When a company buys back its shares from existing shareholders that is called a buy back of securities. It is a strategic tool used by companies to optimize capital structure, enhance shareholder value, and signal confidence in the business.
What is Buy Back of Securities?
A buy back of securities is when a company buys its shares. Once bought back, these securities are extinguished, reducing the total number of outstanding shares in the market.
Legal Framework Governing Buy Back in India
Buy back of securities is governed by:
- Companies Act, 2013 (Sections 68, 69, and 70)
- SEBI (Buy-back of Securities) Regulations, 2018 (for listed companies)
Objectives of Buy Back
Companies undertake buy back for various reasons:
- To increase Earnings Per Share (EPS)
- To improve Return on Equity (ROE)
- To utilize surplus cash efficiently
- To support share price in the market
- To prevent hostile takeovers
Sources of Buy Back
A company can buy back its securities out of:
- Free reserves
- Securities premium account
- Proceeds of issue of any shares or other specified securities
Note: Buy back cannot be made from proceeds of the same kind of shares.
Modes of Buy Back
Buy back can be carried out through:
- Tender Offer
- Open Market Purchase
- Book Building Process
- Purchase from odd-lot holders
Conditions for Buy Back
Key conditions include:
- Authorization in Articles of Association
- Approval via Board Resolution or Special Resolution
- Debt-equity ratio post buy back should not exceed 2:1
- All shares for buy back must be fully paid-up
- Compliance with SEBI regulations (for listed companies)
Limits on Buy Back
- Maximum 25% of paid-up capital and free reserves
- For equity shares, 25% of total paid-up equity capital in a financial year
- Board approval allowed up to 10%, beyond that shareholders’ approval is required
Procedure for Buy Back of Securities
1. Check Authorization in Articles
Ensure that the Articles of Association (AOA) of the company contain a provision authorizing buy back of securities. If not, the AOA must be amended before proceeding.
2. Conduct Board Meeting
Hold a Board Meeting to discuss and approve the proposal for buy back, including size, mode, and sources. The Board will also decide whether shareholder approval is required.
3. Obtain Shareholders’ Approval (if required)
If the buy back exceeds 10% of paid-up capital and free reserves, obtain approval through a Special Resolution passed at a General Meeting.
4. File Necessary Forms with ROC
File the required forms such as MGT-14 (for special resolution) and SH-8 (Letter of Offer) with the Registrar of Companies within prescribed timelines.
5. Dispatch Offer Letter to Shareholders
Send the Letter of Offer to eligible shareholders containing details such as number of shares, price, and procedure to tender shares.
6. Open Buy Back Offer
Open the buy back window for shareholders to tender their shares within the specified time period as per the offer terms.
7. Verify and Accept Shares
Verify the shares received from shareholders and accept them on a proportionate basis if the offer is oversubscribed.
8. Extinguish and Destroy Shares
Extinguish and physically destroy the bought-back shares within 7 days of completion of the buy back process as per legal requirements.
9. Maintain Register of Bought-back Securities
Maintain a register in Form SH-10 containing details of shares bought back, consideration paid, and date of cancellation.
10. File Return of Buy Back
File Form SH-11 with the Registrar of Companies within 30 days of completion of the buy back, along with necessary certifications.
Impact of Buy Back on Financial Statements
The impact of Buy Back on Financial Statements can be any of the following:
- Reduction in share capital
- Reduction in free reserves
- Increase in EPS
- Change in capital structure
Advantages and Disadvantages of Buy Back
The advantages and disadvantages are enumerated below:
Advantages
- Improves financial ratios
- Provides exit opportunity to shareholders
- Enhances shareholder value
- Efficient use of surplus funds
Disadvantages
- Reduces company’s liquidity
- Lack of growth opportunities
- Potential misuse for price manipulation
Penalties for Non-Compliance
Failure to comply with buy back provisions may result in:
- Fines on the company and officers
- Imprisonment for defaulting officers
- Invalidity of buy back transaction
Conclusion
Buy back of securities can really help companies. It is a strategy when used carefully.
- It helps companies deal with cash.
- It makes key financial numbers look better.
- It also rewards shareholders.
However, strict compliance with legal provisions is essential to avoid penalties and ensure transparency.
FAQs
Q1. What is the maximum limit for buy back of shares?
The maximum limit is 25% of the aggregate of paid-up capital and free reserves.
Q2. Can a company buy back shares without shareholder approval?
Yes, up to 10% of paid-up capital and free reserves with Board approval.
Q3. What happens to shares after buy back?
They are extinguished and cannot be reissued.
Q4. Can a company issue new shares after buy back?
A company cannot issue the same kind of shares within 6 months, except for bonus or conversion.
Q5. Is buy back beneficial for investors?
Yes, as it may increase share value and provide an exit opportunity.
Q6. What is the debt-equity ratio limit after buy back?
It should not exceed 2:1.
Q7. Is buy back allowed from borrowed funds?
No, buy back must be done only from specified internal sources.
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