Buy Back of Shares/Securities

BUY-BACK OF SHARES/SECURITIES

(For Unlisted Company)

INTODUCTION:

Buy-Back of shares or other specified securities is a process by which a company re-purchases its securities from its shareholders or security-holders as the case may be. It is one of the corporate financial strategy or method of corporate re-structuring without going for lengthy process for capital reduction.

Section 68, 69, and 70 of The Companies Act, 2013 along with Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014, governs the procedure of Buy-Back of shares and other specified securities by Unlisted Companies. Unlisted companies are those companies whose shares are not listed on a recognized stock exchange and therefore not available for trading by the general public. An unlisted company can be a Private or Public company.

BRIEFING OF THE SECTION 68, 69 & 70 ALONG WITH RULES:

1. Source of Buy Back

A Company can purchase its own shares or other specified securities (hereinafter referred to as buyback) out of—

(a) Its free reserves;

(b) The securities premium account; or

(c) The proceeds of the issue of any shares or other specified securities:

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.

2. Conditions to follow for Buyback

No company shall purchase its own shares or other specified securities if does not follow or comply the below conditions:

(a)    the buy-back is authorized by its articles;

(b)   a Board or Special resolution has been passed authorizing the buyback:

a.       Board Resolution If Buy Back is 10% or less of the total paid-up Equity capital and free Reserves.

b.      Special Resolution If Buy Back is more than 10% but up to 25% of the total paid-up capital and free Reserves.

(c)    only 25% equity shares of its total paid up equity share capital can be buy-backed in any financial year;

(d)   Post Buy Back Debt Equity ratio should not exceed 2:1

Debt includes the aggregate of secured and unsecured debts owed by the company and Equity means total paid-up capital and its free reserves.

(e)   all the shares or other specified securities for buy-back are fully paid-up;

(f)     the buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the regulations made by the Securities and Exchange Board in this behalf;

(g)    The buy-back in respect of shares or other specified securities for unlisted entity is in accordance with Companies (Share Capital and Debentures) Rules, 2014.

(h)   No offer of buy-back shall be made within a period of one year from the date of the closure of the preceding offer of buy-back, if any.

3. Matters for Explanatory Statement

The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following disclosures, namely:—

(a)   the date of the board meeting at which the proposal for buy-back was approved by the board of directors of the company;

(b)   the objective of the buy-back;

(c)    the class of shares or other securities intended to be purchased under the buy-back;

(d)   the number of securities that the company proposes to buy-back;

(e)    the method to be adopted for the buy-back;

(f)     the price at which the buy-back of shares or other securities shall be made;

(g)   the basis of arriving at the buy-back price;

(h)   the maximum amount to be paid for the buy-back and the sources of funds from which the buyback would be financed;

(i)      the time-limit for the completion of buy-back;

(j)     (i) the aggregate shareholding of the promoters and of the directors of the promoter, where the    promoter is a company and of the directors and key managerial personnel as on the date of the notice convening the general meeting;

(ii) the aggregate number of equity shares purchased or sold by persons mentioned in sub-clause (i) during a period of twelve months preceding the date of the board meeting at which the buyback was approved and from that date till the date of notice convening the general meeting;

(iii) the maximum and minimum price at which purchases and sales referred to in sub-clause (ii) were made along with the relevant date;

(k)    if the persons mentioned in sub-clause (i) of clause (j) intend to tender their shares for buy-back:

(i) the quantum of shares proposed to be tendered;

(ii) the details of their transactions and their holdings for the last twelve months prior to the date of the board meeting at which the buy-back was approved including information of number of shares acquired, the price and the date of acquisition;

(l)      a confirmation that there are no defaults subsisting in repayment of deposits, interest payment thereon, redemption of debentures or payment of interest thereon or redemption of preference shares or payment of dividend due to any shareholder, or repayment of any term loans or interest payable thereon to any financial institution or banking company;

(m) a confirmation that the Board of directors have made a full enquiry into the affairs and prospects of the company and that they have formed the opinion:

(i) that immediately following the date on which the general meeting is convened there shall be no grounds on which the company could be found unable to pay its debts;

(ii) as regards its prospects for the year immediately following that date, that, having regard to their intentions with respect to the management of the company’s business during that year and to the amount and character of the financial resources which will in their view be available to the company during that year, the company shall be able to meet its liabilities as and when they fall due and shall not be rendered insolvent within a period of one year from that date; and

(iii) the directors have taken into account the liabilities (including prospective and contingent liabilities), as if the company were being wound up under the provisions of the Companies Act, 2013;

               

(n)   a report addressed to the Board of directors by the company’s auditors stating that:

(i) they have inquired into the company’s state of affairs;

(ii) the amount of the permissible capital payment for the securities in question is in their view properly determined;

(iii) that the audited accounts on the basis of which calculation with reference to buy back is done is not more than six months old from the date of offer document; and

Where the audited accounts are more than six months old, the calculations with reference to buy back shall be on the basis of un-audited accounts not older than six months from the date of offer document which are subjected to limited review by the auditors of the company.

