Share Buyback: Legal Requirements and Process
Share Buyback: Legal Requirements and Process
The provisions for the buyback of shares were introduced in the Companies Act, 1956, effective October 31, 1998, and SEBI regulations, 1999.
- Section 68 of the Companies Act, 2013 empowers a company to purchase its own shares and other specified securities.
- Buyback refers to the purchase by the buyer of something already sold by the said buyer.
- Buyback of shares means the purchase of its own shares already issued by the company.
- It is a process by which a cash-rich company purchases and cancels some of its outstanding equity shares.
Conditions for Share Buyback
Section 68 of the Companies Act, 2013, provides that no company shall purchase its own shares or other specified securities unless the following conditions are satisfied:
(a) Authorization by Articles
The share buyback must be authorized by the company’s articles.
(b) Special Resolution or Board Resolution
A special resolution must be passed in a general meeting of the company authorizing the buyback. However, if the buyback is up to 10% of the total paid-up equity capital and free reserves of the company, the Board of Directors may authorize the buyback by passing a resolution at its meeting. Only one such buyback is allowed in a year.
(c) Resource Test
The buyback must be equal to or less than 25% (i.e., not more than 25%) of the total paid-up capital and free reserves of the company.
(d) Share Outstanding Test
The buyback of equity shares in any financial year must not exceed 25% of the company’s paid-up equity capital in that financial year.
(e) Debt-Equity Test
The ratio of secured and unsecured debt owed by the company must not be more than twice the capital and its free reserves after such buyback. However, the Central Government may prescribe a higher ratio of debt for a class or classes of companies. ‘Debt’ here should include both long-term debt as well as short-term debt.
(f) Fully Paid-up Shares
All the shares or other specified securities for buyback must be fully paid up.
(g) SEBI Regulations for Listed Companies
The buyback of the shares or other specified securities listed on any stock exchange must be in accordance with the regulations made by the SEBI in this behalf.
(h) Rules for Unlisted Companies
The buyback in respect of shares not listed on any recognized stock exchange must be in accordance with the prescribed rules. Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014, deals with the buyback of shares and other specified securities.
(i) Filing of Letter of Offer
The company, authorized by a special resolution, shall, before buying back shares, file with the Registrar of Companies a letter of offer in the prescribed form along with the fee.
(ii) Dispatch of 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 21 days from its filing.
(iii) Offer Period
The offer of buyback 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.
(iv) Proportionate Acceptance
If 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 a proportionate basis out of the total shares offered for being bought back.
(v) Verification and Communication
The company shall complete the verification of the offers received within 15 days from the date of the closure of the offer. The shares or other specified securities lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the date of the closure of the offer.
(vi) Separate Bank Account
The company shall, immediately after the 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 buyback in terms of these rules.
(vii) Payment and Return of Certificates
The company shall, within the prescribed time:
(a) Make payment of consideration in cash to those shareholders whose securities have been accepted; or
(b) Return the share certificates to the shareholders whose securities have not been accepted at all or the balance of the securities in case of part acceptance.