BUYBACK OF SECURITIES

Helen Mary Varghese

LL.M Ph.D
 INTRODUCTION

• A corporate action in which a company buys back its shares from the existing shareholders,
usually at a price higher than the market price
• . When the Company buy-back the Shares, the number of Shares outstanding in the market
reduces/fall. It is the option available to Shareholder to exit from the Company business.

• To increase promoters holding

• Increase EPS
• Tax exemptions
• Restructuring the debt-equity mix
• To counter a hostile takeover
• To return surplus cash
 COMPANIES ACT – SS. 68,69,70

1. Buyback should be authorized by AoA

• no buy-back be made out of the proceeds of an
2. Special resolution passed at general meeting
authorizing buyback earlier issue of the same kind of shares or the same

NO special resolution needed when, kind of other specified securities

• buy-back is 10% or less of the total
paid-up equity capital and free 6. Buyback to be less than 25% of the aggregate of paid up
reserves of the company; and
• such buy-back has been authorized capital and free reserves [RESOURCE TEST]
by the Board by means of a
resolution passed at its meeting;
7. Co. cannot buyback more than 25% of the no. of shares

3. Buyback from : issued/outstanding [SHARES OUTSTANDING TEST]

• Free reserves; or
8. Debt-equity ratio - 2:1 [DEBT-EQUITY RATIO TEST]
• Securities Premium A/c; or
• Proceeds of the issue of any shares or other LOWEST OF 3 TO BE ADOPTED
specified securities.
9. All the shares for buy-back are fully paid-up;
10. Shall be completed within 1 year from the date of 10. When buyback is initiated through special
passing of the special resolution resolution, a declaration of solvency signed by at
least two directors and verified by an affidavit to
11. Buyback may be:
be submitted to Registrar and SEBI – IF it is
• from the existing shareholders or security holders
capable of meeting its liabilities and will not be
on a proportionate basis;
rendered insolvent within a period of one year
• from the open market; from the date of declaration adopted by the

• by purchasing the securities issued to employees Board:

of the company pursuant to a scheme of stock • no declaration of solvency to be filled by an

option or sweat equity unlisted co. on any recognized stock exchange.
11. extinguish and physically destroy the shares so bought back within 7 days of the last date of completion
of buy-back.

12. Shall not make a further issue within a period of 6 months

13. Where a company purchases its own shares, 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.
 COMPANIES (SHARE CAPITAL DEBENTURES) RULES,
2017

• R. 17 e. the method to be adopted for the buy-back;

1) Following Disclosures in the notice of the general f. the price at which the buy-back of shares or other
meeting for buyback: securities shall be made;

a. the date of the board meeting at which the proposal for g. the basis of arriving at the buy-back price;
buy-back was approved by the board of directors of the h. the maximum amount to be paid for the buy-back and the
company; sources of funds from which the buy-back would be
b. the objective of the buy-back; financed;

c. the class of shares or other securities intended to be i. the time-limit for the completion of buy-back;

purchased under the buy-back; j. the aggregate shareholding of the promoter and the

d. the number of securities that the company proposes to aggregate number of equity shares purchased or sold by

buy-back; them
k. persons mentioned in (j) intend to tender their
3) file, in case of a listed company, a declaration of solvency -
shares for buy-back—
signed by at least two directors, one of whom shall be the
• the quantum of shares proposed to be tendered;
managing director,
• the details of their transactions and their holdings for
4) The letter of offer shall be dispatched to the shareholders or
the last twelve months prior to the date of the board within 20 days from its filing with the Registrar of Companies
meeting at which the buy-back was approved a
5) The offer for buy-back shall remain open for min 15 and max. 30
l. confirmation that there are no defaults days from the date of dispatch of the letter of offer
m. a confirmation that the Board of directors have 6) Completion of verifications within 15 days from the date of
made a full enquiry into the affairs and prospects of closure of the offer
the company and a report of the same
7) After the date of closure of the offer, open a separate bank
2) file with the Registrar of Companies a letter of offer account and deposit such sum, as would make up the entire sum
- signed by not less than two directors on behalf of due and payable as consideration for the shares tendered for buy-
the Board of Directors, one of whom shall be the back in terms of these rule
managing director,
8) The company shall within 7 days of the time • the opening of a separate bank account adequately
funded for this purpose
• make payment of consideration in cash to those
shareholders or security holders whose securities • shall not withdraw the offer once it has announced the
have been accepted; or offer to the shareholders;

• return the share certificates to the shareholders or • shall not utilize any money borrowed from banks or
security holders whose securities have not been financial institutions for the purpose of buying back its
accepted at all or the balance of securities in case of shares; and
part acceptance.
• shall not utilize the proceeds of an earlier issue of the
9) company shall ensure that— same kind of shares or same kind of other specified
securities for the buy-back.
• the letter of offer shall contain true, factual and
material information – no misleading information 10) after the completion of the buy-back, shall file with the
Registrar and the Securities and Exchange Board of
• shall not issue any new shares from the date of
India, a return.
passing of special resolution authorizing the buy-back
till the date of the closure of the offer
 SEBI (BUYBACK OF SECURITIES) REGULATIONS,
2017

• The maximum limit of any buy-back shall be 25% • following methods:

or less of the aggregate of paid-up capital and free
 from the existing share holders or other specified
reserves of the company
securities holders on a proportionate basis through the
• Debt- equity ration – 2:1 tender offer;

• Max. limit shall be 25% in a year  from the open market through—

• All shares shall be fully paid-up. i) book-building process,

ii) stock exchange;

