BUY BACK OF EQUITY SHARES
Normally the Sections in the Act deals with the compliance part of it and the rules connected to the particular Section lays down procedures for compliance and the Forms for submission. Under the new Companies Act, 2013, we get confused as to which is the Act and which is the Rules. We need to read both the Act and the Rules, assimilate and then come to a conclusion and take action with the right interpretation. Small mistakes committed in various chapters make our work more difficult to bring the right kind of interpretation. I was told that there will be some more amendments to the rules and would be notified very shortly. I pray that that it should not add to further confusion.
LEGAL AND SECRETARIAL ASPECTS GOVERNING BUY BACK OF EQUITY SHARES UNDER THE COMPANIES ACT, 2013
Section 68, 69 and 70 of the Companies Act, 2013 and Rule 17 of Companies ( Share Capital and Debentures) 2014 deal with buy back of Securities. The Act and the Rules both prescribe the permitted resources and the permitted methods for buy back of Securites. Both the Act and the Rules not only list out various criteria to be fulfilled for a buy back but also the rules to be followed for buy back. Section 69 deals the accounting treatment on account of Buy back of Securities and Section 70 gives the list of things that the Company should not have done in order to make them eligible to go for a buy back.
We shall deal with the subject of buy back of Equity Shares step by step.
A. PERMITTED RESOURCES AND PERMITTED METHODS FOR BUY BACK OF EQUITY SHARES
The first step is find out the resources under which the Equity Shares could be purchased and also the permitted source of funds to be utilised for the purpose of buy back. a.Section 68(1) says that the Shares could be purchased out of resources generated in the following manner i. Free reserves ii. Securities Premium Account iii. Proceeds that are generated out of Issue of any shares or other specified securities However the proceeds thus generated should not be of an earlier issue of the same kind of shares or same kind of other specified securities. b. Rule 10 says that i. A separate Bank Account has to be opened and the amount has to be paid only by way of cash. ii. The Company shall not utilize any money borrowed from the Bank or financial institution for the purpose of buying back its shares iii. The Company shall not utilize the proceeds of an earlier issue of the same kind of shares for buy back or same kind of other securities.
B. FROM WHOM THE EQUITY SHARES COULD BE BOUGHT BACK
The second step is to find out from whom the Shares could be bought back. Under Section 68 ( 5) of the Companies Ac, 1956, the buy-back of equity shares may be (i) from the existing equity shareholders on a proportionate basis; (ii) from the open market; (ii) by purchasing the shares issued to employees of the company pursuant to a scheme of stock option or sweat equity.
C. ELIGIBILITY CRITERIA FOR BUY BACK OF EQUITY SHARES UNDER THE ACT AS WELL AS THE RULES
The third step is to find out whether the Company fits in with the norms prescribed under the Act as well as the rules to make them eligible to go for a buy back. #a. Eligible Criteria for Buy Back under the Act Section 68(2) lists out the following criteria to be fulfilled for buy back of shares i. The percentage of Buy Back shall not exceed 10% of the total equity capital and free reserves if the same is to be authorized by the Board by means of a resolution in the Board meeting.
ii. The percentage of buy back could exceed 10% but not beyond 25% of the total paid equity Capital and free reserves if the same is authorized by the shareholders by means of a Special resolution.
( In the case of buy-back of equity shares in any financial year, the reference to twenty-five per cent should be construed with respect to its total paid-up equity capital in that financial year only)
Note: We need greater clarity to this point. It would have been better had it been worded this way.
˜Twenty percent should be construed with respect to it total equity capital in that financial year end preceding the Buy back of Shares. We may have to deal with two financial years for a buy back i.the Audited financial year and ii. the year in which the real Buy back of shares happens. Since the event of buy back happens in the current financial year, we have to calculate the percentage for the current financial year only. Since the current year percentage will always be more that the last year percentage if there is an allotment, I do not understand what message the section wants to convey to the stakeholders¦There is no clarity. iii. the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and its free reserves: (The Central Government may in future notify by order a higher ratio of the debt to capital and free reserves for a class or classes of companies;) iv. All the Equity Shares for buy-back are fully paid-up;
v. the buy-back of the shares listed on any recognized stock exchange is in accordance with the regulations made by the Securities and Exchange Board in this behalf; and
vi. the buy-back in respect of shares other than those specified in clause (v) is in accordance with such rules prescribed under Rule 17 of the (Companies Share Capital and Debentures ) Rules, 2014.
