What are the requirments to Buy Back the Shares of Private Ltd Com.?
4 Replies
Mohammed
(CS, Mcom, LLB)
(857 Points)
Replied 21 February 2011
Buy back of shares in Private Limited Companies
The concept of “buy back of securities” is just over a decade old and is normally resorted to
reorganize the capital structure. It means buying the shares allotted to shareholders at a
predetermined price. Buy back results in cancellation of capital leading to an improved EPS in
future. Buy back in case of private limited companies are governed by Sections 77A/77AA/77B
and the Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999.
Prohibition: Kindly note that a Company which has defaulted in –
1. Repayment of Deposits
2. Payment of interest on deposits
3. Redemption of debentures
4. Redemption of preference shares
5. Payment of dividend to any shareholders
6. Repayment of interest or principal to any financial institution or bank
7. Complying with the provisions of Section 159 (filing of annual return) section 207
(distribution of dividend within 42 days) or Section 211 (annual accounts) of the Companies Act,
is not eligible to buy back its shares.
Sources of buyback: The Company can buy back its shares only out of company’s free
reserves or its securities premium account or out of the proceeds of any shares or other
specified securities.
Ceiling per financial year:
- 25% of the paid up capital + free reserves
- However the buyback of equity shares should not be more than 25% of paid up equity
share capital.
Debt Equity Ratio: You have to maintain debt equity ratio of 2:1(post buy back)
Authority:
- Board of Directors: Upto 10% of the paid up capital and free reserves per financial
year.
- Shareholders: More than 10% and up to 25% of the paid up capital and free reserves.
Procedures in brief:
1. Hold a Board Meeting to get the approval of the Board for the buyback proposal (if the
buy back is up to 10% of the paid up capital and free reserves).
2. The Article of Association of the Company must authorize the Company to buy back its
own share. If the Article of Association is silent on buyback provisions then the Company
should hold a shareholders’ meeting to alter the Article of Association of the Company to
include buy back provisions.
3. Hold a Board Meeting to get the approval of the Board for the buyback proposal and to
convene a General Meeting for taking necessary approval from the shareholders (if the
buy back is more than 25% of the paid up capital and free reserves)
4. Hold a shareholders’ meeting to take the approval of the shareholders for such buyback.
5. File Form 23 for registering the special resolution passed at the general meeting within
30 days with ROC.
6. File Form 62 attaching draft letter of offer along with the declaration of solvency in Form
4A (prescribed format) with ROC.
7. Issue the letter of offer to the shareholders not later than 21 days from its filing with
ROC. The offer made to shareholders will remain open for not less than 15 days and
maximum of 30 days from the date of dispatch of such letter. The shares can only be
bought back if the offer is accepted by the shareholders.
8. Open a separate bank account for the payment of consideration to shareholders who
have accepted the offer.
9. Offer once made cannot be withdrawn.
10. Extinguish the share certificates bought back within 7 days after completing buy back.
11. Intimate ROC about buy back in E-Form 4C.
12. Update the register of Buy Back.
Buyback of shares issued to non – residents: It will be considered as transfer from nonresident
to resident and applicable FEMA provisions in respect of transfer of securities from
non-resident to resident in terms of RBI Master Circular No.13/2010-11 dated 1st July, 2010
will have to be complied with.
Azim Khan ACA,CS,CMA*,LLB*
(Proprietor)
(1312 Points)
Replied 21 February 2011
Thanks mohammed for giving a detailed info.
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