INTRODUCTION:
Company can return the surplus funds to its shareholders either through dividend on shares or buyback of shares. Buyback of shares is a mechanism available to the Company where it can repurchase its shares from existing shareholders. This mechanism provides benefits not only to Company but also to shareholder. If the Company has excess funds they can buy back their shares from existing shareholder which will improve return on equity. This corporate restructuring step boost the confidence of the investors in the Company and prevents hostile takeover of the Company.
PROVISIONS UNDER COMPANIES ACT, 2013 (Section 68, 69 and 70 read with rule 17 The Companies (Share Capital and Debenture) Rules, 2014):
1. Company can purchase its shares out of (Sources of Funds):
a) Its free reserves
b) Securities premium account
c) Proceeds of the issue of any shares or other specified securities
Note: Buyback of shares or any other specified securities shall not be made from proceeds of earlier issue of same kind of shares or specified securities. For example, Proceeds of allotment of equity shares shall not be utilised to buyback equity shares of the Company.
Further, the Company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares {Rule 17 (10) (e)}
2. Conditions for buyback of shares:
i) It should be authorised by the articles of association
ii) In case if buyback of shares is 10% or less of paid up equity capital and free reserves, it should be authorised by Board Resolution
iii) In case if the buyback is 25% or less of paid up capital and free reserves, it should be authorised by Special Resolution
iv) After buyback, the ratio of secured or unsecured debt owed by the Company shall not be twice of the paid up capital and free reserves.
v) All shares or other specified securities for buyback shall be fully paid up,
vi) In case of shares listed on any recognised stock exchange it shall be in accordance with the regulations made by Securities and Exchange Board
vii) Buyback in respect of unlisted or other specified securities shall be in accordance Share Capital and Debenture Rules, 2014
Note: As per Section 179(3) (b) a Company shall exercise the power of Buy Back of shares only by means of resolutions passed at the meeting of Board of Directors. Thus, a Buy back of shares cannot be approved by circular resolution.
3. Explanatory Statement of Notice:
The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement stating various details as required under Section 68 (3) of Companies Act, 2013 read with Rule 17(1) of The Companies (Share Capital and Debentures)Rules,2014.
4. Completion of Buy-Back:
Buyback shall be completed within one year from the date of passing of Board or Special resolution as the case may be.
5. From whom Buy-back of shares can be made :
a) From existing shareholders or security holders on a proportionate basis
b) From open market
c) By purchasing the securities issued to employees of the Company pursuant to a scheme of stock option or sweat equity.
6. Filing of Letter of Offer with Registrar of Companies('ROC') (Form SH-8).
The Company which has been authorised by Special Resolution shall, before the buyback of shares, file with the Registrar of Companies a letter of offer in Form SH-8 along with the fee.
7. Filing of declaration of solvency (Form SH-9):
An unlisted company shall file with the Registrar along with letter of offer and in case of a listed company with the Registrar and the Securities And Exchange Board, a declaration of solvency in Form SH-9 along with the fee and signed by atleast two directors of the Company, one of whom shall be managing director, if any. Declaration of Solvency shall be accompanied by the affidavit to the effect that Board of Directors after inquiring the affairs of the Company have formed an opinion that it is capable of meeting its liabilities and the Company will not rendered insolvent within one year from the date of declaration by the Board.
8. Dispatching Letter of offer:
Once, the letter of offer in Form SH-8 is filed with Registrar of Companies. It shall be dispatched to the shareholder immediately but not later than 20 days from the date of filing
9. Offer Period:
Letter of offer shall remain open for the period of not less than 15 days but not exceeding 30 days from the date of dispatch of offer.
Note: If all the Members agree than the offer period can remain open for the period less than 15 days.
10. Completion Of Verification of offers received:
The Company shall complete verifications of offers of Buyback within 15 days from the date of closure of offer of buy back of shares. In case if the offer of Buy back of shares or other securities is not accepted of any shareholder, a communication of rejection shall be made within twenty one days of closure of offer.
11. Opening of Separate Bank account:
After the closure of offer, the Company shall open a separate Bank account and deposit therein, such sum, as would be necessary to make the payment for Buyback of shares.
12. Acceptance and Rejection for Buyback:
After 21 days from the date of closure of offer, within 7 days, consideration shall be paid whose Buyback is accepted. In case if the Buyback is not accepted, share certificates will be returned for all shares/securities or the balance of securities in case of part acceptance.
