Buy Back of Shares- Companies Act, 2013

INTRODUCTION
Buy Back of Securities is a very important tool for Companies who wants to reduce their
Share Capital. Buy Back of securities simply implies purchase of its own shares & other
specified securities by a Company. Buy Back of securities is an important mode of Capital
Restructuring. A company can buy back its shares under Section 68 of the Companies Act,
2013 which is more or less same as section 77A of The Companies Act, 1956 apart from
some Procedural Changes.
 Buy-back is one of the method of financial restructuring. Buy-back of shares is a method of
financial engineering. Financial restructuring of a Company involves a re-arrangement of its
financial structure to make the Company’s finances more balanced.

Advantage:
A Company generally opt for buy-back of its own shares for the following reasons:- (i) To
improve the shareholders value- buy-back generally result in higher earning per shares. (ii)
As a defense
Mechanism- Buy back provides a safeguard against hostile take- overs bids by increasing
promoters’ shareholding. (iii) To provide an additional exit route to shareholders when shares
are undervalued or thinly traded. (iv) To return surplus cash to shareholder.

For Unlisted Public - Section 68, 69 and 70 of Companies Act, 2013

and Private
- Rule 17 of Companies (Share Capital and Debentures)
Companies Rules, 2014
For Listed Companies- Section 68, 69 and 70 of Companies Act, 2013
- Rule 17 of Companies (Share Capital and Debentures)
Rules, 2014
- Securities and Exchange Board of India (Buy-back of
Securities) Regulations, 1998 and Securities and Exchange
Board of India (Buy-back of Securities) (Amendment)
Regulations, 2013

 [1][2] GOVERNING SECTIONS & RULES:

Section 68: Power of Company to purchase its own shares & other specified securities
Rule17: of the Companies (Share Capital and Debenture) Rules,2014
Section 117(3) (a) A copy of every resolution or any agreement, in respect of the matters
specified in sub-section (3) of section 17 together with the explanatory statement under
section 102, if any, annexed to the notice calling the general meeting in which the resolution
is proposed, shall be filed with the Registrar within thirty days of the passing of resolution.
Section70: Prohibition for buy-back in certain circumstances.

FORMS INVOLVED:
MGT– 14-Filing of Special Resolutions to the Registrar of Companies
SH– 8 – Letter of Offer
SH – 9– Declaration of Solvency
SH – 11– Return in respect of buy back of securities
SH – 10- Register of Buy Back of Securities

PuRPOSE OF FILING OF FORMS:

MGT-14: This form is required to be filed within 30 days of passing of Special
resolution for All The Companies including Private Limited Company {Section
117(3)(a)}.
 SH-8: The Company which has been authorized by a Special resolution shall,
before making the buy-back of shares, file with the Registrar of Companies a letter of
offer.
SH-9: The Company shall file with the Registrar a declaration of solvency along
with fee.
SH-10: The Company shall maintain a Register of Buy Back containing the
particulars as may be prescribed.
Sh-11: The Company after completion of the buy-back file with the Registrar a
return along with the fee.
RESOLUTION REQUIREMENT:
[3]Special Resolution: A Special resolution is required to be passed at a General
Meeting of the Company authorizing the buy-back [Section 68(2)(b)].

Board Resolution: A Board resolution is required to be Pass for following purposes:

 Authorization for buy back of shares subject to approval of shareholders. (Pass
resolution for approval of scheme of buy-back as contained in letter of offer.)
 Issue the Notice of General Meeting along with [4]explanatory statement.
(According to SS-2).
 Authorize a Company Secretary or director of company to issue notice of General
Meeting.
 Adoption of unaudited/Audited Accounts
 Take note of valuation report
 Declaration of solvency in Forms SH-9
 Declaration by Board of Directors under Rule 17(1)(m)
 Approval of Board for letter of offer of buy-back of shares.
 Open Separate Bank Account: for remittance and payment towards purchase
consideration for buy back.

PROVISION IN AOA:
Table- F- Clause 41: Notwithstanding anything contained in these articles but
subject to the provisions of sections 68 to 70 and any other applicable provision of
the Act or any other law for the time being in force, the company may purchase its
own shares or other specified securities.