(iv) the Board of directors have formed the opinion as specified in clause (m) on reasonable grounds and that the company, having regard to its state of affairs, shall not be rendered insolvent within a period of one year from that date.

4. Period for Buyback

Every buy-back shall be completed within a period of one year from the date of passing of the Board resolution or Special resolution as the case may be.

5. Form whom Buyback can be done

The buy-back may be:

(a)          From the existing shareholders or security holders on a proportionate basis;

(b)          From the open market; (for listed companies only)

(c)           By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

6. Letter of Offer for Buyback

The company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a letter of offer in Form No. SH.8, along with the fee and such letter of offer shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director, where there is one.

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 20 days from its filing with the Registrar of Companies.

The offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer.

Where all members of a company agree, the offer for buy-back may remain open for a period less than 15 days.

7. Buyback of securities on proportionate basis

In case 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.

8. Verification of Offers for buyback

The company shall complete the verifications of the offers received within 15 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 21 days from the date of closure of the offer.

9. Open 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 due and payable as consideration for the buyback of securities.

10. Payment of Consideration for Buyback

The company shall within 7 days of the verification process:

(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.

11.  General Conditions for buyback

The company shall ensure that—

(a) the letter of offer shall contain true, factual and material information and shall not contain any misleading information and must state that the directors of the company accept the responsibility for the information contained in such document;

(b) 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;

(c) the company shall confirm in its offer the opening of a separate bank account adequately funded for this purpose and to pay the consideration only by way of cash;

(d) the company shall not withdraw the offer once it has announced the offer to the shareholders;

(e) the company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares; and

(f) 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.

12. Declaration of Solvency

The Company, before making such buy-back, file with the Registrar and, if listed, with the Securities and Exchange Board also, a declaration of solvency in form SH-9 signed by at least two directors of the company, one of whom shall be the managing director, if any and verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board.

13. What to do with shares or securities bought back?

The Company shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.

14.  No issuance of same kind of shares or securities Bought Back

The Company shall not make a further issue of the same kind of shares or other securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

15. Register of Buyback

(a)  Where a company buys back its shares or other specified securities, it shall maintain a register of the shares or securities so bought in Form No. SH.10, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed.

(b) The register of shares or securities bought-back shall be maintained at the registered office of the company and shall be kept in the custody of the secretary of the company or any other person authorized by the board in this behalf.

(c) The entries in the register shall be authenticated by the secretary of the company or by any other person authorized by the Board for the purpose.

16. Return of Buyback

A company shall, after the completion of the buy-back file with the Registrar and, if listed, with the Securities and Exchange Board also a return in form SH-11 containing such particulars relating to the buy-back within 30 days of such completion.

There shall be annexed to the return filed with the Registrar in Form No. SH-11, a certificate in Form No. SH-15 signed by two directors of the company including the managing director, if any, certifying that the buy-back of securities has been made in compliance with the provisions of the Act and the rules made thereunder.

17. Transfer of Certain Sums to Capital Redemption Reserve Account

Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.

The capital redemption reserve account may 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.

18. Prohibition for Buy-Back in Certain Circumstances

No company shall 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 a default, is made by the company, in the 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 any term loan or interest payable thereon to any financial institution or banking company.

The buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.

19. Prohibitions

No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of Sections 92 (Annual Return), 123 (Declaration of Payment of Dividend), 127 (Failure to Pay Dividend), and Section 129 (Failure to give True and Fair Statement).

20. Penal Provisions 

If a company makes any default in complying with the provisions of buy back or any regulation made by the Securities and Exchange Board, (in case of listed companies), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

Explanation I.—“specified securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time.

Explanation II.—“free reserves” includes securities premium account.

