Introduction

Previously, a company was not allowed to purchase its own shares/ securities, except for a very exceptional cases, as given in section 67 of the 2013 Act. This structural change in the principle and philosophy of company law was brought about by Section 77-A of the Companies (Amendment) Act, 1999 [1956 Act], which stipulates that subject to the limitations outlined in the section, a company may purchase back its own shares. The 2013 Act’s Section 68 now contains this provision. This article will explain the various particulars of this provision.

Importance of the buy-back of shares

Some of the objectives of the buy-back of shares are as under:

(a) Increase the promoters’ stake: Regulations allow for the cancellation of shares following a buy-back, which lowers the company’s share capital. Buy-back is a successful way to increase the promoter’s ownership in the company because the promoter’s holding stays the same.

(a) Takeover bid defence: A takeover bid’s buy-back of shares is a strong takeover bid defence. A company may make a counter offer to buy back its own shares at a higher price in order to thwart a takeover bid when a bid is made for an open offer of the company’s shares.

(c) Repayment of excess cash: If a company has extra cash that it cannot successfully use for operations, it may use that cash to repurchase shares.

(d) Capital restructuring: Since buy-backs increase the debt-to-equity ratio, capital restructuring may be done. The debt-to-equity ratio compares a company’s total long-term debt to its equity capital. It measures how much money a company borrows rather than using its own money to run its business. A higher D/E ratio among comparable companies indicates greater risk, whereas a particularly low D/E ratio may indicate that a company is not expanding through debt financing.

(e) Increase the EPS (Earnings per Share): Buy-backs could be made to benefit the current shareholders by raising the EPS. However, the price at which shares are repurchased and the returns on capital employed determine how buy-backs affect EPS. The EPS may be diluted if the buy-back is priced over the share’s book value.

(f) Increase in book value: When a share is purchased back at a price that is less than the current book value, the book value per share rises.

Analysis of Section 68

Sub-section (1) shows the fund from which the buy-back exercise is to be financed. The company’s free reserves, a securities premium account, the proceeds of an earlier share offering, or other specified securities are acceptable sources. The earlier proceeds of the same type of shares or the same kind of other specified securities cannot be used to purchase any kind of shares or other specified securities again. [Proviso to sub-s (1)] The definition of “free reserves” in Section 2(43) is also applicable here.

Sub-section (2) specifies specific formalities. The articles should contain a clause allowing for share buy-backs. It was held in the case of Gujarat Amiya Exports Ltd., re, that a special resolution should be voted at a shareholder meeting authorising the buy-back plan as part of the use of that authority. This criterion does not apply in cases where: (i) the buy-back will only account for ten percent or less of the company’s total paid-up equity capital and free reserves, and (ii) it has been approved by the Board of directors by a resolution adopted at a board meeting.

Less than 25% of the company’s total paid-up capital and free resources should be included in the buy-back. After the buy-back, the company’s debt-to-capital ratio should not be twice as high as its capital and available resources. In the case of listed companies, the buy-back should be in accordance with the Securities and Exchange Board of India’s regulations. This requirement is applicable to listed securities as well. In the case of other securities, the buy-back must adhere to any prescribed guidelines.

No buy-back offer may be made within one year (365 days) of the date of the previous buy-back offer. The section allows for the purchase of shares and other specified securities. According to the Explanation to sub-section (2), “specified securities” include employees’ stock options and other securities as notified by the Central Government from time to time.

The notice convening the meeting of shareholders for the purpose of passing a special resolution must include the information required by sub-section (3). The required information is as follows: (a) a complete and accurate disclosure of all material facts;

(b) the requirement for the buy-back;

(c) the type of security that will be purchased;

(d) the amount of money to be invested in buy-backs;

(e) time limit for transaction completion.

This is subject to the limitation outlined in subsection (4), which states that any such transaction must be completed within 12 months of the date of the special resolution or the Board resolution. The power can be used to buy back shares from existing shareholders directly on a proportionate basis, from the open market, or the employees’ stock option shares or sweat equity shares.

