Buyback of Shares in India

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Buy-Back of Shares 1. Companies Act, 1956: Section 77A of the Companies Act lays down the conditions governing buy-back of shares by a company. Section 77A stipulates that a buy-back can be done only out of free reserves or securities premium account or proceeds of fresh issue of shares or specified securities subject to certain terms and conditions. The conditions to be complied with by the Company for buy-back are: • • Articles of Association (AoA) of the Company provides for buyback of its own shares [Section 77A(2)(a)]. Special resolution should be passed by the shareholders in a general meeting authorizing the buy-back [Section 77A(2)(b)]. If buy-back is less than 10% of paid-up capital and free reserves and has been approved by the Board in a Board meeting, then shareholder resolution is not required. The quantum of shares to be bought-back has to be decided and cannot exceed twenty-five percent of the paid-up capital and free reserves as per last audited Balance Sheet [Section 77A(2)(c)]. The Company has to ensure that the ratio of the debt will be not more than twice the capital and its free reserves after such buyback. [Section 77(2)(d)]. Only fully paid up shares can be purchased [Section 77A(2)(e)]. The buy-back of shares should be in accordance with the regulations laid down by SEBI (for listed companies) and as per the Private Limited Company & Unlisted Public Limited (Buyback of Securities) Rules, 1999 (for non-listed companies) [Section 77A(2)(f) and (g)]. The explanatory statement to the notice of the general meeting should contain complete disclosure of all material facts, necessity of buy-back, security intended to be bought back, amount of buyback and time limit for completion of buy-back and such other disclosures as required under SEBI regulations [Section 77A(3)]. Buy-back has to be completed within 12 months of passing of Board resolution or Shareholders resolution [Section 77A(4)]. Buy-back can be made from existing shareholders on proportionate basis or from open market or from odd lots (in case of listed securities) or purchase of stock options from employees [Section 77A(5)]. Before making buy-back, a company has to file declaration of solvency in Form 4A with Registrar (ROC) and SEBI (only for listed companies) [Section 77A(6)]. After buy-back is completed, the securities bought back should be extinguished and physically destroyed within 7 days of buy-back [Section 77A(7)].

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After buy-back, company cannot issue similar securities for six months except by way of bonus, stock options / preference shares / debentures / warrants conversion [Section 77A(8)]. Company should maintain register of securities bought back containing details as prescribed [Section 77A(9)]. After completion of buy-back, a company has to file return in Form 4C with Registrar (ROC) and SEBI (only for listed companies) [Section 77A(10)].

In case of buy-back out of free reserves, a sum equal to nominal value of shares bought back should be transferred to capital redemption reserve account [Section 77AA]. Companies are prohibited from directly or indirectly purchasing its own shares through any subsidiaries or investment companies or in case of a default by the company in payment of debentures / preference shares / loans or interest and dividend thereon or where a company has not filed annual accounts and annual return or failed to pay dividends within 30 days of declaration [Section 77B].

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SEBI (Buy-Back) Regulations, 1998 as amended by SEBI (Buy-Back of Securities)(Amendment) Regulations, 2012 (for listed companies): • A company cannot buy-back its shares so as to delist its shares from the stock exchange. • Buy-back cannot be done by way of negotiated deals or any private arrangement. • No person or insider should deal in securities of the company based on unpublished information relating to buy-back. • Companies should comply with all requirements laid down under the...
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