THE FOLLOWING TABLE SHOWS THE STEP-BY-STEP PROCEDURE IN A COMPREHENSIVE MANNER

Step No	Description	Time Limit	Explanation
1	(a) Buy-Back by Board of Directors without Special Resolution.	At least 7 days’ notice to Directors.	·         Only when Buy-Back is 10% or less of the total paid up equity capital and free reserves of the company. ·         Buy-Back shall be authorized by the Board. ·         No special resolution need to be passed.
	(b) Buy-Back approved in General Meeting with Special Resolution		·         When Buy-Back is more than ten percent (10%) and up to Twenty-Five percent (25%) of the aggregate of paid up capital and free reserves of the Company. ·         In respect of Buy-Back of Equity Shares the reference to 25% in this clause shall be construed with respect to total paid-up Equity Capital in that Financial Year. ·         Convene a Board Meeting as above and decide details of proposed Buy-Back and fix date, time, place and agenda for convening a general meeting to pass a special resolution. ·         A special resolution needs to be passed at the forthcoming general meeting of the company authorizing Buy-Back.
2	Notice of General Meeting accompanied by Explanatory Statement for passing a special resolution	At least clear 21 Days’ Notice to Shareholders and other eligible persons.	Information that needs to be annexed with the Explanatory Statement and notice of GM: · The date of Board meeting at which the proposal for buyback was approved by the Board of Director of the Company; · Necessity for the Buy Back; · Class of shares or security intended to be purchased under the buy back; · The number of securities that the company proposes to Buy-Back; · Method to be adopted for the Buy-Back; · The price at which the Buy-Back of shares or other securities shall be made · The basis of arriving at the Buy-Back price; · The maximum amount to be paid for the Buy-Back and the sources of funds from which the Buy-Back would be financed; · The time limit for the completion of Buy-Back; · The aggregate of shareholding of promoter and the director as on the date of the notice convening the General Meeting; · Aggregate number of equity shares purchased or sold by persons including promoter and director during a period of twelve (12) months preceding the date of Board Meeting at which Buy-Back was approved till the date of the notice convening the General Meeting; · The maximum and minimum price at which purchase and sales referred to above made along with the relevant date; ·Intention of the promoter and person in control of the Company to tender shares for Buy-Back:- (i)                  indicating the number of shares, details of acquisition with date and price; (ii)                Details of their transactions and their holdings for the last twelve (12) months prior to the date of board meeting at which Buy-Back was approved. ·A confirmation that there is no default subsisting in repayment of deposits, redemption of debenture or preference shares or repayment of term loan to any financial institution or banks; ·A confirmation that the Board of Directors has made full enquiry into the affairs and prospects of the Company. And there are no grounds on which the company could be found unable to pay its debts; ·In the view of Board of Directors company shall be able to meet its liabilities as and when they fall due and shall not be rendered insolvent within a period of one year from that date; ·The directors have taken into account the liabilities(including prospective and contingent liabilities), as if the company were being wound up under the provisions of the Companies Act, 2013; ·A report to the Board of Directors by the Company’s auditors stating that:- (i)                  They have inquired into the Company’s state of affairs; (ii)                The amount of permissible capital payment for the securities in question is, in their view, properly determined; (iii)               The audited accounts on which calculation with reference to Buy-Back is done not more than six (6) months old from the date of offer document. (iv)              The Board of directors have formed the opinion on reasonable grounds and that the company, having regard to its state of affairs, shall not be rendered insolvent within a period of one year from that date.
3	Filing Special Resolution with ROC in form No. MGT-14	Within 30 days of passing of special resolution	·         Must be filed with a copy of the special resolution and explanatory statement. ·         Must be certified by a CA, CS or any Cost Accountant of the company with digital signatures.
4	File Letter of Offer in Form No. SH 8 with ROC		Dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director, with the following attachments: (i)                  Details of the promoters of the company; (ii)                Declaration by auditor(s); (iii)               Copy of the board resolution; (iv)              Copy of the notice issued under section 68(3) along with the explanatory Statement thereto; (v)                Audited financial statements of last three years; (vi)              Buy back details of last three years; (vii)             List of holding and subsidiary companies of the company; (viii)           Unaudited financial statement (if applicable); (ix)              Statutory approvals received (if any); (x)                Details of the auditor, legal advisors, bankers and trustees (if any); (xi)              Confirmation of opening of Separate Bank Account.
5	Declaration of Solvency in Form No. SH-9 to be filed along with Letter of Offer mentioned under step no. 4, with ROC		Signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit as specified in the said Form.
6	Dispatch copy of Letter of Offer to Shareholders/ Security holders	Not later than 21 days from the date of filing with ROC	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.
7	Deposit of money in the Separate Bank Account for Buy Back payments	Immediately after closure of offer of Buy Back	Deposit such sum due and payable as consideration for the shares tendered for Buy-Back.
8	Verification, Acceptance and Rejection of Shares/ Securities	Within 15 days from the date of closure of offer	·         Acceptance of buy back shall be on pro rata basis if number of shares offered for Buy-Back is more than the total number of shares so approved to be bought back. ·         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.
9	Payment of Consideration Amount	Within 7 days of verification/ acceptance	Payment in cash only, to those shareholders whose shares/securities have been accepted.
10	Return of share certificates where shares/ securities not accepted for Buy-Back.	Within 7 days of Rejection	Return 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 on pro rata basis.
11	Extinguish and physically destroy shares/ securities bought back	Within 7 days from the last date of completion of Buy-Back
12	Maintain Register of shares/securities bought back		·         The register of shares or securities bought-back shall be maintained at the registered office of the company and shall be kept in the custody of the secretary of the company or any other person authorized by the board in this behalf. ·         The entries in the register shall be authenticated by the secretary of the company or by any other person authorized by the Board for the purpose. ·         Register shall contain all the particulars as mentioned under Form No. SH-10.
13	Filing Return of Buy-Back with ROC	Within 30 days of Completion of Buy-Back	After the completion of the Buy-Back, file with the Registrar, a return in Form No. SH.11 with the following attachments: (i)                        Description of shares or other specified securities bought back; (ii)                       Particulars relating to holders of securities before Buy-Back; (iii)                     Copy of the special resolution passed at the general meeting; (iv)                     Copy of the board resolution and Balance sheet of the company.
14	Filing of Compliance Certificate with ROC along with the Return	Within 30 days of Completion of Buy-Back (annexed with Form NO. SH-11)	Annexed to the return filed with the Registrar in Form No. SH-11, a certificate in Form No. SH-15 signed by two directors of the company including the managing director, if any, certifying that the Buy-Back of securities has been made in compliance with the provisions of the Companies Act and the Companies (Share Capital and Debentures) Rules.

