Buy-Back of Shares

Buy back of its own shares by a company is nothing but reduction of share capital, after the recent amendments in the Companies Act, 1956 buy back of its own shares by a company is permitted without sanction of the Court. It is nothing but a procedure which enables a company to go back to the holders of its shares and offer to buy from them the shares that they hold.

There are three main reasons why a company would opt for buy back :

A company may buy its own shares or other specified securities out of :

No buy-back of any type of shares or other specified securities can be made out of the earlier proceeds of an earlier issue of the same type of shares or same kind of other specified securities.

No company can buy its own shares or other specified securities unless :

The notice of the meeting at which special resolution is intended to be passed shall be accompanied by an explanatory statement stating

Every buy-back must be completed within twelve months from the date of passing the special resolution.

The buy-back may be :

Where a company has passed a particular resolution to buy-back its own shares or other securities under this section, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a statement of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board has made a full investigation into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by not less than two directors of the company, one of whom shall be the managing director, if any: Such a statement of solvency need not be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.

Where companies purchase back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy-back.

Where a company completes a buy-back of its shares or, other specified securities under this section, it shall not make additional issue of the same kind of shares or other specified securities within a period of twenty four months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

Where companies buy back its securities under this section it shall keep a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other details as may be prescribed.

A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such details relating to the buy-back within thirty days of such completion as may be prescribed. But such return need not be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.

If a company makes failure in complying with the provisions of this section or any rules or any regulations, the company or any officer of the company who is in default shall be punishable with imprisonment for a period which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.

For the use of buy back, specified securities includes employees' stock option or other securities as may be notified by the Central Government from time to time; Where a company purchases its own shares out of free reserves, then a amount equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.

No company shall directly or indirectly purchase its own shares or other specified securities

No Company can, directly or indirectly, buy its own shares or other specified securities in case such company has not filed its annual returns with the Registrar of Companies, or has not paid the dividends declared by it within 42 days from the date of declaration or has not prepared its annual accounts in the prescribed manner.