The buyback of securities, also known as a share repurchase, is a corporate financial strategy where a company repurchases its own shares from existing shareholders. This reduces the total number of outstanding shares in the market, often leading to an increase in the value of the remaining shares.

Companies engage in buybacks for various reasons, including enhancing shareholder value, improving financial ratios, utilizing excess cash, or preventing hostile takeovers. Buybacks can be executed through different methods such as open market purchases, tender offers, Dutch auctions, or negotiated deals with major investors.

Buybacks are commonly seen as a signal that the company believes its stock is undervalued and expects future growth. However, they also come with potential risks, such as reducing cash reserves that could be used for expansion or innovation.

Legal Framework

Buyback of shares in India is primarily regulated by:

  1. Companies Act, 2013 (Section 68, 69, and 70)
  2. Companies (Share Capital and Debentures) Rules, 2014
  3. Securities and Exchange Board of India (SEBI) Buyback Regulations (for listed companies)

Conditions for Buyback (Section 68)

As per Section 68 of the Companies Act, 2013, a company may buy back its own shares or other specified securities under the following conditions:

  1. Authorization: The buyback must be authorized by the company’s Articles of Association (AOA).
  2. Board/Shareholder Approval:
    1. If the buyback is up to 10% of the total paid-up equity capital and free reserves, it can be approved by the Board of Directors.
    2. If the buyback exceeds 10% but is within 25% of the total paid-up equity capital and free reserves, it requires approval from shareholders through a special resolution.
  1. Sources of Buyback: As per the section 68(1) of the companies Act 2013, Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2), a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of-
    1. Free reserves
    2. Securities premium account
    3. Proceeds of an earlier issue of shares or specified securities (excluding an issue made for buyback purposes)

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.

  1. Debt-Equity Ratio: Post buyback, the company’s debt-equity ratio should not exceed 2:1 (except for non-banking financial companies).
  2. Maximum Buyback Limit: The buyback cannot exceed 25% of the total paid-up equity capital and free reserves in a financial year.
  3. Completion Timeline: The buyback process must be completed within 12 months from the date of passing the resolution.
  4. Mode of Buyback: The buyback can be done through:
    1. Open market purchases
    2. Tender offer
    3. Buyback from employees via stock options

Step By Step process of Buy Back of Securities

The buyback of securities to be done by the company in two ways:

  1. By the approval of Board (if Buy Back is up to 10% of paid up capital and free reserve)
  2. By the approval of shareholder (if buy back is more than 10% of paid up capital and free reserve and up to 25% of paid up capital and free reserve)

PROCESS OF BUY-BACK OF SECURITIES

  1. Authorization of AOA

Ensure that the company’s articles of association authorize the buyback of share capital. In case of absence of relevant provisions, modify the articles in line with the provisions of the Companies Act, 2013.

  1. Convene a Board Meeting

If the buyback constitutes 10% or less of the company’s total paid-up equity capital and free reserves, the Board of Directors can authorize the proposal through a resolution passed during a board meeting.

  1. Convene a General Meeting

For any buyback exceeding the 10% threshold but up to 25% , the proposal must be authorized by a special resolution passed in a duly convened General Meeting.

  1. Filed MGT-14 to ROC

Within 30 days of passing the Board Resolution or Special Resolution in the General Meeting, as the case may be, file Form MGT-14 with the Registrar of Companies (ROC).

  1. Declaration of Solvency

Prior to the buyback, file a declaration of solvency in Form SH.9 along with the letter of offer in Form SH-8. This declaration should be signed by a minimum of two directors, with one of them being the managing director, if applicable.

  1. Dispatch the Letter of Offer

The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than twenty days from its filing with the Registrar of Companies.

  1. Offer Period

The offer for buy-back shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer. Provided that where all members of a company agree, the offer for buy-back may remain open for a period less than fifteen days.

  1. Verification of Offer

The company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty-one days from the date of closure of the offer.

  1. Open a Separate Bank Account

The company shall immediately after the date of closure of the offer, open a separate bank account and deposit therein, such sum, as would make up the entire sum due and payable as consideration for the shares tendered for buy-back in terms of these rules.

  1. Extinguishment of Shares/Securities

Within seven days of the last date of completion of the buyback, the company should extinguish and physically destroy the shares or securities that were bought back. This step ensures the removal of such shares or securities from circulation.

  1. File Form SH-11

After the completion of the buyback, the company should file a return in Form No. SH.11 within 30 days of the completion date.

  1. Maintain the Statutory Register

The company is also obligated to maintain a register of shares or other securities that have been bought back. This register, Form No. SH.10, should be housed at the company’s registered office and be in the custody of the Company Secretary or another individual authorized by the board for this purpose.

Prohibitions on Buyback (Section 70)

       A company is prohibited from buying back its securities if:

  1.  It has defaulted in repayment of deposits, interest, debentures, or preference shares.
  2. It has defaulted in payment of dividends or repayment of any term loan from banks or financial institutions.
  3. It has not complied with the provisions of Sections 92 (Annual Return), 123 (Declaration of Dividend), 127 (Punishment for Failure to Distribute Dividend), and 129 (Financial Statements).
  4. The buyback is done through borrowed funds.

Key points remember before Buy-Back

  1. The company shall not issue any new shares including by way of bonus shares, from the date of passing of special resolution authorizing the buy-back till the date of the closure of the offer under these rules, except those arising out of any outstanding convertible instruments.
  2. The company shall not withdraw the offer once it has announced the offer to the shareholders.
  3. The company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares.
  4. The company shall not utilize the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities for the buy-back.

Conclusion

The buyback of securities is a strategic financial decision that helps companies optimize their capital structure, enhance shareholder value, and improve financial ratios. However, it must be conducted in strict compliance with the Companies Act, 2013, and SEBI regulations to avoid legal and financial repercussions.