Amendment Rules:
G.S.R. (E): dated 10th March, 2013 The Companies (Share Capital and Debentures)
Amendment Rules, 2016

Terms used under Buy-Back:

1. Free Reserve: 2(43) , Free Reserves means such reserves which, as per the latest
audited balance sheet of a Company, are available for distribution as dividend:
General: Companies which have excess of Profit after the appropriation for statutory
reserves and dividend do have tendency to retain it as Surplus of the company, rather
than transferring it to any Reserves, which are Free Reserves for the company.
 Following shall not be treated as Free Reserve:
i. any amount representing [5]unrealised gains, [6]notional gains or revaluation of assets,
whether shown as reserve or otherwise or

ii. any change in carrying amount of an asset or of a liability recognized in equity, including
surplus in the profit and loss account on measurement of the assets or the liability at the
fair value.

Explanation II. For the purpose of this section “Free Reserve” includes security premium
account.

2. Specified Securities:
Explanation I. Specified Securities includes ESOP or any other securities as notified by
Central Government
Meaning of Specified Securities [Regulation 2(1) (h) of SEBI (LODR) Regulations, 2015]
Non-convertible debt securities, non-convertible redeemable preference shares, perpetual
debt instruments, perpetual non-cumulative preference shares, Indian depository
receipts, securitized debt instruments, units issued by mutual funds and any other
securities as may be specified by the Board.

3. Financial Year 2(41):

“Financial year”, in relation to any company or body corporate, means the period ending
on the 31st day of March every year. i.e. 1st April, to 31st March.

4. Secured debt: Secured debt financing is typically easy to obtain for most consumers to
obtain. Lenders take on less risk by lending on terms that require an asset held as
collateral security . As this type of loan carries less risk for the lender, interest rates
are usually lower for a secured loan. A prime example of a secured debt is a mortgage,
where the lender places a lien, or financial interest, on the property until the loan is
repaid in full. If the borrower defaults on the loan, the bank can seize the property and
sell it to recover the funds owed.

5. Unsecured debt: Unsecured debt is the opposite of secured debt, and, like its name,
itrequires no security for the loan. Lenders issue funds in an unsecured loan based solely
on the borrower's creditworthiness and promise to repay. In days past, loans were issued
this way with a simple handshake. If a borrower fails to repay the loan, the lender can sue
the borrower to collect the amount owed, but this can take a great deal of time, and legal
fees can add up quickly. Therefore, banks typically charge a higher interest rate on these
so-called signature loans.

Let’s Discuss Provision of Buy- Back of Shares:

A. Funding of Buy Back of Shares: [Section 68(1)] Shares can be purchased out of
the[7]resources generated in the following manner i.e.

a) Free Reserves;
b) The Securities Premium Account; or
c) The proceeds of the issue of any kind of shares or other specified securities:

Condition:
 Company shall not utilize any money borrowed from Banks/ Financial Institutions for the
purpose of buying back its shares. [Rule 10(e)].
 [8]The buyback cannot be made out of proceeds of same kind of shares or securities. [Rule
10(f)].
 Withdrawal of Offer: The Company shall not withdraw the offer once it has announced the
offer to the shareholders. [Rule 10(d)].
 Cash Consideration: Consideration will be paid by company in cash only.[In an English
case,BGD Roof Bond Ltd. v. Doughlas, (2000) 1 BCLC 401 (Ch D)]

B. Buy Back of Shares from whom? [Section 68(5)] Let’s find out from whom the
share could be bought back, The buy-back may be[9]

a) from the existing shareholders or security holders on a proportionate basis;

b) from the [10]open market;
c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity (ESOP).

C. Non-Eligibility for buy-back: We should ascertain whether the Company falls under
any one of the prohibitory lists for buy back. The Company cannot buy back its shares
form the following. [Section-70]

a) Through any subsidiary Company including its own subsidiary Companies.

b) Through any investment Company or group of investment Companies
c) If it has not complied with the provisions of Section [11]92, [12]123, [13]127 and Section [14]129
d) If a default, is made by the company, in the repayment of deposits accepted either before or after the
commencement of this Act, interest payment thereon, redemption of debentures or preference shares
or payment of dividend to any shareholder, or repayment of any term loan or interest [15]payable
thereon to any financial institution or banking company.

