Buy-Back of Securities (Unlisted Public Co. & Private Co.)

Buy Back of Securities is a boon for Companies who wants to reduce their Share Capital. First of all, here are few preliminary notes of Buy Back:

• Introduced by ‘The Companies (Amendment) Act, 1999

• Governing Sections of Companies Act, 1956:

o 77A

o77AA

o77B

• Specified Security: includes ESOP or other security as notified by Central Government.

• Free Reserves: Clause (b) of explanation to section 372A defines free reserves as ‘Reserves which, as per latest audited balance sheet of the company are free for distribution as dividend and shall include balance to the credit of Security Premium A/c but shall not include Share Application Money’.

• Penalty: upto Rs. 50,000 and/or imprisonment upto 2 years.

•  Advantages of Buy Back:

1.  It is an alternative mode of reduction in capital without requiring approval of the Court/CLB(NCLT),

2.  to improve the earnings per share;

3. to improve return on capital, return on net worth and to enhance the long-term shareholders value;

4. to provide an additional exit route to shareholders when shares are undervalued or thinly traded;

5. to enhance consolidation of stake in the company;

6. to prevent unwelcome takeover bids;

7. to return surplus cash to shareholders;

8.  to achieve optimum capital structure;

9. to support share price during periods of sluggish market condition;

10.  to serve the equity more efficiently.

EPS gets improved as can be been with the below mentioned eg.

PROVISIONS OF BUY BACK SIMPLIFIED:

Preliminary Conditions (section 77A(2)):

• Authorized by Articles,

• Special Resolution in a extra-ordinary general meeting of the company, but not necessary in the following cases (as amended in Companies Amendment Act, 2001):

o Buy Back is less than 10 % of total paid up capital and free reserves,

o Buy Back authorized by Board Resolution,

o Less than 365 days from date of previous buy back.

• Maximum Buy Back is less than 25% of total paid up capital + free reserves but in case of equity shares its 25% of total paid up capital.

• Debt Equity Ratio should not be more than 2:1 after such buy back where,

Equity = Capital + Free Reserves,

Debt = All Unsecured and Secured Debts

• Only fully paid up shares or securities can be bought,

• Compliance:

o  Listed Co : SEBI (buy back of security) Regulations, 1998

o Other : Buy Back of Securities Rules, 1999

Funds for Buy Back (Section 77A(1)):

• Free Reserves

• Security Premium Account

• Proceeds of any share or other specified security, except an earlier issue of the same kind of shares or other specified security.

• No money borrowed from banks or FI’s can be used for buy back.

Contents of Notice (Section 77A(3)):

• Notice of EGM at which Special Resolution is to be passed has to contain certain informations which is discussed later.

Time Limit (Section 77A(4)):

• 12 months from the date of passing Special Resolution or BOD resolution, as the case may be.

Method of Buy Back (Section 77A(5)):

• From Existing Shareholders on a proportionate basis,

• By Purchasing the security issued to employees of the company pursuant to a scheme of Stock Option or Sweat Equity,

• Other methods which are given in this section but not in Buy Back Rules, 1999 and thereby cannot be used are:

o   From open market

- Book Building

- Stock Exchange

- From odd lots.

Solvency Declaration (Section 77A(6)):

• Before Buy Back, file with ROC a declaration of solvency in e-form 4A.

• Affidavit: by BOD to confirm solvency of company for a year from the date of declaration and its ability of pay off all its liability.  It must be signed by 2 directors, 1 of whom must be managing director, if any.

Destruction of Certificate (Section 77A(7)):

• Within 7 days of the last day of completion of Buy Back.

Prohibition on Fresh Issue (Section 77A(8)):

No issue, even by way of Right Shares can be made upto 6 months except by way of:

• Bonus Shares,

• Discharge of subsisting obligation, e.g. Conversion of Warrants.

• Stock Option Scheme,

• Sweat Equity Scheme,

• Conversion of Preference Shares or Debentures into Equity Shares.

Register of Buy Back (Section 77A(9)):

With

• Details of Security so bought,

• Consideration paid for buy back,

• Date of Cancellation of Securities,

• Date of physically destroying the securities,

• Other prescribed particulars.

Such Register has to be maintained as per e-form 4B.

