PURCHASE OF OWN SHARES AND BUYBACK

Purchase of own shares by a company is possible but for legal restrictions.

Restriction on purchase by company or giving loan for purchase of its shares (Section 67):

A company limited by shares or a company limited by guarantee and having share capital shall have no power to by its own shares unless the consequent reduction of share capital is effected under the provision of this Act.

No public company shall give any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company. This financial assistance includes a loan, guarantee, the provision for security or otherwise.

However, this restriction on financial assistance shall not apply to –

(a)  The lending of money by a banking company in the ordinary course of its business;

(b) It the purchase of or subscription for the shares held by trustees for the benefit of the employees or such shares held by the employees of the company;

For this purpose, a scheme should have been approved by company through special resolution and in accordance with the prescribed requirements

(c)  The giving of a loan by a company to its employees other than directors or key managerial personnel for an amount not exceeding their salary or wages for a period of six months with a view to enabling them to purchase or subscribe for fully paid – up shares in the company or its holding company to be held by them by way of beneficial ownership.

A disclosure in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates shall be made in the Board’s report.

This Section shall not affect the right of a company to redeem any preference shares issued by the company.

If a company contravenes the provisions of this section, it shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

POWER OF COMPANY TO PURCHASE ITS OWN SECURITIES (SECTION 68):

This power is called buy – back.

A Company may purchase its own shares or other specified securities out of –

(a)  Its free reserve;

(b) the securities premium account; or

(c)  the proceeds of the issue of any shares or other specified securities.

No buy – back of any kind of shares or other securities shall be made out of the proceeds of an earlier issue of the same kind of share or other specified securities.

No company shall buy – back unless –

(a)  the buy – back is authorised by its articles;

(b) a special resolution has been passed at a general meeting of the company authorising the buy – back.

(c)  The buy – back is twenty – five percent or less of the aggregate of paid – up capital and free reserve of the company;

(d)  The ratio of the aggregate of secured and unsecured debts owned by the company after buy – back is not more than twice the paid up capital and its free reserve; this may be such higher ratio as central government may by order notify;

(e)  All the shares or other specified securities for buy – back are fully paid – up;

(f)   The buy – back of shares or other specified securities listed on any recognised stock exchange is in accordance with the regulation made by the Securities and Exchange Board of India (SEBI);

(g)  The buy – back in respect of shares or other specified securities not listed on any recognised exchange is in accordance with rules as prescribed.

A company may buy – back without special resolution, where –

(a)  The buy – back is ten or less of the total paid – up equity capital and free reserve of the company; and

(b) The buy – back has been authorised by the Board by means of a resolution passed in its meeting

In respect of the buy-back of equity shares in any financial year, the reference to twenty-five percent shall be construed with respect to its total paid-up equity capital in that financial year.

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

(a)  A full and complete disclosure of all material facts;

(b) The necessity for the buy – back;

(c)  The class of shares or securities intended to be purchased under the buy – back;

(d)  The amount to be invested under the buy – back; and

(e)  The time – limit for completion of buy – back.

Every buy – back shall be completed within a period of one year from the date of passing of the special resolution or the resolution, as the case may be.

The buy – back may be –

(a)  From the existing shareholders or security – holders on a proportionate basis;

(b) From the open market; or

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

A company proposing to buy – back, before making such buy – back, shall file with the Registrar a declaration of solvency signed by at least two directors of the company. They shall also verify by an affidavit that the Board of Directors has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liability and will not be rendered insolvent within a period of one year from the date of declaration adopted by the board. Where company has a managing director, one of the signatory shall be managing director.

In case of listed company, this declaration shall also be filed with Securities and Exchange Board of India.

Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.

Where a company completes a buy-back of its shares or other specified securities, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares or other specified securities within a period of six months except by way of a 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.

Where a company buys back its shares or other specified securities, it shall maintain a register of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and other particulars.

A company shall, after the completion of the buy-back, file with the Registrar a return containing such particulars relating to the buy-back within thirty days of such completion. In case of a listed company, this return shall also be filed with the Securities and Exchange Board of India.

If a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

TRANSFER OF CERTAIN SUM TO CAPITAL REDEMPTION RESERVE ACCOUNT (SECTION 69):

Where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.

The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

PROHIBITION FOR BUY – BACK IN CERTAIN CIRCUMSTANCES (SECTION 70):

No company shall directly or indirectly purchase its own shares or other specified securities—

(a)  Through any subsidiary company including its own subsidiary companies;

(b) through any investment company or group of investment companies; or

(c)  if a default, is made by the company, in the repayment of deposits and interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

The buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.

No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of sections 92 (Annual Return), 123 (Declaration of dividend), 127 (Failure to distribute dividend) and section 129 (Financial Statement).

This is all about buy back under this act. We may have additional information, once we may know rules and regulation in this regard.

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