BUY BACK OF SHARES

An over capitalized company may resort to buy back of its shares. A company is said to be over capitalized if its earnings are not sufficient to justify a fair return on the amount of share capital and debentures that have been issued. Otherwise, it is said to be over capitalized when total of owned and borrowed capital exceeds its fixed and current assets i.e. when it shows accumulated losses on the assets side of the balance sheet. Over capitalization may be due to insufficient volume of trading.

If Company want to distribute such surplus fund to its shareholders, it can Buy-Back its own share. Beside this Company has several means through which they can distribute their excess fund to its Shareholder. If the company has huge cash reserves with not many new profitable projects to invest in. The company can go for One or more of below options.

  1. Buy Back of its own securities under Section 68-70 of the Companies Act, 2013.
  2. Declaring Dividend under Section 123 of the Companies Act, 2013.
  3. Reduction of Share Capital under Section Section 66 of the Companies Act, 2013
  4. Members’ Voluntary Liquidation.
  5. Purchase of Company’s Own shares under Section 241 of the Companies Act, 2013

Selection of one of the above modes will depend on

  • Tax efficiency
  • Payment to all shareholders or some of the willing shareholders
  • To reduce paid up capital permanently
  • Time efficiency
  • Ease of approvals and finally
  • Minimum compliances

 

In recent times many  big market builders have announced buyback of their shares to name a few WIPRO, Bharti Airtel, Bharti Infratel, Dr. Reddy’s Laboratory, PC Jewellers, HSBC Bank etc. .

On the basis of above point you if you selected to go for Buy Back of shares as one of the means to distribute surplus fund, then the company need to follow the procedure as laid down below. Buy Back of Share of listed Company is as per SEBI (Buy Back of Security) Regulations, 1998 andgoverned by Section 68 of the Companies Act, 2013 and the rules made thereunder.

 

 

CHECKLIST FOR BUY BACK OF SHARES:

  1. Check financial position of the Company, i.e.
  • Maximum permissible amount

Calculate Net worth of the Company i.e. Paid up Capital + Free Reserve – amount standing under miscellaneous expenditure based on the latest available audited accounts.25% of net worth calculated above   is the maximum amount up to which buyback can be done

 

  • Sources

Sources for Buy Back of shares i.e.

  1. Free reserves,
  2. Securities Premium a/c
  3. Proceeds of any shares or other specified securities, Provided that no buy back of securities can be made from proceed of an earlier issue of same kind of securities.

 

“Specified securities” as referred to in above includes employees’ stock option or other securities as may be notified by the Central Government from time to time.

Company shall not utilize

- Any money borrowed from banks or financial institutions for the purpose of buy- back

- Proceeds of an earlier issue of the same kind of shares for the buy-back

 

  • Debt Equity Ratio

Post buyback, debt equity ratio should not be more than 2:1

Debt = aggregate of secured + unsecured debts owed the after buy-back

Equity= is aggregate of the paid-up capital + its free reserves after buy-back

 

  • Surplus funds

The company needs to arrive at funds which are not required for its business

 

  • Equity Paid up capital

Total number of shares offered for buy back should not exceed 25% of the paid up capital

Lowest amount out of four above will be the maximum amount for which a company can go for buyback.

All the shares to be Bought Back has to be Fully Paid Up.

 

Example:

Particulars Amount in Rs.
Paid Up Capital 1500000
Reserve & Surplus  
Free Reserve 1000000
Net Worth 2500000
   
25% of Net Worth ( i.e. Maximum permissible amount ) 625000
   
Surplus Fund which are not required for its business 700000
   
Maximum Equity Shares that can be bought Back i.e.25% 150000 37500
   
Valuation of shares comes @25 per share  
   
Decision to Buy Back shares is 25000 Equity shares @ 25 625000
   

 

 

 

 

  1. Valuation of shares

There is no prescribed valuation method for buy back. . Therefore Company is free to make valuation of buy back price under any recognized method whether asset based or profit based or market value in case of listed company or even premium/ discount to  value arrived under any method

 

Company has to give full disclosure of such method adopted in Explanatory Statement and in the Offer Letter. Buyback price is arrived at based on valuation certificate from the auditors. The price arrived at is the minimum price at which buyback needs to be done. Based on price per share, number of shares to be bought is worked out but as already mentioned above not exceeding 25% of Equity Paid up capital.

 

  1. Modes of Buy Back

For unlisted company: From existing shareholders on proportionate basis.

For listed company

  1. From the existing shareholders on a proportionate basis through the tender offer; (Promoter can tender their shares)
  2. From open market through:
  3. Book building process (Buy Back of share shall not be made from promoter or person acting in concert with them)
  4. Stock exchange (Promoter shall not deal in shares during their period of Buy Back of offer.
  • From odd lot holders.

 

  1. Eligibility Criteria & Conditions
  2. No company shall directly or indirectly purchase its own shares or other specified securities through any subsidiary company including its own subsidiary companies
  3. through any investment company or group of investment companies
  4. if there are 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;

Provided that the buy-back is not prohibited if default is remedied and a period of three years has lapsed after such default ceased to subsist.

