This is prescribed especially for the underperforming company distressed with debt burden and is caught up with heavy accumulated losses.
Companies capital has been eroded due to losses, due to which actual capital has lowered as compared to actual paid up capital, company needs to undertake reduction of capital. This will enable the company to bring paid up capital near to actual capital employed.
The reduction of share capital shall be in any way, and in particular in the following manner or in combination of below mentioned:
- Extinguishing liability on shares which have
remained unpaid after calls. - Consolidating shares by reducing face value
of shares to the extent paid up. - Cancellation of paid up share capital either with or without reduction of liability on shares (whether fully paid or not) to match paid up capital with capital employed, and subsequently consolidating these partly paid-up shares into fully paid up share.
Purchasing of own shares from investors by The Company amounts to buyback. This process is regulated by several governing laws like Companies Act and SEBI, this offer can be binding or optional to the investors.
Buyback becomes necessary when there are surplus but idle funds or unattractive alternative investment options with it, then company may choose to reduce its share by purchasing for cancellation form its shareholders.
Few peeks flowing from above strategic move are
- Higher EPS and value creation to the
shareholders - Helps exit to the selected/ small group
of Shareholders - Help increase promoter holding in the
company - Thwart takeover bid
- This management decision triggers the
signal of bright prospects about the
company among the investors.
Detailed steps involved in buyback of Listed, Unlisted & Pvt. Ltd. Companies
It's a compromise agreement entered into between shareholders (all or any class of them) with The Company on application to the High
Court, by either of them. In this case the Court shall direct the proceeding in manner it considers justified, in consultation with either parties.
When company's substantial capital has been eroded by losses or paid up capital is excess of actual capital employed, company needs to undertake Arrangement with Shareholders.
Some of the benefits accruing are :
- Facilitates Buyback beyond limitation and
condition imposed under 77A (2) of
Companies Act. - Optimise shareholders return and increase value
- Help exit to the Shareholders.
It's a compromise agreement entered into between creditors and The Company on application to the High Court, by either of them. In this case the Court shall direct the proceeding in manner it considers justified, in consultation with either parties.
This arrangement is effective when company is over burdened with debt and debt servicing is causing operational instability and substantial capital has been eroded by losses, due to which actual capital employed is getting diluted compared to paid up capital. Arrangement with Creditors to will help restructure this debt.
Some of the benefits accruing are
- Dilution of debt burden
- Arrangement creditors for restructuring secured and/or unsecured loans
- Conversion of debt into equity
- This facilitate optimum credit utilization and servicing and eases day to day smooth operation of business
As solution to hassles involved, HU consultancy provides planning and execution of strategy in lights of allied laws and taxation matters, with backing of highly experienced team of CAs, CSs and solicitors, we will be acting as project manager on behalf of you taking entire responsibility from end to end, assisting you in all the intricacies involved in carrying out successfully Arrangement with Creditors &
Shareholders.