Transaction Advisory Services
| November 04
A snapshot of shares buy back
Many a times a Company might face the need to reduce its Capital owing to several operational and financial reasons and emergencies. One of the most common methods of Reduction of Share Capital is by way of Buyback of shares. Shares Buyback refers to the situation wherein the corporate entity whose buys or purchases its own shares listed on a particular stock exchange. The shareholders are paid back the market value of the shares and the company re-absorbs such shares in its capital.
However such a process is not solely orchestrated by the Company, many times pressure from investors (Activist Investors) forcing the company to re-evaluate and articulate alternative uses of capital. Many priorities behind such buy-backs in open market are based on setting and utilizing a fixed time frame, which makes it urgent for the Board of Directors which shall strike a fine balance between ling-term strategies and risk management. Buy-backs and its initiation are also guided by the behavior of the peers operating on a similar capital structure. It prevents takeovers and mergers thus preventing monopolization and aiding the survival of consumer sovereignty. On the other hand Buy back can help in manipulating the records in flatting share prices, Price-Earnings Ratio, Earning per share, thus misleading shareholders.
Upon acceptance of this resolution, the amount raised via buy-back is to be kept in a separate account (Capital Redemption Account). Hence, the short-time viewpoints behind buy-back decisions scream hysteria. The present emerging corporate world and tightening regulations, long-term visions and availability of cash in hand to foster growth and vision are important underlying considerations.
There are various reasons due to which Buyback of Shares takes place as summarized below:
- When Company is in need of emergency shares;
- Company may also execute a buyback of shares so as to provide higher dividend to its shareholders in the form of additional surplus;
- Buyback of shares is a common activity when the Company is about to take over another corporate entity or merge with another company or go through any form of corporate restructuring;
- Further the cash from the buyback of shares also helps the Company to utilize the funds for activities which it is otherwise not able to finance due to lack of liquidity;
There are various sources from which the Company can buy-back its shares. These sources include Company’s free reserves, security premium account or even from the proceeds of issued shares. Buyback of Shares is governed under Section 68, 69 and 70 of the Companies Act 2013 (hereinafter the ‘Act’), SEBI (Buy-back of Securities) Regulations, 2018 and Companies (Share Capital and Debentures) Rules, 2014. Corporate entities intending to buy back their shares are supposed to follow the given below procedure:
i. A Company can buy back its shares or securities only if the same is permitted according to the provisions in the Articles of Association (AOA) of the Company as well. Further prior to such buy back a special resolution is required to be passed in the General Meeting of the Company hereby authorizing such a purchase of its own shares;
ii. It is to be Noted that a Company cannot execute a buy-back of shares until and unless a period of one year has elapsed since the previous buy-back of shares if any;
iii. Whenever the Company is about to hold a Meeting for passing the Special Resolution with respect to Buy-back of shares, then the meeting notice must reveal in detail all the material facts with respect to such a buy-back such a class of shares and time period that will be invested for the whole process to come around. Further the Notice should also show cause and circumstance out of which the Company is taking that route to reduce Share Capital. This mainly done as a buy-back of shares not only affects the Company but also directly affects the Board Members of the Company;
iv. It is pertinent to note that a Company must complete the process of purchasing its shares within one year from the date on which the special resolution to buy back the shares was passed;
v. Once the Special resolution has been passed, the next step for the Company is to file Form SH 9 with the Registrar of Companies (ROC) and Securities Exchange Board of India (SEBI). This form must be signed by at least two directors among which one should be the MD or the Managing Director of the Company. It is to be noted that this compliance only applies on Companies whose shares are listed on a recognised stock exchange. For an unlisted Company, such a notice in the form is to be filed with only the Registrar of Companies;
vi. In addition to this, the Company is required to maintain a register in Form SH 10 keeping a record of the shares and securities that were re-purchased by the Company from the stock exchange including the date records;
vii. Once the buyback is completed, the Company whose shares are listed must file a return in the Form SH 11 before the ROC and SEBI detailing the various particulars of the buyback process. In case the Company is unlisted, it should file this form only before the Registrar of Companies;
Apart from the knowledge of the above mentioned exhaustive process of buy backing of shares, a Company must be vary of the various restrictions that it is subjected to before initiating such a buyback. These restrictions form part of the Section 70 of the Act and are as follows:
i. Companies who are desirous to buy back shares cannot do so via their subsidiary entities whether it is owned by them or not. The same restriction applies to the mode of investment companies;
ii. Further the restriction is valid when such a Company has failed to comply with the requirement of filing annual return in Form MGT 7;
iii. Similarly if the Company fails to file a declaration with respect to dividend for that particular Financial Year, it shall not be allowed to buy back its shares;
iv. Lastly if the Company’s Financial Statements are found to be contrary to any provision of the Act, then it will not be permitted to reduce its capital by way of buyback of shares;
Thus it won’t be wrong to say that the process of buyback of shares offers a way of respite to Companies facing fall in the value of their listed stocks which directly affects their freedom to utilize the capital in the profitable manner. Where this buyback process is increasingly helpful to Companies, new shareholders must take in consideration all the pros and cons before investing in such corporate entities going through shares buyback process.