Key Takeaways on Buyback of Shares by Companies

INTRODUCTION 

    
The Buyback refers to the process by which Company purchases its own shares or securities from its shareholders at a price usually higher than the market price (where shares refer to both Equity and Preference shares and specified securities refer to ESOP and other securities specified by CG from time to time). It is also known as financial restructuring which involves re-arrangement of the financial structure of the Company to make the company’s finance more balanced, buyback is a process of making, and the overcapitalized company a balanced capitalized company.
Though it amounts to a reduction of capital but the provisions of reduction of capital are not applicable on buyback as Section 66(6) of Companies Act 2013 clearly states that nothing in this section shall apply to buyback of its own securities by a company under section 68.

 

      However, one should bear in mind that the Company cannot buy back its debentures as it is not covered under the definition of shares or other specified securities

    Also, Buy-back is not regarded as transfer of shares as the shares bought back by the Company is eventually destroyed and the rights attached to such shares are extinguished. Therefore, there is no stamp duty payable in case of buyback as the stamp duty is payable only in case of transfers.

 

Given below are the various needs of Buy Back:-

To increase the promoter’s shareholding

To increase the Earning per share as the shares outstanding in the market reduces.

To Counter hostile takeover

To return the surplus cash not required by a company to its shareholders

Restructuring of debt-equity ratio

This serves as an exit opportunity to the shareholders of the Company

 

Legal Framework for Buyback

·    Buyback of unlisted company-Section 68 to 70 and Rule 17 of Companies (share capital and debenture rules) 2014;

·   Buyback of listed Company -Provision of Companies Act and various SEBI regulation such as SEBI (Prohibition of Insider trading) Regulation 20015, SEBI (Listing obligation and disclosure requirements) Regulation, 2015 and SEBI(Buyback of securities) regulation 2018

 

In Re SMR universal Softech limited it was seen that the company not being eligible for buyback as there was no authority in AOA of the Company to buy back its shares and the shares proposed to be brought back were not fully paid up issued a public announcement for Buy and was withdrawn simultaneously which resulted in fraud on shareholders, The ruling of SAT are hereunder

 I can therefore be inferred that the motive behind the above advertisement was to deceive the investors by way of disseminating false information. The process of announcing buy-back of shares and its subsequent withdrawal must have resulted in a pecuniary loss to the investors who were influenced to purchase shares on the basis of the advertisement. Hence SMR had committed fraud on shareholders by first issuing misleading advertisement when they were not eligible/ required to make a commitment of buy-back as also their failure to take any conclusive action thereon.

Therefore, taking into consideration all the material facts and circumstances of the case. I hereby restrain the Company and its directors from buying, selling and dealing, or accessing the securities market in any manner for a period of two years.

 

Buy- Back of listed Company

 

Different methods of Buyback

Particulars	Tender offer	Stock exchange	Book Building
Reservation for small shareholder	Yes	No	No
Letter of offer	Yes	No	No
Amount to be deposited in Escrow Account	For 1st 100CR 25%  Beyond 100CR 10%	25% of total Consideration	For 1st 100CR 25% Beyond 100CR 10%
Margin money	1% of total consideration	2.5% of the total consideration	1% of the total consideration
Promoter participation	Yes	No	No
Tendering period	Mas 10 days	Max 6 months	Minimum 15 days Maximum 30 days
Buyback through order matching mechanism. *	N. A	Yes

 

 

 

In case of buyback through the stock, exchange method shares must be buyback through order matching mechanism except for ‘all or none” order matching system where order matching the mechanism is simply the electronic system that matches the buy and sell orders and ‘all or none” order matching system impose a condition that only full order should be matched if the full order is not matched it will stay in books till matched or canceled. 

 

Can a promoter be allowed to decrease its holding in Company?

In a case Re, Punjab Communication, petitioner submitted that the promoter shall not be allowed to participate in the buyback offer as the sole motive of the promoter is to decrease its holding in the Company However SAT held that the promoter can decrease its shareholding in the Company provided that the aggregate shareholding of the public do not fall below the mandatory limit of 25% Of the paid-up capital and the promoter complies with the disclosure requirements.

The ruling of SAT is as hereunder: -

What is relevant here is the question: Whether the promoters can also participate in the company's buy-back offer. The disclosure requirements in this regard are found to have been complied with. The Letter of Offer clearly states that the "promoters intend to surrender equity shares under the buyback offer". There is also a declaration that "The promoters have not traded in the equity shares of the company during a period of 12 months preceding the date of the Board resolution for approving the Buy-Back and during the period of 6 months prior to the Public Announcement for Buy-back". It has also stated that the aggregate shareholding of the promoter on the date of the Public Announcement of the Buyback offer was. 70.22% of the paid-up capital of the company. The Letter of Offer also contains an averment that the non-promoter shareholding will be maintained at 26.48% of the paid-up capital of the company. It is seen from the particulars made available by the PunCom that post-buy back, non-promoter shareholding in the PunCom would be 28.74%. So long as the promoters' participation in the PunCom's buy-back offer is in accordance with the extant law and regulations there is no justifiable reason to disallow the same at this stage.

 

However, presently there are still some ambiguities prevailing in the market in respect of buyback, such as unclear timeline in case of opening of Escrow Account, Regulation 11 and Regulation 21 of Buy Back Regulation which talks about extinguishment of shares contradicts each other which in turn leads to confusion in respect of reporting of extinguishment of shares as a result of which different companies are following different timeline, but one should ensure that they comply with good corporate governance and all the disclosures shall be made as soon as possible.

 

This Article has been compiled by Deepika Sharma (Senior Associate). You can direct your queries or comments to the author at deepika@factumlegal.com)

 

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The contents of this article should not be construed as a 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.