What is Buy back of securities?

Question

What is buy back of securities? ways of buy back? regulations and provisions in case of default? Governing Laws?

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William 1 year 1 Answer 317 views Silver 0

Answer ( 1 )

  1. Company at a time may come under a situation where it needs more capital or some time it may suffer from over capitalization. This extra capital may harm company by various ways. To prevent from this harm, there is way called buy-back of securities.

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    What is Buy back of securities-

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    Since there is no specific definition given by Companies Act. But as interpretation of Section 68, buy-back is a process whereby company purchases its own shares or specified securities from the holder of them. It means, in this process company purchases back its own securities issued in past.

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    Why company needs buyback –

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    As we all know, business meant for revenue and wealth generation. At a time ownership of a company may be so much diluted, Which results in lesser earning per share as well return on net worth. Company can also opt for this process, when there is surplus cash or to provide better service to the equity or enhance consolidation of stake in the company.

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    Regulatory framework for buy back of securities-

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    Section 68 of Companies Act, 2013 regulates the process of buy-back. In addition to this SEBI(Buy back of securities)Regulation,1998 and Private Limited Company and Unlisted Public Company(Buy back of securities) Rules,1999 are also applicable to Listed and Unlisted Companies respectively.

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    What may be sources of buy back-

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    Since this process will require fund. Company is not free to opt as per their ease. As per Companies Act, 2013, a company may purchase its own securities or other specified securities out of –
    1. Free reserve,or,
    2. The securities premium account,or,
    3. The proceeds of any shares or other specified securities.
    However no buy back of any kind of shares or securities shall be made out of an earlier issue of same kind of shares or securities.

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    Who is authorized for process of buy back-

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    First of all, Articles of Association of the company shall authorize buy back. After that Board Resolution or Special Resolution passed in General Meeting is required as per amount of buy back.
    Is there any limits on buy back- off course, there are limits on buy back. If company passes Board Resolution in a duly convened meeting not by circulation then it can buy back only upto 10% of PAID UP EQUITY CAPITAL AND FREE RESERVE and if Company opts need to buy back more securities then Special Resolution is required and by this, company can buy back upto 25 % PAID UP CAPITAL AND FREE RESERVE.

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    However, it may be noted that company can buy back upto 25% of paid up equity in a financial year and after buy back Debt-Equity ratio of the company should not be more than 2:1. The shares or securities which are to be buy back should be fully paid up only.

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    Is there any time frame and modes of process of buy back –

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    Yes, buy back is time bound process which should be completed within 12 month of passing of board resolution or special resolution as the case may be. If company is not able to complete the process within stipulated time , then reasons for such failure should be included in Director’s Report.
    Buy back of securities may be from
    1. Open market ;or,
    2. From existing security holder on proportionate basis ;or,
    3. From odd lot holders; or,
    4. From securities issued to its employees pursuant to a scheme of stock option or sweat equity.

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    What are the provisions in case of default-

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    If company has defaulted with provision of this section or rules made there under, the there is fine of INR 1 Lakh to 3 lakh fine on company and imprisonment or fine or INR 1 Lakh to 3 Lakh for every officer in default.

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    Is there any prohibition on buy back in any circumstance-

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    Yes, The conditions in which company can not go for buy back are –
    1. If default subsists in repayment of deposit, term loan or interest payable thereon or in redemption of debenture or preference shares.
    2. If company has defaulted in payment of dividend to equity of preference shares.
    Further a company can buy back through any subsidiary or investment company.

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    Other provisions which should be kept in mind-

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    If company is passing Special Resolution, then complete disclosures like source, need etc should be made in explanatory statement. Declaration of Solvency need to be filled to ROC and SEBI In form SH-9. Same kind of securities should not be issued within 6 months of completion of buy back except some circumstance like bonus issue, conversion of warrants, preference shares or debentures etc. After completion, bought back securities should be destroyed within 7 days and Return of buy back in E form SH-11 should be filed to ROC and SEBI in 30 days and if company purchased the securities out of free reserve then sum equal to nominal value of purchased securities should be transferred to Capital Redemption Reserve.

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