• Invest in India
  • Corporate Legal Services

Buy Back of shares

February 6, 2016     by Simratjeet Kaur

SECTION 68, 69 and 70 of COMPANIES ACT, 2013

Essential preliminary conditions to fulfill before opting for buy back:-

  • It must be authorized by the Articles
  • It must be authorized by the shareholders by way of Special Resolution in a General meeting.
  • It should not exceed 25% of the aggregate of paid up equity capital and free reserves.
  • Debt equity ratio post buy back should be upto 2:1.
  • Shares or other securities to be bought back should be fully paid up.
  • If securities are
    • Listed – the buy back must be as per SEBI regulations.
    • Unlisted – the buy back must be as per Share Capital and Debenture Rules, 2014
  • There should be no offer of buy back within 1 year of closure of preceding offer of buy back.

Buy back must be from the company’s:-

  • free reserves
  • securities premium account
  • proceeds of issue of any other security

A company does not require shareholders approval for buy back if:-

  • it is for or less than 10% of the total capital.
  • it is authorized by the Board of Directors.
Here capital  = Paid up capital + Free Reserves

Declaration of Solvency

Declaration of solvency needs to be filed:-

  • before commencement of Buy back
  • with the Registrar and SEBI
  • in SH-9 (prescribed form)

It should be:-

signed by at least 2 Directors, one of whom should be Managing Director.

It contains as Affidavit from the Board that states the following:-

  • the company is capable of meetings its liabilities
  • the company will not be rendered insolvent within 1 year from the date of adoption of such Declaration.

Extinguishment of Securities

To be extinguished and physically destroyed within 7 days of the last date of completion of buy back.

No further issue of securities within 6 Months of buy back except for

  • issue of
    • bonus issue
    • conversion of warrants
    • stock option scheme
    • sweat equity
  • conversion of preference shares or debentures into equity.

Prohibition on buy back

A company can’t directly or indirectly buy back its securities through:-

  1. any subsidiary company including its own subsidiaries
  2. any investment company or group of investment companies.
A company can’t buy back its securities if it commits the following defaults in:-

  1. Repayment of deposits and payment of interest thereon
  2. Redemption of debentures or preference shares
  3. Payment of dividends
  4. Repayment of any term loan or interest payable thereon
A Company also can’t buy back its securities if it has not complied with the following provisions of Companies Act, 2013:-

  1. Section 92 : Annual Return
  2. Section 123 : Declaration and payment of Dividend
  3. Section 127 : Failure to pay Dividend
  4. Section 129 : Failure to give true and fair statement in the Financial Statement of the Company

COMPANIES ACT 1956 VS COMPANIES ACT 2013

Particulars Provisions of Companies Act, 1956 Provisions of Companies Act, 2013
Definition of Free Reserves has been changed. Free Reserves include Free Reserves include

Free reserves for distribution as dividend

+

Credit of the securities premium account

Free reserves for distribution as dividend

+

Securities premium account

Gap between 2 offers of buyback clearly defined in the New Act Minimum gap of 365 days from the date of preceding offer of buy back. Minimum gap of 1 year from the date of closure of the preceding offer of buy back.
Buy back from odd lots has been dispensed with in the Companies Act 2013. Buy back could be done from:

  • Existing shareholders
  • Open market
  • Odd lots
  • employees
Buy back can be done from:

  • Existing Shareholders
  • Open market
  • employees
Penalty has been increased in the New Act For company and any officer in default:

  • fine – INR 50,000, or
  • Imprisonment upto 2 years,

Or both

  1. For Company:
    • Fine – INR 1,00,000 to 3,00,000
  2. Officer in default:
    • Imprisonment upto 3 years
    • Fine – INR 1,00,000 to 3,00,000

Or both

TAXATION ASPECT OF BUY BACK

Taxation for companies

Listed company

Unlisted company

Provisions for Capital Gains shall apply on the shareholders of the Company Chapter XII DA shall apply on the Company

 

Chapter XII DA (Additional Tax):- (Section 115 QA – 115QC)

Rate of Tax                 = 20% + 10% surcharge + 3% cess

Effective Rate             = 22.66%

Tax Liability of the Company = Buy back price * 22.66%

Provision is mandatory in nature irrespective of whether the company is liable to tax or not or not.

Tax shall be deposited within 14 days from the date of payment of consideration to the shareholder.

The Company is not liable to pay Stamp Duty.

 


 

7 thoughts on “Buy Back of shares

  1. in case of a private Company At what rate it should be bought back. Book value or Face value or since there is no Fair market value of Unlisted shares

    1. Shares can be bought back at the fair value of the shares which may or may not be the book value of shares. Fair value is to be determined by an independent valuer. A proper explanation of the basis of deciding the value of buyback should be stated in the explanatory statement.

  2. In buyback what is the deciding price that is to be paid by the company to the shares that have been bought back.

Leave a Reply

Your email address will not be published. Required fields are marked *


Please Fill All Field

" "