Tuesday 23 June 2020

BUY BACK OF SHARES BY UNLISTED COMPANIES

Buyback of shares is the repurchase of its outstanding shares by a company. Companies generally buyback shares in order to reorganise its capital structure, return cash to shareholders and enhance overall shareholders’ value. Buyback leads to reduction in outstanding number of equity shares, which may lead to improvement in earnings per equity share and enhance return on net worth and create long term value for continuing shareholder.

SOURCES OF FUNDS WHICH CAN BE UTILISED FOR BUYBACK
A company may purchase its own shares or other specified securities out of –
  1. free reserves; or
  2. Securities premium account; or
  3. The proceeds of any shares or other specified securities

A company intending to buy its shares/other securities must have at the time of buyback, balance in any one or more of these accounts, which is sufficient to accommodate the total value of buy back. Buyback of shares out of free reserves/securities premium  account does not mean that amount in the reserve  or premium account is represented by equivalent cash in hand or invested so that the company draw requisite amount of cash from it for the purpose of payment to the shareholders whose shares are bought back. It will be noted that reserve is not a fund; it is only an account created by appropriation of profits by book entry. So far as premium is concerned, though at the time of issue of shares it is received in cash (or kind), it does not remain in that form forever or invested in securities, since it is used by the company for its business and thus used up. Therefore, a company which buys its securities by debiting to free reserves or premium account must have liquid cash sufficient to meet its obligation of payment to the shareholders whose securities are bought.

CONDITIONS FOR BUY-BACK
  1. Buy-back is authorized by its Articles of Association;
  2. Special resolution is passed by the company authorizing buy-back. However, if the buy-back is 10% or less of the total paid-up equity capital and free reserves, board resolution, in this regard, will suffice;
  3. Buy-back is 25% or less of the aggregate of paid up capital and free reserves of the company;
  4. The Ratio of debt (secured and unsecured) owed by the company is not more than twice the paid up capital and its free reserves after such buy-back;
  5. All the shares or other specified securities for buy-back are fully paid up;
  6. No offer of buy-back shall be made within a period of one year from the date of the closure of the preceding offer of buy-back, if any.

TIME LIMIT FOR COMPLETION OF BUY BACK
Within a period of one year from the date of passing of the special resolution, or board resolution, as the case may be, buy-back shall be completed

OPTIONS FOR BUY BACK
The buy-back can be from:
  1. from the existing shareholders or security holders on a proportionate basis;
  2. from the open market;
  3. by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity

TAXATION ON BUY BACK OF SHARES
In case of a domestic company, Section 115QA of the Income Tax Act, 1961 provides for the levy of tax on account of buy-back of shares, at an effective rate of 23.296% (20% + 12% SC + 4% H&EC).    

Buy-Back Tax has to be paid by the company on the distributed income which is nothing but the consideration paid by the company on buy back of shares, as reduced by the amount received by the company on issue of such shares, determined in the manner prescribed under Rule 40BB of the Income Tax Rules, 1962. Also, such Buy Back Tax has to be paid by the company over and above the tax paid by it, if any, on its total income.

Back Tax is levied at the level of company, the consequential income arising in the hands of shareholders is exempt from tax, as per Section 10(34A) of the Income Tax Act, 1961.
For the purpose of Section 115QA, ‘Buy-Back’ means purchase by the company of its own shares, in accordance with the provisions of any law for the time being in force relating to companies.

APPLICABILITY OF STAMP DUTY

No Stamp Duty is payable in case of buy back of shares as company is buying back its own shares and hence, the same does not result in any transfer.

PROHIBITIONS ON BUY BACK
  1. No company shall directly or indirectly purchase its own shares:-
  2. through any subsidiary company including its own subsidiary companies;
  3. through any investment company or group of investment companies; or
  4. if a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

 However, the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.
The Company shall not buy-back its shares if the company has not complied with the provisions of 92 (Annual Return), 123 (Declaration of Dividend), 127 (punishment for failure to distribute dividends) and section 129 (Financial Statement).

PENALTY

If a company makes any default in complying with the applicable provisions of the Companies Act, 2018 (i.e. Section 68 of the Companies Act, 2013) the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.   

This Article has been Compiled by Swati Garg (Senior Associate)
You can direct your queries or comments to the author at swati@factumlegal.com

Disclaimer-
The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.







