Monday, April 18, 2016

Buy Back of Shares by Private or Unlisted Company

The provisions relating to buy-back of securities, under the Companies Act 2013 namely sections 68 to 70, which have been notified, have now repealed the provisions relating Companies Act, 1956.

Points to be noted:
1. A company may buy-back its own shares or other specified securities out of—
             (i) its free reserves; or
             (ii) the securities premium account; or
            (iii) the proceeds of any shares or other specified securities:

It is pertinent to note that no buy-back of any kind of shares or other specified securities can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
2. For a company to be able to buy-back securities the buy-back must be  authorised by its articles;
3. A special resolution must be passed in general meeting of the company authorising such buy-back if the buy-back is more than 10% of paid up capital and free reserves of the Company. In other cases, a Board Resolution is sufficient.
4. The notice of the meeting at which special resolution is proposed to be passed must be accompanied by an explanatory statement stating—
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of security intended to be purchased under the buy- back;
(d) the amount to be invested under the buy-back; and
(e) the time limit for completion of buy-back.
5. Every buy-back must be completed within 1 year from the date of passing the special resolution or the Board Resolution, as the case may be. 
6. No offer of buy-back can be made within a period of 1 year from the date of the preceding offer of buy-back, if any.
7. Buy-back will only be possible if the same equal to or less than 25% of the total paid-up capital and free reserves of the company and buy-back of equity shares in any financial year cannot exceed 25% of its total paid-up equity capital in that financial year;
8. The ratio of the debt owed by the company after the buy-back should not be more than twice the capital and its free reserves:
9. Only fully paid up shares and securities can be the subject of buy-back.
10. The buy-back  may be -
(a) from the existing security holders on a proportionate basis; or
(b) from the open market; or
(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
11. Where a company completes a buy-back of its shares or other specified securities, it cannot not make further issue of same kind of shares or other specified securities with in a period of 6 months from the completion of such buy-back. However, the Company may issue shares by way of Bonus issue or in discharging of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
12. The company is required to 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 such other particulars as may be prescribed.

Other Restrictions on Buy-back of Securities:
A Company should not buyback its securities or other specified securities in case there is a default:
(a)   repayment of deposits or interest payable,
(b)  redemption of debentures,
(c)  redemption  of preference shares,
(d)  repayment of term loans or interest payable to any financial institutions or banks.
It must be noted, however, compounding of the above mentioned defaults or subsequent curing of the default may qualify as an enabling provision for buyback.
A company cannot directly or indirectly buy-back securities:
(a) through any subsidiary company including its own subsidiary companies;
(b) through any investment company or group of investment companies; or
(c) if a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, 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:
(d) in case such company has not complied with the provisions of sections 92, 123, 127 and 129.
It is important to note that shares and securities which are under dispute and have been kept in abeyance or in respect of which transfer or transmission has not been effected, cannot be the subject of buy-back.

Income Tax Act
Section 46A. of the Income Tax Act, 1961 will apply in case of buy-back of securities. As per the said provision  any consideration received by a security holder from any company on buy back shall be chargeable to tax on the difference between the cost of acquisition and the value of consideration received by the security holder as capital gains.

FEMA Regulations:
As per the Foreign Direct Investment (FDI) in India - Issue/Transfer of Shares or Convertible Debentures - Revised pricing guidelines dated 15th July 2014, and bearing no. RBI/2014-15/129  A. P. (DIR Series) Circular No. 4 , the price of shares transferred by way of sale, by non-resident to resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident. i.e. where the shares of an Indian company are not listed on a recognized stock exchange in India, the transfer of shares shall be at a price not less than the fair value worked out as per any internationally accepted pricing methodology for valuation of shares on arm’s length basis which should be duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.
Documentation and other guidelines governing buy-back of securities are provided in RBI/2014-15/6 Master Circular No. 15/2014-15 dated July 01, 2014 (Amended upto February 09, 2015).
Prior approval of transfer of shares from a Non Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met provided that :-
i. The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation, etc.;
ii. The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST, buy-back); and

iii. Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.


Post a Comment