Procedure for Buy-Back of Shares by Unlisted Company

Aakanksha Singhal

Aakanksha Singhal

Published on: May 30, 2022

Khushboo Sharma

Updated on: Oct 6, 2023

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Introduction:

A Company that has excess funds and considering the same as unused cash/funds which may be very costly for the Company, the Company can buy back its shares by using that fund for various reasons like increasing the value of shares, company consolidation, and show its position in the market as financially strong. “Buyback of Shares” is basically the purchasing or buying back of its own shares by a company that was issued by the Company earlier. Section 68 of the Companies Act, 2013 empowers the Companies to do so.

A company may purchase its own shares or other specified securities i.e., engage in the Buy-Back of its securities out of:

1. Its free reserves
2. The securities premium account or
3. The proceeds of the issue of any shares or other specified securities except for proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Such buy-back of securities can be undertaken by a company through any of the following modes

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.

Relevant Sections and Rules:

Section 68, 69, and 70 of the Companies Act, 2013 read with Rule 17 of the Companies (Share Capital and Debentures) Amendment Rules, 2016 regulates the procedure of Buyback of shares by an Unlisted company.

Mandatory Requirements:

1. Buy-back shall be authorized by the articles of the Company [Section 68(2)(a)]
2. Obtaining Shareholder’s/members’ approval by passing a special resolution in the general meeting authorizing buy-back except in the following cases: [Section 68(2)(b)]
   • Buy-back is 10% or less of the company’s total paid-up equity capital and free reserves and
   • Such Buy-back shall be authorized by the Board through a board resolution passed in its meeting
3. Buy-back is 25%* or less of the aggregate of paid-up capital and free reserves of the company [Section 68(2)(c)]
4. Post-buy-back Debt–Equity Ratio is not more than 2:1 [Section 68(2)(d)]
5. All shares or other specified securities for buy-back are fully paid up [Section 68(2)(e)]
6. Time-lapse amidst two buy-back offers should be one year [Section 68(2)(g)]
7. Every buy-back must be completed within a period of one year from the date of passing of the special resolution, or Board resolution as the case may be [Section 68(4)]

* Note: The reference to twenty-five percent in Section 68(2)(c) above shall be construed with respect to the company’s total paid-up equity capital in that financial year in which the Buy-back is undertaken by the Company.

Procedure:

1. Authorization by the Articles [Section 68(2)]:
   The first step is to ensure that the articles of the company authenticate the buy-back of share capital and in the absence of relevant provisions to this effect, the articles are to be modified in accordance with the provisions of the Companies Act, 2013 including such authorization.
   [ Refer to the Procedure for Alteration of Articles of Association (AoA) for further details 
2. Convene a Meeting of the Board of Directors [Section 173, Section 68(2)(b)(ii) and SS-1]:
   In case of buy-back being 10% or less of the company’s total paid-up equity capital and free reserves, the proposal for buy-back of share capital can be authorized by the Board by passing a resolution to this effect in its meeting.
   [Refer to the Procedure for Conducting Board Meeting for further details]
3. Convene General Meeting [Section 96, 100, 68(2)(b) & 68(3), Rule 17(1) and SS-2]
   In case of buy-back being more than 10% of the company’s total paid-up equity capital and free reserves, the proposal for buy-back of share capital shall also be authorized by a special resolution passed in a duly convened General Meeting.
   [Refer to the Procedure for Conducting Extraordinary General Meeting (EGM) for further details.]
4. File Form MGT-14 with ROC:
   The Company shall file a copy of the Board Resolution and Special Resolution passed in its duly convened Board meeting and General meeting in Form MGT-14, within 30 days of passing such resolution along with the requisite documents and fees, with the Registrar of Companies (ROC).
5. File Declaration of Solvency [Section 68(6) and Rule 17(3)]:
   The company before making any buy-back as per the stipulated provisions shall file a declaration of solvency in Form SH.9 along with the letter of offer in Form SH-8 ensuring the following:
   • Such Declaration and Letter of Offer to be signed by a minimum of two directors, one of whom shall be the managing director if any,
   • Such declaration to be verified by an affidavit to the effect that the Board of Directors has made a full inquiry into the company’s affairs concluding that the company is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of the declaration adopted by the Board
   • Such declaration to be filed with the Registrar along with the prescribed fees and the following documents:
     • Statement of assets and liabilities
     • Auditor’s report
     • Affidavit as per rule 17(3) of the Companies (Share Capital and Debenture) Rules
     • Optional attachment(s), if any
6. File Letter of Offer [Rule 17(2)]:
   The company shall file a letter of offer in Form SH-8 along with the stipulated fees and the following documents:
   • Mandatory Documents:
     • Declaration by the auditor(s)
     • Certified true copy of board resolution authorizing buyback
   • dcuments on the basis of applicability as mentioned in the e-Form:
     • Buyback details of the last 03 years are mandatory in case the company has done any buyback in the last 03 years
     • Management discussion and analysis are mandatory in the case of the listed company
     • List of holding and subsidiary companies of the company if applicable
     • Unaudited financial statements if applicable
     • Statutory approvals received (if any)
     • Details of the auditor, legal advisors, bankers, and trustees (if any)
     • Any other information as an optional attachment(s) if deemed necessary
7. Dispatch of Letter of Offer to the Shareholders [Rule 17(4)]:
   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 20 days from the date of its filing with the Registrar of Companies.
8. Offer Period [Rule 17(5)]:
   The buy-back offer shall remain open for a period of at least 15 days and not more than 30 days from the date of dispatch of the letter of offer to the Shareholders. In case all the members of a company agree, the buy-back offer may remain open for a period of less than 15 days.
9. Verification of the Offers [Rule 17(7)]:
   • The company shall complete the verification of the offers so received within 15 days from the offer closure date.
   • The shares or other securities so lodged shall be regarded as accepted unless a communication of rejection is made within 21 days from the offer closure date.
10. Transfer Certain Sums to Capital Redemption Reserve Account [Section 69(1) and Rule 17(8) of the Companies (Share Capital and Debenture) Rules, 2014:
    • The company in case acquires its own shares out of free reserves or securities premium account, shall transfer to Capital Redemption Reserve Account immediately after the offer closure date, a sum equal to the nominal value of shares so purchased, details of which shall be disclosed in the balance sheet. [Section 69(1)]
    • The company shall open a separate bank account and deposit therein, such sum, as would make up the entire sum due and payable as consideration for the shares tendered for buy-back in terms of the Companies (Share Capital and Debenture) Rules, 2014, immediately after the closure date of the offer. [Rule 17(8)]
11. Extinguishment of Shares/Securities [Section 68(7)]:
    The company buying back its own shares or other specified securities, shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
12. Closure of the Offer [Section 68 and Rule 17]:
    • The company shall accept the shares per shareholder on a proportionate basis out of the total shares being offered for buy-back, where the number of shares or other specified securities so offered by the shareholders or security holders is more than the total number of shares to be bought back by the company. [Rule 17(6)]
    • Company shall within 07 days of the time specified in rule 17 (7) [Rule 17(9)]
      • Disburse the consideration in cash to those shareholders or security holders whose securities have been accepted
      • Return the share certificates to shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance
    • Every buy-back shall be concluded within a period of one year from the date of passing of the special resolution [Section 68(4)
13. File Form SH.11 [Section 68(10) & Rule 17 (13) of the Companies (Share Capital and Debenture) Rules, 2014]:
    • The company shall file a return in  Form No. SH. 11 within 30 days of the completion of buy-back with the Registrar along with stipulated fee and the following documents:
      • Description of shares or other specified securities bought back
      • Particulars relating to holders of securities before buy-back
      • Certified true copy of the special resolution passed at the general meeting
      • Certified true copy of board resolution authorizing buyback
      • Balance Sheet of the company
      • Compliance certificate for the buy-back rules as per the sub-rule (14) of Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014
      • Optional attachment(s) if any.
14. Maintain Register of Shares or Securities Bought Back [Section 68(9) and Rule 17(12) of the Companies (Share Capital and Debenture) Rules, 2014]:
    • Company shall maintain a register of shares/other specified securities in Form No. SH. 10 comprising of details like shares/securities so bought, consideration paid, cancellation date of shares/securities, date of extinguishing/physically destroying the shares/securities, and such other particulars [Section 68(9) & Rule 17(12)(a)]
    • Such Register of shares or securities bought-back shall be maintained at the company’s registered office in the custody of the Company Secretary or any other person authorized by the board on this behalf [Rule 17(12)(b)]
    • Entries in such register shall be authenticated by the Company Secretary or any other person authorized by the Board on this behalf [Rule 17(12)(c)]
15. Other Obligations & Restrictions [Section 68(8) and Rule 17(10) of the Companies (Share Capital and Debenture) Rules, 2014]:
    • The company shall abstain from making a further issue of the same kind of shares or other securities including allotment of new shares under section 62 (1)(a) of the Act or other specified securities within a period of six months except by the following modes:
      • bonus issue or
      • discharging subsisting obligations such as the conversion of warrants, stock option schemes, sweat equity, or conversion of preference shares or debentures into equity shares e. Obligations of the Company
    • The company shall abstain from issuing any new shares including by way of bonus shares from the date of passing of special resolution authorizing the buy-back till the closure date of the offer under these rules, except those arising out of any outstanding convertible instruments
    • The company shall ensure the following:
      • letter of offer comprises true, factual, and material information and abstains from including any misleading information, stating that their directors accept the responsibility for the information contained in such document
      • confirm in its offer about the opening of a separate bank account aptly funded for this purpose and also the consideration shall be paid only by way of cash
      • abstain from withdrawing the offer once it has been announced to the shareholders
      • abstain from utilizing any money borrowed from banks or financial institutions for the purpose of buying back its shares and
      • abstain from utilizing the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities for the buy-back.

Note: The Ministry of Corporate Affairs had notified Companies (Share Capital and Debentures) Amendment Rules, 2023 (dated: 20th January, 2023) by which:

1. in Form SH-9 now attachment of Copy of Board Resolution & special resolution is not required.
2. in Form SH-8 Company has to mention Default in repayment of deposits, interest on deposits, debentures, preference shares, term loans to financial institutions or bank, interest of term loans and payment of dividend to shareholders, any default in complying with the provisions of the sections 92, 123, 127, 129. Particulars of directors and key managerial personnel deleted and Attachments:
   • Details of the promoters of the company
   • Copy of the notice issued under section 68(3) along with the explanatory Statement thereto
   • Audited financial statements of last three years are not required to be attached.
3. In Form SH-11 declaration of compliance with buy-back provisions in form SH-15 is now included in SH-11 and not required to be attached separately.