Compliance Return (Section 77A(10)):

E-form 4C is to be filed with ROC within 30 days from the date of completion of buy back.

Transfer to Capital Redemption Reserve (Section 77AA):

If buy back is done out of Free Reserves, amount equivalent to the Nominal Value of the shares bought back shall be transferred to Capital Redemption Reserve. Security Premium can also be used for the same. Details of such transfer shall be disclosed in the balance sheet as referred to in the section 80(1)(d).

Price for Buy Back:

The Buy Back Rules, 1999 has not defined any basis of Valuation for Buy Back Price. Therefore Company is free to make valuation of buy back price on any relevant basis. Such relevant basis can be:

• Current Book Value,

• Net Asset Value,

• Fair Market Value, Etc

Company has to give full disclosure of such method adopted in Explanatory Statement and in the Offer Letter.

Special Account:

A Special Account has to be opened with a schedule bank which can be in the name such as ‘X ltd – Buy Back Account’.

Prohibition from Buy Back:

Shares cannot be purchased from:

• through any subsidiary company including its own subsidiary company,

• through any investment company or their group,

• default in repayment of any deposit or debt or its interest (preference shares, debentures, loans etc)

• if company has not complied with

o Sections 159 (annual return)

o Sections 207 (failure to pay dividend within 30 days of declaration)

o Section 211 (Regarding disclosure of true and fair information in Balance Sheet and Profit & Loss Account)

o Section 211(3A) (All Accounting Standards is to be followed)

Securities not Purchasable:

• Partly paid securities,

• Securities subject to Lock in Period or otherwise not transferrable

• Securities held by promoter or persons in control if buyback is through Stock Exchange.

Alteration of Articles:

• Pass Board Resolution

• Conduct Extra – Ordinary General Meeting

• Pass Resolution regarding the alteration in the above mentioned Extra - Ordinary General Meeting

• Prepare Altered AOA

• File e-form 23

DISCLOSURES TO BE MADE IN EXPLANATORY STATEMENT

The notice of the meeting at which Special Resolution is proposed to be passed shall be accompanied by an explanatory statement stating all the details regarding buy back of shares viz:

1. The date of Board meeting at which the proposal for buyback was approved by the Board of Director of the Company;

2. Necessity for the Buy Back;

3. Class of security intended to be purchased under the buy back;

4. Method to be adopted for the buy-back;

5. The maximum required under the buy-back and the sources of funds from which the buy-back would finance;

6. The basis of arriving at the buy-back price;

7. The number of securities that the company proposed to buy-back;

8. The time limit for the completion of buy-back;

9. The aggregate of shareholding of promoter and the director as on the date of the notice convening the General Meeting;

A. Aggregate number of equity shares purchased or sold by persons including promoter and director during a period of 6 Months preceding the date of Board Meeting at which buy back was approved form the date of the notice convening the General Meeting;

B. The maximum and minimum price at which purchase and sales referred to above made along with the relevant date;

10. Intention of the promoter and person in control of the Company to tender shares for buy-back indicating the number of shares, detail of acquisition with date and price; Procedural Checklist for Buying Back shares of an unlisted company;

11.  A confirmation that there is no default subsisting in repayment of deposits, redemption of debenture or preference shares or repayment of term loan to any financial institution or banks;

12. A confirmation that the Board of Directors has made full enquiry into the affairs and prospects of the Company;

13. A report to the Board of Directors by the Company’s auditors stating that they have inquired into the Company’s state of affairs, the amount of permissible capital payment for the securities in question is in their view properly determine.

14. The price at which the buy-back of shares shall be made;

15.   If promoters intend to offer their shares the quantum of shares proposed to be tendered and details of their transaction and their holding for the last six months prior to the passing of the Special Resolution.

