‘Buy-back’ means buying back of shares. It is in context of a company buying its own shares back from the investors in the Open Market. Buy-back is generally done to increase the promoter holding or to eliminate the threat by people trying to gain stake in the company.
According to Sec77A of Companies (Amendment) Act, 1999 – A company is allowed to buy-back from the open market however, subject to certain conditions:-
1. The buy-back should be done out of free reserves (reserves available for dividend) - When a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the shares purchased shall be transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance-sheet.
2. Securities Premium Account.
3. Proceeds of any shares or other specified securities.
Here referring to point 2, no buy-back is done out of proceeds of fresh issue of same type of securities. For e.g. in order to buy back the Equity Shares, the company has to either issue debentures or preference shares and not equity shares.
Conditions of Buy-Back
1. The buy-back is authorized by the Articles of association of the Company.
2. A special resolution {SR} should be passed in the general meeting of the company authorizing the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. The buy-back can be made by a Board resolution if the quantity of buy-back is less than ten percent of the paid up capital and free reserves.
3. Companies are allowed to buy-back their own shares up to 25% (twenty five) of paid-up capital and free reserves. If such shares are bought at premium, then buy-back should be 25% (twenty five) of the paid-up capital + free reserves (including securities premium).
4. The ratio of the debt owed by the company should not be more than twice the capital and its free reserves after such buy-back.
5. The existing shares or other securities for buy back should be fully paid up.
6. The buy-back of the shares or other specified securities listed on any recognized stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and the buy-back in respect of shares or other specified securities of private and closely held companies should be in accordance with the guidelines as may be prescribed.
Section 77A (3) states that the notice of the meeting at which the special resolution shall be passed on buy-back shall accompany an explanatory statement:-
a) Providing complete disclosure of the material facts.
b) The need for buy-back.
c) Type/class of security to be purchased.
d) Amount invested for the buy-back purpose.
e) Time-Limit for completion of buy-back
Note: Every buy-back shall be completed within 12 months from the date of passing the SR.
Issue of further shares after Buy back
Every buy-back shall be completed within twelve months from the date of passing the special resolution or Board resolution as the case may be. A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of:-
Public issue
Right issue up to six months from the date of completion of buy back.
Section 77AA of the act says that where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the shares so purchased shall be transferred to the Capital Redemption Reserve (CRR).
CRR so created under section 80(1)(d) being a free reserve can be applied by the company in paying up unissued shares of the company as fully paid up bonus shares but it cannot be utilized for the payment of Dividend.
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