D. Eligibility Criteria for buy-back:

Let’s find out whether our Company is eligible to go for a buy-back by fulfilling the
conditions of Section and Rules. Section 68(2) of Companies Act 2013 list out the criteria’s
to be fulfilled for buy-back of shares.

i. Check whether Company is authorized under [16]Article of Association (AOA) for buy-back
of shares. [Section 68(2)(a)]
Limit of Buy-Back:
ii. The percentage of Buy Back shall not exceed 10% of the total paid up equity capitaland
free reserves if the same is to be authorized by the Board by means of a resolution in the
Board meeting and not by circulation.
iii. The percentage of buy back could exceed 10% but not beyond 25% of the total paid equity
Capital and free reserves if the same is authorized by the shareholders by means of
a [17]Special resolution.
[18]IN SIMPLE WORDS
Note:Calculation of 10% or 25%

o Proviso: The reference to twenty-five per cent in this clause shall be construed with respect to
its total paid-up equity capital in that financial year. Let’s
Discuss;
o We may have to deal with two financial years for a buy back i.e. the Audited financial year
and the financial year in which the real Buy back of shares happens. Which financial year
will be considered? We need more clarity to this point.

o Since the event of buy back happens in the current financial year, we have tocalculate the
percentage for the current financial year only. Percentage should be construed with respect
to its total equity capital in that financial year end, preceding the buy- back of Shares.

Debt Equity Ration:

iv.
The ratio of the aggregate of secured and unsecured [19]debts owed by the company after
buy-back shall not be more than twice the paid-up capital and its free reserves.
No Default:
v. There are no defaults subsisting in repayment of deposits and interest payment thereon.
vi. There are no defaults on redemption of preference shares.
vii. There are no defaults in payment of Dividend due to any Shareholder.
viii. There are no defaults in repayment of any loan or interest payable thereon to any financial
institution or banking Company.

Note: However Section 70(1)(c) gives an exemption that buy-back is not prohibited, if the
default from (point no. vi-ix) is remedied and a period of 3 years has lapsed after such
default ceased to subsist.

Other Eligibility Criterias:

 ix. The Company should be in a position to meet the liabilities as and when they fall due and
shall not be rendered insolvent within a period of one year from the date of buy back.

x. All the Equity Shares and other specified securities for buy-back are fully paid-up.

xi. Listed Company: The buy-back of the shares listed on any recognized stock exchange are
in accordance with the regulations made by the Securities and Exchange Board of India in
this behalf.

xii. [20]Buy-back should be completed within a period of 1 (one) year from the date of passing
of Special Resolution.

Procedure for buy-back:

Once the Company meets the eligibility criteria, the next step is how to start the process of
buy-back of shares:

STEP-1
Call Meeting of Board Director:
 Issue Notice of Board Meeting to all the directors of company at least 7 days before the date
of Board Meeting.
 Attach Agenda, Notes to Agenda, and Draft Resolution of Board Meeting along with Notice.

STEP-II
Hold the Board Meeting:
 Check the quorum of Board Meeting.(Section 174)
 Check whether there is a provision in the AOA for buy back of share or not, if yes then ok. If
No then pass special resolution for alteration in AOA.
 Passing of Resolution for authorization for buy back of shares subject to approval of
shareholders. (Pass resolution for approval of scheme of buy-back as contained in letter of
offer.)
 Passing of resolution for Issue the Notice of General Meeting along with [21]explanatory
statement. (According to SS-2).
 Passing of resolution for Authorize a Company Secretary or director of company to issue
notice of General Meeting.
 Passing of Resolution for adoption of unaudited/Audited Accounts
 Passing of Resolution for take note of valuation report
 Passing of Resolution for declaration of solvency in Forms SH-9
 Passing of Resolution for declaration by Board of Directors under Rule 17(1)(m)
 Passing of Resolution for and approval of Board for letter of offer of buy-back of shares.
 Passing of resolution for Open Separate Bank Account: for remittance and payment towards
purchase consideration for buy back.
 Fixing the record date for buy-back of shares.

Note:
 Company cannot give any specific offer to a particular member for buy-back of shares, it is required to give
Letter of Offer to all the existing members, therefore, there should not be any specific name in the
resolution or explanatory statement.

STEP-III
Hold Extra-Ordinary general Meeting:
 Check the quorum of Meeting.(Section-103).
 Pass the Special Resolution for buy back of shares.

STEP-IV
File Form with Registrar (Letter of Offer/ declaration of solvency):
- File MGT-14- with Registrar within 30 days of passing of Special Resolution.
- File SH-8 – Letter of offer Roc before buy back of shares.
- File [22]SH-9- Declaration of solvency with ROC along with SH-8.

