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Home List Manuals Companies LawCompanies Act, 1956 - Ready Reckoner [OLD]Ready Reckoner - Companies Act, 1956 This

Companies Act, 1956 - Ready Reckoner [OLD]

Ready Reckoner - Companies Act, 1956

CORPORATE RESTRUCTURING – BUY BACK OF SHARES

  • Contents

Buy Back of Shares – Section 77A

Company limited by shares may not purchase its own shares as this would amount to an unauthorized reduction of Capital.

A company may purchase its own shares or other specified securities through “buy-back" out of -

     (i) its free reserves; or

     (ii) the securities premium account; or

     (iii) the proceeds of any shares or other specified securities

No company shall purchase its own shares or other specified securities unless such  buy-back is authorized by its articles and  a special resolution has been passed in general meeting of the company authorizing the buy-back.

 

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.

 

Authority and Quantum of Buy back of Securities

1. Authority in the Articles – Buyback of securities should be authorized by the Articles of Association – Section 77A (2)(A)

2. Board resolution and quantum of buy back – By passing a resolution, the Board can authorize the buy – back of securities not exceeding 10% of the total paid – up equity capital and free reserves of the company. Section 77A (2)

3. Shareholders’ resolution and quantum of buy – back – By passing a special resolution, the buyback of securities is or less than twenty-five per cent of the total paid-up capital and free reserves of the company. Section 77A (2)(b)& (c)

4. Maximum Quantum of buy back – A company cannot buy back more than 25% of its total paid – up capital and free reserves. Section 77A (2)(c)

5. Further offer of buyback - No offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back, if any. Second proviso to Section 77A(2)

 

Conditions to be fulfilled and obligations for Buy back of Securities

  1. Only fully paid up securities qualify for buy back – Section 77A (2)( e). Fully paid up securities, even if quoted below par on the stock exchange qualify for buy back.
  2. After buy back, the company should have a debt- equity ratio not exceeding 2:1 - Section 77A (2)(d)
  3. Where buy back is made out of free reserves, the company should transfer to the capital redemption reserve account [Section 80(1)(d)], a sum equal to nominal amount of the shares bought back and the details of such transfer and should be disclosed in the balance sheet - Section 77AA
  4. Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make further issue of the same kind of shares including allotment of further shares under section 81(1)(a) or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares. Section 77A (8)
  5. No buy back of securities should be undertaken while a petition for amalgamation is pending
  6. No issue of any securities including bonus shares should be made till the closure of offer of buy back
  7. Promoters or persons acting in concert should not deal in the securities of the company while the buyback offer is open.

 

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)

 

Declaration of Solvency – Section 77A (6)

Where a company has passed a special resolution or the Board has passed a resolution under the first proviso to clause (b) of Section 77A to buy-back its own shares it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prescribed, and verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director.

 

Income Tax Aspects

Section 46A of Income tax Act provides that where a shareholder or a holder of other specified securities the meaning assigned to it in section 77A of the Companies Act, 1956,  receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company.

 

Methods of Buy back

The buy-back under sub-section (1) may be

     (a) from the existing security holders on a proportionate basis; or

     (b) from the open market; or

      (c) from odd lots, that is to say, where the lot of securities of a public company whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or

     (d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

 

 

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