Buy Back of Securities - Mehta & Mehta

1. BUY BACK OF SECURITIES
-By Pranav Shah

2. MEANING
• A buyback, also known as a share repurchase, is when a company buys
its own outstanding shares to reduce the number of shares available on
the open market. Companies buy back shares for a number of reasons,
such as to increase the value of remaining shares available by reducing
the supply or to prevent other shareholders from taking a controlling
stake.
• The main aim of share repurchase might be to reduce the number of
shares in circulation in order to improve the share price, or simply to
return to the shareholders resources no longer needed by the company.

3. Reasons for Buy Back:
1. Improve Shareholder Value.
2. Defense Mechanism.
3. Flexibility.
4. Intrinsic Value.
5. Corporate Restructuring
6. Financial Engineering

4. ADVANTAGES
1. Firms enjoy greater share price growth after shares are repurchased.
2. It provide a clear indication to the investors about the strengths of the
company.
3. Buy Back helps the promoters to formulate an effective defensive
strategy against hostile takeover bids. It is sometimes used as part of a
“poison pill” strategy, to discourage a potential acquirer by making the
shares more expensive.
4. Buyback of shares and securities results in lower capital base,
enhances post-buyback earning per share and appreciates considerably
the price-earnings ratio.

5. CRITICISMS
1. It could enable unscrupulous promoters to use company’s money to
raise their personal stakes since buy back is a method of reinforcing
control in the hands of promoters;
2. It opens up possibilities for share price manipulation.
3. It could divert away the company’s funds from productive
investments. The opportunity cost of the funds used in financing the
buy back.

6. LEGAL PROVISIONS
Companies Act, 2013:
• Section 68:Power of Company to purchase its own shares;
• Section 69:Transfer of certain sums to Capital Redemption
Reserves Account;
• Section 70:Prohibition for Buy Back in Certain Circumstances;
SEBI (Buy-back of Securities) Regulations, 2018;
Companies (Share Capital and Debentures Rules), 2014.

7. Section 68:Power of Company to purchase its own shares
 Sources of Buy Back:
• Free reserves;
• Securities premium account;
• Proceeds of the issue of any shares or other specified securities other
than proceeds of an earlier issue of the same kind of shares or same
kind of other specified securities.
 Quantum of Buy Back:
• 10% or less of the total paid-up equity capital and free reserves of the
company on the strength of a Board Resolution
• 25% or less of the aggregate of paid-up capital and free reserves of the
company on the strength of a Special Resolution

8.  Conditions:
• There shall be authority in the articles;
• The ratio of debt to equity shall not be more than 2:1;
• All the shares or other specified securities for buy-back are fully paid-
up;
• There shall be a minimum gap of at least one year between two
successive offers of buy back.
 Avenues of Buy Back:
• From the existing shareholders or security holders on a proportionate
basis;
• From the open market;
• By purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.

9. Buy Back Process:
• Letter of offer is to be filed with ROC before opening of the buy back offer period and the same
needs to be dispatched to the shareholders or security holders within 21 days of the said filing;
• A declaration of solvency to be filed with Registrar and SEBI (in case of listed entities);
• The Buy Back period shall remain open for not less than 15 days and not more than 30 days;
• Verifications of the offers received has to be completed within 15 days from the date of closure
of the buy back offer;
• A separate bank account has to be opened for the purpose of depositing therein the amount of
consideration for the buy back as security for due discharge of payment obligation;
• Payment of consideration or return of security certificate in case of non-acceptance of securities
for buy back is to be made within 7 days of completion of verifications of the offers received.

10. Post Buy Back Compliances:
• Shares or securities bought back shall be extinguished and physically destroyed
within seven days of the last date of completion of buy-back;
• Register of shares and securities bought back is to be maintained and to be kept
at the registered office of the Company;
• A return of buy back is to be with filed with ROC and SEBI (in case of listed
entities) along with an annexure in Form SH-15 certifying that the buy-back is in
compliance with the applicable provisions.
• Company shall not make a further issue of the same kind of shares or other
securities including a rights issue for a period of next 6 months
Exception- A bonus issue or an issue of securities in discharge of subsisting
obligations.

