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Buy-Back Compliance

The process by which Company buy-back it’s Shares from the existing Shareholders usually at a price higher than the market price is known as buyback of shares. Situation when the Company buy-back the Shares, the number of shares outstanding in the marke

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Introduction

The process by which Company buy-back it’s Shares from the existing Shareholders usually at a price higher than the market price is known as buyback of shares. Situation when the Company buy-back the Shares, the number of shares outstanding in the market reduces/falls. It is the option available to shareholders to exit from the Company business. It is governed by section 68 of the Companies Act, 2013

Reasons for buy-back

➲ Use of Idle Cash:

When the company has surplus cash in hand then it can opt for buyback of its own shares from the market, in this way it can utilize its cash and may offer a good deal to its shareholders.

➲ Enhances earning per shares

As buyback leads to a decrease in paid capital of the company, means the number of shareholder gets decreases after and earning per share increases.

➲ Gain confidence in shareholder

Buyback is one of the best tools for the company who’s share price falls in the market, it will help to gain the confidence of existing shareholders.

➲ Reduces the chance of a takeover

Buyback leads to dilution of voting which will lead to the reduction of the chance of a takeover

➲ Return surplus cash to the shareholder

Buyback repays back to shareholders a good price which may be more than market price.

Sources of buy-back of shares

As per the company law, a company can perform buy-back only through using its:

  1. Free Reserves
  2. Securities premium
  3. Proceed of issue of any shares

However, the repurchase of any kind of shares or other specified securities can not be made from earlier issue proceeds of the same kind of shares or other specified securities

Buy-Back Conditions

As per the company’s act 2013 following conditions must be fulfilled for the buy-back :

  1. There should be the provision of buy-back in the article of the company
  2. Pass special resolution if buy-back is up to 25% of paid-up capital and free reserve or only bord resolution is required if buy-back if of 10% of paid-up equity or free reserve
  3. A company can do maximum numbers of buy-back in a financial year is 25% of paid-up share capital.
  4. The maximum amount of shares that can be bought back in a financial year is 25% of paid-up share capital and free reserves (where paid-up share capital includes equity capital and preferential share capital, and free reserves include securities premium)
  5. Debt ratio after buy-back should not exceed 2:1
  6. Only fully paid-up shares can be bought back
  7.  The company should maintain a register for buy-back in form SH-10

Process of Buy-back

Step1: Call board meeting after giving proper notice and pass the necessary resolution and fix the date, time place for EGM

Step2: Call EGM and pass a special resolution for buyback

Step3: File MGT-14 within the passing of the resolution.

Step4: file declaration of solvency to ROC in form SH-9 and this declaration shall be signed by 2 directors one of them should be MD (if any)

Step5: Sending of the Letter of Offer to Shareholders OR Security Holders within 21 days of filing with (ROC) Company Registrar to ensure the Company's (Share Capital & Debentures) rule, 2014 followed

Step56 The offer for Share Buyback will remain open for at least 15 days but not more than 30 days from the day a letter of offer is dispatched.

Step7: In within 15 days from the date of closure of offer complete the verification process

Step8: open separate bank account form date from the date of the offer

Step9: make the payment to that shareholder or securities holder whose application has been selected

Step10: extinguish or destroy the securities within 7 days of the last date of completion of buy-back

Step11: File Return of buyback with the Registrar in Form No SH.11 & SEBI, if specified, upon completion of the transaction, along with the certificate in Form No SH.15 signed by 2 Directors, one of whom shall be the Managing Director (M.D), if any, certifying that the transaction of securities has been made in compliance with the provisions of the Act and the rules within 30 days of the completion.

 Step12: Maintain the register of buyback of shares or other securities in Form No SH-10 at the company's registered office and hold in the custody of the secretary of the company or any other individual approved by the board on this behalf and the entries shall be authenticated by the secretary of the company or any other person authorized by the board.

Restriction on Buy-back

As per section 70 of the company’s act 2013, a company should not buy-back its securities directly or indirectly-

  • Through its subsidiary
  • Through investment or group of investment companies
  • When the company has not filed its annual returns
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