This article is written by Asmita Topdar, Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here she discusses “Procedure for Buy-Back of Shares in Unlisted Companies”.

Introduction

Buy-Back of shares is a process whereby a company repurchases back its own shares from the shareholders at a price usually higher than its market price. The recent decade has witnessed a transition in the company using buyback of shares over dividends in order to return back the funds of investors. The company can buy back the shares from the open market or existing shareholders in the market or from the employees who have been allotted such share as sweat equity or as ESOPs. Proceeds from security premium account or free reserve or proceeds from the issue of any other security can be utilised for buying back of shares by the company. 

Buy-Back of shares can be undertaken by both listed and unlisted company. Earlier, the concept of buyback was buried under the Companies Act, 1956 until it was amended in the year 1999. Apart from this, section 68, 69 and 70 of the Companies Act, 2013 with the Rule 17 of the Companies (Shares Capital and Debentures) Rules, 2014 governs the process of buyback of shares by the unlisted company. For a listed company, along with the above-mentioned provisions, SEBI (Buy-back of Securities Amendment) Regulations, 2013 also comes in the fore for regulating the Buy-Back by listed companies. 

Reasons Behind Buy-Back of Shares

Also known as Share Repurchase, Companies prefer buying back its own shares when the market price of its shares are falling and buying back those shares helps in increasing the market price of those shares. By buying back the shares company retains back the ownership and control over the company which otherwise would have been in the hands of shareholders. This acts as an exit route for the shareholders. This further helps in maintaining a favourable debt-equity ratio of the company. 

Restrictions on Buying Back of Shares

There are certain conditions imposed on the company if they choose to Buy-Back shares. The company is required to act in compliance with the conditions.

• Company cannot negotiate any deal to purchase the shares from any person irrespective of whether the negotiation is through stack exchanges or any spot transactions or through any private arrangement or not. 
• Companies are prohibited from buying back of shares with the sole purpose of delisting its share from stock exchange
• Company cannot go for offering Buy-Back of shares within a period of 1 year from the date of expiry of the previous Buy-Back period.
• Reduction of share capital shall be effected in order to allow the company to offer to buy back

Procedure for Buying Back of Shares

• AOA authorising Buy Back

Articles of Association (AOA) should authorise for buying back of shares by the company if not authorised company shall alter its AOA for incorporating the provision enabling authorisation by the company. 

• Approval 

The company must take approval from the Board of Directors (BOD) and shareholders. Approval can be in the form of:

1. Shareholders– Special resolution passed by the shareholders if the quantum of Buy-Back is up to 25% of the aggregate of free reserves and paid-up capital of the company, or 
2. BOD– Approval from BOD if the quantum of Buy-Back is up to 10% of the aggregate of free reserves and paid-up capital of the company. 

3. Notice from the general meeting

The notice must be sent to the shareholders at least before 21 days from the proposed meeting which should also be accompanied by an explanatory statement for passing the special resolution. The explanatory statement must contain 

• Details regarding the number of shares, acquisition details, price.
• Details regarding shareholders’ holdings and transactions in the last 12 months before to the date of approval of Buy-Back of shares
• Confirmation that no default regarding repayment of loans, debentures or any other securities 
• Confirmation on a full background check of affairs of the company and no grounds on which company can default in paying debts
• Report from the company’s auditors to BOD 

4. Filing form MGT-14

The form MGT-14 must be filed with Registrar of Companies (ROC) within 30 days of passing the special resolution. The form must be certified by a Chartered Accountant or a Company Secretary or any Cost Accountant and it must be accompanied by the special resolution and explanatory statement. 

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5. Filing Letter of Offer (SH-8)

Letter of the offer has to be filed with ROC in form SH-8 which must be signed by BOD not less than 2 directors and one of the directors signing the document must be the Managing Director. While filing the form should be accompanied with following documents: 

• Details regarding promoters of the company
• Copy of the board resolution;
• Declaration by auditors
• Audited financial statements of last 3 years;
• Copy of the notice issued under section 68(3) along with the explanatory Statement thereto
• List of holding and subsidiary companies of the company;
• Buy-Back details of the last 3 years;
• Statutory approvals received (if any);
• Unaudited financial statement (if applicable);
• Confirmation of opening of Separate Bank Account.
• Details of the auditor, legal advisors, bankers and trustees (if any);

6. Dispatch copy of Letters of Offer

The letter of offer shall be dispatched to the shareholders within 20 days from the date of filing with ROC. Shareholders can accept the offer of Buy-Back within the window of not less than 15 days but not beyond 30 days from the date of dispatch of the letter of offer.

