The repurchase of outstanding shares by a company in order to reduce the number of shares in the market is termed as buy-back of shares. Companies will buy-back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. INTRODUCTION
Share capital is a very essential part of a company, listed or unlisted. Share capital can be of two types, i.e. equity share capital or preferential share capital. The share capital of a company has to be subscribed by one or more persons. After the share of a company has been allotted to the subscribing members, the subscribers have no right over the money gone as proceeds of the shares subscribed. All that the shareholder has is the right to vote at the general meetings of the company or the right to receive dividends or right to such other benefits which may have been prescribed. The only option left with the shareholder in order to realise the price of the share is to transfer the share to some other person. But there are certain provisions in the companies act which allow the shareholders to sell their shares directly to the company and such provisions are termed as buy-back of shares. Buy-back of shares can be understood as the process by which a company buys its share back from its shareholder, or a resort a shareholder can take in order to sell the share back to the company. HISTORY
Prior to the amendment in 1999 of the Companies Act, there was no way a company could buy its shares back from the shareholders without a prior sanction of the court (except for preferential shares). The laws as to the buying of its share by the companies were very stringent. Some of the ways by which a company could buy its shares back were as follows:- (i) Reduction of share capital as given in Sections 100-104. (ii) Redemption of redeemable preferential shares under Section 80. (iii) Purchase of shares under an order of the court for scheme of arrangement under Section 391 in compliance with the provisions of Sections 100-104. (iv) Purchase of shares of minority shareholders under the order of the Company Law Board under Section 402(b). A company could buy its shares back from the shareholders only with the sanction of the court. This was done to protect the rights of the creditors as well as the shareholders. But the need of less complex ways of buying its shares back by the company was always felt. The much needed change in the companies act was brought about by the Companies Amendment Act, 1999. Presently, the provisions regulating buy-back of shares are contained in Section 77A, 77AA and 77B of the Companies Act, 1956. These were inserted by the Companies (Amendment) Act, 1999. The SEBI (SEBI) framed the SEBI(Buy-back of Securities) Regulations, 1999 and the Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy-back of Securities) Rules, 1999 pursuant to Section 77A(2)(f) and (g) respectively. COMPANY MANAGEMENT’S PERSPECTIVE ON BUY-BACK
In the words of the working group which recommended the introduction of buy-back in the Companies Act: “It is an erroneous belief that the sole reason for buy-back is to block hostile take-overs. In this connection it is relevant to list 5 reasons why the bank of England favoured the making of law to allow companies to repurchase their shares, of which blocking take-over was only one: (i) To return surplus cash to shareholders.
(ii) To increase the underlying share value, earnings per share. (iii) To support the share prices during temporary weakness. (iv) To achieve or maintain a target capital structure.
(v) To prevent or inhibit unwelcome take-over bids.”
Briefly a company resorting to the buy-back may have surplus cash, and it may not have found the right avenue to invest such surplus cash. During such period of dilemma the company may decide...