10 Important Provisions of the Companies Act 1956 Regarding the Buyback of Shares of a Company

(a) The buy-back is authorised by its articles;

(b) A special resolution has been passed in general meeting of the company authorising the buy-back. However, if the buy-back is up to 10% of the total paid-up equity capital and free reserves of the company, the Board of Directors by passing a resolution at its meeting may authorize the company for such buy-back. But only one buy-back in a year is permitted under the resolution of the board;

(c) the notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating- a full and complete disclosure of all material facts; the necessity for the buy-back; the class of security intended to be purchased under the buy-back; the amount to be involved under the buy-back; and the time limit for completion of buy- back;

(d) The amount involved in the buy-back must not be more than 25% of the total paid-up capital and free reserves of the company. Further, in case of buy- back of equity shares, the limit is 25% of the total paid-up equity capital of the company in that financial year;

(e) The debt-equity ratio of the company must not be more than 2:1 after such buy-back;

(f) All the shares or other specified securities for buy-back are fully paid-up;

(g) The buy-back of the shares or other specified securities listed on any recognized stock exchange must be in accordance with the SEBI Guidelines in this behalf; and

(h) The buy-back in respect of unlisted shares or other specified securities must be in accordance with the prescribed Central Government Guidelines.

(2) Sources of buy-back:

A company may purchase its own shares or other specified securities out of:

(i) Its free reserves; or

(ii) The securities premium account; or

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

Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

When a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.

(3) Methods of buy-back:

The buy-back may be:

i. From the existing security holders on a proportionate basis by inviting offers from them; or

ii. From the open market; or

iii. From odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or

iv. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

(4) Completion of buy-back:

Buy-back must be completed within 12 months from the date of passing the special resolution or a resolution passed by the Board.

(5) Declaration of Solvency:

Before passing the resolution of buy-back, the company is required to file with the Registrar and the SEBI a declaration of solvency in the prescribed form. It must be 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 it has formed an opinion that the company 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.

The declaration must be signed by at least two directors of the company, one of whom shall be the managing director, if any. However, in case of unlisted company, such declaration is to be filed only with the Registrar.

(6) Extinguishing the securities:

The company is required to extinguish and physically destroy the securities so bought-back within 7 days of the last date of completion of buy-back.

(7) Further Issue of securities:

Where a company completes a buy-back of its shares and other specified securities, it shall not make further issue of the same kind of shares or other specified securities within a period of 6 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.

(8) Register of securities bought back:

The company is required to maintain a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other prescribed particulars.

(9) Filing of Return:

A company shall, after the completion of the buy-back file with the Registrar and the SEBI (only to the Registrar in case of unlisted company), a return containing the prescribed particulars relating to the buy-back within 30 days of such completion.

(10) Default:

If a company makes default in complying with the provisions of this section or any rules made there under, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years, or with fine which may extend to Rs. 50,000, or with both.