ESOP)
- From odd lot holders
- From the open market:
Book building process (Max Buyback allowed is up to 15% of paid up capital & free reserve)
- No offer of Buy-back be made within 1 year from the date of expiry of period of previous Buyback.
- Buy-back is not permitted through negotiated private transactions, spot transactions.
- When Buy-back of securities is from existing shareholders through tender offer and on proportionate basis.
- 15% of the number of securities proceed to be bought back or number of securities entitled as per their shareholding whichever is higher shall be reserved for small shareholders.
- Public announcement and filing of offer document –
- The company shall make a public announcement within 2 working days from the date of resolution (BR/SR) in at least three newspapers (English, Hindi, Regional Language) with wide circulation at the place where registered office of company is situated.
- The announcement shall contain all material information as specified in Schedule II.
iii. Copy of announcement with soft copy shall also be submitted to board simultaneously through a merchant banker.
- Within 5 working days of the public announcement a draft letter of offer along with soft copy shall be filed through a merchant banker for the comments / objections of the board if any.
- The merchant banker shall include the changes specified by the board in the letter of offer before it is dispatched to the shareholders.
- Offer Procedure –
- Record Date: To be announced for the purpose of determining the names of security holders eligible for the purpose of Buy-back.
- Letter offer: To be dispatched within 5 working days from the receipt of comments from the board.
- Opening of offer: Within 5 working days from the date of dispatch of letter of offer
- Proposed shares: To be divided into 2 categories
- Reserved category for small shareholders.
- General category for others.
- Period the offer is open :10 Working days
- The acquiree or promoter shall facilitate tendering of shares by the shareholders and its settlement through the stock exchange mechanism.
- Shares left to be bought back shall be issued to shareholders who have tendered over and above their entitlement
- Escrow Account –
- Cash to be deposited with a scheduled commercial bank: Empower the merchant banker to instruct the bank to make payment.
- Bank Guarantee: In favour of merchant banker and valid until thirty days after the expiry of buy-back period
- Deposit of acceptable securities: Empower the merchant banker to
- realize the value by sale or otherwise.
- Combination of 1,2 &3
- Consideration payable shall be deposited in the ESCROW account before opening of offer –
(i) if the consideration payable does not exceed 100 crores—25 per cent of the consideration payable;
(ii) if the consideration payable exceeds 100 crores—25 percent up to 100 crores and10 percent thereafter;
- If there is any deficit realization of the value of the securities, the merchant banker shall be liable to make good any such deficit.
- When the escrow account consists of bank guarantee or deposit of approved securities (2 or 3) Company shall deposit in cash a sum of at least 1% of the total consideration payable as security for fulfilment of the obligation.
- On payment of consideration to all security holders and after completion of all the formalities of Buy-back, the amount in the term of guarantees and securities shall be realized.
- In case of non-fulfilment of obligations SEBI may forfeit the escrow account either in full or part and distribute the forfeited amount on pro-rata basis among the security holder who accepted the offer and balance if any shall be utilized for investor protection
- Payment to the security holders –
- The company shall immediately after the date of closure of offer open a special account with a SEBI registered banker and deposit therein 90% of the amount lying in the escrow A/C & complete the verifications of offers received and make payment within 7 days from closure of offer.
- Extinguishment of Bought Back Securities: Securities bought back shall be extinguished within 7 days from the expiry of buy back period.
To be physically destroyed within 15 days of the date of acceptance of share in the presence of registrar to the issue or Merchant Banker and Statutory Auditors.
- Furnish a certificate to Board for the extinguishment and destruction of the securities as well as the stock exchange within 7 days of extinguishment and destruction duly certified and verified by the Registrar / Merchant Banker, 2 Directors of the company (One shall be MD) and Statutory Auditor.
- The above permissions of Buy-back through tender offer shall be applicable mutatis mutandis to Buy-back of odd lot shares (Method) or Buy-back of other specified securities (Method).
FREQUENTLY ASKED QUESTIONS : Buyback of Shares
- What is the manner in which the company can buy back its own shares?
The company can buy back its shares in any of the following manners:
- From the existing shareholders on a proportionate basis through the tender offer;
- From open market through:
- Book building process
- Stock exchange;
iii. From odd lot holders.
