Buyback of Shares

What is meant by Buyback of Shares? The repurchase of the outstanding shares by a company in order to reduce the number of shares in the market. Companies will buy back either to increase the value of shares still available( reducing supply), or to eliminate any threats to the shareholders who may be looking for a controlling stake. A buyback allows companies to invest in themselves to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns

The ways of carrying out Buyback Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them. Companies buy back shares on the open market over an extended period of time.

Why do companies opt for Buyback? A company which possesses huge cash reserve but has no upcoming projects to invest into. In that case the company may plan to invest in itself and offer the existing shareholders an option to sell their shares to the company at an attractive price. It is similar to reinvesting its cash in itself which also aims at bringing in dilution in the markets as outstanding shares in the market are reduced.

A company may also go for buybacks with an aim of projecting better valuation of their stocks when they think it is undervalued in the market. The reason is companies buy its shares at higher price than current market price which indicates that its worth in the market is more than the present value. This in turn shoots up company’s stock prices post buy back.

Some companies may also use it as a tool to change their capital structure i.e. debt-equity ratio in specific. By buying back the shares from open market, a company may increase its reliance on the debt financing rather than equity financing. Moreover interest payment on debt is tax deductible. So after tax cost of debt is quite lesser than shareholders return on equity.

Companies also go for buyback with intent of projecting better financial ratios as indicated below: Earning per Share = Earnings Shares Outstanding Since outstanding shares reduce, the company’s earnings are now divided amongst less number of shares for calculating EPS value. From investor’s point of view, higher the earnings per share, better it is as an investment option. Thus even though the earnings of a company are still the same, but EPS value post buyback is increased. 

Legal Framework for Buyback of Shares Companies Act, 2013 Companies (Share Capital and Debentures) Rules, 2014 Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998 and Securities and Exchange Board of India (Buy-back of Securities) (Amendment) Regulations, 2013

For Unlisted public and private companies Section 68, 69 and 70 of Companies Act , 2013 Rule 17 of Companies (Share capital and Debentures) Rules, 2014 For listed companies Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998 and Securities and Exchange Board of India (Buy-back of Securities) (Amendment) Regulations, 2013

Section 68 : Power of Company to purchase it’s own securities Purchases can be made out of : No buyback of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of other specified securities. Securities Premium Account Proceeds of the issue of any shares or other specified securities Free Reserves

Must be authorized by the articles Preliminary Conditions Must be authorized by the articles A special resolution should be passed at the general meeting authorizing the buyback , but the same is not required when: 1)The buyback is 10% or less of the total paid up capital equity capital and free reserves of the company. 2) such buy-back has been authorized by the Board by means of a resolution passed at its meeting The buy-back should be 25% or less of the aggregate of paid-up capital and free reserves of the company. But in case of Equity Shares, the same shall be taken as 25% of paid up equity capital only. Debt equity ratio should be 2:1

Explanatory Statement The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement stating various details as required Time Limit Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board Options for Buyback The buyback can be from 1. The existing shareholders or security holders on a proportionate basis 2. The open market 3. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity

Solvency Declaration A declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director. Form No. SH.9 may be prescribed and verified by an affidavit to the effect that the Board of Directors of the company 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 liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board Extinguishment of Certificate Company shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back No further issue till 6 months The company 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

Register to be maintained The company shall maintain a register in Form No SH10 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 distinguishing and physically destroying the shares or securities

Return of Buy Back & a Declaration The company shall file with the Registrar a return in Form No.SH 11 containing such particulars relating to the buy-back within thirty days of such completion. Punishment for any Default If a company makes any default in complying with the provisions of this section, 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.

Section 69 – Transfer of certain sums to Capital Redemption Reserve Account Where a company purchases its own share s 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. Utilization of Capital Redemption Reserves 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.

Section 70: Prohibition for Buy Back in certain circumstances Restriction on Buy Back No company shall directly or indirectly purchase its own shares or other specified securities— Through any subsidiary company including its own subsidiary companies Through any investment company or group of investment companies If a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, 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

Companies (Share Capital and Debentures) Rules, 2014 Rule 17: Buy-back of shares or other securities Information disclosure in Explanatory Statement to be annexed with Special Resolution and Notice of General Meeting File Letter of Offer with ROC in FORM SH-8 File Declaration of Solvency in FORM SH-9 along with FORM SH-8 Circulate among the Shareholders in 20 days from filing with ROC Offer Period between 15-30 days from the date of Circulation Verification of the offers received by the company Opening a separate bank account as would make up the entire sum for the buy back of shares Make payment or return the share certificates Maintain register for Buy back in the Form SH-10 File return for buy back in form SH-11 File compliance certificate in the form SH-15

Prohibitions 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 Section 123: Declaration and Payment of Dividend Section 127: Failure to pay Dividend Section 129: Failure to give True and Fair Statement

Recent Developments FinMin announces buyback of IIBs linked to WPI The finance ministry announced the buyback of Inflation Indexed Bonds (IIBs) linked to the wholesale price index (WPI). The government will repurchase "1.44% Inflation Indexed Government Stock-2023" through reverse auction for an aggregate amount of Rs 6,500 crore (face value).  Reserve Bank of India (RBI) had suggested to the finance ministry that the government buy back Inflation Indexed Bonds (IIBs) linked to the wholesale price index (WPI), reasoning that this is no longer the most important measure of prices.  Auction for securities will be on price based auction format. The auctions will be conducted using multiple price method. Bids for the auction should be submitted in electronic format on the Reserve Bank of India Core Banking Solution (E-Kuber) system on January 14, 2016.  The result of the auctions will be announced on the same day 

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