BUY-BACK PROCESS UNDER COMPANIES ACT & RULES

The term buy-back of securities implies the act of purchasing its own shares by a company. This
facility enables the Company to go back to the holders of its own shares/securities and make an
offer to purchase such shares/securities from them. The buy-back of securities is governed by
Sec 68, 69 and 70 of the Companies Act, 2013 and Rule 17 of the Companies (Share Capital and
Debentures) Rules, 2014.

SOURCES OF BUY-BACK [Section 68(1)]

According to Section 68(1) of the Companies Act, 2013 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 the issue of any shares or other specified securities.

METHODS OF BUY-BACK [Section 68(5)]

Buy-Back under section 68(1) may be:

a) From the existing shareholders or security holders on a proportionate basis;
(b) from the open market;
(c) by purchasing the securities issued to employees of the company pursuant to a scheme of
stock option or sweat equity

PROCEDURE:

STEP 1: Authorisation and Quantum [Section 68(2)]

The primary requirement is that the articles of association of the company should authorise
buy-back. In case, such a provision is not available, it would be necessary to alter the articles of
association to authorise buy-back. Buy-back can be made with the approval of the Board of
Directors at a Board meeting and/or by a special resolution passed by shareholders in a general
meeting, depending on the quantum of buy-back.

The Board of Directors can approve buy-back up to 10% of the total paid-up equity capital and
free reserves of the company and authorise such buy-back by means of a resolution passed at the
meeting.

Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up
capital and free reserves of the company, in respect of any financial year. In respect of buy-back
of equity shares in any financial year the reserve of 25% shall be construed with respect to its
paid-up equity capital in that financial year.

STEP 2: Special Resolution to be accompanied by Explanatory Statement

[Section 68(3)]
If the buy-back exceeds the Boards limit then the notice of the meeting at which the special
resolution is proposed to be passed shall be accompanied by an explanatory statement
stating-

i) A full and complete disclosure of all material facts;

ii) The necessity for the buy-back;
iii) The class of shares or securities intended to be purchased under the buy-back;
iv) The amount to be invested under the buy-back; and
v) The time-limit for completion of buy-back.

STEP 3: Disclosure under Companies (Share Capital and Debentures) Rules, 2014
[Rule 17(1)]
Under Rule 17(1) there are a total of 14 disclosures which need to be made by the company
going for buy-back. Since this is a summary, I have not included them in the note.

STEP 4: Letter of Offer to be filed with Registrar of Companies before Buy-Back

[Rule 17(2)].
The company which has been authorised by a special resolution shall, before the buy-back of
shares, file with the Registrar of Companies a letter of offer in Form No. SH. 8, along with the
fee as prescribed. Such a letter of offer shall be dated and signed on behalf of the Board of
directors of the company by not less than two directors of the company, one of whom shall be
the managing director, where there is one.

STEP 5: Dispatch of Letter of offer to shareholders [Rule 17(4)].

The letter of offer shall be dispatched to the shareholders or security holders immediately after
filing the same with the Registrar of Companies but not later than 21 days from its filing with
the Registrar of Companies.

STEP 6: Period of offer for buy-back [Rule 17(5)]

The offer for buy-back shall remain open for a period of not less than 15 days and not
exceeding 30 days from the date of dispatch of the letter of offer. Provided that where all
members of a company agree, the offer for buy-back may remain open for a period less than
fifteen days.

STEP 7: Filing Declaration of Solvency with ROC [Section 68(6) read with Rule
17(3)]
When a company proposes to buy-back its own shares or other specified securities under this
section in pursuance of a special resolution or board resolution as the case may be, it shall,
before making such buy-back, file with the Registrar and the Securities and Exchange Board (in
case of listed companies), a declaration of solvency signed by at least two directors of the
company, one of whom shall be the managing director, if any, in Form No. SH.9 and verified by
an affidavit to the effect that the Board of Directors of the company has made a full inquiry into
the affairs of the company as a result of which they have formed an opinion that it is capable of
meeting its liabilities and will not be rendered insolvent with in a period of one year from
the date of declaration adopted by the Board.

STEP 8: Carrying out buy-back and Extinguishing of shares bought back

[Section 68(7)]
When a company buys-back its own shares or other specified securities, it shall extinguish and
physically destroy the shares or securities so bought back within seven days of the last date of
completion of buy-back.