STEP-V
The Letter of Offer after filing of with ROC together with all attachments should be
dispatched to the shareholders not later than 21 days from the date of its filing with the
Registrar of Companies.
STEP-VI
The offer of buy back should remain open for a period of not less than 15 (fifteen) days but
not later than 30 days from the date of dispatch of offer.
STEP-VII
The Company should immediately after the date of closure of offer should open the bank
account and deposit therein the entire purchase consideration money meant to be used for buy
back purpose.

STEP-VIII
The Company shall complete the verification of offers within 15 (fifteen) days from the date
of closure of offer[23].

STEP-IX
The Company shall within 7 (seven) days of the time specified for completion of verification:
- make (Consideration) payment to the respective shareholders
- return back the entire share certificates whose shares have not been accepted fully and also
return back the balance share certificates if the shares are accepted partially

[24]STEP-X
If the communication of rejection is not sent to the concerned shareholders within 21 (Twenty
one days) from the date of closure of offer, the shares lodged would be deemed to have been
accepted for buy back.

E. Post buy-back Compliances:

STEP-XI- Certificate of Compliance:
- The Company shall prepare a certificate of Compliance in respect of Buy Back in[25]Form
No.Sh-15 duly signed by [26]two Directors and verified by the Company Secretary in
Practice. [Rule 17(14)]

- Form SH.15 should be attached along with other attachments to FormNo.SH-11 which is the
Return in respect of Buy back and upload the Form with ROC. [Rule 17(13)]

STEP-XII- Destroy Share Certificate [Section 68(7)]:

The Company shall within 7 (seven) days of the last day of the completion of buy back shall
extinguish and physically destroy the shares or securities bought back.

STEP-XIII - Register of share bought back[Section 68(9)]:

- The Company shall maintain a register of shares or other securities which have been bought-
back in Form SH-10.
- The Register shall be maintained at registered office of the Company.
- The register shall be under the CUSTODY of the Secretary or anyother person authorized by
the Board for this purpose.
- The entries of the Register shall be AUTHENTICATED either by the Secretary or by any
other person authorized by the Board for this purpose
- Following details are required to be given in Register- SH-10
 The consideration paid;
 The date of cancellation;
 The date of extinguishment and physical destruction; and
 Such other particulars as may be prescribed.

STEP-IV - Transfer to Capital Redemption Reserve(Sec-69)

After buy-back a sum equal to the nominal value of the share so purchased shall be
transferred to the capital redemption reserve account and details of such transfer shall be
disclosed in the balance sheet.
Use of CRR: The capital redemption reserve account shall be utilized by the Company only
for the purpose of issuing of fully paid up bonus shares.

Restriction on the further issue of Shares/Securities: Under Section 68(8),

i. Time Period: The Company shall not issue [27]further shares of the SAME CLASSwithin a
period of 6 (six) months from the date of completion of buy back.
ii. Except: The Company can issue same class of shares in the following forms:
 By way of bonus issue OR

 In discharge of subsisting obligations such as conversion of warrants, stock option scheme,

sweat equity or conversion of preference shares or debentures into equity.

Content of Letter of Offer [Rule (10) (a)]:

i. True Fair: The letter of offer shall contain true, factual and material information and shall
not contain any misleading information.
ii. Responsibility: LOO must state that the directors of the company accept the responsibility
for the information contained in such document.

F. Duty of the Company:

 Mode of Payment: The company shall confirm in its offer the opening of a separate bank
account adequately funded for this purpose and to pay the consideration only by way of cash.
 Restriction on the issue of New Shares :The company shall not issue any new shares
including by way of bonus shares from the date of passing of special resolution authorizing
the buy-back till the date of the closure of the offer under these rules.
 Except those arising out of any outstanding convertible instruments.
 Buy-back offer shall not be made within a period of one year reckoned from the date of
closure of the preceding offer of buy-back, if any.

G. Provisions of Explanatory Statement of Buy Back [Section 68(3)]:

 The notice of the meeting at which the special resolution is proposed to be passed under
clause (b) of sub-section (2) shall be accompanied by an explanatory statement stating—
a)A full and complete disclosure of all Material Facts
b) The Necessity for the buy-back
c)The Class of Shares or securities intended to be purchased under the buy-back
d) The amount to be Invested under the buy-back; and
e)The Time-Limit for completion of buy-back.
f) The Date of the Board Meeting at which the proposal for buy-back was approved by the
board of directors of the Company.
g) The Objective of the buy-back
h) The Number of securities that the company proposes to buy-back
i) The Method to be adopted for the buy-back
j) The Price at which the buy-back of shares or other securities shall be made;
k) The Basis of Arriving at the buy-back price
l) The Maximum Amount to be paid for the buy-back
m) The Sources of Funds from which the buy-back would be financed;
n) The Time-Limit for the completion of buy-back

m) Disclosure about the Promoters and Directors:

i. Aggregate Shareholding of Promoters:

The aggregate shareholding of the promoters and of the directors of the promoter, where the
promoter is a company and of the directors and key managerial personnel as on the date of
the notice convening the general meeting.

ii. Shares Purchased or Sold:

The aggregate number of equity shares purchased or sold by persons mentioned above in two
lists:
- Shares Purchased and sold during a period of 12 (twelve) months preceding the date of the
board meeting at which the buy-back was approved and
- Shares Purchased and sold from that date to the date of notice convening the general
meeting.

iii. Consideration Price:

The maximum and minimum price at which purchases and sales were made in point two
above made.

n) If the persons mentioned in point (i) intend to tender their shares for buy-back :
i. The Quantum of shares proposed to be tendered.
ii. The details of their transactions and their holdings for the last twelve months prior to the
date of the board meeting at which the buy-back was approved including information of
number of shares acquired, the price and the date of acquisition;

o) No defaults:
A confirmation that there were NO DEFAULTS subsisting in the repayment of deposits,
interest payment thereon, redemption of debentures or payment of interest thereon or
 redemption of preference shares or payment of dividend due to any shareholder, or
repayment of any term loans or interest payable thereon to any financial institution or
banking company.

p) A confirmation that the Board of directors have made a full enquiry into the affairs and
prospects of the company and that they have formed the opinion:-

(i) that immediately following the date on which the general meeting is convened there shall be
no grounds on which the company could be found unable to pay its debts;

(ii) as regards its prospects for the year immediately following that date, having regard to their
intentions with respect to the management of the company’s business during that year and to
the amount and character of the financial resources which will in their view be available to
the company during that year, the company shall be able to meet its liabilities as and when
they fall due and shall not be rendered insolvent within a period of one year from that date;
and

(iii) the directors have taken into account the liabilities(including prospective and contingent
liabilities), as if the company were being wound up under the provisions of the Companies
Act, 2013

q) A report to be addressed to the Board of directors By The Company’s Auditors stating

that:-

(i) They have inquired into the company’s state of affairs;

(ii) The amount of the permissible capital payment for the securities in question in their view
has been properly determined;
(iii) That the audited accounts on the basis of which calculation with reference to buy back is
done is not more than six months old from the date of offer document; and
Provided that where the audited accounts are more than 6 months old, the calculations with
reference to buy back shall be on the basis of un-audited accounts not older than 6 months
from the date of offer document which are subjected to limited review by the auditors of the
Company.
(iv) The Board of directors have formed the opinion that the company, having regard to its state
of affairs, shall not be rendered insolvent within a period of one year from that date.

H. Punishment for any Default: If a company makes any default in complying with the
provisions of this section,
- The company shall be punishable with fine which shall not be less than one lakh rupees but
which may extend to three lakh rupees.

- Every officer of the company who is in default shall be punishable with an imprisonment for
a term 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.

I. Accounting Treatment:
 Disclosure in Balance Sheet: Where a Company purchases its own shares or specified
securities out of its free reserves or securities premium account, 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 transfers shall be disclosed in the balance sheet as per Section 69 of
Companies Act 2013.

J. Tax Treatment for Buyback of Shares:

I. DIVIDEND:
As per Indian Income Tax Act, 1961 any sum paid from accumulated profit to the
shareholders of the company is treated as dividend under section 22(a). In case of buyback
any payment made by a company on purchase of its own shares from a shareholder in
accordance with the provisions of Section 68 of the Companies Act, 2013 will not be treated
as dividend hence Dividend Distribution Tax (DDT) under Section 115-O will not be
applicable in this case.

II. STAMP DUTY.-The Chamber of Income Tax Consultants, Mumbai, has expressed the
opinion that stamp duty is not payable on buy-back of shares under section 77A. Here is what
the Chamber says :

"A question may arise as to whether any stamp duty becomes payable in a case where buy-
back of shares is done by a company. One may note that "transfer" of shares attracts stamp
duty vide Schedule I, Entry 62 to the Indian Stamp Act 1899. Since stamp duty is payable on
"transfer" of shares buy-back cannot be equated with 'transfer". Transfer of shares to be
complete requires the company to register the shares bought back in its name. In case of buy-
back, as provided in section 77A(7), the shares bought back have to be statutorily
extinguished within seven days of the last date of completion of buy-back. Hence, no
registration of such shares takes place in the name of the acquirer. Even the names of the
members/holders of the shares have to be struck off from the Register of members. Hence,
stamp duty would not become payable in a case where buy-back of shares takes place." [P.
35, 1st Edn., 2000].

