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.