11. Section 69: Transfer of Certain Sums to Capital Redemption
Reserve Account
(1) If the shares are purchased out of free reserves or securities premium
account, a sum equal to the nominal value of the shares purchased has to
be transferred to the Capital Redemption Reserve Account;
(2) The capital redemption reserve account may be utilised by the
company, in paying up unissued shares of the company to be issued to
members of the company as fully paid bonus shares and for no other
purpose or else provisions of reduction of share capital shall apply.

12. Section 70: Prohibition for Buy-Back in Certain Circumstances
Buy Back of shares or other specified securities by a company shall not be
made:
(a) Through any subsidiary company including its own subsidiary
companies;
(b) Through any investment company or group of investment companies;
or
(c) If the Company appears to have made a default repayment of deposits
accepted, interest payable 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:

13. SEBI (Buy Back of Securities)Regulations, 2018
Conditions and requirements for buy-back of shares and specified securities:
The conditions and requirements as per the Regulations are the same as Section 68 of
Companies Act, 2013 except with the following difference:-
• An offer of buy back for fifteen per cent or more of the paid up capital and free
reserves of the company shall not be made from the open market;
• Buy back shall not be made so as to delist shares or other specified securities from
the stock exchange;
• Buy back shall not be made from any person through negotiated deals or through
spot transactions or through any private arrangement.
• A company shall not allow buy-back of its shares unless the consequent reduction of
its share capital is effected.

14. BUY BACK THROUGH TENDER OFFER
A company can make buy back from its existing securities
holders on a proportionate basis subject to the condition that
at least fifteen per cent of the number of securities which the
company proposes to buy-back or number of securities
entitled as per their shareholding, whichever is higher, shall be
reserved for small shareholders.
Tendering of shares by the shareholders and settlement of the
same shall be facilitated through the stock exchange
mechanism.

15. BUY BACK FROM THE OPEN MARKET
 Buy Back from open market may be either
1. through the stock exchange
2. Book Building process
 Buy-back shall be made only on stock exchanges having nationwide trading terminals;
 Promoters or persons in control of the company shall not participate in the buy back;
 Buy back shall be made only through the order matching mechanism except ‘all or none’
order matching system;
 Buy Back offer shall be opened within 7 days from PA and shall remain open for 6 months;

16. GENERAL OBLIGATIONS OF THE COMPANY
 No issuance of shares or other specified securities during buy back period;
 Consideration only in cash;
 After filing of draft letter of offer with the Board, the buy back offer shall not be withdrawn;
 Promoters or his/their associates shall not deal in the shares or other specified securities of
the company in the stock exchange or off-market. Also inter- se transfer of shares among
the promoters shall not be done during the entire buy back period.
 Further capital raising shall not be made for the next one year after the expiry of buyback
period except to discharge subsisting obligations.

17. During the pendency of any scheme of amalgamation or compromise or
arrangement, buy back shall not be made;
Particulars of the security certificates extinguished and destroyed to be
furnished to the stock exchanges within 7 days thereof;
Locked-in and non-transferable shares or other specified securities shall
notbe eligible for buy back until pendency of lock-in or non-
transferability;
Public Announcement in a National daily shall be made within two days
of expiry of buy-back period

18. Prominent share buy backs announced in light of Covid-19*
• Sun Pharma
BOD on 17 March 2020approved share buy back of upto INR 1,700 crores
from open market. Promoter stake to increase pursuant to buy back.
• Supreme Petrochem
BOD on 10 March 2020approved share buy back of upto INR 62.67 crores
from open market
• Emami
BOD on 19 March 2020approved share buy back of upto INR 194 crores in
order to distribute cash to shareholders and increase promoter stake

19. • Dalmia Bharat
BOD on 21 March 2020 approved share buy back of upto INR 500
crores to provide support to its share price
• Granules India
Shareholders on March 10 2020 approved share buy back of up to INR
250 crores from all shareholders on proportionate basis
In less than three months, about 17 companies have announced buy
back of shares. Companies such as Sun Pharmaceuticals Ltd, Supreme
Petrochem, Dalmia Bharat Ltd, Emami Ltd and Granules India Ltd have
announced buy back at a 15-72% premium to their prevailing market
price
• Infosys
BOD on 14 April 2021 approved share buy back of upto INR 9200
Crores from open market