TAX TREATMENT:

Tax	Company	Shareholder
DDT (Section 115-O)	No, Since here payment is made as per Section 68 of Companies Act, 2013 and not from accumulated profits.	NA
Additional Tax (Chapter XII-DA) (wef. 01.06.2013)	Yes, 20% of (Consideration received by shareholder – amount received by a company for issue of such shares)*	NA
Capital Gain	NA	No (wef 01.06.2013)
Stamp Duty	No, Shares are cancelled by buy back and therefore are not transferred.	NA

Please note that provisions of Section 115QA, Income Tax Act, 1961 applies to the Buy-Back of shares by an unlisted company. Accordingly, the company needs to pay distribution tax @ 20% on the amount of Distributed Income** within fourteen (14) days of payment of consideration to shareholders.

**Distributed Income means the consideration amount paid for Buy-Back less (-) sum received at the time of issue of such shares.

* This tax of 20% is increased by 10% surcharge (if applicable) and EC & SHEC which makes it equivalent to 22.66%.

The aforesaid taxes are not creditable by any person under the provisions of the Indian income-tax law; and in case of failure to deposit taxes on time, the principal officer or the company:

1.       Shall be deemed to be ‘assessee in default’; and

2.       Will be subject to simple interest at the rate of 1% of every month or part thereof.

For Companies Listed on recognized stock exchange, Section 46A will apply i.e. Capital gains provisions are applicable & no distribution tax is payable by the company.

Example for Taxation on listed and unlisted Company:

Suppose you are shareholders of two companies.

A: Listed
B: Unlisted

suppose both are buying back their shares. Section 46A is applicable on both case. But section 115QA is applicable only in case of Unlisted Company.

In case of company B, Company will be paying tax and shareholders (despite having capital gains) will get exemption u/s 10(34A).

And in case of Listed Company A, it is the shareholder who will pay capital gains u/s 46A.

Contact Details:

VISHAL SHARMA

Company Secretary

Mob: 9716763754

Email: csvishalpbs@gmail.com

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Disclaimer: The Content is prepared on the basis of our general understanding and on the basis of relevant provision of Companies Act, 2013 read with rules made there under. The whole content is only for the knowledge sharing purpose, we do not take any responsibility for the correctness of the same.