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Buy Back of Sharesby Harsh Juneja
Meaning BUY-BACK IS A CORPORATE ACTION IN WHICH A COMPANY BUYS BACK ITS SHARES FROM THE EXISTING SHAREHOLDERS USUALLY AT A PRICE HIGHER THAN MARKET PRICE.
Reasons • To increase promoters holding
• Increase EPS
• Maintaining shareholders’ value in a situation of poor state of secondary market by a return of surplus cash to the shareholders
• Restructuring the debt-equity mix
• To return surplus cash not required by business to shareholders
Economics
Increase in Market Price post buy back
• This increase is due to high demand at the time of buy back
Market Price stabilizes
• Once this arbitrage is covered, the prices of securities settles down at Intrinsic Value
Legal framework
SEBI (Buy-Back of Securities)
Section 68, 69 and 70 of the Companies Act, 2013
Rule 17 of the Companies (Share
Capital and Debentures) Rules, 2014
Section 68 - Power of Company to Purchase its Own Securities
Securities Premium Account
Proceeds of the issue of any shares or other specified
securities
Free Reserves
A company may buy-back its own shares or other specified securities out of-
No buy-back 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 shares or same kind of other specified securities.
•Authorization by AOA
•Board Resolution (at board meeting) is required if buy-back is up to 10% of the aggregate of paid up equity capital and free reserves
•Special resolution will be passed if the company wants to buy back more than 10% of the aggregate of the paid up capital (equity and preference) and free reserves
• In the case of buy back of equity shares only, the buy back in any financial year shall not exceed 25% of the paid up equity capital
•Debt-Equity Ratio post buy back ≤ 2:1
•All securities are fully paid up
• For listed companies, in accordance with SEBI Regulations
• For unlisted companies, in accordance with rules
•No offer of buy-back under this sub-section shall be made within a period of 1 year from the date of the closure of the preceding offer of buy-back, if any.
Conditions
Section 68 - Power of Company to Purchase its Own Securities
Example • 60,000 equity shares of Rs. 100 each
• General Reserve – Rs. 36,00,000
• P&L(Cr) – Rs. 40,00,000
• Security Premium – Rs. 4,00,000
• Secured Loans – Rs. 40,00,000
• Unsecured Loans – Rs. 20,00,000
• Offer Price – Rs. 250
Free Reserves 80 Lacs 80 Lacs
Paid-up Capital 25% 0F 60 Lacs = 15 Lacs 15 Lacs/100 = 15000 shares 15000 x 250 = 37.5 Lacs
37.5 Lakhs
Debt-Equity Ratio 140 Lacs (–) 50% of 60 Lacs 110 Lacs
Paid up Capital & Free Reserves 25% of 140 Lacs 35 Lacs
Number of shares for buy-back 35 Lacs/250 14000 shares
Buy-back
Section 69 – Transfer of certain sums to Capital Redemption Reserve
Section 70 - Prohibition for Buy-Back in Certain Circumstances
P ro
h ib
it io
n f
o r
B u
y- B
ac k
Subsidiary company
companies
If a default is made in-
Repayment of Deposits or interest thereon
If the default is remedied and a period of 3 years has
lapsed
Repayment of any term loan or interest payable to any
financial institution or bank
BOD Resolution/SR File SH-8 (Draft LOD) with SH-9 Dispatch of LOD to shareholders
Open a special bank account All shares lodged with the
Company shall be verified within 15 days from closure of the offer
Offer shall be kept open for minimum 15 days and maximum
30 days
Extinguish certificates within 7 days from payment
Within 7 days from verification, payment to be made or shares to be given back, as the case may be
File SH-11 and SH-15 after the completion of buy-back
Procedure for Pvt Co./Unlisted Public Co.
SEBI (Buy-Back of Securities)
Number of securities entitled as per their shareholding
15% of the number of securities which the company proposes to buy-
back
Whichever is higher
Small shareholders means shareholders holding shares of a company whose market value as on record date is not more than Rs. 2 Lacs
Date of passing SR/BR
Submit public announcement to SEBI
Public announcement Indicating record date
File draft LOO and Declaration of Solvency with SEBI
Incorporate SEBI comments/changes
Opening offer date
Offer closing date
2 working days
Compliance certificate to SEBI
BoD and Merchant Banker shall determine cut-off price
Date of Closing buyback offer
Within 7 working days
Bidding shall take place through minimum 30 electronically linked bidding terminals all over India
Buy-back shall be kept open for Min – 15 Days & Max – 30 Days
P.A. in newspapers
Same cut-off price shall be paid to all successful bidders (SHs) who have bid
at or below the cut-off price
File the copy of PA to SEBI
Within 2 working days
Public announcement in newspaper and submit the same to SEBI
Date of opening buyback offer
Extinguish all shares received in BuybackDate of Closing buyback offer
Within 2 working days
Within 7 working days
Within 7 working days
Inform SE on daily basis about quantum of shares bought
back
Special note: Promoters cannot sell or tender their shares to the company during
the 6 months buyback period
Buyback shall be completed within 6 months
Stock Exchange
Promoter Participation x
First-cum, first-serve x
Spill Over x
Record Dates x
SEBI Informal Guidance in the matter of M/s Infosys Limited
•Regulation 24(i)(b) does not prohibit a company from issuing stock options grant letters during the offer period.
•A company may issue Grant Letters granting ESOPs to eligible employees during the Buyback period in accordance with its Plan
•The minimum vesting period of one year to be computed from the date of issue of grant letters.
The Informal Guidance can be accessed here
Capital Gain u/s 46A
No Impact
Domestic Company
4% H&E Cess
Exempt under section 10(34A)
Company (-)
As an example, suppose XYZ originally issued shares for Rs 10. The shareholder bought the
shares at Rs 400. The company XYZ goes for buy-back of shares at Rs 600. In such case, as per
Section 115QA, tax is payable on Rs 590 (Rs 600 – Rs 10).
Credit - http://www.lawstreetindia.com/experts/column?sid=510
Parameters Reduction of Capital Share buy-back
Restrictions on size No restrictions Restricted upto 25% of paid-up capital and free reserves
Regulatory process/ approvals
SEBI, Lenders, NCLT Board of Directors approval and under section 68 of the Companies Act, the Special Resolution, but subject to limitations of quantum and Compliance with SEBI Regulations
Income tax · Upto to the extent it is treated as deemed dividend – maximum 30% plus surcharge/cess. · Beyond such deemed dividend, taxable as capital gains at the rate of 20% plus surcharges, if long- term in nature and 15%, if short term.
20% plus surcharge/cess payable by the company