vii. No offer of buy-back under shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.
viii. Under Rule 10 (b) The Company shall not issue any new shares including Bonus shares from the date of passing the special resolution authorizing Buy back till the date of closure of offer of Buy back except those arising out of convertible debentures. #b. Eligibility Criteria for Buy Back under the Rules Rules 17 lists out the following eligibility criteria for buy back of shares
i. there are
a.No defaults subsisting in repayment of deposits and interest payment thereon.
b.No defaults on redemption of preference shares.
c.No defaults in payment of Dividend due to any Shareholder.
d.No defaults in repayment of any loan or interest payable thereon to any financial institution or banking Company .
However Section 69 gives an exemption that if the above default is remedied and a period of three years has lapsed after such default ceased to subsist. ii. There shall be no grounds on which the Company could be found unable to pay its debts.
iii. The Company should be in a position to meet the liabilities as and when they fall due and shall not be rendered insolvent within a period of one year from the date of buy back.
D. PROHIBITORY LISTS FOR COMPANIES WHICH MAKE THEM INELIGIBLE TO GO FOR A BUY BACK OF EQUITY SHARES IN CERTAIN CASES
The fourth step is to ascertain whether the Company falls under any one of the prohibitory lists for buy back. Section 69 lists out the following , under which Buy back is not allowed. i. The Company cannot buy back its shares
a.through any subsidiary Company including its own subsidiary Companies.
b.through any investment Company or group of investment Companies.
ii. The Company shall cannot buy back its shares if it has not complied with the provisions of Section 92, 123, 127 and Section 129
a. Section 92 deals with preparation and filing of Annual Return
b. Section 123 deals with manner of declaration of Dividend and its payment.
c. Section 127 deals with punishment for failure to distribute Dividend.
d. Section 129 deals with financial Statements. (there should not be any qualifying remark either on the Report of the Auditors or in the Notes and the financial statements should give true and fair view) Note: 1. I fail to understand what Section 129 has to do with compliance. It is only a penal provision for non compliance.
2. Sections 159,160,161 and 162 of the Old Act are combined into Section 92 . Section 205 and 205A are combined into Section 123. Sections 210,211 and 212 are combined into Section 129. The compliance requirements are very broad and any non compliance of any of the provisions of the above Sections will make the company ineligible to go for a buy back. In my view, the Government has to notify certain provisions of the above sections of which in its view should be complied with. This will simplify the process.
E. RULES AND PROCEDURES TO BE FOLLOWED FOR BUY BACK OF EQUITY SHARES UNDER THE ACT AND THE RULES
Once the Company satisfies conditions laid under A,B,C and D, the next step would be to comply with procedures laid under the Act and the Rules. Once the Company meets the eligibility criteria, the next step would be how to go ahead with the Buy back.
Separate rules and procedures are laid in the Act as well as in the rules. We shall go step by step. There are about eleven points which the Company should follow for complying with the process of Buy Back.
SECRETARIAL WORK CONNECTED WITH BUY BACK OF EQUITY SHARES I
I. Convening a Board Meeting for passing the following resolutions
a. Provision in the Articles of Association (subject to the approval of the shareholders ) if there is none.
b. Approval for buy back (subject to the approval of the shareholders)
c. Convening of an Extra Ordinary General Meeting for amending the Articles of Association if required and approval of buy back.