13. Maintenance of Register:
The Company shall maintain the register of shares or other securities which has been bought back in Form SH-10. The register of shares or securities bought back shall be maintained at the registered office of the Company and kept in the safe custody of secretary of the Company or any person authorised by the Board. Further, entries in the register shall be authenticated by the secretary or any person authorised by the Board.
13. Filing of Return of Shares bought back:
The Company after completion of Buy Back of shares or other specified securities shall file a return with the ROC and in case of listed company with ROC and SEBI in Form SH-11. A certificate in Form SH-15 shall be annexed in Form SH-11 certifying that the buyback of securities has been made in compliance with the provisions of the Act and the rules made thereunder.
14. Transfer of amount to capital redemption reserve (Section 69):
In case if the shares or other specified securities are purchased out of free reserve or securities premium account, a sum equal to the nominal value of shares so purchased shall be transferred to the capital redemption account. The capital redemption reserve account may be applied by the Company in paying up unissued shares of the Company to the members as fully paid bonus shares.
15. Prohibition for buy-back in certain circumstances (Section 70):
In following circumstances, Company cannot make buy back of shares:
a) Through subsidiary including its own subsidiary
b) Through Investment Company or group of Investment Company
c) Defaulting in repayment of deposits accepted, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.
Note: a Company can buyback shares if the default is made good and period of three years has been expired.
Further, a Company cannot purchase its own shares or other specified securities if the investee Company has not complied with following provisions.
- section 92 Annual Return
- section 123 Declaration of Dividend
- Section 127 Punishment for failure to distribute dividend
- Section 129 Financial Statement.
TAX IMPLICATION OF BUY BACK OF SHARES:
As mentioned earlier, the Company which has surplus funds can distribute the same towards the shareholders either through Dividend or by repurchasing the shares (Buy back of shares). Buy back of shares was taxable as Capital gain whereas Dividend distribution attracts dividend distribution tax (DDT). So Companies used to prefer re-purchasing the shares that is buying back their shares.
Later on, Government introduced section 115 QA under the Income tax act, 1961 on 1st June, 2013 which levy tax on distributed income by the Company to the shareholders at the rate of 20% excluding the Company listed on Stock exchange. So, burden of taxation was shifted from shareholder to the Company.
This section was amended on 05th July, 2019 including the listed Company under its purview. It means now all the Companies who consider buying back its shares from shareholders will be liable to tax at the rate of 20% on distributed income. Distributed Income is explained in explanation of section 115QA as 'distributed income" means 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.'
It is to be noted that bringing section 115QA to listed company brings Inability to set off the losses using capital gain arising by tendering the shares in Buy Back. Further, shares under Buy back are re-purchased at premium in order to give incentives to the investor. However, as rate of tax is high companies could either reduce buy back size or the price.
Let us understand taxation on distributable income with the help of following examples:
For Example 1: M/s Varad Limited originally issued shares for Rs. 10. The shareholder bought the share at Rs. 10 from the Company. Now, the Company wants to buy back the share at Rs. 500. The Company shall pay tax @ 20% on Rs. 490 (500-10) (distributed Income).
Example 2: M/s Varad Limited originally issued share at Rs. 100 which was purchased by Mr. A. Now Mr. B purchased the share at Rs. 500 from Mr. A through exchange. M/s Varad buy back the share from Mr. B at Rs. 800/-. The Company is liable to pay tax at Rs. 700 (800-100) (amount received by the Company for such issue). Here the Mr. A have already paid capital gain tax which is not considered in the subsequent payment of tax.
CONCLUSION:
Buy Back of shares was one of the modes available to the Company to distribute surplus funds in order to boost the confidence of the investor. It was beneficial for the Shareholder as they were required to pay capital gain tax ranging from 15-20%. However, with the introduction of section 115QA of Income tax Act 1961 including in its purview the listed company, it may not remain the feasible option for the Company and also shareholder.
Disclaimer: Kindly note that the entire content of this Article have been developed on the basis of relevant statutory provisions and as per the information existing at the time of preparation of i.e Act, Rules, notification, clarification, circulars, issued by MCA, SEBI or any other statutory authority. Though I have made upmost efforts to provide authentic information, however, I do not undertake any liability in any way whatsoever, to any person in respect of anything arising by reliance upon the content of this article. It shall not be used as a legal opinion and not to be used for rendering any professional advice.
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