Procedure for Buy-Back of Shares or Other Specified Securities by Listed Company through Tender Offer

Khushboo Sharma

Khushboo Sharma

Published on: Apr 17, 2024

Pragya Sonkhiya

Updated on: Apr 17, 2024

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Introduction:

Buyback of Shares or other specified Securities procedure is a strategic maneuver employed by companies to repurchase their own outstanding shares from the market. Section 68 of the Companies Act, 2013 empowers the Companies to do so.

Company intends to buy-back its own shares or other specified securities, in pursuit of increasing the value of its shares, increase EPS, to restructure the debt-equity mix, company consolidation, and show its position in the market as financially strong. It is an option for Shareholders to exit from the Company business.

Company can repurchase its own shares or other specified securities out of:

1. Free reserves
2. Securities premium account or
3. 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.

Mode of Buy-Back: 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 through a tender offer
2. From the open market* through:
   • Book-building process
   • Stock Exchange
3. By purchasing the securities issued to its employees in pursuance of Scheme of Stock Option or SWEAT Equity.

Note: Company shall abstain from direct or indirect purchase of its own shares or other specified securities:

1. through any subsidiary company including its own subsidiary companies
2. through any investment company or group of investment companies
3. in case of default in repayment of deposits accepted, interest payment thereon, or 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
4. in case the default is remedied and a period of three years has lapsed after such default ceased to subsist, then the buy-back is not prohibited.

Applicable Provisions:

1. Section 68, 96, 100 and 173 of Companies Act, 2013
2. Rule 17 of Companies (Share Capital and Debentures) Rules, 2014
3. Regulation 4, 5, 6, 7, 8, 9, 10, 11 and 24 of SEBI (Buy-Back of Securities) Regulations, 2018
4. Regulation 29, 46(3) of Listing Obligations and Disclosures Requirements Regulations, 2015
5. Secretarial Standard-1 (SS-1)

Mandatory Requirements:

1. Buy-back shall be authorized by the Articles of the Company.
2. Obtain Members’ approval by passing a special resolution in the general meeting authorizing such buy-back except in the following cases:
   • 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 by passing a board resolution in its meeting.
3. Buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company based on standalone or consolidated financial statements of the company, whichever sets out a lower amount.
4. Post buy-back Debt–Equity Ratio is less than or equal to 2:1 based on standalone or consolidated financial statements of the company, whichever sets out a lower amount or after excluding the financial statements of all subsidiaries being non-banking financial companies and housing finance companies regulated by Reserve Bank of India or National Housing Bank, as the case may be.
5. All shares or other specified securities for buy-back are fully paid up.
6. Time-lapse amidst two buy-back offers should be one year.
7. Every buy-back to 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.
8. Company shall contain a specific disclosure of the consent obtained by it from its lender in case of a breach of any covenant with such lender.
9. Company shall pay the consideration only by way of cash.
10. A company shall abstain from the following:
    • Buying back its shares or other specified securities so as to delist its shares or other specified securities from the stock exchange
    • Buying back its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions, or through any private arrangement
    • Allowing buy-back of its shares unless the consequent reduction of its share capital is affected.
    • insider to be abstained from dealing in the shares or other specified securities of the company on the basis of unpublished price sensitive information with respect to buy-back of such shares or other specified securities of the company.
11. Reserve higher of the two for small shareholders:
    • 15% of the number of securities that the company proposes to buy-back or
    • Number of securities entitled as per their shareholding.
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. Intimation to Stock Exchange:
   The listed entity shall give prior intimation about the meeting of the board of directors where the proposal for buy-back of securities is to be considered at least 02 working days in advance excluding the intimation date and meeting date to the Stock Exchange.
2. Convene a Meeting of the Board of Directors :
   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
   Note: In the absence of any provision in respect of buy-back of share capital in the Articles of Association (AoA), the Company shall make amendments in its AoA and requisite Board resolution shall also be passed to this effect. (Section 68(2) and Regulation 5(i)(a) of the SEBI (Buy-Back of Securities) Regulations, 2018)
   Refer to the Procedure for Alteration of Articles of Association for the detailed procedure.
3. Disclose Outcome of the Board Meeting to the Stock Exchange(s):
   The listed entity shall disclose to the Stock Exchange(s) (where its shares are listed) about the outcome of Board meeting held to consider the issuance of buy-back of securities as per the timeline specified therein from end of the meeting and also, update about the same on its website within 2 working days.
4. Convene General Meeting:
   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 passing a special resolution to this effect in a duly convened General Meeting.
   Refer to the Procedure for Conducting Extraordinary General Meeting (EGM) for further details.
   Note: An explanatory statement is required to be annexed with the notice for the general meeting pursuant to section 102 of the Companies Act which shall contain mandatory disclosures in accordance with the provisions of Regulation 5(iv) of the Buy-Back regulations.
5. File Form MGT-14 with ROC:
   The company shall file a copy of 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).
6. File Resolution Copy with Securities and Exchange Board of India (SEBI) and Stock Exchanges:
   • The company shall within 2 working days of the date of passing the board resolution file a copy of such resolution passed by the Board of Directors at its meeting to buy back the shares or other specified securities under the proviso to section 68(2)(b) of the Companies Act, with the Board and the Stock Exchanges where their shares or other specified securities are listed.
   • The company shall within 7 working days from the date of passing the special resolution, file a copy of such resolution passed at the general meeting under section 68(2) of the Companies Act, with the Board and Stock Exchanges where their shares or other specified securities are listed.
   Note:
   • The special resolution so passed shall specify the maximum price at which the buy-back shall be made.
   • All the filings to the Board shall be made only in electronic mode after being digitally signed by the Company Secretary or the person authorized by the board of the company.
7. File Public Announcement with the Board:
   • The company shall make a public announcement within 2 working days from the date of passing the board resolution or special resolution, as relevant and shall contain disclosures as specified in Schedule II:
     • one English National Daily
     • one Hindi National Daily and
     • one regional language daily
     having wide circulation at the place where company’s Registered Office is located.
   • The company shall along with the fees specified in Schedule V, file a copy of the public announcement in electronic mode with the Board and the stock exchanges on which its shares or other specified securities are listed.
   • A copy of the public announcement shall be placed on the respective websites of the stock exchange(s), merchant banker and the company.
   • The company shall announce a record date in the public announcement for ascertaining the entitlement and names of security holders eligible to participate in the proposed buy-back offer.
8. File Letter of Offer with the Registrar/ Board:
   • The company shall prior to buy-back of shares file with Registrar of Company, a letter of offer dated and signed on behalf of company’s Board of directors by at least 02 directors of company, one of whom shall be Managing Director, in Form No. SH. 8 along with the stipulated fees and the following documents:
     • Details of company’s promoters [Mandatory]
     • Declaration by auditor(s) [Mandatory]
     • Certified true copy of board resolution authorizing buy back [Mandatory]
     • Copy of the notice of general meeting issued under section 68(3) along with the explanatory Statement thereto [Mandatory]
     • Audited financial statements of last three years. [Mandatory]
   • Below attachments are based on applicability of the e-Form:
     • Buy back details of last 03 years is mand
     • Management discussion and analysis is mandatory in case of 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.
   • The company shall within 02 working days from the record date, file the below-stated documents in electronic mode with the Board:
     • letter of offer containing disclosures as specified in Schedule III, through a Merchant Banker who is not an associate of the company
     • certificate by the Merchant Banker who is not an associate of the company, in the form specified by the Board, certifying that the buy-back offer and content of the letter of offer is in compliance with these regulations.
   Note: In case of buy-back through tender offer, no draft letter of offer is required to be filed with the Board.
9. Appointment of Merchant Banker:
   Company shall appoint a merchant banker for the purposes of buy-back of shares or specified securities.
10. Opening Escrow Account:
    
