Buyback of Shares under Companies Act,2013 by Samidha Hegde@Lexcliq

Introduction-

 What is buyback of shares?

Buy back of shares is a mechanism in which the Company approaches the existing shareholders and buys back the shares held by them. Buyback of shares is the process whereby a company reduces its share capital. It is nothing but a process to enable a company to go back to the shareholder and offer to purchase from them the shares that they hold in the company. The Buy-Back process results in the return of the shareholder’s money and reduction of the floating stock of the company’s securities in the market.

 

Provisions regarding Buy-Back of Shares in Companies Act 2013:

Section 68 of Companies Act deals with Buyback of Shares by a company. This section corresponds to section 77A (Power of company to purchase its own securities) of the 1956 Act with no changes except that the definition of the free reserve has been modified and the penalty provisions have been enhanced. Unlike the provisions of section 67 which prohibits a company to buy-back its own shares unless reduction of capital is effected, this section dilutes this general prohibition and allows a company whether public or private, to purchase its own shares or other specified securities out of following sources according to Section 68(1) of the Companies Act, 2013:-

  1. a) Its free reserves; or
  2. b) The securities premium account; or

c )The proceeds of any shares or other specified securities.

However, buy-back of any kind of shares or securities shall not be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Objective of Buy – Back

The reasons for buy- back may be one or more of the following:

  1. To improve earnings per share
  2. To improve return on capital, return on net worth and to enhance the long term shareholder value
  3. To provide an additional exit route to shareholders when shares are under valued or are thinly traded
  4. To enhance consolidation of stake in the company
  5. To prevent unwelcome takeover bids
  6. To return surplus cash to shareholders
  7. To achieve optimum capital structure
  8. To support share price during periods of sluggish market conditions
  9. To service the equity more efficiently.

 

Sources for the Buyback of Shares

For buyback of shares, a company may purchase it’s own shares/other specified securities out of its –

  • Free Reserves,
  • Securities Premium Account,
  • Receipts of an earlier issue of shares or other specified securities.

 

Restriction on Buy back  

  1. A company should not buy back its securities if default subsist in repayment of deposits or interest payable thereon, or in redemption of debentures or preference shares or repayment of any term loan or interest payable to any financial institutions – Section 77B(1)(C)  
  2. Buy back should not be made if a company has defaulted in relation to preparation and filling of its annual return – Section 77B(2)
  3. Buy back should not be made in event of any default in relation to payment of dividend to any equity or preference shareholders – Section 77B(2)
  4. Buy back should not be made in the event of default in preparation of annual accounts – Section 77B(2)
  5. Buy back should not be made through any subsidiary company including its own subsidiary companies or through any investment company or group of investment companies – Section 77B(1)(a)&(b)

 

References-

https://www.taxmanagementindia.com/visitor/detail_manual.asp?ID=626

https://www.taxmanagementindia.com/visitor/detail_manual.asp?ID=626

https://enterslice.com/learning/buyback-of-shares-key-considerations-under-corporate-law/

 

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