What is Buyback of securities?

What is Buyback of securities? Company


Hello Enthusiasts; you must have heard about a Company purchasing its own securities; well let us discuss about this action of Company which is popularly known as Buyback of Securities by the Company.
Talking about the Law, Sec 68-70 of The Companies Act, 2013 covers the topic of Buyback of Securities.

What is Buyback of securities?
As per the provisions, Buyback is the re-acquisition by a Company of its own securities. It is a way of returning money to its investors.
Buyback is done by the Company generally at a price higher than the market price for various reasons such as to pump up the value of share in the market, or to distribute excess cash to the shareholders; because many times many industries doesn’t have much growth opportunities. Last year in 2021, TCS had bought back more than 53.3 million equity shares at Rs.3000 per share under buyback offer. This happens especially in the case of IT industries.

Sources of Funds:
Now coming to the sources of funds which should be used by the company for the purpose of Buyback are its Free reserves; or the securities Premium  Account; or the proceeds of the issue of any shares or some other specified securities as prescribed in the law i.e. employees’ stock option.
For more guidance, contact our experts today.

Conditions for Buy Back:
When a company does buyback; there are certain conditions specified by sec 68 of The Companies Act, 2013 which needs to be followed:
a)     Buyback should be authorized by its articles,
b)    A Special resolution should be passed. However, SR is not needed if the Buyback is 10% or less of the total paid up equity capital and free reserves of the company provided Board Resolution is passed.
c)     Buyback should not exceed 25% of paid up capital and free reserves of the Company; 
d)    The ratio of the aggregate debts(secured and unsecured) owed by the company after buy back is not more than twice the paid up capital and its free reserves;
Likewise there are some other conditions too which needs to be followed. Do get in touch with us for further assistance.

Procedural Checklist:
a)    Post Buy Back Debt Equity ratio should not exceed 2:1
b)    After a Buyback is completed, the next Buyback should be after a minimum period of one year.
c)    As per Section 70, a company shall not directly or indirectly purchase its own shares through any subsidiary company including its own subsidiary companies or through any investment company;
d)    The buy-back may be— a. From the existing shareholders or security holders on a proportionate basis; b. From the open market; (for listed companies only) c. By purchasing the securities issued to employees of the company pursuant to a scheme of  stock option or sweat equity.
e)    Form MGT-14 should be filed with the Registrar within 30 days of passing the Special Resolution.
f)    After passing of SR but before buy back, the company should file a letter of offer in Form SH 8 to the Registrar signed by 2 directors. It should also be dispatched to the Shareholders within 20 days from filing to the Registrar.
g)    The offer of Buyback should be open for a maximum period of 30 and minimum period of 15 days. 

Procedural issues:
Well, Buyback is not as easy as it appears, it involves various compliances which should be complied with and it involves professional expertise like relating to resolution and approvals to be taken and whose securities to be purchased under Buyback. But, now you don’t need to panic as we are here to help you through the entire process.

Time-limit for completion of buyback:
Buyback shall be completed within twelve months from the date of passing of the Special Resolution or Board Resolution as the case maybe.

Declaration of Solvency:
After passing the requisite resolutions, the company has to file Declaration of Solvency in Form SH 9 to the Registrar and SEBI and should also be verified by an affidavit that the Board has made a full inquiry into the affairs of the Company that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration of solvency adopted by the Board.

Cooling Period:
After the completion of entire process of Buyback, the company shall not issue further shares of same kind within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, sweat equity etc.

Register of Buyback:
A Register should be maintained relating to shares bought, consideration paid for shares, the date of cancellation of shares, etc. in Form SH 10.

Filing of Return of Buy-Back:
Return relating to Buyback should be filed with the Registrar and SEBI if shares are listed on any recognized stock exchange in Form SH 11 along with a certificate in Form SH 15 signed by two directors of the company including the managing director, if any certifying that the buy-back of securities has been made in compliance with the provisions of the Act and rules.

If a Company defaults in complying with the provisions of The Companies Act, 2013 or any regulations made by SEBI; penalty will be imposed on the Company and every officer of the company who is in default as follows:
  Minimum of Rs.1 Lakh and maximum of Rs. 3 Lakh.

So, till now you all must have understood a lot about Buyback. Please feel free to take our guidance and contact our experts for any queries or assistance relating to any issues or procedural aspects.


Related Blogs