DISCLOSURES TO BE MADE IN LETTER OF OFFER

The Letter of Offer shall inter-alia include:

1. Details of the offer including the total number and percentage of the total paid up capital and free reserves proposed to be bought back and price;

2. Authority for the offer of buy-back;

3.  The proposed time table from opening of the offer till the extinguishment of the certificates;

4. A full and complete disclosure of all material facts including the contents of the explanatory statement annexed to the notice for the general meeting at which the special resolution approving the buy back was passed;

5. The necessity for the buy back;

6. The process to be adopted for the buy back;

7. The minimum and the maximum number of securities that the company proposes to buy-back, sources of funds from which the buy-back would be made and the cost of financing the buy-back;

8.  Brief information about the company;

9.  Audited Financial information for the last 3 years and the company and its Directors shall ensure that the particulars (audited statement and un-audited statement) contained therein shall not be more than 6 months old from the date of the offer document together with financial ratios as may be specified by the Board; Procedural Checklist for Buying Back shares of an unlisted company;

10. Present capital structure (including the number of fully paid and partly paid securities) and shareholding pattern;

11. The capital structure including details of outstanding convertible instruments, if any, post buy-back;

12. The aggregate shareholding of the promoter group and of the directors of the promoters, where the promoter is a company and of persons who are in control of the company;

13. The aggregate number of equity shares purchased or sold by persons mentioned in clause (12) above during a period of twelve months preceding the date of the public announcement and from the date of public announcement to the date of the letter of offer; the maximum and minimum price at which purchases and sales referred to above were made alongwith the relevant date;

14. Management discussion and analysis on the likely impact of buy back on the company's earnings, public holdings, holdings of Non Resident Indians/Foreign Institutional Investors, etc., promoters holdings and any change in management structure;

15. The details of statutory approvals obtained;

16. A declaration to be signed

A. by at least two whole time directors that there are no defaults subsisting in repayment of deposit. Redemption of debentures or preference shares or repayment of a term loans to any financial institutions or banks;

B. b. by at least two whole time directors, one of whom shall be the managing director stating that the Board of Directors has made a full enquiry into the affairs and prospectus of the company and that they have formed the opinion –

i.  as regards its prospects for the year immediately following the date of the letter of offer that, having regard to their intentions with respect to the management of the company's business during the 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 will be able to meet its liabilities and will not be rendered insolvent within a period of one year from the date;

ii. in forming their opinion for the above purposes, the directors shall take into account the liabilities as if the company were being wound up under the Procedural Checklist for Buying Back shares of an unlisted company provisions of the Companies Act, 1956 (including prospective and contingent liabilities)

17.  The letter of offer must be accompanied by an Auditor’s report obtained by the directors

Time Schedule Summarised:

Tax Summarized:

o   * This tax of 20% is increased by 10% surcharge (if applicable) and EC & SHEC which makes it equivalent to 22.66%. This levy is mandatory irrespective of whether the company is liable to tax or not on its income. The tax shall be deposited with the Government within 14 days from the date of payment of any consideration to the shareholder. The aforesaid taxes are not creditable by any person under the provisions of the Indian income-tax law; and in case of failure to deposit taxes on time, the principal officer or the company:

o Shall be deemed to be ‘assessee in default’; and

o Will be subject to simple interest at the rate of 1% of every month or part thereof.

Accounting Treatment:

• In case Investment are sold for Buy Back:

Bank…………………………Db

To Investment Account

(The difference if any will be credited to Profit on Sale of Investment Account or debited to Loss on Sale of Investment Account which in turn will be transferred to Profit and Loss Account)

• In case proceeds of Fresh Issue are issued for Buy Back:

Bank Account……………….……………………Db

To Debentures/Other Investment Account

To Security Premium Account (if any)

• For Buy Back of Shares:

Equity Shareholders Account……..Db

To Bank Account

(With the amount paid)

• For Cancellation of Shares Bought Back:

Equity Share Capital A/c…………………db                         (Nominal Value)

Free Reserve/Security Premium A/c……..db                          (With the excess amount)           

To Equity Shareholders A/c (Amount Paid)             (Amount Paid)

• If Shares are bought back at a discount:

Equity Share Capital Account…………...db

To Equity Shareholders A/c

To Capital Reserve A/c

• For transfer of nominal value of shares purchased out of free reserves/Security Premium to Capital Redemption Account:

Free Reserves…………………………….……….db

Security Premium A/c………………………….…db

To Capital Redemption Reserve Account

• For Expenses incurred in Buy Back:

Buy Back Expenses A/c……………..db

To Bank

Profit & Loss A/c……..db

To Buy Back Expenses A/c

This was a brief summary of Buy Back. For any query, please mail me at info@onlinelawsolutions.com

Author:

Sagar Gupta

www.onlinelawsolutions.com