Compliances required for a buy-back of shares by a private company

Introduction

As the term suggests, buy-back of shares refers to a process wherein a company repurchases its own securities in form of shares from various stakeholders which enables the company to consolidate it’s stake holdings, increase its earning per share, ensure optimised capital structure, avoid any situations of hostile takeovers or return the excessive or surplus cash to the shareholders.

Under Indian laws, the process is governed under the regulatory provisions strictly enumerated under the Companies Act 2013 along with the Companies (Share and Capital Debenture) Rules 2014, and for the listed companies there are various regulations by the Securities and Exchange Board of India which apply to ensure that the intricate process of buy back of shares by the companies is carried on in a legal and transparent manner, thereby assuring compliance to the statutory norms.

Modes of Buy – Back of Shares

Under the regulations of the Companies Act 2013, there are various modes through which the process of buy-back of shares can be completed as per Section 68(1) which are as follows:

Buy Back of shares from Open Market: Under the process of buy back of shares by a company from the open market, a company purchases its own shares from the open market i.e., the stock exchanges through the rate determined by the stock exchanges, thereby ensuring transparency in the entire process.

Buy Back of shares from the existing shareholders or security holders on proportionate basis: Under the scheme of buy back of shares from existing shareholders at a proportionate basis, the company buying back such shares makes a proportionate offer to its existing shareholders or security holders based upon their current share – holding patterns.

Under the buy back of shares issued to employees, the companies are authorized to buy back sweat equity shares or Employee Stock Option Plan (ESOP) from the existing shareholders. In order to finance the buy – back of shares, the companies have also been authorized to utilise their free reserves, security premium accounts or proceeds from the issue of shares.

Compliances for Buy-Back of shares for Private Companies

In order to ensure that the buy-back of shares is conducted in a fair and transparent manner, there are certain conditions that need to be fulfilled by the private companies as specified under the Companies Act 2013 which include the following:

1. Authorisation Requirements- The scheme or provision for buy-back of shares for a private or unlisted company must be listed in the Articles of Association (AoA) of the Company. Additionally, the articles of association should explicitly permit the company to buy back its own shares. Secondly, a special resolution must be passed by the shareholders for the buy back of shares except in cases wherein the buy-back of shares is upto 10% of the company’s total paid up equity capital and free reserves as well as authorised by the Board of Directors (BoD).
2. The debt- equity ratio of the company post completion of the buy-back of shares should not exceed 2:1.
3. There should be a minimum time gap of one year in between two buy-back offers of shares.
4. The offer period for which the buy-back option shall remain open should be of at least 15 days and not more than 30 days from the date of dispatch of the letter of offer to the shareholders. In case all the members of the company have agreed, the buy – back offer may be allowed to remain open for a period less than 15 days.
5. A declaration of solvency in accordance with the norms laid down by the SEBI shall be filed by the company before and after making the buy – back offer which shall ensure that such declaration and letter of offer is to be signed by a minimum of two directors, out of whom one shall be a managing director. Secondly, such declaration shall be verified by an affidavit stating that the Board of Directors have made a full enquiry into the affairs of the company concluding that the company is capable of meeting its liabilities and shall not be rendered insolvent within a period of one year from the date of declaration as adopted by the board.
6. There are various additional requirements that are needed to be fulfilled by the company which may include that the buy-back price of the shares so offered is fair and reasonable, the shares so brought back must be extinguished or destroyed physically within 7 days of acceptance, allowing proportionate acceptance in cases where the total number of shares offered for buy-back exceed the number of shares to be bought back.

Conclusion

Even though the system of buy-back of shares can be a strategic tool for private entities operating in India, it is utmost important to adhere to the specific compliances which are outlined under the Companies Act 2013. Moreover, after thorough consideration towards the factors such as shareholders approval, sources of funding, debt – equity ratio, and requirements for filing, the company can successfully execute the process of buy – back of shares after thoroughly considering the legal and compliance procedures.

It is also essential for the companies to adhere strictly to the regulatory framework, obtain the necessary approvals along with fulfilling the prescribed conditions under the laws and guidelines before initiating the process of buy-back of shares. Compliance also ensures transparency, protects the interests of the shareholders, and maintains thorough integrity and legality of the entire system.

King Stubb & Kasiva,
Advocates & Attorneys

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