7. Deposit in a bank account

After the date of window period closes, the Company shall open separate bank accounts for the shareholders who have accepted such offer and the due amount is to deposit in that account.

8. Verification and acceptance of Buy-Back offer

The Offer will be considered as accepted if there’s no communication of rejection within 21 days of offer closure.

9. Payment of consideration

Consideration for acceptance of Buy-Back shares must be paid in cash only within 7 days of verification to those shareholders whose shares have been accepted.

10. Return of share certificate of unaccepted shares

Share certificates of those shares which have not been accepted for Buy-Back shall be returned to the shareholders within 7 days of rejection. Also, share certificates of those shareholders whose shares have been partly accepted on pro-rata basis and the share certificates of part shares which have not been accepted shall be returned.

11. Destruction of share certificates

Within 7 days from the last date of completion of Buy-Back, share certificates which have been returned shall be physically destroyed.

12. Account for shares bought back

Shares and securities which have been bought back shall be properly accounted in a register. The register shall be maintained properly and shall be in the custody of Company Secretary or any authorised person by the BOD. Proper authentication of the entries in the register required by the company secretary. All particulars as mentioned in SH-10 shall be incorporated in the register. 

13. Filing SH-11 with ROC

Return of Buy-Back in the form SH-11 shall be filed with the registrar within 30 days of completion of the process of Buy-Back. The filing must be accompanied with the following details regarding:

• Details regarding the share or the security holder
• Description of shares bought back
• Copy of Board resolution and financial statement of the company
• Copy of Special resolution passed in general meeting

14. Filing compliance certificate with ROC

Along with SH-11 form, the company shall file with the registrar compliance certificate in form SH-15 which shall be annexed with form SH-11. SH-15 shall be signed by 2 directors, one of which shall be Managing Director of the company (if any). The directors shall certify that the process of Buy-Back has been in accordance and compliance with Companies Act and the Companies (Share Capital and Debentures) Rules. 

Penalty for Default in Buy-Back Procedure

Section 68 of the Companies Act, 2013 provides for the punishment in case the company defaults in the procedure of Buy-Back of shares. The company shall be liable to pay fine, not less than Rs.1 Lakhs which might exceed up to Rs.3 Lakhs. All the officials of the company who are involved in the procedure of buying back of shares defaults in any required compliances shall be punishable with imprisonment for a term extending to 3 years or with fine of an amount not less than Rs.1 Lakh. 

Tax Implications for Buy-Back of Shares

The Finance Act, 2013 has introduced the concept of tax on Buy-Back of shares under Section 115QA. Under this provision, the company shall be liable to pay 20 per cent tax on distributable amount by unlisted companies. Distributable Income means the amount which is the difference between the consideration paid for Buy-Back of shares and the amount received by the company on the issue of such shares. 

However, the tax implication on the Buy-Back of shares was only imposed on the unlisted company. Recently, in the year 2019, Finance Minister Nirmala Sitharaman has introduced certain amendments in the tax regime. One of which levied the tax implication for Buy-Back of shares on listed companies. It was believed that companies were trying to evade from tax payment on dividend distribution which is called Dividend Distribution Tax by following the procedure of Buying Back the shares from shareholders and indirectly giving them a dividend. Thus, the introduction of tax implication was levied on a listed company.

Endnotes

1. Available at https://swaritadvisors.com/learning/procedure-for-buyback-of-shares-and-other-specified-securities/ [Accessed on Feb 18 2020]
2. Available at https://swaritadvisors.com/learning/procedure-for-buyback-of-shares-and-other-specified-securities/ [Accessed on Feb 18 2020]

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