III. Income Tax, Tax on Capital Gains.-Capital gains tax has become leviable on
buyback of shares by virtue of section 46A inserted in the Income Tax Act, 1961 by the
Finance Act, 1999 effective financial year 1999-2000. The provision is as follows ;

Capital gains on purchase by company of its own shares or other specified securities

46A. Where a shareholder or a holder of other specified securities receives any consideration
from any company for purchase of its own shares or other specified securities held by such
shareholder or holder of other specified securities, then, subject to the provisions of section
48, the difference between the cost of acquisition and the value of consideration received by
the shareholders or the holder of other specified securities, as the case may be, shall be
deemed to be the capital gains arising to such shareholder or the holder of other specified
securities, as the case may be, in the year in which such shares or other specified securities
were purchased by the company.

CASE STUDY
Effect of validity of shareholders' resolution for twelve months

In a recent case D-Link (India) Limited v The Securities and Exchange Board of
IndiaAppeal No. 120 of 2007, decided on 14-7-2008, the Securities Appellate Tribunal
(SAT) had the occasion to decide on the effect of a shareholders' resolution in the context
of a buyback of shares. The facts of the case are fairly straight forward.

The company involved, D-Link India Ltd, proposed to the shareholders a resolution for
the buyback of its shares pursuant to Section 77A of the Companies Act, 1956 (now
section 68 of the Companies Act, 2013) . Under this provision, such a resolution is valid
for a period of 12 months, within which period the company may act upon the resolution.
If the company, however, fails to proceed with the buyback, the resolution lapses at the
end of the 12 months period.

In this case, D-Link India Ltd failed to initiate any buyback within the 12 months period,
due to which its shareholders' resolution lapsed. SEBI initiated action against the
company on the grounds that the company never had any intention of buying back its
shares, and that the convening of the shareholders’ meeting and the announcement of a
buyback was only for the purpose of misleading the investors. Consequently, following
the request of some investors who bought shares in the company in anticipation of a buy-
back, SEBI passed an order stating that the company violated Regulation 5(1)(a) of the
Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade
Practices Relating to the Securities Market) Regulations, 1995. Hence, the company was
directed not to buy, sell or deal in the securities in any manner directly or indirectly for a
period of one month. The company went on appeal to the SAT against such order.

SAT overturned SEBI's order, primarily on two grounds:

(i) Shareholders’ Resolution only enabling in nature

The first issue considered was whether the company was under any obligation to proceed
with the buyback after its shareholders had passed a special resolution authorizing the
company to carry out the buyback. In this behalf, SAT noted:

“On a reading of the provisions of section 77A of the Act (now section 68 of the
Companies Act, 2013) and the relevant provisions of the buy-back regulations … we are
of the considered view that a company is under no obligation to buy-back its securities
even if its shareholders have passed a special resolution authorizing it to buy-back on the
terms and conditions mentioned in the resolution. Section 77A of the Act is only an
enabling provision and all that it mandates is that no company shall buy-back its own
securities unless it is authorized by its articles and also by its shareholders. But even
where the shareholders pass a special resolution, it does not become obligatory for the
company to buy-back the shares.”

Such a resolution only provides authority to the Board of directors to then decide on the
details of the transaction, and even to decide on the essential question of whether the
transaction should be given effect to in the very first place. In a sense, such a resolution
recognises the primacy of the directors in such a context. Other examples of such
resolutions where the board is given the power to effect a transaction without being
obligated to do so include issue of shares, disposal of an undertaking or substantial assets,
borrowing.

(ii) Not misleading investors

As for the allegation of misleading the investors, SAT was of the considered opinion that
there is no material on the record to indicate that the company had no intention to buy
back its shares when the shareholders passed a resolution. It held that there can be no
inference of the company's lack of intention to buy-back merely because it made no offer
to the shareholders to buy back its securities. There has to be some other material or
circumstance from which such an inference could be drawn, which was absent in this
case. SAT then dealt with in detail the factual circumstances based on which it had
arrived at this conclusion.