    • The company shall within 2 working days of the public announcement, as and by way of security for performance of its obligations under the regulations, deposit the amount indicated below, in an Escrow account on or before the offer opens:
      • if the consideration payable does not exceed Rupees 100 crores, then 25 per cent of the consideration payable
      • if the consideration payable exceeds Rupees 100 crores, then 25 per cent up to Rupees 100 crores and 10 per cent thereafter.
    • The escrow account referred above shall consist of,
      • cash including bank deposits deposited with any scheduled commercial bank or
      • bank guarantee provided by any scheduled commercial bank, to the merchant banker or
      • deposit of frequently traded and freely transferrable equity shares or other freely transferrable securities or
      • government securities or
      • units of mutual funds invested in gilt funds and overnight schemes or
      • a combination of above.
11. Opening of Offer:
    • The date of the opening of the offer shall be not later than 04 working days from the record date and such offer shall be remain open for a period of 05 working days.
    • Letter of offer along with the tender form shall be dispatched to eligible securities holders.
    • The company shall accept shares or other specified securities from the securities holders on the basis of their entitlement as on record date. And, such shares shall be divided into two categories as under wherein entitlement of a shareholder in each category shall be calculated accordingly:
      • reserved category for small shareholders and
      • general category for other shareholders.
    • Ensuing acceptance of shares or other specified securities tendered on entitlement basis, shares or other specified securities left to be bought back, in one category shall be first accepted, in proportion to the shares or other specified securities tendered over and above their entitlement in the offer by securities holders in that category and thereafter from securities holders who have tendered over and above their entitlement in another category.
12. Closure of the Offer:
    • The company shall promptly ensuing the offer closure date, open a special account with banker to an issue, and deposit therein such sum as would together with 90% of the amount in the escrow account, which may be transferred for this reason, to cover the whole amount owed and payable as consideration for the buy-back.
    • The company shall complete verification of offers received and make payment of consideration to those holders of securities whose offer has been accepted and return the remaining shares or other specified securities to the securities holders within 05 working days of the closure of the offer.
13. Post Buy-back Compliances:
    • The company shall extinguish and physically destroy the share certificates so bought back in the presence of a Merchant Banker and Secretarial Auditor on or before 15th day. of the succeeding month and company shall ensure that all the securities so bought – back are extinguished within 07 days of expiry of buy-back period.
    • The company shall furnish a certificate to the Board within 07 days of extinguishment and destruction of such certificates certifying compliance of the Buy-Back regulations which shall be duly certified and verified by:
      • the Registrar and in case there’s no Registrar by the Merchant Banker
      • 02 directors of the company one being Managing Director and
      • Statutory Auditor of the company.
    • The company shall furnish the particulars of share certificates extinguished and destroyed, to the Stock Exchanges where the company’s shares are listed within 07 days of extinguishment and destruction of the certificates.
    • Where a company buys back its shares or other specified securities under these regulations, it shall maintain a register of the shares or securities so bought, the amount 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 any other additional details as may be prescribed in sub-section (9) of section 68 of the Companies Act.
    • A certificate in Form No. SH. 15 signed by 02 directors of the company including managing director, certifying that buy-back of securities has been made in compliance with the provisions of the Act and the rules made thereunder.
    • The company, after the completion of the buy-back under these rules, shall file with the Registrar, and in case of a listed company with the Registrar and the Securities and Exchange Board of India, a return in the Form No. SH.11 along with the fee.
    • The company shall within 02 days of expiry of buy-back period make a public advertisement in a national daily inter alia, stating:
      • number of shares or other specified securities acquired
      • price at which shares or other specified securities acquired
      • total amount invested in buy-back
      • details of securities holders from whom shares or other specified securities exceeding 1% of total shares or other specified securities were acquired and
      • consequent changes in the capital structure and shareholding pattern after and before buy-back.