- Can a company buy back its shares without passing shareholders’ resolution?
Yes. A company may buy back its shares without shareholders’ resolution, to the extent of 10% of its paid up equity capital and reserves, based on both standalone and consolidated financial statements of the company. However, if a company intends to buyback its shares to the extent of more than 10% of its paid up capital and free reserves then the same has to be approved by shareholders by way of special resolution in term of the provisions of Companies Act, 2013.
- Where can one get details of companies proposing to buyback their shares?
Listed companies are required to intimate the stock exchange of general meetings and resolutions passed thereof. Hence, information on companies proposing to buyback shares may be obtained from the stock exchanges. When the public announcement or offer document is filed with SEBI, the same is uploaded on the SEBI website.
- How does one tender one’s shares for buyback in the tender offer method?
In case the equity shares are held in dematerialized form: Eligible sellers may tender the equity shares through their respective stock broker by indicating the details of equity shares to be tendered under the buyback offer, during the normal trading hours of secondary market.
In case the equity shares are held in physical form: Eligible sellers shall approach their respective stock broker along with the complete set of documents, as stated in public announcement / letter of offer, for verification procedures. Upon placing the bid, the broker will provide a slip generated by the exchange bidding system to the eligible seller, confirming registration of transaction. After placement of bid, the broker shall send the tender form along with slip and other relevant documents, to the registrar to the buyback offer, as specified in public announcement / letter of offer.
- How does one participate in the buyback in case one does not receive the tender/offer form?
In case the equity shares are in dematerialised form: Eligible sellers can make an application by providing the application in writing on plain paper, signed by the eligible seller, stating name and address of eligible seller, number of equity shares held as on the record date, client ID number, DP name/ID, beneficiary account number and number of equity shares tendered for the buyback offer.
In case the equity shares are in physical form: Eligible sellers can participate in the offer by providing the application in writing on plain paper signed by the eligible seller stating name, address, folio number, number of equity shares held, share certificate number, number of equity shares tendered for the buyback offer and the distinctive numbers thereof, enclosing the original share certificate(s), copy of eligible sellers’ PAN card(s) and executed share transfer form in favour of the company. Eligible sellers shall ensure that the relevant documents are tendered at the collection centres / registrar to the buyback offer, as mentioned in public announcement / letter of offer.
In both cases above, eligible sellers will be required to approach their respective stock broker (along with the complete set of documents for verification procedures) and have to ensure that their bid is entered by its respective broker in the electronic platform to be made available by respective stock exchange, before the closing date as specified in public announcement / letter of offer.
- Can you tender your shares for buyback if you are not a registered shareholder?
Yes, provided you submit the duly executed transfer deed for transfer of shares in your name, along with the offer form and other relevant documents as required for transfer, if any. The same should be sent to the registrar to the buyback offer.
- What is the manner in which the company decides the acceptances from each shareholders?
In case the shares of the company are tradable compulsorily in demat segment, the acceptances from any investor shall be on a proportionate basis irrespective of the number of shares tendered in the buyback, and irrespective of whether shares are in physical or demat form.
If the shares are not in compulsory demat segment, first the entire shares tendered being less than the minimum market lot shall be accepted in full. Thereafter, the acceptances will be on proportionate basis in a manner to ensure that the acceptances are in the market lot. In such a case, a draw of lots shall be done, as in the case of public issues.
- When will the shareholder receive intimation about acceptance of his shares?
The company is required to send intimation to the tenderers within 7 working days from the closure of the offer.
- When will the shareholder receive the consideration/the share certificate in the tender offer method?
The company is required to send the above, within 7 working days from the closure of the buyback offer.
- Can cash component of the escrow account in the buyback offer process be maintained in an interest bearing account?
Yes, the cash component of the escrow account may be maintained in an interest bearing account. However, the merchant banker shall ensure that the funds are available at the time of making payment to shareholders.
- Can the letter of offer be dispatched through electronic means?
Letter of offer can be dispatched through electronic means in accordance with the provisions in the Companies Act, 2013. However, on receipt of a request from any shareholder to receive a copy of the letter of offer in physical format, the same shall be provided. Besides this, for all those shareholders who do not have their email IDs registered with the company, the letter of offer shall be sent physically. This shall be disclosed in the letter of offer.