When it comes to an action relating to fraudulent and unfair trade practices, since there is
an element of “mens rea” involved in proving an offence, SEBI as the regulator has the
onerous task of proving that element.

Important Provisions at a Glance

Section Section Matters dealt with Form
under CA under CA Nos.
2013 1956

141 31 Alteration in Articles -

622 81 Further issue of Share Capital -
66 100-105 Reduction of Share Capital -
683 77A Powers of company to purchase its own securities. -
68(2)3 77A Filing of Letter of Offer for Buy back to ROC 4.8
68(6)3 77A Filing of Declaration of Solvency to ROC/SEBI 4.9
68(9)3 77A Register for Buy back of shares SH-10
683 77A Declaration of Solvency SH-9
68(10)3 77A Filing of return of Buy back to ROC/SEBI SH-8
683 77A Return F buy back of Shares SH-11
683 77A Certificate for Companies of buyback of shares SH-15
68(9)4 77AA Transfer of certain sums to capital redemption reserve -
account
705 77B Prohibition for Buy back in certain circumstances -
673 2(34) Provisions of money by company for purchase of its -
shares by employees or by trustees for the benefit of
employees

Flow Chart:
S. DAYS PARTICULARS DOCUMENTATION/ INFORMATION FORMS
NO

0 Check Points  Whether AOA allow for the Buy Back.

 Whether other conditions fulfilled.
1 Issue the Notice of the Notice
Board meeting  Agenda
 Notes on Agenda
 Draft Resolution
9 Convening of the Board  Attendance Sheet N.A
Meeting  Passing of Resolution for
- Adoption of unaudited/Audited Accounts
- take note of valuation report
- Declaration of solvency in Forms SH-9
- Declaration by Board of Directors under
Rule 17(1)(m)
- Approval of Board for letter of offer of
buy-back of shares.
- Open Separate Bank Account: for
remittance and payment towards purchase
consideration for buy back.
32 Convening of the Extra Pass Special Resolution for buy back of shares
Ordinary General Meeting

62 Filing of e-forms  Filing of forms within 30 days of passing of special MGT- 14

resolution. Form SH-9
 Letter of offer to ROC Form SH-8
 Declaration o Solvency

62-83 Circulation of Letter of The Letter of Offer after filing of with

offer ROC together with all attachments should
be dispatched to the shareholders not later
than 21 days from the date of its filing with
the Registrar of Companies.

98  Offer will be open for minimum period of 15 days.

 Company will open the Separate Bank account.
113 Verification of Offer The Company shall complete the
verification of offers within 15 (fifteen)
days from the date of closure of offer.

120 Payment to Shareholders

 127 Destroy of Share The company shall within 7 days of the last
Certificates day of the completion of buy back shall
extinguish and physically destroy the
shares or securities bough back.

130 Filling of Form with ROC- The Company shall prepare a certificate of SH-15
Compliance in respect of Buy Back SH-11
in [28]Form No.Sh-15 duly signed
by [29]two Directors and verified by the
Company Secretary in Practice. [Rule 17(14)]

- Form SH.15 should be attached along with

other attachments to FormNo.SH-11 which
is the Return in respect of Buy back and
upload the Form with ROC. [Rule 17(13)]

K. FAQ’s Buy-Back
A. What is a share buyback and why are you doing it?
This is when a company purchases its own shares back from its shareholders. A share
buyback is thus a way for the company to return funds to shareholders, and thus similar to a
dividend. A share buyback is an alternative form of shareholder distribution, where a
company buys back its own stock from shareholders, effectively reducing the number of
outstanding shares and increasing the proportional rights of any single share.

B. What is the difference between a dividend pay-out and a share buy back?

A dividend payment is a direct payment of cash to shareholders whereas a share buyback is

an alternative form of shareholder distribution, where a company buys back its own stock
from shareholders, effectively reducing the number of outstanding shares and increasing the
proportional rights of any single share.

[1]Corresponding section 77A of Companies Act, 1956.

