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Buy Back of Shares Legal Aspects

Posted on 09 Jun 2011 by admin | Filled under: regulatory-compliance

Introduction:

When a company has substantial cash resources , it may like to purchase its own shares from the market particularly when the prevailing rate of its share in the market is much lower than the book value .the legal aspects involved in this connection are described as under:

Under section 77A of the Indian companies Act, 1956, a company may purchase its own shares or other specified securities out of - its free reserves; or the securities premium account; or the proceeds of any shares or other specified securities. but no buy-back of any kind of shares or other particular securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

(1)There is also an embargo that no company shall purchase its own shares or other specified securities unless the buy-back is authorized by its articles; a special resolution has been passed in general meeting of the company authorizing the buy-back. However, the buy-back is of less than ten per cent of the total paid-up equity capital and free reserves of the company; and such buy-back has been authorized by the Board by means of a resolution passed at its meeting then the articles approval and special resolution is not required. A company is prohibited from going for further buy-back within a period of three hundred and sixty-five days, reckoned from the date of the earlier offer of buy-back.

It is very clear that, unless the company enforces strict corporate governance principles it is hard to expect from the company’s board that, it will fairly exercise the power granted to buy back shares upto ten per cent of the of paid up capital and free reserves.

(2)A company cannot buy back its shares from the market more than twenty-five per cent of the total paid-up capital and free reserves of the company at a time. Further, buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year, while the debts (of all types) of the company shall not be more than twice the capital and its *free reserves after such buy-back. For certain companies the Central Government may prescribe a higher ratio.

It gives capricious to the Central Government regarding prescribing a higher ratio for certain companies. The ratio of buyback of shares upto 25% may have been restricted to less than 20%, as the present limit is 1/4th of the capital of the company.

In case of securities listed in the recognized stock exchange, the company planning for buyback should get the permission ofSEBI. It is important to note that, only fully paid up shares can be redeemed. No partly paid up shares can be redeemed.

(3)The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating

·Full and complete disclosure of all material facts;

·The inevitability for the buy-back;

·The class of security intended to be purchased under the buy-back;

·The amount to be invested under the buy-back; and

·The time limit for completion of buy-back.

(4)Every buy-back shall be completed within twelve months from the date of passing the special resolution or a resolution passed by the Board under clause (b) of sub-section (2).

(5)The buy-back under sub-section (1) may be

(a)from the existing security holders on a proportionate basis; or

(b)from the open market; or

(c)from odd lots, that is to say, where the lot of securi ties of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or

(d)By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

(6)Where a company has passed a special resolution under clause (b) of sub-section (2) or the Board has passed a resolution under the first proviso to clause (b) of that sub-section to buy-back its own shares or other secu rities under this section, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prearranged and verified by an affidavit to the effect that the Board has made a full inquest into the affairs of the company as a result of which they have formed an opinion that it is capable of meet ing its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any :

Provided that no declaration of solvency shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.

(7)Where a company buys-back its own securities, it shall extin guish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back.

(8)Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make fur­ther issue of the same kind of shares (including allotment of further shares under clause (a) of sub-section (1) of section 81) or other *specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

(9)Where a company buys-back its securities under this section, it shall maintain a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physi­cally destroying of securities and such other particulars as may be prescribed.

(10)A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed. Provided that no return shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.

(11)If a company makes default in complying with the provisions of this section or any rules made there under, or any regulations made under clause (f) of sub-section (2), the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.