 

  1. No buy-back can be done in case the company has not complied with following sections (Of companies Act, 2013)

Sec 92 : Annual Return,

Sec 123 : manner of declaration of Dividend and its payment,

Sec 127 : punishment for failure to distribute Dividend

Sec 129 : 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)

 

 POINTS TO BE NOTED:

  

  1. No further issue till 6 months:

Once Buy Back of shares is completed by the Company, the Company cannot issue new shares within 6 months and buy back of shares has to be completed within period of One year from the date of passing Resolution by Shareholders / Directors.

 

  1. No offer of buy-back 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

 

  1. Buy back through Postal Ballot

As per provision of Section 110 of the Companies Act, Resolution for Buy Back of shares shall be transacted only by means of voting through a postal ballot except One Person Company and companies having members up to 200.

 

Once we satisfy all condition as listed above and decide about quantum of shares, Sourced to be used for Buy Back of shares and mode of Buy Back, we can go for procedure for Buy Back of share as listed below.

 

APPROVAL:

 

Board Approval: If the shares to be Buy Back is less than or equal to 10  % of Equity Share Capital of the Company.

  1. Convening a Board Meeting for passing the following resolutions : -
  • For approval of buy back .

 

Shareholders’ Approval : If the shares to be Buy Back is more than 10% of total paid up Share Capital and free reserves of the Company but less than or equal to 25 % of total paid up Share Capital and free reserves of the Company. Section 68(3) provides the details as to be given in the  explanatory statement annexed to the notice for EOGM.

 

If the Company is listed Company then is also need to adhere to SEBI Buy Back Rules.

 

Tax Summarized:

Element Buy back of Shares
Listed Companies
·         Direct buy-back i.e. directly from the shareholders In cases where shares are bought back directly from the shareholders, long-term capital gains on transfer of shares would attract tax for the shareholders, by virtue of Section 112 of the Income Tax Act, at the rate of lower of the following:

-> 20% of capital gains after indexation and;

-> 10% of capital gains without indexation.

The shareholder is not entitled to the exemption on long-term capital gains on sale of listed securities under Section 10(38) of the Income Tax Act, since STT (Securities transaction tax) is not paid on such direct transfers.
·         Buyback through stock exchange   i.     Buy-back of shares acquired by the shareholder before 1st October, 2004 and;

ii.     Buy-back of shares acquired by the shareholder on or after 1st October 2004

As far as category ‘i.’ is concerned, the shareholders would be entitled to the benefit of exemption under Section 10(38) of the Income Tax Act on long-term capital gains arising on account of buy-back, provided STT (securities transaction tax) is paid on the transaction. However, for the purpose of exemption, the condition of payment of STT need not be satisfied in cases where the transaction is undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency.

So far as category ‘ii’ is concerned, the benefit of exemption under Section 10(38) would be available to the shareholder only on the fulfilment of either of the following additional conditions:

·         STT has been paid by the shareholder on the acquisition of such shares or;

·         The shares have been acquired by the shareholder in one of the modes notified by the Government. [Notification NO. SO 1789(E) [NO. 43/2017 (F.NO.370142/09/2017-TPL)] dated 5-6-2017]- The Government has, by virtue of this notification, bestowed relaxation in cases of certain genuine transactions where the STT could not have been paid, such as acquisition of shares pursuant to IPO, FPO, bonus or rights issue, etc.]
Buyback by Unlisted Companies
  In the event of a buy-back by Unlisted Companies, as per Section 115QA of the Income Tax Act, the unlisted company shall pay an additional tax (i.e. over and above the tax chargeable in respect of the total income of the Unlisted company for any assessment year) at the rate of 20% on the ‘distributed income’. The term ‘distributed income’ has been defined to mean ‘the consideration paid by the Company on buy-back of shares as reduced by the amount, which was received by the Company for issue of such shares, determined in the manner as may be prescribed’. The mode of computation of amount received by the Company in respect of the shares issued by it has been laid down in Rule 40BB of the Income Tax Rules.

In the hands of the shareholder of the afore-mentioned Unlisted Company, the income (i.e. the excess of buy back price over his cost of acquisition) is exempt by virtue of Section 10(34A) of the Income Tax Act. This exemption holds goods regardless of whether the gain is short-term or long-term.

 

BUY BACK IN THE SCHEME OF ARRANGEMENT

The company can include the process of buy back of its share capital in the scheme of Arrangement subject to compliance of section 68 of the Companies Act, 2013 and the rules made thereunder.  As the provision of Section 68 starts with word ”Notwithstanding anything contained in this Act “. This would imply that, it gives an overriding effect to the said provision and is a complete code for buy-back of shares. Therefore, the company desiring to buy-back its equity shares must follow procedure as set down in the provision. The section provides a detailed framework for a Company to Buy back its own shares. 

While seeking approval of the scheme by the members, the consent of the members with respect to the approval of buy back of share capital shall also be obtained.

Punishment for any Default

If a company makes any default in complying with the provisions of this section or any regulations of SEBI (in case of listed company), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

 

Buy back Tax: ( Chapter XII DA )

Companies can distribute their accumulated profits in the form of dividend, buy-back, capital reduction, etc. The buy-back mechanism was preferred as it enabled the companies to circumvent DDT, particularly when the capital gains arising to the shareholders were not taxable or chargeable at lower rates. To curb such tax evasion, the Finance Act, 2013 introduced the Buy Back Tax (BBT) to be levied on the companies on the amount distributed to the shareholders on buy-back and the same would be exempt for the shareholders.