Primary Market
Public Issues - Buy Back of Shares

Buyback of shares by a Company is the process of taking back its shares from its shareholders against payment. Instead of selling his holdings to other investors through the stock exchange, the shareholder returns back his holding to the company and gets back the value offered for the same. It is the only contingency in which the company returns back the capital, at its current market value represented by the offer price, to its shareholders. It is a reverse process of issue of shares to the public by the company through different routes approved by SEBI. While the process of issue of shares increases the share capital of the company and process of buyback of shares by a company reduces the share capital of that company. Like issue of shares to the public, buyback of shares also is regulated by the Companies Act, 1956/SEBI. Hence the relevant provisions of the Act & guidelines of SEBI have to be scrupulosuly adhered to in carrying out this process.

1. Section 77A, 77AA and 77B of the Companies Act,1956. These were inserted by the Companies (Amendment) Act,1999.

2. SEBI(Buy Back of Securities) Regulations,1998 and

3. The Department of Company Affairs framed the Private Limited Company and Unlisted Public company (Buy Back of Securities) Regulations,1998 pursuant to Section 77A(2)(f) and (g) respectively.

The Working Group on Buyback of Shares stated five major benefits on Buyback of shares. These are:

1. Prevent hostile takeovers

2. Return surplus cash to shareholders.

3. Increase the underlying share value.

4. To increase the underlying share price during period of temporary weakness.

5. To achieve or maintain a target capital structure

Buy back shares from the open market at a premium over the prevailing market price is the best strategy to maintain the share price in a bear run. Buyback also increase promoters holding & earnings per share (EPS) and P/E Ratio

SEBI has approved different routes for the company to buy back its shares. The company can buy back its shares in any of the following manners:

1. From the existing shareholders on a proportionate basis made by a tender offer through a letter of offer from the holders of shares of the company ; SEBI Regulations define ‘tender offer’ as an offer by a company to buy back its specified securities through a letter of offer from the holders of the specified securities of the company.

2. From open market (though Book building process or Stock Exchange)

3. From odd lot holders that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or.

4. purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

It may be noted that company may buyback its shares without shareholders' resolution, to the extent of 10% of its paid up equity capital and reserves. However, if a company intends to buyback its shares to the extent of 25% of its paid up capital and reserves then the same has to be approved by shareholders' resolution as specified in Section 77 A of Companies Act, 1956. In all cases buy-back should have been authorised by the Articles of association of the Company. Also, the shares for buy back should be free from lock in period/non transferability.

1. The buy-back is authorised by the Articles of association of the Company;

2. A special resolution has been passed in the general meeting of the company authorising the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. Also, the shares for buy back should be free from lock in period/non transferability. The buy back can be made by a Board resolution If the quantity of buyback is or less than ten percent of the paid up capital and free reserves;

3. Filing of Declaration of solvency: After the passing of resolution but before making buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in form 4A. The declaration must be verified by an affidavit to the effect that the Board has made a full inquiry 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 at least two directors of the company, one of whom shall be the managing director, if any: No declaration of solvency shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.

4. The buy-back is of less than twenty-five per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year;

5. The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back;

6. There has been no default in any of the following

   1. in repayment of deposit or interest payable thereon,

   2. redemption of debentures, or preference shares or

   3. payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or

   4. repayment of any term loan or interest payable thereon to any financial institution or bank;

7. There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts;

8. All the shares or other specified securities for buy-back are fully paid-up;

9. The buy-back of the shares or other specified securities listed on any recognised stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and

10. The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.

11. Every buy-back shall be completed within twelve months from the date of passing the special resolution or Board resolution as the case may be.

12. Only Free Reserves are allowed to be utilized for the purpose of Buyback

13. A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue, rights issue up to six months from the date of completion of buy back.

1. The compnay to complete the interim formalities of holding general meeting and passing resolutions authorising buy back of its shares specifying the extent thereof.

2. make a public announcement at least one English National Daily, one Hindi National daily and Regional

3. Language Daily at the place where the registered office of the company is situated.

The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.

4. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations.

5. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.

6. A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges.

7. SEBI issues a press release and the offer document is put on the SEBI website under primary market page under the head "buyback". The company also appoints a registrar to act as an intermediary between the company and shareholder and carry out the buyback process.

8. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date

9. The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days.

10. A company opting for buy back through the public offer or tender offer shall open an escrow Account.

The offer reaches the notice of shareholders in this manner. However the decision to accept or forego the offer is at the exclusive discretion of each shareholder. Normally the shareholder studies the offer letter and takes a decision in this regard after considering various factors such as the price of the offer, number of shares likely to be accepted under the offer etc. The company also sends the shareholder each an offer form. Where the shareholder decides to accept the offer, he has to fill up the form as per the instructions of the company and enclose the documents asked for, by the company. In case the offer form is not received by a shareholder, he can make an application on plain paper stating your folio number, name, address, number of shares held, share certificate number, distinctive numbers, number of shares tendered, together with the original share certificate and tender the same at the collection centres/registrars, as mentioned in the public announcement. If the shares are not registered in the name of the shareholder, and he is still holding the same with a blank transfer deed, he should submit the duly executed transfer deed for transfer of shares in his name, along with the offer form and other relevant documents as required for transfer, if any. The same should be sent to the registrar to the buyback offer.

1. In case the shares of the company are tradeable compulsorily in demat segment, the acceptances from any investor shall be on a proportionate basis irrespective of the number of shares tendered in the buyback, and irrespective of whether shares are in physical or demat form.

2. If the shares are not in compulsory demat segment, first the entire shares tendered being less than the minimum market lot shall be accepted in full. Thereafter, the acceptances will be on proportionate basis in a manner to ensure that the acceptances are in market lot. In such a case, a draw of lots shall be done, as in the case of public issues.

3. The company is required to send intimation to the tenderers within 15 days from the closure of the offer. It is required to send the consideration/the share certificate, within 21 days from the closure of the buyback offer.

A Company shall, after the completion of the buy-back file with the Registrar and the Securities and Exchange Board of India, a return in form 4 C containing particulars relating to the buy-back within thirty days of such completion. No return shall be filed with the Securities and Exchange Board of India by an unlisted company.

In the next article we will study the essential provisions of SEBI in its buyback regulations