A buy-back of shares means a purchase of by a company of its shares or securities. A company may buy-back for a variety of reasons,
e.g., excess floating stock in the market, the poor performance of the share, utilization of excess cash with the company, etc.
Several times a company has excess cash on its balance sheet which it wants to distribute amongst its shareholders.
The buy-back of shares can be made only out of:
- Free Reserves
- Share Premium Account
- Proceeds of any Securities
However, Buyback cannot be made out of the proceeds of an earlier issue of the same kind of securities.
Under the Companies Act, a buy-back can be made in two ways:
- By way of a Shareholders’ Resolution passed in a General Meeting; or
- By way of a Directors’ Resolution passed in a Meeting of the Board of Directors.
The important features of the two types of buy-backs are briefly summarised as follows: –
- Must be authorized by the AOA (Articles of Association)
- An SR (Special Resolution) of the shareholders must be passed. For listed
companies it must be by way of a Postal Ballot
- 25% of the total Paid-up Equity Capital + Free Reserves; and
- Not more than 25% of total Paid-up Equity in that financial year
- From the Open Market
- From Existing shareholders/ member on a proportionate basis
- From Odd Lots
- By purchasing ESOP/ Sweat Equity shares
- Debt Equity ratio should be maintained 2:1 (Debt/ (Equity Capital + Preference Capital + Reserves) after the Buyback
In the following circumstances a company cannot buy-back its shares/ securities:
(a) It cannot directly or indirectly purchase its own shares/ securities through any subsidiary company or investment/ group of investment companies.
(b) It cannot directly or indirectly purchase its own shares/ securities if it has defaulted in repayment of the deposit or interest or redemption of debentures or preference shares or payment of dividends or repayment of a loan/ interest payable to a bank/ financial institution.
(c) If it has defaulted in filing the Annual Return with the ROC or it has failed to distribute dividends within 30 days or it fails to lay the accounts before the general meeting as required u/s. 211.
Under the SEBI Guidelines on buy-back of securities which are applicable to listed companies, a buy-back may take place by one of Four methods:
- Tender Offer: from existing shareholders on a proportionate basis
- Open Market Route:
- By Stock Market Operations
- By Book Building process
- Odd-lot Holders Buyback.