Procedure for Buy Back of Equity Shares of a Company
1. Authorization:
Company should be authorized by Articles of Association to Buy Back its own share.
2. Threshold Limit through Resolution:
a. Board Resolution: 10% of the total paid-up Equity capital + Free Reserves
b. Shareholders Resolution: 25% of total paid-up capital + Free Reserves
3. Maximum Limit:
Overall limit for buying equity share during a financial shall be 25% of Equity Shares.
4. Proceeds:
The company can purchase its owns shares out of
a. Free Reserves
b. Securities Premium Account
c. Proceeds of the issue of any shares or other specified securities:
Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
5. Mode of Buyback:
a. From the existing shareholders or security holders on a proportionate basis
b. From the open market
c. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity
6. Time Gap between two buybacks should be one year
7. Prohibition:
No company shall directly or indirectly purchase its own shares or other specified securities
a. through any subsidiary company including its own subsidiary companies
b. through any investment company or group of investment companies; or
c. if any default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company: However, the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.
d. No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of sections 92 Annual Return, 123 (Declaration of Dividend), 127 (punishment for failure to distribute dividend) and section 129 (Financial Statement).
8. If Special Resolution is to be passed,
a. Notice for the same has to be given to Shareholders at least 21 days before the date on which passing Special Resolution.
b. Explanatory statement
c. File MGT-14 within 30 days of passing resolution.
9. After passing special resolution before buy-back of shares, Company should file with ROC a letter of offer in eFrom: SH-8
10. File declaration of solvency with ROC in eForm: SH-9 along with Letter of offer and fees
11. Letter of offer needs to be dispatched to the shareholders or security holders within 20 days from its filing with ROC.
12. Period of Offer:
Minimum period of 15 days to a maximum period of 30 days from the date of dispatch.
13. Proportionate basis:
When the buyback of the Company is oversubscribed, then the acceptance shall be on proportionate basis.
14. Communication of Rejection:
within 15 days from the closure of the offer and the shares or other securities are deemed to be lodged unless a communication of rejection is made within 21 days from the date of closure of the offer.
15. Open a Separate bank Account:
The Company shall open a separate bank and deposit
16. Payment:
The Company shall pay the amount to the shareholders who have tendered their shares in buyback within 7 days from the date of closure of buyback.
17. Extinguish of shares:
The Company extinguish the securities within 7 days from the date of payment made (i.e. Completion of buyback).
18. Transfer to and application of Capital Redemption Reserve Account:
When a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet. The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
19. File eForm:
SH-11 within within 30 days from date of completion of buyback.
20. Penalty:
Company – INR 1 lakh to INR 3 lakhs
Every Officer – punishable with imprisonment for a term which may extend to 3 years or with fine INR 1 lakh to INR 3 lakhs or both.
21. Section 115QA of the Income Tax Act applies to buy back of unlisted companies shares (equity & preference). Company has to pay distribution tax @ 20% on the amount of distributed income (consideration paid by the company for the purchase of its own unlisted shares LESS sum received at the time of issue of shares), within 14 days from payment of consideration to shareholders, which will be exempt in the hands of shareholders u/s 10(34A).
One should not forget to consider the Interest and penal provisions u/s 115QB & 115 QC.
THINGS THAT COMPANY NEEDS TO ENSURE WHILE BUY BACK:
1. The letter of offer shall contain true, factual and material information and shall not contain any misleading information and must state that the directors of the company accept the responsibility for the information contained in such document;
2. The company shall not issue any new shares including by way of bonus shares from the date of passing of special resolution authorizing the buy-back till the date of the closure of the offer under these rules, except those arising out of any outstanding convertible instruments;
3. The company shall confirm in its offer the opening of a separate bank account adequately funded for the purpose of Buy back and to pay the consideration only by way of cash;
4. The company shall not withdraw the offer once it has announced the offer to the shareholders;
5. The company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares; and
6. The company shall not utilize the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities for the buy-back.
CHECKLIST OF TIMELINESS
- Board Meeting proposing Buyback - No Time Limit
- Extra Ordinary General Meeting Approving Buy Back - NA
- Filing of letter of offer with ROC - SH-8 & SH-9 - No Condition
- Dispatch of Letter of Offer Within 20 days from the date of filing SH-8
- Offer Opens Not less than 15 days from dispatch of offer
- Offer Closes Not later than 30 days
- Separate Bank account Within 7 days of closure of offer.
- Last date of verification Within 15 days from the closure of the offer
- Last date of intimation regarding acceptance / Non-Acceptance Within 21 days closure of offer Communication has to be made
- Last date of dispatch of consideration Within 7 days of Verification
- Last date of extinguishment of equity shares Within 7 days of the last date of Completion
- SH-11 Within 30 days of completion.
DOCUMENTS CHECKLIST
- Required Documents Status
- Board Resolution for approval of
- - Buyback
- - Offer letter
- - Declaration of solvency (Notary & Franking)
- - Statement of account (Notary)
- Letter of offer
- Auditor’s certificate
- Acceptance Letter(s)
- Rejection letter(s) (if any)
- Board Resolution for Bank account opening
- List of shares bought back
- SH-10 – Register of shares bought back
- SH-15 – Compliance certificate by directors
- List of Promoters
- Pre & Post Shareholding (Promoter & Public)
- Financial Statements for last 3 years
FORMS
Key Points:
1. First to file SH-9 (Declaration of solvency)
• Affidavit for Declaration of solvency – to get it sign
• Auditor Report under Rule 17 - to alter in PDF
• Board Extracts – to get it sign
• Statement of Assets and Liabilities – to get it sign.
2. To File SH-8
• Auditor Report under Rule 17 – to alter in PDF
• Board Extracts - to get it sign
• List of Promoters – to get it sign
• Financials for last three years – Available
3. For SH-11
• Auditor Report under Rule 17 – to alter in PDF
• Board Extracts - to get it sign
• Description of Shares Bought - to get it sign
• Letter of offer – to get it sign
• Last year Balance Sheet – Available
• Particulars relating to holders of shares Before Buy Back – to get it sign
• Particulars relating to holders of shares After Buy Back – to get it sign
• SH-15 - MRR