In this article we will discuss about the statutory requirements regarding buy-back of own shares by a company:- 1. Conditions for Buy-Back 2. Sources of Funds for Buy-Back 3. Prohibition for Buy-Back 4. Completion of Buy-Back 5. Register of Securities 6. Returns and Declaration.
1. Conditions for Buy-Back:
(a) Must be authorised by Articles.
(b) Shares/securities must be fully paid.
(c) Special resolution of company in general meeting must be passed authorising buy-back.
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The explanatory statement to be annexed to the notice for such a meeting must state:
(i) All material facts in full and completely;
(ii) The necessity for the buy-back;
(iii) The class of security to be bought back;
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(iv) The amount to be invested for the buy-back;
(v) Time-limit for completion of buy-back.
(d) The buy-back should not exceed 25% of the aggregate paid-up value and free reserves of the company, in any financial year.
(e) The debt-equity ratio (after the buy-back) shall not be more than 2: 1 (equity includes free reserves, debt in- eludes secured and unsecured debts), unless a higher ratio of debt is prescribed by the Central Government for a class or classes of companies.
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(f) The buy-back may be affected from the following, viz.
(i) Existing security holders on a proportionate basis; or
(ii) The open market; or
(iii) Old lots i.e. the lot of securities of a listed public company smaller than market lots specified by recognised stock exchange(s); or
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(iv) Employees’ securities issued to them under a scheme of stock option or sweat equity.
(g) The buy-back of shares/specified securities other than those listed on any recognised stock exchange is as per guidelines as may be prescribed.
2. Sources of Funds for Buy-Back:
(a) Free reserves; or
(b) Securities premium account; or
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(c) Proceeds of any shares or other specified securities other than proceeds of any earlier issue of same kind(s) of shares/securities.
3. Prohibition for Buy-Back:
No company can directly or indirectly resort to any buy-back:
(a) Through its own or other subsidiary companies; or
(b) Through any investment company/companies; or
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(c) In case(s) of subsisting default(s) in payment of interest on or repayment of any deposit or of any term loan from any financial institution or bank, redemption of debentures or preference shares or payment of dividend to any shareholders); or
(d) In case of non-compliance with provisions of Sections 150 (maintenance of Register of Members), 207 (payment of dividend within 30 (thirty) days of declaration thereof and 210 (form and contents of Balance Sheet and Profit and Loss Account.
4. Completion of Buy-Back:
Every buy-back must be completed within 12 (twelve) months from the date of passing of the special resolution as per 1(b) above.
After completion of a buy-back a company cannot make any further issue of the same kind of securities (including allotment of further shares under Sec. 81(i)(a) or other specified securities within a period of 24 (twenty four) months except by way of a bonus issue or in the discharge of subsisting obligations like conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
5. Register of Securities:
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A company that buys back its securities must maintain a register of such securities, containing entries, inter alia, of consideration paid for the securities, date(s) of cancellation, extinguishing and physically destroying the concerned securities which must be done (within seven days from the last date of completion of the buy-back) and such other particulars as may be prescribed. The Register is to be as per Form No. 4B.
6. Returns and Declaration:
The following returns are required to be filed:
(a) Form No. 23 with the Registrar within 30 days of passing of the special resolution authorising the buy-back.
(b) A declaration in Form No. 4A verified by an affidavit signed by at least two directors including the managing director, if any, to the effect that as a result of a full enquiry into the affairs of the company the Board have formed an opinion that the company is capable of meeting its liabilities and will not be rendered insolvent within 1 (one) year of the date of declaration, to be filed before making a buy-back with the Registrar and the Securities and Exchange Board of India (only when the company’s shares are listed with any recognised stock exchange).
(c) A return in Form No. 4C containing such particulars relating to a buy-back, as may be prescribed, to be filed within 30 (thirty) days of completion of such buy-back to the Registrar and Securities and Exchange Board of India (only when the company’s shares are listed with any recognised stock exchange.