II. Convening of Extra Ordinary General Meeting for approving the buy back. Section 68(3) states that the following information is to be provided in the explanatory Statement
a. A full and complete disclosure of all material facts
b. The necessity for the buy back
c. The class of shares intended to be purchased
d. The amount to be invested
e. The time limit for completion of the buy back
Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 superimposes Section 68(3) and gives an exhaustive list of information to be furnished which are as follows:
(a) the date of the board meeting at which the proposal for buy-back was approved by the Board of Directors of the company;
(b) the objective of the buy-back;
(c) the class of shares or other securities intended to be purchased under the buy-back;
(d) the number of securities that the company proposes to buy-back;
(e) the method to be adopted for the buy-back;
(f) the price at which the buy-back of shares or other securities shall be made;
(g) the basis of arriving at the buy-back price;
(h) the maximum amount to be paid for the buy-back and the sources of funds from which the buy-back would be financed;
(i) the time-limit for the completion of buy-back;
(j) (i) the aggregate shareholding of the promoters and of the directors of the promoter, where the promoter is a company and of the directors and key managerial personnel as on the date of the notice convening the general meeting;
(ii) the aggregate number of equity shares purchased or sold by persons mentioned in sub-clause (i) during a period of twelve months preceding the date of the board meeting at which the buy-back was approved and from that date till the date of notice convening the general meeting;
(iii) the maximum and minimum price at which purchases and sales referred to in sub-clause (ii) were made along with the relevant date;
(k) if the persons mentioned in sub-clause (i) of clause (j) intend to tender their shares for buy-back
(i) the quantum of shares proposed to be tendered;
(iii) the details of their transactions and their holdings for the last twelve months prior to the date of the board meeting at which the buy-back was approved including information of number of shares acquired, the price and the date of acquisition;
(l) a confirmation that there are no defaults subsisting in repayment of deposits, interest payment thereon, redemption of debentures or payment of interest thereon or redemption of preference shares or payment of dividend due to any shareholder, or repayment of any term loans or interest payable thereon to any financial institution or banking company;
(m) a confirmation that the Board of directors have made a full enquiry into the affairs and prospects of the company and that they have formed the opinion-
(i) that immediately following the date on which the general meeting is convened there shall be no grounds on which the company could be found unable to pay its debts;
(ii) as regards its prospects for the year immediately following that date, that, having regard to their intentions with respect to the management of the company™s business during that year and to the amount and character of the financial resources which will in their view be available to the company during that year, the company shall be able to meet its liabilities as and when they fall due and shall not be rendered insolvent within a period of one year from that date; and
(iii) the directors have taken into account the liabilities(including prospective and contingent liabilities), as if the company were being wound up under the provisions of the Companies Act, 2013
(n) a report addressed to the Board of directors by the company™s auditors stating that-
(i) they have inquired into the company™s state of affairs;
(ii) the amount of the permissible capital payment for the securities in question is in their view properly determined;
(iii) that the audited accounts on the basis of which calculation with reference to buy back is done is not more than six months old from the date of offer document; and
(iv) the Board of directors have formed the opinion as specified in clause (m) on reasonable grounds and that the company, having regard to its state of affairs, shall not be rendered insolvent within a period of one year from that date. III. Once the company is authorized by the members in the Extra Ordinary general Meeting, the next step is to convene a Board Meeting and pass the following resolutions
a. Approval of the Draft buy back offer prepared in Form SH-8 and the declaration of Solvency in Form No.SH-9
b. Authorising the any one Director and the professional to digitally sign and certify Form No.MGT-14 for registering the special resolution and authorizing two Directors to sign the E Form SH-8 and SH-9.
c. Opening a Special Bank Account for remittance and payment towards purchase consideration for buy back.
IV.The Company should then upload in the MCA21 portal the Letter of offer and the declaration of Solvency prepared in SH-8 and SH-9 respectively together with necessary attachments.
V.The ˜Letter of Offer™ together with all attachments should be dispatched to the shareholders not later than 21 days from its filing with the Registrar of Companies.
VI. The offer of buy back should remain open for a period of not less than fifteen days but not later than 30 days from the date of dispatch of offer.
VII. The Company shall complete the verification of offers within fifteen days from the date of closure of offer. If the number of shares offered by the shareholders are more than the number of shares to be bought back, the acceptance per shareholder should be on a proportionate basis. VIII. If the communication of rejection is not sent to the concerned shareholders within fifteen days from the date of closure of offer, the shares lodged would be deemed to have been accepted for buy back.
IX. The Company should immediately after the date of closure of offer should open the bank account and deposit the entire purchase consideration money meant to be used for buy back. X. The Company should then make payment to the respective shareholders which shall not be later than seven days from date of time specified for completion of verification.
XI. The Company should also return back the entire share certificates whose shares have not been accepted fully and also return back the balance share certificates if the shares are accepted partially.
SECRETARIAL WORK CONNECTED WITH POST BUY BACK
Once the process of buy back is completed, the following rules have to be observed post buy back.
1.Under rule 12, the Company shall maintain at its registered office ˜The Register of shares or other securities which have been bought back in Form No.SH-10 and shall be under the custody of the Secretary or any other person authorized by the Board for this purpose. The entries of the Register shall be authenticated either by the Secretary or by any other person authorized by the Board for this purpose.