STEP 9: Register of Buy-Back [Section 68(9) and Rule 17(12)]

When a company buys-back its shares or other specified securities under this section, it shall
maintain a register of the shares or securities so bought, the consideration paid for the shares or
securities bought back, the date of cancellation of shares or securities, the date of extinguishing
and physically destroying the shares or securities and other particulars.

Rule 17(12) of the Companies (Share Capital and Debentures) Rules, 2014 provides that the
company shall maintain a register of shares or other securities which have been bought-back in
Form No. SH-10.

STEP 10: Return of Buy-Back [Section 68(10)]

A company shall, after the completion of the buy-back under this section, file with the Registrar
of Company a return containing such particulars relating to the buy-back within thirty days of
such completion, as may be prescribed.

Rule 17(13) of the Companies (Share Capital and Debentures) Rules, 2014 states that the return
shall be filed in Form No. SH-11 along with the fee.

Rule 17(14) of the Companies (Share Capital and Debentures) Rules, 2014 states that a certificate
in Form No. SH.15 signed by two directors of the company including the managing director, if
any, certifying that the buy-back of securities has been made in compliance with the provisions
of the Act and the rules made thereunder shall be annexed to the return filed with the Registrar
in Form No. SH.11.
Following are the Conditions which shall be complied while going for a buy-back:

1) The ratio of the aggregate of secured and unsecured debts owed by the company after
buy-back is not more than twice the paid-up capital and its free reserves.

For example: If a company has a debt of Rs. 2,00,000 and an equity share capital of Rs.
1,20,000. The maximum buy-back a company can do is of Rs. 20,000, below that the debt
to equity ratio will exceed the prescribed limit.
2) No company shall purchase its own shares or other specified securities unless all the
shares or other specified securities for buy-back are fully paid-up.
3) No offer of buy-back under Section 68(2) shall be made within a period of one year
reckoned from the date of the closure of the preceding offer of buy-back, if any.
4) Every buy-backs shall be completed within a period of one year from the date of passing
of the special resolution, or as the case may be, the resolution passed by the Board.
ADDITIONAL PROCEDURE FOR LISTED COMPANIES UNDER SEBI
(BUY-BACK OF SECURITIES) REGULATION, 2018:
Note:
1) For listed companies under section 68(2) of the Act, If the buy-back exceeds boards
limit, approval of shareholders shall be obtained only by postal ballot.
2) The listed companies under section 68(5) and 68(10) while filing declaration of solvency
and return of buy-back respectively shall intimate ROC and SEBI both.
3) The authorisation limit of the board and shareholders are the same. In case a Special
Resolution needs to be obtained from the shareholders, a copy of the resolution passed
at the general meeting shall be filed with SEBI and the stock exchanges within seven
days from the date of passing of the resolution.
4) In case of Board Resolution passed in the Board meeting, shall be filed with SEBI and
the stock exchanges within two working days of the date of the passing of the
resolution.

METHODS OF BUY-BACK:
1) From the existing shareholders on a proportionate basis through the tender offer
2) From the Open Market:
2.1) Book-Building Process
2.2) Stock Exchanges

The procedure for every method under the regulation is slightly different and hence,
separate procedure for every method has been noted down below.

1. BUY-BACK THROUGH TENDER OFFER:

Step 1: The company which has been authorised by a special resolution or board resolution at its
meeting shall make a public announcement within two days from the date of resolution in at
least one English national Daily, one Hindi National Daily and a Regional language daily all with
wide circulation at the place where the Registered office of the is situated at the place where the
Registered office of the company is situated.

Step 2: A copy of the public announcement along with the soft copy, shall also be submitted to
SEBI simultaneously through a merchant banker.

Step 3: The company shall within five working days of the public announcement file with
SEBI a draft-letter of offer. SEBI may give its comments on the draft letter of offer not later
than seven working days of the receipt of the draft letter of offer. In the event SEBI has sought
clarifications or additional information from the merchant banker to the buyback offer, the
period of issuance of comments shall be extended to the seventh working day from the date of
receipt of satisfactory reply to the clarification or additional information sought.
Step 4: In the event, SEBI specifies any changes, the merchant banker to the buyback offer and
the company shall carry out such changes in the letter of offer before it is dispatched to the
shareholders.

Step 5: The company shall file along with the draft letter of offer, a declaration of solvency

Step 6: A company making a buy-back offer shall announce a record date for the purpose of
determining the entitlement and the names of the security holders, who are eligible to participate
in the proposed buy-back offer.

Step 7: The letter of offer along with the tender form shall be dispatched to the security holders
who are eligible to participate in the buy-back offer, not later than five working days from the
receipt of communication of comments from SEBI.

