BUY BACK OF SHARES

CONCEPT OF BUYBACK
• Buy back of shares is one of the prominent
modes of capital restructuring. It is a
financial strategy that allows a company to
buy back its equity shares and other
specified securities(as notified by CG)
including the securities issued to employees
of the Company pursuant to a scheme of
stock option or sweat equity.
• Section 77A of the Companies Act,1956
was introduced on 31.10.1998 permitting
buyback of shares when equity is costlier
than debt, buy back helps in reducing the
overall capital cost.
 FUNDING OF BUY BACK
• Out of:
(i) Free reserves;or
(ii) securities premium account;or
(iii) the proceeds of any shares or other specified
securities.
However no buyback of any kind of shares or
other securities can be made out of proceeds of an
earlier issue of the same kind of other specified
securities.
 CONDITIONS FOR BUY
BACK
i. Articles must authorise.
ii. Buy back must be approved by Special
Resolution passed in the general meeting of the
company.
iii. If buy back is 10% or less of the total paid up
capital and free reserves of the company, such
buy back may be made if authorised by board of
directors at resolution passed at meeting.
(iv) No offer of buy back shall be made within a
period of 365 days reckoned from the date of
preceding offer of buyback if any.
(v) Buy back should be 25% or less than the total
paid up capital and free reserves.
(vi) The buy back in any financial year shall not
exceed 25% of its paid up equity in that
financial year.
(vii) The ratio of debt owed by the company should
not be more than twice the capital and its free
reserves after such buy back.
(viii) All the shares and securities under buy-back
should be fully paid up.
(ix) The buy back of shares listed on stock
exchange should be in accordance with
regulations made by SEBI.
(x) Every buy back should be completed
within 12 months from the date of passing
the special resolution or board resolution.
• Practical Question
Following information is available from the B/S as at 31st
March,2006 of ABC Ltd which is an unlisted company:
Rs. In Lacs
Equity Share Capital 300
Share Premium Account 30
General Reserve 100
Secured Loans 400
Unsecured Loans 220
The company seeks to implement buy-back of its shares in
May,2006.Compute the maximum limit up to which buy-
back is permitted in the financial year 2006-2007.
 PROCEDURE OF BUY BACK
IN LISTED COMPANIES
 Passing of Special Resolution/Board Resolution
 Copy of Special Resolution passed at General
Meeting shall be filed with SEBI & Stock
Exchanges where the securities of the company are
listed within 7 days of passing of resolution.
 Public announcement of buy back in one English
Daily, one Hindi daily and a regional language
daily.
 Public announcement shall specify a date which
shall be the ‘specified date’ for the purpose of
determining the names of the security holders to
whom the letter of offer shall be sent.
 The specified date shall not be earlier than 30 days
and not later than 42 days from the date of public
announcement.
 The company shall within 7 working days of the
public announcement file with the SEBI a draft
letter of offer through a merchant banker.
 Letter of offer should be accompanied by
prescribed fees.
 The letter of offer shall be dispatched not
earlier than 21 days from its submission to
SEBI.
 The offer for buyback shall remain open to
the members for a period not less than 15
days and not exceeding 30 days.
 Letter of offer should be sent to security
holder so as to reach before opening of
offer.
 The company shall complete the
verification of the offer received within 15
days of the closure of the offer and the
securities lodged shall be deemed to be
accepted unless a communication of
rejection is made within 15 days from the
closure of the offer.
 The money for buyback should be
deposited in Escrow account from which
the company shall make the payment to
security holders.