2. Under 68(7) of the Act, the Company shall within seven days of the last day of the completion of buy back shall extinguish and physically destroy the shares or securities bought back.
3. The Company shall prepare a certificate of Compliance in respect of Buy Back in Form No.Sh-15 duly signed by two Directors and verified by the Company Secretary in Practice.
4. Form No.15 should be attached along with other attachments to Form No.SH-11 which is the Return in respect of Buy back and upload the Form in the MCA21 Portal. With this compliance, the entire secretarial process of Buy Back of Shares will be completed.
COMPANY NOT TO ISSUE SHARES OF THE SAME CLASS AFTER BUY BACK WITHIN A PERIOD OF SIX MONTHS AFTER COMPLETION OF BUY BACK.
Under Section 68(8), the Company shall not issue further shares of the same class within a period of six months from the date of completion of buy back except by way of bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock option scheme, sweat equity or conversion of preference shares or debentures into equity.
ACCOUNTING TREATMENT RELATING TO POST BUY BACK
Asper Section 69 of the Act, a sum equal to the nominal values of the Shares bought back should be transferred to Capital Redemption Reserve Account and the Details of transfer should be disclosed in the Balance Sheet. The Capital Redemption Reserve could be used for issue Bonus Shares. #Summing up #Meetings and Documents connected to approval of the Board Two Board Meetings and one EGM to be conducted for a buy back
a.Documents for the first Board Meeting conducted for Buy back
i. Notice convening the Board Meeting.
ii. Resolution for go ahead with the Buy back subject to the approval of the shareholders.
iii. Determining the Quantity of Buy Back and the price at which at which to be bought back.
iv. Calendar for Buy Back
v. Confirmation by the Directors as required under rule 17(l) and 17(m).
vi. Auditors Report as required under Rule 17(n)
vii. Resolution for amending the Articles of Association for making provision for buy back subject to the approval of the shareholders.
viii. Resolution for convening an EGM
b. Documents for the EGM conducted for the Buy Back
i. Notice convening the EGM
ii. Explanatory Statement
iii.Resolution authorising the Board of Directors to go for a buy back Board Meeting to formalize the arrangements of buy back i. Resolutions for i.Formalising all arrangements of buy back like ii.quantum of buy back, iii.price at which the shares to be bought back,iv.calendar depicting the process of buy back, v.approval of Draft Offer of Buy Back prepared in E Form-SH-8 and vi.the draft declaration of Solvency prepared in SH-10 and vii.authorizing two Directors to sign the Forms SH-8,SH-9 and MGT-14 . Managing Director™s signature should be one of the signatories if there is one.
ii. Opening of special Bank Account for remittance of money for buy back #c.Forms and attachments to be uploaded in the MCA21 Portal #E FORM MGT-14 i.Notice convening the EGM duly signed by the Director
ii. Explanatory Statement duly by a Director
iii. Special resolution for amending the Articles of Association if any, and/or authorizing the Board of Directors to go for buy back.
iv. Board resolution authorizing the Director to sign and the Professional to certify (optional attachment) duly signed by a Director. #E FORM SH-8
The following attachments should be signed by two Directors who are authorized to the Sign the Form SH-8 i. List of Promoters of the Company.
ii. Declaration by auditors given under rule 17(9).
iii. Copy of Board resolutions passed in the second Board meeting.
iv. Copy of EGM Notice and the Explanatory Statement.
v. Audited financial Statements for three years (just the financial statements will do. It is not necessary to have the Notice, Board report and the Auditors report as the file size will increase)
vi. Statement showing the details of Buy for the last three years (Only if applicable-optional)
vii. Management Discussion and analysis (only for listed Company)
viii. List of holding and subsidiary Company (only if applicable)
ix. Unaudited financial Statements (only if applicable-optional)
x. Statutory Approvals received (if any-optional)
xi. Details of Auditors, legal advisors, bankers and trustees (if any)
xii. Board resolution authoring two Directors to sign the Form SH-9 #FORM NO.SH-9 i. Copy of the Board resolution passed in the second Board meeting
ii. Statement of Assets and Liabilities as on the latest Audited Balance sheet prior to buy back.
iii. Auditors report given under 17(9)
iv. Affidavit as per Rule 17(3)
v. Copy of the Special resolution passed in the EGM
vi. Copy of the Board resolution authorizing the Directors to sign the Form (optional attachment )