The concept of buyback of securities has gained significant traction as a means
for companies to return surplus cash to their shareholders and optimize their
capital structure. In recent years, buyback regulations in India have emerged as
a crucial aspect of capital market operations.
The term "buyback" has not been
defined specifically neither in the Companies Act, 2013 nor in SEBI regulations.
In general, buyback implies the act of a company buying its own shares or
securities. The buyback of shares is also known as a stock buyback or repurchase
of shares. Buyback leads to reduction of share capital [i]and is an effective
way of influencing the share prices in the market by the company and
consolidating the ownership.
The regulatory landscape governing buybacks in India is primarily governed by
the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI)
(buy-back of securities) regulations, 2018. These regulations ensure
transparency and protect the interests of investors.
regulations is crucial for investors, market participants, and company
executives alike, as compliance plays a vital role in ensuring fairness,
transparency, and protection of shareholder interests. This article delves into
the concept of buyback, applicable provisions, reasons for buyback, conditions,
and procedure of buyback of securities.
Applicable Provisions Of The Companies Act, 2013:
- Section 68 of the Companies Act, 2013 - It deals with the power of the company to purchase its own securities.
- Section 69 of the Companies Act, 2013 - It deals with the transfer of certain sums to capital redemption reserve account.
- Section 70 of the Companies Act, 2013 - It prohibits buyback in certain circumstances.
- Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014.
Reasons For Buyback
A company buys back its own securities for various reasons including the
- To enhance the consolidation of stakes in the company: Buyback can be utilized as a strategic tool to consolidate the ownership structure of a company. When a company buys back its own shares, fewer shares are available for sale in the market, which effectively concentrates ownership among the remaining shareholders.
- Tax Efficiency: Buyback can offer tax advantages for shareholders compared to receiving dividends. In India, the capital gains tax on the income from the buyback of shares is exempted for the investor.
- To achieve optimum capital structure: Buybacks allow companies to optimize their capital structure by reducing the amount of equity capital outstanding. When a company repurchases shares, the remaining shareholders' ownership stakes increase proportionately, potentially boosting their confidence and the overall market perception of the company's value. Through buyback, companies can also improve key financial metrics such as earnings per share (EPS) and return on equity (ROE).
- To support share price during periods of the sluggish market: In certain cases, companies may engage in the buyback of securities to provide support to their own share price and stabilize the market. By repurchasing shares, companies can demonstrate confidence in their business and create a positive perception in the market, potentially mitigating price volatility and attracting investor interest.
- Surplus Cash Utilization: When a company generates excess cash beyond its immediate operational and investment needs, a buyback can be an effective way to utilize those funds. By repurchasing shares, the company can deploy its surplus cash and potentially increase the value of the remaining shares.
Sources Of Buyback Of Shares
According to the Companies Act, 2013, a company may purchase its own shares or
specified securities out of:
- free reserves,
- the securities premium account,
- the proceeds of the issue of any shares or other specified securities.
However, no buy-back of any kind of shares or other specified securities shall
be made from the proceeds of an earlier issue of the same kind of shares or the
same kind of other specified securities.[iii]
Methods Of Buyback In India:
SEBI regulations provide for two main methods of buyback in India:
- Tender offer method: In this method, the buyback happens through the letter of offer given to the shareholders by the company at a fixed price within a given time frame. In this method, the company makes a direct offer to shareholders to purchase a specified quantity of shares at a specified price.
- Open market offer method: In this method, buyback happens through the stock exchange mechanism. The corporation sets a maximum price and has the option to buy back shares at any price up to that amount. Here the price of the shares is not fixed. The company usually opts for the open market offer to reward the existing shareholders.
However, through a recent notification, SEBI has decided to phase out buyback
through the open market offer method.[iv]
Conditions Of Buyback:
As per section 68(2) of the Companies Act, 2013 and Regulation 4 of SEBI
(Buyback of securities) regulations, 2018, the conditions of buyback are:
- Authorisation by articles of association: Companies Act, 2013 provides that the buyback of securities must be authorized by the AOA of the company. If no such provision exists in AOA, AOA must be altered to authorize the buyback of securities.
- Approval of buyback: The Buyback of securities must be approved by the Board of Directors if the buyback is up to 10% of the Paid up capital and free reserve. Approval must be obtained from the shareholders of the company if the buyback is up to 25% of the Paid up Capital and free reserves.
- Maximum limit: The maximum limit for the buyback of securities shall be between twenty-five percent or less of the aggregate of paid-up capital and free reserves of the company.
- Declaration of solvency: When a company proposes to buy back its own shares, it shall before the buyback, file with Registrar and SEBI a declaration of solvency signed by at least two directors of the company in Form No. SH 9.[v]
- Debt-Equity ratio: The debt-equity ratio after the buyback must be 2:1 (Debt/ (Equity Capital + Preference Capital + Reserves).
