presentation buy back

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  • 7/28/2019 Presentation Buy Back


    By Vishal Shah

  • 7/28/2019 Presentation Buy Back



    Introduction & History of Buy Back Provisions;

    Objectives/Advantages of Buy Back;

    Modes of Buy Back;

    Sources of Buy Back; Conditions for a Buy back;

    Restrictions on Buy Back;

    Income tax Aspect of Buy Back;

    Declaration of Solvency; Brief Procedure for Buy Back through Tender Offer & Book Building


  • 7/28/2019 Presentation Buy Back


    Introduction & History on Buy Back

    Buy back of shares can be understood as the process by which acompany buys its share back from its shareholder.

    Prior to the amendment of the Companies Act in year 1999, therewas no waya company could buy its shares back from the shareholders

    without a prior sanction of the court (except for the preferenceshares). The laws as to the buying of its share by the companies werevery stringent. Some of the ways by which a company could buy itsshares back were as follows:-

    i. Reduction of share capital as given in sections 100 to 104;

    ii. Redemption of redeemable preferential shares under section 80;iii. Purchase of shares under an order of the court for scheme ofarrangement under section 391 in compliance with the provisions ofsections 100 to 104;

    iv. Purchase of shares of minority shareholders under the order of thecompany law board under section 402(b);

  • 7/28/2019 Presentation Buy Back


    Though there were ways by which a company could buy its shares backfrom the shareholders but it could not be done without the sanction ofthe court. This was done to protect the rights of the creditors as well asthe shareholders. But the need of less complex ways of buying itsshares back by the company was always felt. The much needed changein the companies act was brought about by the companies amendmentact 1999. Sections 77A, 77AA and 77Bwere inserted in the companiesact by this amendment. In line with this, SEBI also came out with SEBI(Buy Back of Securities) Regulations, 1998 applicable to listed

    Company. The Private Limited Company and Unlisted PublicCompany (Buy Back of Securities) Rules, 1999 are applicable toPrivate Company and Unlisted Public Company.

  • 7/28/2019 Presentation Buy Back


    Objectives/ Advantages of Buy Back

    1. To improve earnings per share;

    2. To improve return on capital & return on net worth;

    3. To provide additional exit route to shareholders when share areunder-valued;

    4. To enhance consolidation of stake in the Company;

    5. To prevent hostile takeover;

    6. To return surplus cash to shareholders;

  • 7/28/2019 Presentation Buy Back


    Modes of Buy Back

    1. From the existing security holders on a proportionate basis; or

    2. From the open market, through ;

    i) stock market.ii) book building process. or

    3. From odd lots, that is to say where the lot of securities of a publiccompany, whose shares are listed on a recognised stock exchange,is smaller than such marketable lot, as may be specified by thestock exchange; or

    4. By purchasing the securities issued to employees of the companyunder a scheme of stock option or sweat equity;

  • 7/28/2019 Presentation Buy Back


    Sources of Buy Back

    1. Free Reserves - A company may buy back out of its free reserves buta sum equal to the nominal value of the shares so purchased must bedeposited in the capital redemption reserves account.

    2. Securities Premium Account - Though Section 78 of CompaniesAct, 1956 does not mention buy back of securities as one of purpose,however by virtue of clause in Section 77A, i.e. Notwithstandinganything contained in this act, funds in Securities premium accountcan be used to buy back shares.

    3. Proceeds of Fresh Issue - No buy back of any shares or securitiesshall be made out of the proceeds of an earlier issue of the same kindof shares or same kind of securities.

  • 7/28/2019 Presentation Buy Back


    Conditions for a Buy Back

    Authority in Articles of Association of the Company;

    Quantum of Buy Back;

    Debt Equity Ratio Post Buy Back;

    OnlyFully Paid Shares qualify for Buy Back;

    Transfer to Capital Redemption Reserve Account, if free reserves isutilised for Buy Back;

    No issue of any securitytill closure of offer of Buy Back;

  • 7/28/2019 Presentation Buy Back


    No issue of same kind of securitywithin 6 months of completion ofBuy Back;

    Promoters or persons acting in concert shall not deal in securitieswhile Buy Back offer is open;

    Further, no Buy Back should be made which will result in public

    shareholding below the prescribed limit;

    Purchase of Convertible debentures by the Company before the duedate of conversion would deemed to be Buy Back;

  • 7/28/2019 Presentation Buy Back


    Restrictions on Buy Back;

    No company shall buy its own shares or other specified securities -

    i. through any subsidiary companyincluding its own subsidiarycompany.

    ii. through any investment companies or group of investmentcompanies.

    iii. if default is made in preparation of annual accounts;

    iv. if default is made in preparation & filing of annual return;

    v. if default is made in payment of dividend to any shareholder;

  • 7/28/2019 Presentation Buy Back


    vi. if default is made in redemption of thedebentures/preference shares or deposits includinginterest thereon;

    Note: Compounding or curing of above defaults mayqualify for Buy Back.

  • 7/28/2019 Presentation Buy Back


    Income tax Aspects for Buy Back

    Section 46A of Income Tax, 1961 provides that any considerationreceived by security holder form Company on buy back shall bechargeable to capital gain tax.

    Declaration of solvency (DoS)

    Where a company has passed a special resolution or a board resolutionhas been passed under some circumstances to buy back its securities, itshall before making such buy back, file with the registrar and theSecurities And Exchange Board of India, a declaration of solvencyand verified by an affidavit to the effect that the board has made a

    full enquiry into the affairs of the company as a result of which theyhave formed an opinion that it is capable of meeting its liabilities and

    will not be rendered insolvent within a period one year of the date ofdeclaration, and signed by at least two directors of the company, oneof whom shall be the managing director, if any.

  • 7/28/2019 Presentation Buy Back


    Brief Procedure for Buy Back through Tender Offer

    Board Meeting -Decision for


    Public Notice, if



    if applicable

    Appointment of




    Filing of draftLOO & DoS

    with SEBI & STX

    SEBI Clearance& Filing of LOO

    with SEBI & STX

    Specified dateDispatch of

    LOO & Advt. inNewspaper

    Opening of offerfor Buy-back

    Closure of offer

    for Buy-back

    Payment toSecurity holders

    Extinguishmentof Certificates

    Filing of Return

    with ROC

  • 7/28/2019 Presentation Buy Back


    Brief Procedure for Buy Back through Book Building


    Board Meeting -Decision for



    if applicable

    Appointment of


    Opening ofEscrow Account



    Filing of copy ofPA with SEBI &


    Opening of offerfor Buy-back

    Closure of offerfor Buy-back

    Determinationof Price

    Payment toSecurity holders


    of Certificates

    Filing of Returnwith ROC

  • 7/28/2019 Presentation Buy Back