The concept of buy-back shares in company law refers to a share repurchase process where a company repurchases its own shares either from the open market or directly from its shareholders. Buy-back of shares is a financial restructuring strategy that is typically carried out through a buy-back share program. This program sets the company’s limit for purchasing shares and determines the duration of the buy-back program.
Objectives of Buy-Back Shares of 2013
a) In Case of Excess Capital
When a company has excess capital in its balance sheet, it can engage in the process of buy-back of shares as a means to distribute the surplus funds to its shareholders.
b) To Increase Share Price:
Buy-back of company shares is an effective strategy to increase the share price in the market. When shares are bought back from shareholders, it creates a demand for the shares in the market, subsequently driving up the share price.
c) Improve Financial Ratios:
The method of buy-back of shares contributes to an increase in the Earnings Per Share (EPS) value, thereby improving the company’s financial ratios.
d) Signal Confidence:
Investors often see The decision to buy back shares as a signal of confidence. Companies exercise this option when there is a perceived decrease in the value of their shares. By repurchasing shares, they demonstrate their confidence in the company’s future prospects.
Important Provisions of Buy-Back Shares
a) Sec 68(1)(a): A company can engage in the buy-back of shares using its own reserves.
b) SEC 68(2)(b): A company can engage in the buy-back of shares based on a board resolution for up to 10 percent of its paid-up capital plus free reserves. Alternatively, a special resolution can allow buy-back for up to 25 percent of its paid-up capital plus free reserves.
c) SEC 68(2)(c): The buy-back is limited to 25 percent of the aggregate share capital and free reserves.
d) SEC 68(2)(d): The debt-equity ratio should not exceed 2:1 after the buyback. However, if a government company is engaged in NBFCs (Non-Banking Financial Companies), the debt-equity ratio can be up to 6:1.
SEC 68(3): The notice containing the special resolution, along with necessary details such as the amount of investment in shares and the reasons for buy-back, should be provided.
SEC 68(4): Every buy-back must be completed within one year of passing the special resolution or board resolution.
SEC 68(5): Shares can be bought back from existing shareholders or security holders, from the open market, or by purchasing securities issued to employees.
SEC 68(6): The company must submit a declaration of solvency in the form of SH-9, signed by two directors, one of whom should be the managing director. An affidavit verified by the board of directors is also required to accept the buy-back process. Additionally, documents such as statements of assets and liabilities, auditor’s reports, and any other optional documents should be submitted to the registrar.
SEC 68(7): The company must destroy share certificates within seven days of the buy-back. In the case of an unlisted company, the share certificates are destroyed, while in the case of a listed company, the certificates are stored in dematerialized form and destroyed by the depositories.
Prohibition of Buy-Back (SEC 70)
SEC 70 prohibits the purchase of securities in certain cases, including:
a) Purchasing securities in any subsidiary company or a subsidiary of the organization.
b) Purchasing securities in any investment company or company owned by the organization.
c) Purchasing securities in any company that has failed to file annual returns or filings.
Conclusion
The concept of buy-back of shares is an effective and useful process that enhances the financial structure of an organization. It helps maintain share prices, increase the reputation of the organization’s shares, and provides a means to distribute excess capital to shareholders. By optimizing the financial ratios and signalling confidence to investors, the buy-back of shares can significantly contribute to the overall success of a company.