Step 8: The date of the opening of the offer shall be not later than five working days from the
date of dispatch of the letter of offer.

Step 9: The offer for buy back shall remain open for a period of ten working days.

Step 10: The shares proposed to be bought back shall be divided into two categories;
(a) reserved category for small shareholders and
(b) the general category for other shareholders

Step 11: The company should as and by way of security for performance of its obligations under
the Regulations, on or before the opening of the offer, deposit in an escrow account the sum as
specified:
(i) if the consideration payable does not exceed Rs 100 crores – 25 per cent of the consideration
payable;
(ii) if the consideration payable exceeds Rs 100 crores – 25 per cent upto Rs 100 crores and 10
per cent thereafter.

Step 12: On payment of consideration to all the security-holders who have accepted the offer
and after completion of all the formalities of buy-back, the amount, guarantee and securities in
the escrow, if any, should be released to the company.

Step 13: The company shall immediately after the date of closure of the offer, open a special
account with a SEBI registered banker to an issue and deposit therein, such sum as would,
together with the amount lying in the escrow account make up the entire sum due and
payable as consideration for the buy-back and for this purpose, may transfer the funds from the
escrow account.

Step 14: The company shall complete the verifications of offers received and make payment of
consideration to those security holders whose offer has been accepted. The company shall
extinguish and physically destroy the security certificates so bought back in the presence of a
Registrar to issue or the Merchant Banker and the Statutory Auditor within fifteen days of the
date of acceptance of the shares.

2. BUY-BACK FROM THE OPEN MARKET:

2.1) STOCK EXCHANGE PROCESS:

Step 1: The special resolution/ board resolution, should specify the maximum price at which the
buy- back will be made. The buy-back of securities should not be from the promoters or persons
in control of the company.

Step 2: The company should appoint a merchant banker and make a public announcement
within two days from the date of passing the resolution. Simultaneously with the issue of such
public announcement, the company shall file a copy of the public announcement with SEBI.

Step 3: The company shall submit the information regarding the shares or other specified
securities bought back, to the stock exchange on a daily basis in such form as may be specified by
SEBI and the stock exchange shall upload the same on its official website immediately.

Step 4: The company shall upload the information regarding the shares or other specified
securities bought back on its website on a daily basis.

Step 5: The buy-back offer shall open not later than seven working days from the date of
public announcement and shall close within six months from the date of opening of the offer.
The buy-back should be made only on stock exchanges having Nationwide Trading Terminal
facility and only through the order matching mechanism. The identity of the company as a
purchaser would appear on the electronic screen when the order is placed.

Step 6: The Company shall, before opening of the offer, create an escrow account. An amount
equal to 25% of the total proposed buy back has to be deposited in an escrow account. The
escrow amount may be released for making payment to the shareholders subject to at least 2.5%
of the total amount for buy-back remaining in the escrow account at all points of time.

Step 7: The company shall extinguish and physically destroy the security certificates so bought
back during the month in the presence of a Merchant Banker and the Statutory Auditor, on or
before the fifteenth day of the succeeding month: the company shall ensure that all the securities
bought-back are extinguished within seven days of the last date of completion of buyback.
2.2) BOOK-BUILDING PROCESS:

Step 1: The resolution should specify the maximum price at which the buy-back will be made.
The company should also appoint a merchant banker.

Step 2: A public announcement shall be made at least seven days prior to the commencement of
the buyback.

Step 3: The deposit in the escrow account should be made before the date of the public
announcement. (The amount to be deposited in the escrow account should be determined with
reference to the maximum price as specified in the public announcement).

Step 4: A copy of the public announcement must be filed with SEBI within two days of the
announcement.

Step 5: The book-building process should be made through an electronically linked transparent
facility. The number of bidding centres should not be less than thirty and there should be at least
one electronically linked computer terminal at all the bidding centres.

Step 6: The offer for buy-back should be kept open to the security-holders for a period of not
less than fifteen days and not exceeding thirty days.

Step 7: The merchant banker and the company should determine the buy-back price based on
the acceptances received and the final buy-back price, which should be the highest price accepted
should be paid to all holders whose securities have been accepted for the buy-back.

Step 8: The company shall extinguish and physically destroy the security certificates so bought
back during the month in the presence of a Merchant Banker and the Statutory Auditor, on or
before the fifteenth day of the succeeding month: the company shall ensure that all the securities
bought-back are extinguished within seven days of the last date of completion of buyback.