Buy Back of shares

6 February 2016 • Simratjeet Kaur

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Buy Back of shares

6 February 2016 • 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.

 


 

23 comments

  1. Dear Sir,
    In such case whether Independent Valuer means registered valuer or Statutory Auditor?.
    Even Pvt. Co. required to get the Valuation Report?

    1. In case of M/s. Kottaram Agro Foods Pvt. Ltd., V/s The Assistant Commissioner of Income Tax Bangalore ITAT had held that Tax Auditor of company cannot value shares of company under rule 11UA. In the above context a statutory auditor is not eligible to provide valuation certificate to the auditee company and therefore, it should be obtained from an independent valuer. Further, even a private company is required to get the Valuation Certificate.

  2. debt equity ratio shall be 2:1, here debt means all the debt i.e Long Term and Current liabilities or only long term

    1. Debt to equity ratio (also termed as debt-equity ratio) is a long term solvency ratio that indicates the soundness of long-term financial policies of a company. It shows the relation between the portion of assets financed by creditors and the portion of assets financed by stockholders. As the debt to equity ratio expresses the relationship between external equity (liabilities) and internal equity (stockholder’s equity), it is also known as the “external-internal equity ratio”. Thus, the formulae is Total Liabilities divided by Stockholder’s equity.

  3. Does SH 8 needs to be filed if a private company is buying back 5% of the shares by passing a Board Resolution

  4. if a company wants to buy back equity shares then the maximum limit is 25% of equity shares only in a financial year

  5. If a unlisted private company wants to buyback its share upto 10% of Shares + Free Reserves through its Board Meeting, then is there is any requirement of valuation and if yes then from whom and what is the procedure?

    1. Pursuant to Rule 17 of the Companies (Share Capital and Debenture)Rules, the Company has to disclose the buy- price and the manner of arriving at the buy-price, there is no exemption from the requirement of Valuation Certificate in case the buy-back is within the limits of BR.

  6. for example Z private limited company wants to buy back of 100 shares and A holds 100, b holds 100 and c holds 100, a and b are not interested to sold their shares to company, whether c can give his entire 100 shares in buyback or only 100/3 that is 33 shares (proportion)?

    1. Pursuant to the Companies (Share Capital and Debentures) Rules, 2014 a Company can buy-back shares (provided it is authorized to do so in its articles) from its existing shareholders on a proportionate basis. The Company shall send a Letter of offer for the proposed buy-back all the existing shareholders of the Company, further, A,B,C may tender 33 shares each i.e in the proportion of their existing shareholding.

  7. Is valuation report required by a pvt co. during the buy back process? At price should be shares bought back?

    1. Buy-back is a procedure that enables a company to purchase its shares from its existing shareholders, usually at a price near to or higher than the prevailing market price. Pursuant to the provisions of Section 68, 70 of the Companies Act, 2013 and the relevant rules, the 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.

    1. Pursuant to the Companies (Share Capital and Debentures) Rules, 2014 a Company can buy-back shares from its existing shareholders on a proportionate basis. Hence, the Letter of offer shall be sent to all the existing shareholders of the Company and it is the discretion of the shareholders whether they wish to tender their shares or not.

  8. 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.

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

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