[2]Section referred in buy-back is Section 62&70.
[3] Validity of this Special Resolution is one year from the date of passing of the same.
[4] Provisions relating to Explanatory Statement discussed in detail at the end of the article.
[5]A profit that exists on paper, resulting from any type of investment. An unrealized gain is a profitable position that has yet to
be cashed in, such as a winning stock position that remains open. A gain becomes realized once the position is closed for a
profit.
[6]A contract usually takes several years to get itself completed. If the profit on such contracts is recorded only after their
completion, then wide fluctuations may be noted in the profit figures of contractors from year to year. To avoid these
fluctuations in the reported profits and to reflect the revenue in the accounting period during which the activity is undertaken,
the profit in respect of each contract in progress is transferred to the profit and loss account of the year by calculating the
notional profit. The portion of notional profit to be transferred to the profit and loss account depends on the stage of completion
of a contract.
[7] A separate Bank account has to be opened and the amount has to be paid only by way of cash.
[8]Proceeds of an earlier issue of same kind of security by a company cannot be used for buy-back of the
said security, as it will frustrate the purpose sought to be achieved by such an issue and will make no sense.
Proceeds of an earlier issue may, however, be used for buy-back of another kind of security. In other
words, proceeds of an earlier issue of equity shares may be used for buyback of existing preference shares or
vice-versa.
[9] A company can implement buy-back by any of the aforesaid method but, for a single offer of buy-back,
different methods of buy-back cannot be adopted.

[10]An economic system with no barriers to free market activity. An open market is characterized by the
absence of tariffs, taxes, licensing requirements, subsidies, unionization and any other regulations or
practices that interfere with the natural functioning of the free market. Anyone can participate in an open
market. There may be competitive barriers to entry, but there are no regulatory barriers to entry.

A company intending to buyback its equity shares or other specified securities in accordance with the
provisions of section 66(5)(b) may buyback from the open market in which case the requirements under
Chapter IV [Regulations 14 to 18] of the Buyback Regulations shall be complied with. The buyback of
shares or other specified securities from the open market may be in any one of the following methods: (a)
through stock exchange; (b) Book Building process [Regulation 14].

[11]Section 92 deals with preparation and filing of annual return.

[12]Section 123 deals with manner of declaration of Dividend and itspayment.
[13] Section 127 deals with punishment for failure to distribute divided.
[14] Section 129 deals with Financial Statement.
[15]However Section 70(1)(c) gives an exemption that buy-back is not prohibited, if the default is remedied
and a period of 3 years has lapsed after such default ceased to subsist
[16] There must be a provision in the Articles of Association authorising the company to buy-back its own
shares, otherwise the Articles must be amended by a special resolution to incorporate a suitable provision
and file Form MGT-14 within 30 days to ROC.

[17] When the resolution goes beyond the scope of revocation, it may become specifically enforceable
against the company. Where the off market purchase resolution does not satisfy the requirements of the
section, it is neither binding on the company nor enforceable against it or against any one else. Vision
Express (UK) Ltd. v. Wilson (No. 2), (1998) BCC 173: Western v. Rigblast Holdings Ltd., 1989 GWD 23-950
(Scot). A defective resolution can be rectified before its implementation by a subsequent curative
resolution. But where the resolution has already been implemented the illegality cannot be rectified. R. W.
Peak (Kings Lvun) Ltd., 0 998) 1 BCLC 193 : (1998) BCC 596.
[18] For buy back upto 10% of aggregate paid up share Capital required Board Resolution or Buy-back 10%
of paid up share capital and free reserve but upto 25% of aggregate paid up share capital and free reserve by
Special Resolution.
[19] According to Notification GSR 479(E) issued by the DCA (now MCA) on 12th June, 2005, the debt
equity ratio for listed Housing Finance Companies for the purposes of clause (d) of subsection (2) of section
68 shall be such as may be specified by the National Housing Bank being the regulator, in consultation with
the Central Government.
[20] With case study described at the end of the Article.
[21] Provisions relating to Explanatory Statement discussed in detail at the end of the article.
[22] It’s also required to file with SEBI, if Company is listed.
[23]If the number of shares offered by the shareholders are more than the number of shares to be bought
back, the acceptance per shareholder should be on a proportionate basis
[24]If the number of shares offered bythe shareholders are more than the number of shares to be bought
back,
the acceptance per shareholder should be on a proportionate basis
[25] This form certifying that the buy-back of securities has been made in compliance with the provision of
the act and rules thereunder.
[26] One should be Managing Director, if there is any.
[27] Further issue of the same kind of shares, including allotment of further shares under clause (a) of
subsection
(1) of section 62 as those, which have been bought-back cannot be made within a period of six months.

[28] This form certifying that the buy-back of securities has been made in compliance with the provision of
the act and rules thereunder.
[29] One should be Managing Director, if there is any.