Buy Back Of Shares

BUY BACK OF SHARES

CONCEPT OF BUYBACK • Buy back of shares is one of the prominent modes of capital restructuring. It is a financial strategy that allows a company to buy back its equity shares and other specified securities(as notified by CG) including the securities issued to employees of the Company pursuant to a scheme of stock option or sweat equity.

• Section 77A of the Companies Act,1956 was introduced on 31.10.1998 permitting buyback of shares when equity is costlier than debt, buy back helps in reducing the overall capital cost.

FUNDING OF BUY BACK • Out of: (i) Free reserves;or (ii) securities premium account;or (iii) the proceeds of any shares or other specified securities. However no buyback of any kind of shares or other securities can be made out of proceeds of an earlier issue of the same kind of other specified securities.

CONDITIONS FOR BUY BACK i. ii.

Articles must authorise. Buy back must be approved by Special Resolution passed in the general meeting of the company. iii. If buy back is 10% or less of the total paid up capital and free reserves of the company, such buy back may be made if authorised by board of directors at resolution passed at meeting.

(iv) No offer of buy back shall be made within a period of 365 days reckoned from the date of preceding offer of buyback if any. (v) Buy back should be 25% or less than the total paid up capital and free reserves. (vi) The buy back in any financial year shall not exceed 25% of its paid up equity in that financial year. (vii) The ratio of debt owed by the company should not be more than twice the capital and its free reserves after such buy back. (viii) All the shares and securities under buy-back should be fully paid up.

(ix) The buy back of shares listed on stock exchange should be in accordance with regulations made by SEBI. (x) Every buy back should be completed within 12 months from the date of passing the special resolution or board resolution.

• Practical Question Following information is available from the B/S as at 31st March,2006 of ABC Ltd which is an unlisted company: Rs. In Lacs Equity Share Capital 300 Share Premium Account 30 General Reserve 100 Secured Loans 400 Unsecured Loans 220 The company seeks to implement buy-back of its shares in May,2006.Compute the maximum limit up to which buyback is permitted in the financial year 2006-2007.

PROCEDURE OF BUY BACK IN LISTED COMPANIES  Passing of Special Resolution/Board Resolution  Copy of Special Resolution passed at General Meeting shall be filed with SEBI & Stock Exchanges where the securities of the company are listed within 7 days of passing of resolution.  Public announcement of buy back in one English Daily, one Hindi daily and a regional language daily.

 Public announcement shall specify a date which shall be the ‘specified date’ for the purpose of determining the names of the security holders to whom the letter of offer shall be sent.  The specified date shall not be earlier than 30 days and not later than 42 days from the date of public announcement.  The company shall within 7 working days of the public announcement file with the SEBI a draft letter of offer through a merchant banker.  Letter of offer should be accompanied by prescribed fees.

 The letter of offer shall be dispatched not earlier than 21 days from its submission to SEBI.  The offer for buyback shall remain open to the members for a period not less than 15 days and not exceeding 30 days.  Letter of offer should be sent to security holder so as to reach before opening of offer.

 The company shall complete the verification of the offer received within 15 days of the closure of the offer and the securities lodged shall be deemed to be accepted unless a communication of rejection is made within 15 days from the closure of the offer.  The money for buyback should be deposited in Escrow account from which the company shall make the payment to security holders.