- Only fully paid-up shares can be bought back by the companies.
- The buy-back must be completed within 12 months of passing the Resolution.
- According to the Companies Act, 2013 the shares bought back must be extinguished/destroyed within 7 days of completion of buy-back.
- If the Buyback is being done out of Free Reserves of the company, then an amount equal to the Nominal Value of the shares bought back must be to be transferred to the Capital Redemption Reserve Account (CRR account). [vi]
The Procedure For The Buyback Of Securities:
Prohibition Of Buyback In Certain Cases:
According to section 70 of the Companies Act, 2013, a company must not buyback,
either directly or indirectly in certain cases:
- In the first stage, when the AOA of the company authorizes buyback, the company approves the buyback proposal in the board meeting by passing a board resolution.
- Later, a special resolution must be passed at the general meeting of the company authorizing the buyback of securities, which shall be accompanied by an explanatory statement containing, the necessity of the buyback, the amount to be invested under the buyback, etc.[vii]
- After that, the company makes a public announcement for the buyback.
- A copy of the resolution passed at the general meeting shall be filed with the Board and the stock exchanges where the shares or other specified securities of the company are listed, within seven working days from the date of passing of the resolution.[viii]
- The company which has been authorized by the special resolution shall, before the buyback file with Registrar of Companies, a letter of offer in Form No. SH 8 [ix]along with the fee. Such letter of offer shall be signed on behalf of the board of directors by not less than two directors of the company, one of whom shall be the managing director. This letter of offer shall be dispatched to the shareholders immediately after filing the same with ROC but not later than 21 days from its filing with the registrar.[x]
- Interested shareholders approach their stockbrokers to tender their shares for buyback or put their bid for buyback in case of an open market offer.
- Then registrar scrutinizes the tender forms and informs them about the acceptance or non-acceptance of the tender forms.
- The securities purchased in the buyback are to be physically destroyed/extinguished by the company within 7 days of the buyback of securities.[xi]
- The company must maintain a separate register for the buyback of securities in Form No. SH-10 [xii]and make an entry of the buyback of securities.
- As a final step, as per the Companies Act, 2013, the company must file a return with the Registrar and SEBI in Form No.SH-11. [xiii]
Penalty For Default:
- Through its subsidiary company, including its own subsidiary Company,
- Through any investment company or group of investment companies,
- If the company defaults in repayment of deposits, interest payment thereon, the redemption of debentures or preference shares, payment of dividend to any shareholder, and repayment of any term loan or interest thereon.
- If the Company has not complied with the provisions of Section 92 (Annual Return), Section 123 (Declaration of Dividend), Section 127 (Punishment for failure to distribute dividends), and Section 129 (Financial Statements).
If a company makes any default in complying with section 68
of the act or any other provision, the company shall be punishable with a fine
which shall not be less than one lakh rupees which may be extended to three lakh
rupees and every officer of the company shall be punishable with imprisonment
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.[xiv]
Buyback regulations in India have undergone significant changes in recent years
aimed at protecting the investor's interests and the overall stability of
financial markets. The buyback regulations play a significant role in shaping
corporate actions and protecting shareholder interests. Buybacks provide
companies with a mechanism to efficiently allocate capital, return excess cash
to shareholders, and mitigate dilution. Additionally, they can serve as a
defensive strategy against takeovers, strengthen shareholder engagement, and
consolidate stakes in the company.
Compliance with all the rules and regulations given under Companies Act, rules,
and SEBI regulations is essential as they have been instrumental in maintaining
transparency and maintain a fair and efficient market environment. These
measures are designed to prevent the misuse of buybacks and protect the
interests of minority shareholders.
- Section 66 of Companies Act, 2013
- The Impact of Share Repurchases on Financial Accounting (investopedia.com)
- Section 68(1) of Companies Act, 2013
- section 68 (6) of the Companies Act, 2013 & Rule 17 (3) of Companies (Share Capital and Debentures) Rules 2014.
- Section 69 of Companies Act, 2013 and Regulation 11 of SEBI(buyback of securities) Regulations, 2018
- Regulation 5 of SEBI(buyback of securities) Regulations, 2018
- Regulation 5 of SEBI(buyback of securities) Regulations, 2018
- Section 68 of the Companies Act 2013 rule 17(2) of the Companies (Share Capital & Debentures) Rules, 2014.
- Rule 17 (4) of Companies (Share Capital & Debentures) Rules, 2014.
- Section 68(7) of Companies Act, 2013
- section 68 (9) of the Companies Act, 2013 & Rule 17 (12) of Companies (Share Capital and Debentures) Rules 2014.
- Section 68(10) of the Companies Act, 2013 and rule 17(13) of the Companies (Share Capital & Debentures) Rules, 2014
- Section 68(11) of Companies Act, 2013.