As per subsection 5, a company can buy back its shares from (a) the existing shareholders, (b) security holders, (c) open market, and (d) employees of the company pursuant to a scheme of stock option or sweat equity.

Declaration of solvency [68(6)].—A declaration of solvency has to be filed with the Registrar and SEBI. This has to be filed before the resolution for buying back is implemented. It has to state that the Board of Directors has made a full inquiry into the affairs of the company and has found that it is capable of meeting all its liabilities and will not be rendered insolvent for 12 months from the date of the declaration. It has to be on a prescribed form and verified by an affidavit. It has to be signed by at least two directors of the company, one of whom should be the managing director if any. A company’s declaration need not be submitted to SEBI if its shares are not listed on a stock exchange.

Security destruction in the physical sense [S. 68(7)]— When a company buys back its securities, it is required to physically destroy and extinguish the securities. This needs to be done seven days after the last day the buy-back process is finished.

Additional issue following buy-back [S. 68(8)]— After resorting to the buy-back of its stocks, a company is not permitted to issue new securities for a period of six months. To satisfy its current commitments, it may conduct a bonus issue or convert warrants, stock option plans, sweat equity, preference shares, or debentures into equity shares. Only the kind of securities that were bought back are subject to this restriction. The company is free to issue different kinds of securities.

Securities bought back register [Section 68(9)]— The specifics of the securities that were bought back, including the consideration paid for them, the cancellation date, and any other specifics that may be required, must be kept in a record.

Buy-back return [Section 68(10)]— The company must submit a return to SEBI and the Registrar after complete the buy-back process. The reply must include the required information. Within 30 days after the completion date, it must be filed. A return to SEBI is not required if the securities are not listed.

Punishment [S. 68(11)]— A punishable offence has been created when the rules and regulations of the section are not followed. Every official of the company who is in default would be subject to imprisonment for a maximum of three years, a fine of not less than Rs 1,00,000 and up to Rs 3,00,000, or both. The company is also subject to a fine of not less than Rs 1,00,000 and up to Rs 3,00,000.

It was held in Spring Fields Financial Services Ltd. v. State of AP that the fulfilment of the requirements as per section 77 of the 1956 Act (now section 68 of the 2013 Act) is mandatory, and the non-satisfaction will make the buying back of the shares void.

In the case of M.D. Jindal v. Hydro S&S Industries Ltd., in a special company general meeting, the articles of association were changed. It was argued that the articles did not contain a provision allowing buy-backs at the time the Board of Directors’ resolution was made. Because it was too technical and the scheme did not harm or prejudice shareholders’ interests, the Company Law Board (CLB) declined to consider it.

In Nitin Mukund Sahasrabhojanee v. Venus Automation (P) Ltd., according to a settlement, there was a consensual agreement between the parties to buy back the shares. A request for exemption from Section 77-A’s [now S. 68] provisions was presented to the CLB. The Board concluded that granting the exemption would not be detrimental to anyone’s interests. The application was therefore approved with the relevant instructions.

Conclusion

From this article, it can be concluded that a company buys back its shares to make the most effective use of cash at that moment. Given that a repurchase often boosts shareholder value, it makes sense that a company’s management would want to maximise return for investors. Since it holds such importance for a company, it becomes necessary to follow the procedure to avoid legal battles in the future.

References

• Companies Act, 2013.
• Avtar Singh, Company Law.
• A Ramaiya: Guide to The Companies Act, 19th ed, Vol 1.
• Rinita Das, Company Law.
• Gujarat Ambuja Exports Ltd., In re, 2003 SCC OnLine Guj 281.
• M.D. Jindal v. Hydro S&S Industries Ltd., (2009) 148 Com Cases 719 (CLB).
• Spring Fields Financial Services Ltd. v. State of AP, (2007) 139 Com Cases 410 (AP).
• Nitin Mukund Sahasrabhojanee v. Venus Automation (P) Ltd, (2014) 186 Comp Cas 290.
• Investopedia, https://www.investopedia.com/terms/d/debtequityratio.asp (Last visited on October 30, 2022).

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