Q4 Company law DU SOL

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A Buyback of shares is buying back of own shares by a company that was issued earlier. It is a corporate action event wherein a company makes a public announcement for the buyback offer to acquire the shares from existing shareholders within a given timeframe. The company announces an offer price for the buyback that is generally higher than the current market price.

A buyback allows companies to invest in themselves. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. A company may feel its shares are undervalued and do a buyback to provide investors with a return. And because the company is bullish on its current operations, a buyback also boosts the proportion of earnings that a share is allocated. This will raise the stock price if the same price-to-earnings (P/E) ratio is maintained.

The share repurchase reduces the number of existing shares, making each worth a greater percentage of the corporation. The stock’s earnings per share (EPS) thus increases while the price-to-earnings ratio (P/E) decreases or the stock price increases. A share repurchase demonstrates to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles.

Legal Provisions Related to Buy Back Shares as per Companies Act

 

Section 68 – POWER OF COMPANY TO PURCHASE ITS OWN SECURITIES

(1) 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—

(a) its free reserves;

(b) the securities premium account; or

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

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.

(2) No company shall purchase its own shares or other specified securities under sub-section (1), unless—

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

(b) a special resolution has been passed at a general meeting of the company authorising the buy-back:

Provided that nothing contained in this clause shall apply to a case where—

(i) the buy-back is, ten per cent. or less of the total paid-up equity capital and free reserves of the company; and

(ii) such buy-back has been authorised by the Board by means of a resolution passed at its meeting;

(c) the buy-back is twenty-five per cent. or less of the aggregate of paid-up capital and free reserves of the company:

Provided that in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent. in this clause shall be construed with respect to its total paid-up equity capital in that financial year;

 

Provision related to buyback of shares

1. The sanction for the buyback – AOA (articles of association) of the company should sanction it. They would have to alter the articles of association (AOA) before proceeding if it has no provision related to it.

2. Approval – the buyback can be made with the board of directors’ approval taken at the board meeting or by a special resolution taken by shareholders in the general meeting, depending on the buyback proportion.

The board of directors’ approval is up to total paid-up equity capital’s 10% and free company reserves.

– Shareholders’ approval – up to in totality of paid-up capital’s 25% and free company reserves.

3. Word of notice of general meeting – Meeting’s notice in which the special resolution is advanced to be passed has to be in accordance with an explanatory statement in which the required particulars have to be filled according to section 68(3) (a to e) and rule 17(1) (a to n) of companies rules, (share capital and debentures) 2014 should be revealed

4. The buyback methods – the buyback of shares of private and unlisted public companies, maybe;

– From the prevailing shareholders on a proportionate basis.

– By purchasing the securities issued to the company’s employees following a sweat equity scheme or stock option.

5. The letter of offer (FORM SH-8) – prior to buying back the shares, the company will submit a letter to the companies’ registrar in e-form SH-8. The letter of offer has to be forwarded to the shareholders straight away after submitting the same with the registrar of the companies but not beyond the 20 days from its submission with the registrar of the companies certifying the matters as mentioned in the sub-rule of rule 17 of the company’s rules (share capital and debentures), 2014. 

Statutory provisions of Buy Back:

-Section 68 of the Companies Act, 2013 empowers a company to purchase its own shares or other securities in certain cases

 

-Section 69 of the Companies Act,2013 Accounting treatment of the proceed of Buyback

-Sections 70 of the Companies Act, 2013 imposes restriction on buy back of shares in certain circumstances

Therefore, Section 68,69 and 70 of the Companies Act,2013 read together with the rule 17 of the Companies (share capital and debentures) Amendment Rules,2016 regulates the process of Buyback of shares by an unlisted company.

The buy-back of the shares listed on any recognised stock exchange is in accordance with the regulations made by the SEBI.

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