Buyback

Buyback of Shares under the Companies Act, 2013

A buyback of shares is a process where a company repurchases its own shares from the shareholders. It is a common method used by companies to optimize their capital structure, return excess cash to shareholders, and improve financial ratios such as earnings per share (EPS). In India, the buyback of shares is regulated under Section 68 to Section 70 of the Companies Act, 2013.

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Important Provisions of Buyback Under the Companies Act, 2013

The buyback process is subject to various conditions specified under the Companies Act, 2013 and related regulations. The key provisions are as follows:

1. Key Conditions for Buyback

Under Section 68 of the Companies Act, 2013, companies must meet the following conditions for a valid buyback:

A. Company Type

Both private and public companies can buy back shares, but certain restrictions may apply depending on the type of company.

B. Financial Solvency

The company must remain solvent post-buyback. Its debt-equity ratio should not exceed 2:1 (i.e., the company’s debt should not be more than twice its equity capital after the buyback).

C. Maximum Buyback Limit

Public Companies: The buyback should not exceed 25% of the total paid-up capital and free reserves in any given financial year.
Private Companies: Buyback cannot exceed 10% of the total paid-up capital.

D. Method of Buyback

A company can repurchase its shares using one of the following methods:
- Open Market: Through stock exchanges (applicable to listed companies).
- Tender Offer: Offering to buy back a specified number of shares at a set price from shareholders.
- Private Treaty: Directly from specific shareholders (only under limited conditions).

E. Sources of Funds

The company must use its free reserves, securities premium account, or cash balances to finance the buyback.

F. No Default in Payments

The company should not be in default in paying any deposits, interest, or principal of any outstanding debt.

2. Procedure for Buyback

The process for conducting a buyback of shares involves the following steps:

1. Approval of Buyback Proposal by the Board of Directors

The first step in the buyback process is for the Board of Directors to approve the buyback proposal. The board must evaluate whether the buyback is in the company’s best interest and consider the following:

The number of shares to be bought back.
The buyback price (which should be determined based on the market price or a specified amount).
The source of funds for the buyback (free reserves, securities premium, or cash balance).

The board must also ensure that the company is solvent and can meet its liabilities after the buyback is completed.

2. Shareholder Approval

Once the board resolution is passed, the company must seek shareholder approval. This is done through a special resolution passed in the general meeting of shareholders. The shareholders must approve the buyback in accordance with the Companies Act, 2013.

Public Companies: A special resolution is required for a buyback (unless the buyback is conducted through the open market, in which case board approval may suffice).
Private Companies: Similar shareholder approval is required.

The resolution must specify:

The maximum number of shares to be bought back.
The maximum price at which the shares will be bought.
The method of buyback (open market, tender offer, or private treaty).

Note: A special resolution requires approval of at least three-fourths of the shareholders voting on the resolution.

3. Filing with the Registrar of Companies (RoC)

After the special resolution is passed, the company must file certain forms with the Registrar of Companies (RoC). These include:

Form SH-8: This form is filed with the RoC to provide details of the buyback, including the number of shares, price, and method of buyback. This must be filed within 30 days from the passing of the special resolution.
Form SH-9: If the buyback is completed, the company must file this form to declare its solvency after completing the buyback. This must be filed within 30 days after the buyback is completed.

4. Public Announcement (If Applicable)

If the company is conducting a tender offer (i.e., repurchasing shares directly from shareholders), the company must make a public announcement. This announcement should contain the following details:

The maximum number of shares to be bought back.
The buyback price.
The date and method of buyback.
The process and timetable for shareholders to tender their shares.

The public announcement ensures that all eligible shareholders have an equal opportunity to participate in the buyback.

5. Declaration of Solvency

Before proceeding with the buyback, the company must pass a solvency declaration. This declaration ensures that the company will be able to meet its obligations after the buyback and is in a position to continue its operations.

The board of directors must certify that after the buyback, the company will remain solvent and able to pay its debts.
The company must also file Form SH-9 (Declaration of Solvency) with the RoC within 30 days from the resolution date.

6. Implementation of the Buyback

For listed companies, the buyback must be completed within 6 months from the date of the passing of the special resolution (as per SEBI regulations). For unlisted companies, the buyback must generally be completed within 12 months.

7. Cancellation of Shares

Once the shares are bought back, they are cancelled and removed from the company’s share capital. This reduction in share capital must be reflected in the company’s financial statements.

The company must update its share capital and balance sheet to reflect the reduction in the number of shares and the updated equity structure.
The company must also file Form MGT 7 with the RoC if there is a reduction in share capital.

8. Post-Buyback Filing with RoC

After completing the buyback, the company must file the following with the Registrar of Companies:

Form SH-9: This form must confirm that the buyback has been completed, and the company remains solvent.
Return of Buyback: This filing confirms that the buyback has been executed successfully and must be done by the company as per the prescribed timelines.

Conclusion

The buyback of shares is a well-regulated process under the Companies Act, 2013, designed to ensure transparency and fairness. The company must follow the prescribed procedure, obtain necessary approvals, and comply with regulatory requirements for completing the buyback. Shareholders, too, benefit from this process, as it can lead to increased value per share, depending on the method and terms of the buyback.

Feel free to contact us for any clarification or assistance in conducting a buyback under the Companies Act.