+91 9836047798 admin@legalmantra.net

View News

Submit Query
21 May 2024

Buy-Back-Process-Under-Companies-Act-2013

Buy-Back-Process-Under-Companies-Act-2013

Buy-Back Process Under Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014

Key Provisions and Guidelines

Sources for Buy-Back

  1. Free Reserves

  2. Security Premium Reserves

  3. Proceeds from the issue of shares or securities (excluding the same kind of shares or securities)

Quantum of Buy-Back

  1. 10% of Paid-up + Free Reserves: Authorization by the Board of Directors through a Board Resolution (BR) passed in a Board meeting.

  2. 25% of Paid-up + Free Reserves (Standalone or Consolidated Financial Statements, whichever is less): Authorization by shareholders via a Special Resolution (SR) passed in an Extraordinary General Meeting (EGM) or Annual General Meeting (AGM).

Key Financial Ratios and Limits

  • Debt-Equity Ratio: Post buy-back, the company's debt-equity ratio must not exceed 2:1.

  • Maximum Paid-up Equity Share Capital for Buy-Back: 25% of its total paid-up equity share capital.

Special Resolution Explanatory Statement Requirements (Rule 17(1) of Companies (Share Capital and Debentures) Rules, 2014)

  1. Date of the board meeting where the buy-back proposal was approved.

  2. Objective of the buy-back.

  3. Class of shares or other securities intended for purchase.

  4. Number of securities to be bought back.

  5. Method for the buy-back.

  6. Price at which the buy-back will be made.

  7. Basis for arriving at the buy-back price.

  8. Maximum amount to be paid for the buy-back and sources of funding.

  9. Time limit for completing the buy-back.

  10. Shareholding details of promoters, directors of the promoter (if applicable), and key managerial personnel.

  11. Confirmation of no subsisting defaults in financial obligations.

  12. Board of Directors' confirmation on company's solvency and ability to meet liabilities.

Auditor's Report Requirements

  1. Inquiry into the company’s state of affairs.

  2. Determination of the permissible capital payment for the securities.

  3. Audited accounts used for calculation not older than six months from the date of the offer document.

Methods of Buy-Back

  1. Existing shareholders on a proportionate basis.

  2. Open market.

  3. Employee Stock Option Plan (ESOP)/Employee Stock Purchase Scheme (ESPS)/Sweat equity.

Buy-Back Process Steps

  1. Board Meeting: Call a Board Meeting as per Section 173 of the Companies Act, 2013.

  2. Extraordinary General Meeting (EGM): Call EGM as per Section 100 of the Companies Act, 2013, pass a Special Resolution (SR), and file MGT-14 with the Registrar of Companies (ROC) within 30 days.

  3. Letter of Offer: File a letter of offer in Form SH-8 with ROC within 30 days of passing SR.

  4. Declaration of Solvency: File declaration of solvency in Form SH-9 with ROC, verified by an affidavit.

  5. Dispatch Letter of Offer: Send the letter of offer to shareholders within 20 days of filing SH-8.

  6. Offer Period: The buy-back offer remains open for a maximum of 30 days from the date of dispatch (minimum 15 days with 100% consent).

  7. Verification: Complete verification of offers within 15 days from the offer's closure.

  8. Bank Account: Open a separate bank account and deposit the total buy-back consideration immediately after offer closure.

  9. Payment: Make payment within 7 days of verification and acceptance of shares.

  10. Extinguishment of Shares: Physically destroy securities within 7 days of the last day of buy-back completion.

  11. Register Maintenance: Maintain a register of bought-back shares in Form SH-10.

  12. Return Filing: File Form SH-11 with ROC within 30 days of buy-back completion, along with a certificate in Form SH-15.

Important Forms

  1. SH-8: Letter of offer for buy-back (to ROC).

  2. SH-9: Declaration of solvency (to ROC).

  3. SH-10: Register of buy-back.

  4. SH-11: Return of buy-back (to ROC).

  5. SH-15: Compliance certificate of buy-back.

Completion Timeline

  • Buy-back must be completed within 12 months from the date of passing the Special Resolution or Board Resolution.

Capital Redemption Reserve (CRR)

  • When buying back shares from free reserves or securities premium account, an amount equal to the nominal value of the shares purchased must be transferred to the CRR account.

Restrictions on Buy-Back

  • Through any subsidiary company.

  • Through any investment company or group of investment companies.

  • If the company has defaulted on financial obligations.

Completion Timeline

  • Requirement: The company must complete the buy-back within 12 months from the date of passing the Special Resolution

Subsequent Buy-Back Restrictions

  • Requirement: The company shall not undertake a buy-back of the same kind of security for 1 year after the completion of the current buy-back.

Auditor's Report Requirements

  • Report to the Board of Directors by the Company’s Auditors: a. They have inquired into the company’s state of affairs. b. The amount of the permissible capital payment for the securities in question is, in their view, properly determined. c. The audited accounts on the basis of which the buy-back calculation is done are not more than six months old from the date of the offer document. d. The Board of Directors has formed the opinion that the company shall not be rendered insolvent within a period of one year from that date.

Audited Statement

  • Requirement: The audited statement used for the buy-back calculation shall not be older than six months from the date of the letter of offer.

Timeline Example for Buy-Back

  1. 7 days: Notice and Board Resolution by Board of Directors.

  2. 21 days: EGM notice, Special Resolution by shareholders, and filing of MGT-14 with ROC.

  3. 20 days: Dispatch letter of offer from filing SH-8 to ROC.

  4. Offer Period: 30 days (minimum 15 days with 100% shareholder consent).

  5. 7 days: Payment to shareholders whose offers were accepted.

  6. 7 days: Extinguishment of share certificates.

  7. 30 days: Filing return of buy-back with ROC.

Shortened Buy-Back Period

  • If the company uses a shorter notice for EGM and obtains 100% shareholder consent for a shorter offer period, the buy-back period can be reduced to 15-20 days.

This structured process ensures compliance with the regulatory framework while providing a clear timeline for completing a share buy-back. It is crucial for companies to adhere to these guidelines to ensure transparency and protect shareholder interests.

"Unlock the Potential of Legal Expertise with LegalMantra.net - Your Trusted Legal Consultancy Partner”

Article Compiled by:-

Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.