In this blog post, Tanvi Amlani, a student of GGSIP University, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the concept of buyback of securities and the regulations regarding the same. 

Before discussing the regulations regarding buyback of securities, we must first understand the meaning and need of buyback of securities. Buyback of Securities is discussed in Sections 68, 69, 70 of the Companies Act, 2013. The regulations regarding the same are also mentioned under Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014.

Introduction

Sometimes a company may purchase its shares or other specified securities out of its:

1) Free reserves; defined under Section 2 (43) of Companies Act, 2013

2) Securities Premium Account

3) Proceeds of the issue of any shares or other specified securities. There is also an exception in this case in which it is clearly laid down that the proceeds of an earlier issue of the same kind of shares and securities specified are not permissible.

Sub-section 2 of Section 68 also lays down the conditions of the buyback. The conditions are:

1. a) Authorization under the articles of the company.
2. b) Special resolution at company’s general meeting is to be passed.

Further a proviso lays down that this would not prevail in a case when

1. The buyback is 10% or less of the total paid-up equity capital and free reserves of the company.
2. The board has authorized buyback using resolution passed at its meeting.

• Buyback should be 25% less than the aggregate paid-up capital and free reserves of the company.
• The ratio of aggregate secured and unsecured debts of a company not twice the paid-up capital and its free reserves. Central government may change the ration for a specific class.
• Buyback of shares or specified securities to be fully paid up.
• Buyback of securities of listed stock exchange according to the SEBI regulations.
• Buyback of Securities should be according to the rules specified in the Act.
• Notice of a meeting regarding the discussion of buyback of securities should always be given with an explanatory statement. An explanatory statement must consist of the following facts.

1. Material facts disclosed
2. The need for buyback of securities.
3. Class of shares and securities to be purchased.
4. Amount to be invested under buyback.
5. Time limit for the completion of this process.

• Time limit for completion of the buyback as specified. According to the special resolution or board.
• Who may indulge into the buyback of Securities

1. Existing shareholders or securities holders.
2. Open market.
3. Purchasing securities issued to employees of the company pursuant to a scheme of the stock option.

• Filing with Registrar and the Securities Exchange Board
• A declaration of solvency by 2014 rules. Two directors should sign this declaration out of which one may be a managing director.
• Bought shares to be extinguished within seven days of the last date of the completion of the buyback.
• There should be a detailed registration.

The Section corresponds to Section 77 A of the earlier Companies Act 1956. The buyback is also prohibited under certain cases stated under Section 70 of the present act. Compliance with provisions of Section 92, 123, 127, 129 is a must.

Certain norms are stated in Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014 regarding

1. Explanatory statements and its contents
2. Forms are specified
3. Relevant signatories
4. Dispatching the letter of offer
5. Time limit for opening of letter of offer
6. Requirement to be fulfilled after completion of Officer
7. Time limit for completion of verification
8. Proper records to be maintained
9. Submission to the Registrar and securities exchange board

Conclusion

Thus, we see that buyback of securities is a technical process and permits the company to buyback or repurchase its shares issued by them. It is done through re-absorption of ownership previously distributed amongst public and private investors.

Buy back carries with it many benefits such as:

1) Ownership consolidation

2) Boosting financial ratios

3) Undervaluation

4) Voting rights

5) To avoid pain for the privilege, they do not have access to

6) Reduction of overall cost of capital

7) Reissuing on correct prices

8) Making business looks more attractive to investors

9) Earnings per share ratio are increased.