Buy-Back of shares means buying and purchasing equity shares of a company by the company itself.
Normally, a company is allowed to invest its surplus money by purchasing shares of other companies.
But if the company utilized its surplus money in purchasing its own equity shares, it is called the Buy-back of shares.
It is a method used by a company to cancel a part of its own share capital. Through it is not mentioned in the Companies Act, share Buy-back means buy-back of equity shares.
But Buy-back of shares does not affect the authorised share capital of a company.
Conditions of Buy-back of shares:
The following conditions will have to be satisfied as specified in section 68:-
A) The buy-back is authorised by the articles of association of the company.
B) A special resolution has been passed in general meeting of the company authorizing in buy-back.
C) The buy-back does not exceed 25 per cent of the total paid-up capital and free reserves of the company.
D) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back.
E) All the shares for buy-back are fully paid-up.
F) The buy-back of the shares listed on any stock exchange is in accordance with the regulations made by the securities and exchange board of India.
G) The buy-back of shares which are not listed on any stock exchange has to be in accordance with the guidelines as may be specified.
H) After the completion of the buy-back a company shall extinguish and physically destroy the shares or securities so bought back within seven days of the last days of completion of buy-back.
I) The company shall maintain a register of the shares or securities so bought, the consideration paid for the shares or securities bought back.
According to this section, a company may purchase it’s own equity shares out of:
- Free reserves.
- The securities premium account.
- A fresh issue of any shares.
But no buy-back of shares can be made out of the proceeds of an earlier issue of the same kind of shares.
In other words, Equity shares of a particular class cannot be bought back out of the proceeds of the same class of equity shares.
Equity shares having no voting rights cannot be bought back from the proceeds of the fresh issue of equity shares with no voting rights.
Buy-back procedure in case of over-subscription:
In the case of the total number of shares offered by the shareholders for buy-back exceeds the total number of shares intended to be bought back by the company.
All applications for sale should be accepted and the buyback should be made proportionately I.E on pro-rata basis.
Escrow account in case of Buy-back of shares:
Escrow account means an account in which money is held until a specified duty is performed.
In the case of share buy-back, the Escrow account means an account in which a specified percentage of total consideration payable for the buyback is deposited till that consideration has been paid to the shareholders whose shares are bought.
The escrow account, in case of buy-back, may consist of:
1) Cash deposited with a scheduled commercial bank.
2) Bank guarantee in favour of merchant banker handling the buy-back.
3) Deposit of acceptable securities which appropriate margin, with the banker.
The escrow account must consist of an account equal to 25% of the consideration payable if the consideration is more than 100 Crores plus 10% of the consideration exceeding Rs. 100 crores.
Restrictions on the Buy-back of shares:
Further section 70 imposes restrictions on the purchase of its own shares or other securities through any subsidiary company including its own subsidiary and through any investment company or any group of investment companies.
Section 70(2) states that no company shall, directly or indirectly, purchase its own shares or other specified securities in case such a company has not complied with the provisions of section 92, 123 and section 129 of the companies Act, 2013.