Wednesday 3 June 2020

PREFERENTIAL ISSUE


Preferential issue is one of the fastest ways of raising capital by the company. As per Regulation 2(1)(nn) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, (hereinafter referred as ‘ICDR Regulations’) Preferential Issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

 Requirements for Preferential Issue
As per Regulation 160 of ICDR Regulations, listed entity making a preferential issue of specified securities shall ensure that:
  1. Equity shares allotted by way of preferential issue shall be made fully paid up at the time of the allotment;
  2. Special resolution has been passed by its shareholders;
  3. Equity shares by the proposed allottees are in dematerialised form;
  4. Permanent Account Numbers of the proposed allottees has been obtained
  5. Listed Entity is in compliance with the conditions for continuous listing of equity shares


Lock-in Period

Promoters: Locked-in period for specified securities allotted on preferential basis to promoter or promoter group and the equity shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to promoter or promoter group, shall be three years from date of trading approval granted for the specified securities or equity shares allotted pursuant to exercise of the option attached to warrant, as the case may be.

Other than Promoters: Locked-in period for specified securities allotted on preferential basis to persons other than promoter and promoter group and the equity shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to such persons shall be one year from the date of trading approval.

Time Period for Completion of Allotment for Listed Entities
Within a period of fifteen days of passing special resolution allotment shall be completed.
However, if within fifteen days from the date of special resolution, allotment of the specified securities is not completed then a fresh special resolution shall be passed and the relevant date for determining the price of specified securities shall be taken with reference to the date of the latter special resolution.

Communications to Stock Exchange
As per Regulation 29(1) (d) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed entity shall give prior intimation to stock exchanges, at least two working days in advance, excluding the date of the intimation and date of the meeting, about the meeting of the board of directors in which proposal for fund raising by way of Preferential Issue and for determination of issue price is to be considered.

As per Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, read with Para A of Part A of Schedule III, the listed entity shall intimate outcome of board meeting to stock exchange within 30 minutes of the closure of the meeting in which decision with respect to fund raising has be taken.

Approvals/Application to Stock Exchange
As per Regulation 28(1) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, listed entity shall obtain In-Principle approval from stock exchanges before issuing securities of preferential basis (i.e. before allotment of securities on preferential basis).
As per Regulation 108(2) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, issuer company shall, make an application for listing, within twenty days from the date of allotment, to stock exchange(s) along with the documents specified by stock exchange(s) from time to time.

Penalty for delay in making listing application
As per Regulation 108(3) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, where there is a delay in making listing application beyond twenty days from the date of allotment, the issuer company shall pay penal interest to allottees for each day of delay at the rate of at least 10% per annum from the expiry of thirty days from date of allotment till the listing of such securities to the allottees

Trading Approval: The securities shall be listed and traded on the Stock Exchange after the grant of trading approval from the Stock Exchange(s).

Preferential Issue under Companies Act, 2013 (‘the Act’)

Under the Act, Section 62(1)(c) needs to be complied with in case of preferential issue. 
Applicability of Section 42 of the Act: As per Section 62(1)(c) read with Rule 13(1) of the Companies (Share Capital and Debentures) Rules, 2014, if authorised by a special resolution passed in a general meeting, shares may be issued in any manner whatsoever, including by way of a preferential offer, to any persons whether or not those persons include the equity shareholders or the employees (under ESOP) and such issue on preferential basis should also comply with conditions laid down in Section 42 of the Act.

Thus, in case of issue of shares on preferential basis Section 42 also becomes applicable.

Time Period for Completion of Allotment for Unlisted Entities

The allotment of securities on a preferential basis made pursuant to the special resolution shall be completed within a period of twelve months from the date of passing of the special resolution.
However, if the allotment of securities is not completed within twelve months from the date of passing of the special resolution, then another special resolution shall be passed for the company to complete such allotment thereafter.
Offence
Section 62 (i.e. Further Issue of Share Capital) of the Companies Act, 2013, does not prescribe any penal provision for contravention of the said section. However section 450 of the Companies Act, 2013 will be applicable. Accordingly, the punishment for contravention, the company and every offer of the company who is in default shall be punishable with a fine upto Rs.10,000, if the contravention continues then the fine shall be Rs. 1,000 every day after the first during which the contravention continues.

This Article has been Compiled by Swati Garg (Senior Associate)
You can direct your queries or comments to the author at swati@factumlegal.com

Disclaimer-
The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.