Globally, the year 2014 is considered as a year of repurchase revolution as Companies have been gobbling up their own shares at an exceptional rate. The year 2014 is on track to become the third-biggest year for buybacks ever.
Apple, IBM, Intel, Merck, Oracle, WaltDisney, ebay, CISCO, Citrix, Boeing, JPMorgan Chase, Goldman Sachs are the major international companies which have done buy back in 2014.
To name a few Indian companies which have done buy back in 2014, Cairn India, Jindal Steel & Power Limited, Gujrat Apollo Industries, Maharashtra Seamless, DCM Shriram etc.,
Buy Back of Securities is a very important tool for Companies who wants to reduce their Share Capital. Buy back reduces the number of shares outstanding, it increases earnings per share and tends to elevate the market value of the remaining shares.
With the implementation of Companies Act, 2013 there are some key changes in the provisions relating to buy-back. This article mainly covers the provisions relating to buy back of securities of Unlisted Public Company.
Relevant Act & Rules:
Section 68, 69 & 70 of the Companies Act, 2013 read with rule 17 of Companies (Share Capital and Debentures) Rules, 2014:
Sources:
- Free Reserves
- Securities Premium Account
- Proceeds out of issue of any shares or other specified securities
Note : 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.
Approval required:
- Board’s Approval in a duly convened Board Meeting – In case the Company opts to buy back up to 10 % of total paid up Equity capital and free reserves of the Company.
- Shareholder’s approval – In case the company opts to buy back more than 10 % and up to 25 % of the aggregate of the paid up capital and free reserves of the Company.
Conditions:
- Articles of Association of the Company shall contain an enabling provision for buy back of shares
- Percentage of Buy Back of shares should not exceed 25% of the aggregate of the paid up capital and free reserves of the Company.
- Ratio of the aggregate of secured and unsecured debts owed by the company after buy back should not be more than twice the paid up capital and free reserves (Debt Equity Ratio shall not be more than 2:1)
- Shares or other specified securities for buy back should be fully paid up.
- Every Buy back shall be completed within a period of one year from the date of passing of the Board/ Special resolution.
- In case the company opts to go for buy back out of free reserves/securities premium account a sum equal to nominal value of the shares so purchased shall be transferred to the capital redemption reserve account.
Procedure:
- The Explanatory statement annexed to the notice calling general meeting for members approval through special resolution shall disclose the particulars relating to material facts, necessity of buy back, class of shares, time limit, amount involved etc as specified in section 68 (3) read with rule 17.
- If buy back is authorized by special resolution, file letter of offer in Form No. SH.8 with Registrar of Companies. Letter of offer must be signed by at least 2 directors one of whom shall be the Managing Director.
- Declaration of solvency to be filed in Form No. SH.9 with the Registrar of Companies, along with the letter of offer and verified by affidavit. Declaration of solvency shall be signed by at least 2 directors one of whom shall be the Managing Director.
- Letter of offer shall be dispatched to the shareholders/security holders within 21 days from its filing with the Registrar of Companies containing factual information as specified in Rule 17.
- The offer for buy back shall remain open for a minimum period of 15 days but not more than 30 days from the date of dispatch of letter of offer.
- If the number of shares or other specified securities offered by the shareholders or security holders is more than the total number of shares or securities to be bought back by the company, the acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.
- The Company shall complete the verifications of the offers received within 15 days from the date of closure of offer.
- The company shall immediately after the date of closure of the offer, open a separate bank account and deposit the necessary amount for buy back in order to fulfill the payment obligations to the shareholders.
- The company shall within 7 days from the date of verification of the offers make payment of consideration in cash to those shareholders/security holders whose securities have been accepted or return the share certificates to the shareholders/security holders in case the shares/securities are not accepted
- The Company shall extinguish and physically destroy the shares/ other specified securities bought back within 7 days of the last date of completion of buy back.
- The company shall maintain a register of buy back for Shares /other securities in Form No SH-10 at the registered office of the Company which shall be kept in the custody of company secretary or any other person authorized by the Board in this behalf.
- The Return of Buy back shall be filed with the Registrar in Form No SH.11 on completion of buy back along with the certificate in Form No SH.15 signed by two Directors one of whom shall be Managing Director certifying that the buy back of securities has been made in compliance with the provisions of the Act.
The Company shall ensure the following in the Buy Back Process :
- The Company shall not issue any new shares including bonus shares from the date of passing special resolution till the date of closure of the offer for buy back
- The Company shall confirm in its offer the opening of a separate bank account for the purpose of meeting its payment obligations.
- The company shall not withdraw the offer once it has announced it to the shareholders.
- The company shall not utilize any borrowed money from banks/ financial institutions for the purpose of buy back.
- The company shall not utilize the proceeds of an earlier issue of same kind of shares/securities for the buy back.
- The company after the completion of buy back shall not make further issue of same kind of shares/other securities including by way of rights issue within a period of 6 months except by way of bonus issue, conversion of warrants, stock options schemes, sweat equity or conversion of preference shares or debentures into equity.
Prohibitions for buy back :
- A company shall not directly or indirectly purchase its own shares or other specified securities—(a) through any subsidiary company including its own subsidiary companies;
(b) through any investment company or group of investment companies; or
(c)*If default in 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 nay term loan or interest payable thereon to any financial institution or banking company. - If the company has not complied with the provisions of section 92 (Annual Return) 123 (declaration of dividend) 127 (punishment for failure to distribute dividends) and section 129 (Financial statements).
*Buy back is not prohibited, if the default is remedied and a period of three years has lapsed from the date of making good the default.
Key changes in Companies Act, 2013: Companies could do multiple buy-backs of shares in the same financial year except in certain specific facts where there was a cooling off period of one year as per Companies Act, 1956. However, now the 2013 Act requires a mandatory one-year time period between any type of buy-back, even if the buy-back was achieved through a scheme approved by an Indian court.
Companies are now required to complete their buy back offers with six months as against 12 month allowed earlier.
The 2013 Act also stipulates that a buy-back is not possible if the company has made any default in the repayment of deposits or interest, or redemption of debentures, or preference shares, or payment of dividend, or in the repayment of a term loan to a bank or financial institution. However, the buy-back may be possible if the defect is remedied, and a three-year time period has elapsed.
Companies may have various reasons to buy back which may be to project their stocks better or change their capital structure or better financial ratios but from the investors point of view, it is important to focus on the fundamentals of the company and take a decision.
Disclaimer: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.