• A company shall not buy back its shares or other

specified securities so as to delist them
• A company shall not make any offer of buy-back within • shall be completed within 1year from the date of passing of
1 year reckoned from the date of expiry of buyback the special resolution at general meeting,
period of the preceding offer of buy-back
• Co. to file a return with the Registrar of Companies and the
• A company may undertake a buy-back of its own shares Board within 30 days after the expiry of the buyback period
or other specified securities out of—
• Notice to special resolution must contain:
a) its free reserves;
a) a full and complete disclosure of all material facts;
b) the securities premium account; or
b) the necessity for the buy-back;
c) the proceeds of the issue of any shares or other
c) the class of shares or securities intended to be purchased
specified securities:
under the buy-back;
• no such buy-back shall be made out of the proceeds of
d) the amount to be invested under the buy-back; and
an earlier issue of the same kind of shares or same kind
e) the time-limit for completion of buy-back.
of other specified securities.

• AoA – Special Resolution

• where the buy-back is through tender offer, notice • No insider shall deal in shares or other specified
must contain additional disclosure: securities of the company on the basis of
a) the maximum price at which the buy-back of unpublished price sensitive information relating to
shares or other specified securities shall be made buy-back of shares

b) if the promoter intends to offer his shares, the

quantum of shares or other specified securities
proposed to be tendered and the details of their
transactions and their holdings for the preceding 6
months

c) maximum price at which the buy-back shall be

made:
 BUYBACK THROUGH TENDER OFFER

• Co. to be authorized by a special resolution • Within 2 working days, file:

• Make a public announcement within 2 working days a) A letter of offer

from the date of declaration of results of the special b) A certificate issued by merchant banker certifying that the
resolution in at least one English National Daily, one buy-back offer is in compliance with the regulations
Hindi National Daily and one Regional language daily –
c) a declaration of solvency
disseminate to the public
• The offer for buy-back shall remain open for a period of 5
• file a copy of the public announcement in electronic working days
mode, with the Board and the stock exchanges on which
• Escrow account: Within 2 working days of the public
its shares are listed
announcement, deposit in an escrow account:
• copy of the public announcement shall be placed on the
a) if the consideration payable does not exceed 100 crores; 25%
respective websites of the stock exchange(s)
of the consideration payable;

b) if the consideration payable exceeds 100 crores; 25% up to

• On completion of all formalities of buy-back, the amount, • extinguish and physically destroy the securities certificates
guarantee and securities in the escrow, if any, shall be in the presence of a registrar to an issue or the Merchant
released to the company. Banker and secretarial auditor within 15 days of the date of
acceptance of the shares or other specified securities.
• The Board, may, in case of nonfulfillment of obligations by
the company, forfeit the escrow account - be distributed pro • furnish a certificate to the Board certifying compliance
rata amongst the securities holders who accepted the offer.
• furnish the particulars of the securities certificates
• immediately after the date of closure of the offer, open a extinguished and destroyed within 7 days of such
special account and deposit such sum as would, together extinguishment and destruction
with 90% of the amount in the escrow account, make up the
entire sum due and payable as consideration for buy-back in
terms of these regulations
 BUYBACK FROM OPEN MARKET

• Following methods: • The price determined through volume-weighted average

price of the shares
a) through stock exchange,
• Create escrow a/c within two working days of the public
b) book-building process.
announcement - deposit in escrow account 25% of the
• The buy-back only through stock exchanges having
amount earmarked for the buy-back as specified in the
nationwide trading terminals;
resolution
• The company to appoint a merchant banker and make a • In the event of non-compliance, Board may direct the
public announcement merchant banker to forfeit the escrow account – and
• The public announcement within 2 working days from the deposit in Investor Protection and Education Fund of SEBI
date of passing the resolution - file a copy of the public • extinguish and physically destroy the securities certificates
announcement in electronic mode - disseminate the public in the presence of a Merchant Banker and the secretarial
announcement to the public - copy be placed on the auditor within 15 days
respective websites of the stock exchange
 BUYBACK THROUGH BOOK-BUILDING

• appoint a merchant banker and make a public • The buy-back price shall depend upon the price
announcement within 2 working days from the date discovered through the bids received from the
of the approval of the Board of Directors shareholders within the price range

• disclosures in the public announcement • The offer shall be kept open for a minimum of two
trading days. - Securities holders can submit bids for
• The book-building process shall commence within 7
any number of shares within the price range.
working days from the date of the public
announcement. • If bids are less than the buy-back size; all the shares
shall be accepted at the highest bid price. If bids are
• The company shall disclose the maximum buy-back
more than the buy-back size, the max buy back prize
price – upper limit
is taken
• .
 GENERAL OBLIGATIONS

• No buy-back during the pendency of any scheme of

• true, factual, and material information
amalgamation or compromise or
• shall not issue any shares till the date of expiry of buyback • The company shall issue a public advertisement in a
national daily, disclosing
period
a) number of shares or other specified securities bought;
• company shall pay the consideration only by way of cash; b) price at which the shares or other specified securities
bought;
• the company shall not withdraw the buyback offer after it is
c) total amount invested in the buy-back;
filed with the Board or public announcement of the offer to d) details of the securities holders from whom shares or
buy-back is made; other specified securities exceeding one per cent of total
shares or other specified securities were bought back; and
• the company shall not raise further capital for a period of e) the consequent changes in the capital structure and the
one year from the expiry of buyback period, shareholding pattern after and before the buy-back.

• compliance officer and investors service center for

compliance