SOME OF THE MAJOR PRACTICAL ASPECTS OF BUYBACK

Buy-back is the process by which the Company buy-back its shares from the existing shareholders usually at a price higher than the market price. When the Company buy-back the Shares, the number of shares outstanding in the market reduces/fall. It is the option available to shareholders to exit from the Company business.

Investors benefit from BuyBack

Whether a buyback benefits an investor or not depends on the kind of returns investors expect to make from an investment.

Example: -

1. A long-term investor believes that the company is going to perform well over the next decade and decided not to sell any of his shares. A buyback is optional, so investors can very well stay invested, without reducing the shareholding.
2. A long-term investor decided to sell only a few shares to get some funds and still stay invested with the remaining shares.
3. A short-term investor or trader, needs to make sure that the buyback offer price really makes sense for him. It’s also important to factor in tax implications. The profits from the sale will be subject to short-term capital gains tax.
4. All in all, the decision to sell shares in a buyback offer is subjective.

Effect on Financial Statement of buyback

On the balance sheet, a share buyback would reduce the company’s cash holdings—and consequently its total asset base—by the amount of cash expended in the buyback. The buyback will simultaneously reduce shareholders' equity on the liabilities side by the same amount. As a result, performance measures such as return on assets (ROA) and return on equity (ROE) typically improve subsequent to a share buyback.

One can also get the amount spent on share buybacks from the statement of cash flows in the financing activities section, and from the statement of changes in equity or statement of retained earnings.

Dividend Vs Buyback

1. Buyback is an optional exercise for an investor so not all shareholders participate in it while the dividend is paid out to all depending on the dividend announced as well as in proportion to the number of shares held by the investor.
2. The number of outstanding shares decreases in the case of buyback as some portion of equity shares that are bought back by the company gets extinguished but there is no such impact in the case of dividends.
3. All of the shares offered for buyback may or may not be accepted but in the case of dividend each of the shareholders is entitled to get dividend income.
4. Companies tend to declare a reward in the form of a regular, annual, special, or one-time dividend. However, when it comes to sharing buybacks, there is no variation or type of it.

Brief Steps for Buy Back of Shares for Unlisted Company

1. Buyback authorization in Article of Association of the company
2. Approval from the Board of Directors (BOD) and shareholders (Note: Special resolution passed by the shareholders if the quantum of Buy-Back is up to 25% of the aggregate of free reserves and paid-up capital of the company, or Approval from board of directors if the quantum of Buy-Back is up to 10% of the aggregate of free reserves and paid-up capital of the company):
3. Filing of Form MGT 14 with Registrar of Companies within 30 days of passing special resolution by shareholders of the company
4. Letter of the offer has to be filed with Registrar of Companies in form SH-8 which must be signed by not less than 2 directors and one of the directors signing the document shall be the Managing Director, where there is one.
5. Filing of Declaration of Solvency with Registrar of Companies in form SH-9 and signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit as specified in the said Form.
6. The letter of offer shall be dispatched to the shareholders.
7. Offer of buyback to remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer.
8. Verification and acceptance of Buy-Back offer
9. Company shall open separate bank accounts for the shareholders who have accepted such offer and the due amount is to deposit in that account.
10. Payment of consideration within 7 days of verification to those shareholders whose shares have been accepted.
11. Return of share certificate of unaccepted shares
12. Destruction of share certificates
13. Shares and securities which have been bought back shall be properly accounted in a register of shares or securities bought-back in SH-10.
14. Return of Buy-Back in the form SH-11 shall be filed with the registrar within 30 days of completion of the process of Buy-Back.
15. Along with SH-11 form, the company shall file with the registrar compliance certificate in form SH-15 which shall be annexed with form SH-11.

Penalty for Default in Buy Back Procedure

Section 68 of the Companies Act, 2013 provides for the penalty in case of default. The company shall be liable to pay fine, not less than Rs.1 Lakhs which might be extended up to Rs.3 Lakhs. Every officer of the company who is in default shall be punishable with a fine of an amount not less than Rs.1 Lakh and which also might be extended up to Rs.3 Lakhs. 

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 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.