Transcript Presentation – Buy Back

By Vishal Shah
Synopsis
 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
method;
Introduction & History on Buy Back
 Buy back of shares can be understood as the process by which a
company buys its share back from its shareholder.
 Prior to the amendment of the Companies Act in year 1999, there
was no way a company could buy its shares back from the shareholders
without a prior sanction of the court (except for the preference
shares). The laws as to the buying of its share by the companies were
very stringent. Some of the ways by which a company could buy its
shares back were as follows:-
i.
ii.
iii.
iv.
Reduction of share capital as given in sections 100 to 104;
Redemption of redeemable preferential shares under section 80;
Purchase of shares under an order of the court for scheme of
arrangement under section 391 in compliance with the provisions of
sections 100 to 104;
Purchase of shares of minority shareholders under the order of the
company law board under section 402(b);
 Though there were ways by which a company could buy its shares back
from the shareholders but it could not be done without the sanction of
the court. This was done to protect the rights of the creditors as well as
the shareholders. But the need of less complex ways of buying its
shares back by the company was always felt. The much needed change
in the companies act was brought about by the companies amendment
act 1999. Sections 77A, 77AA and 77B were inserted in the companies
act 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 Public
Company (Buy Back of Securities) Rules, 1999 are applicable to
Private Company and Unlisted Public Company.
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 are
under-valued;
4.
To enhance consolidation of stake in the Company;
5.
To prevent hostile takeover;
6.
To return surplus cash to shareholders;
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 public
company, whose shares are listed on a recognised stock exchange,
is smaller than such marketable lot, as may be specified by the
stock exchange; or
4.
By purchasing the securities issued to employees of the company
under a scheme of stock option or sweat equity;
Sources of Buy Back
1.
Free Reserves - A company may buy back out of its free reserves but
a sum equal to the nominal value of the shares so purchased must be
deposited in the capital redemption reserves account.
2.
Securities Premium Account - Though Section 78 of Companies
Act, 1956 does not mention buy back of securities as one of purpose,
however by virtue of clause in Section 77A, i.e. “Notwithstanding
anything contained in this act”, funds in Securities premium account
can be used to buy back shares.
3.
Proceeds of Fresh Issue - No buy back of any shares or securities
shall be made out of the proceeds of an earlier issue of the same kind
of shares or same kind of securities.
Conditions for a Buy Back
 Authority in Articles of Association of the Company;
 Quantum of Buy Back;
 Debt Equity Ratio Post Buy Back;
 Only Fully Paid Shares qualify for Buy Back;
 Transfer to Capital Redemption Reserve Account, if free reserves is
utilised for Buy Back;
 No issue of any security till closure of offer of Buy Back;
 No issue of same kind of security within 6 months of completion of
Buy Back;
 Promoters or persons acting in concert shall not deal in securities
while 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 due
date of conversion would deemed to be Buy Back;
Restrictions on Buy Back;
 No company shall buy its own shares or other specified securities i.
through any subsidiary company including its own subsidiary
company.
ii.
through any investment companies or group of investment
companies.
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;
vi.
if default is made in redemption of the
debentures/preference shares or deposits including
interest thereon;
Note: Compounding or curing of above defaults may
qualify for Buy Back.
Income tax Aspects for Buy Back
 Section 46A of Income Tax, 1961 provides that any consideration
received by security holder form Company on buy back shall be
chargeable to capital gain tax.
Declaration of solvency (DoS)
 Where a company has passed a special resolution or a board resolution
has been passed under some circumstances to buy back its securities, it
shall before making such buy back, file with the registrar and the
Securities And Exchange Board of India, a declaration of solvency
and 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 they
have 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 of
declaration, and signed by at least two directors of the company, one
of whom shall be the managing director, if any.
Brief Procedure for Buy Back through Tender Offer
Board Meeting Decision for
Buyback
Public Notice, if
applicable
Special
Resolution,
if applicable
Appointment of
Merchant
Banker
Specified date
Dispatch of
LOO & Advt. in
Newspaper
SEBI Clearance
& Filing of LOO
with SEBI & STX
Opening of offer
for Buy-back
Filing of draft
LOO & DoS
with SEBI & STX
Closure of offer
for Buy-back
Filing of Return
with ROC
Public
Announcement
(PA)
Payment to
Security holders
Extinguishment
of Certificates
Brief Procedure for Buy Back through Book Building
method
Board Meeting Decision for
Buyback
Closure of offer
for Buy-back
Determination
of Price
Opening of offer
for Buy-back
Payment to
Security holders
Merchant
Banker
Filing of copy of
PA with SEBI &
STX
Extinguishment
of Certificates
Opening of
Escrow Account
Public
Announcement
(PA)
Filing of Return
with ROC
Special
Resolution,
if applicable
Appointment of
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