Share capital is an essential part of a company. Share capital can be equity or preferential shares and must be subscribed to by one or more persons. After shares are allotted, shareholders only have rights like voting and dividends - they have no claim to the money paid for shares. A way for shareholders to realize the price of shares is to transfer them to another person. The Companies Act allows companies to buy back shares directly from shareholders in a process called buy back of shares. Prior to 1999, companies could only buy back shares with court approval but amendments now allow less complex buybacks. Companies must meet various conditions for buybacks like having authorization, passing a board or shareholder resolution, maintaining solvency, and completing the buy

2. Share capital is a very essential part of a
company, listed or unlisted. Share capital can be of
two types i.e. equity share capital or preferential
share capital.The share capital of a company has to
be subscribed by one or more persons.After the
share of a company has been allotted to the
subscribing members, the subscribers have no right
over the money gone as proceeds of the shares
subscribed.All that the shareholder has is the right
to vote at the general meetings of the company or
the right to receive dividends or right to such other
benefits which may have been prescribed.The only
option left with the shareholder in order to realise
the price of the share is to transfer the share to
some other person
DHARMENDRA SHARMA

3. But there are certain provisions in the
companies act which allow the shareholders
to sell their shares directly to the company
and such provisions are termed as buy back
of shares. Buy back of shares can be
understood as the process by which a
company buys its share back from its
shareholder or a resort a shareholder can
take in order to sell the share back to the
company.
DHARMENDRA SHARMA

4. Prior to the amendment of the 1999 of the companies act there was no way a
company could buy its shares back from the shareholders without a prior
sanction of the court (except for the preferential shares).The laws as to the
buying of its share by the companies were very stringent. Some of the ways by
which a company could buy its shares back were as follows:-
(i) Reduction of share capital as given in sections 100 to 104.
(ii) Redemption of redeemable preferential shares under section 80.
(iii) Purchase of shares under an order of the court for scheme of arrangement
under section 391 in compliance with the provisions of sections 100 to 104.
(iv) Purchase of shares of minority shareholders under the order of the company
law board under section 402(b).
Though there were ways by which a company could buy its shares back from the
shareholders but it could not be done without the sanction of the court.This was
done to protect the rights of the creditors as well as the shareholders. But the
need of less complex ways of buying its shares back by the company was always
felt.The much needed change in the companies act was brought about by the
companies’ amendment act 1999.Sections 77A, 77AA and 77B were inserted in
the companies act by this amendment.
HISTORY
DHARMENDRA SHARMA

5. REASONS FOR BUYBACK
In the words of the working group which
recommended the introduction of buy back in
the companies act:
“It is an erroneous belief that the sole reason for
buy back is to block hostile take-overs. In this
connection it is pertinent to list five reasons why
the bank of England favoured the making of law
to allow companies to repurchase their shares of
which blocking take-over was only one:
(i) To return surplus cash to shareholders
(ii) To increase the underlying share value
(iii) To support the share prices during temporary
weakness.
(iv) To achieve or maintain a target capital
structure.
(v) To prevent or inhibit unwelcome take-over
bids
DHARMENDRA SHARMA

6. REASONS FOR BUYBACK
 Briefly a company resorting to the buyback may have surplus cash, and it may not
have found the right avenue to invest such surplus cash, during such period of
dilemma the company may decide to return the surplus cash by buying back its
shares, with a hope that at a later time when the company brings on an expansion
the investors do not lose their faith in the company. Secondly the company might
as well think of buying its shares with a view to increase the value of the shares
which after the process of buy back still remain in the market. For after the shares
are bought back the number of marketable shares become less and thus the
prices increase. Thirdly, at times there is a slump in the share market due to no
fault of the company. Though the slouch may be temporary but may have
continued far too long .The management then may decide to give value to the
shareholders and buy back there shares at a price higher than the market price.
This is generally done to instill faith in the minds of the shareholders. Saving a
company from hostile take-over has always been seen as a major force behind
bringing about this amendment, the company may use the surplus cash available
in buying back its shares and bringing the number of floating shares
down, resulting in the suitor not finding it a worthy investment or a profitable
acquisition. These could be certain reasons why a company may resort to buy
back of its shares.
DHARMENDRA SHARMA

7. RESOURCES OF BUY BACK:
DHARMENDRA SHARMA
The companies’ amendment act 1999 under
section 77A prescribes for the sources of
buying back of shares or other specified
securities by a company, which are as follows-:
i) Free reserves- a company may buy back out
of its free reserves but a sum equal to the
nominal value of the shares so purchased must
be deposited in the capital redemption reserves
account.
ii) Securities premium account.
iii) The proceeds of any shares or specified
securities.
No buy back of any shares or securities shall
be made out of the proceeds of an earlier issue
of the same kind of shares of same kind of
securities

8. Conditions for a Buyback
Sub clause (2) of section 77A enshrines the conditions for a buy back, which are as
follows :
a) It should be authorised by the articles of association of the company.
b) A special resolution has been passed at the general meeting of the company
authorising the buy back.
If the buy back is or less than 10 percent of the total paid up equity share capital, a
resolution at the general meeting is not needed to be passed rather a simple board
resolution is enough.
Provided that no offer of buy back shall be made within three sixty five days reckoned
from the date of proceeding offer of buy back.
c) The buy back is or less than 25 percent of the total paid up equity share capital and
free reserves
d) The ratio of debt owned by the company is not more than twice the capital and its free
reserves after such buy back.
e) All the shares or other specified securities for buy back are fully paid up.
f) The buyback of shares or other specified securities listed on any recognised stock
exchange is in accordance with the regulations made by the securities and exchange
board of India in this behalf:
g) The buy back in respect of shares and other specified securities other than those
specified in the aforesaid clause is in accordance with the guidelines specified.

9. DHARMENDRA SHARMA
Notice of the meeting at which a resolution
for buy back is proposed to be passed has to
be accompanied by an explanatory
statement stating
a) A full and complete disclosure of all
material facts
b) The necessity for buy back
c) Class of securities intended to be bought
back under the buy back
d) The amount to be invested under buy
back.

10. DHARMENDRA SHARMA
Buy back of shares or other specified securities can be done
through various sources which have been illustrated under
sub section 5 of section 77A, they are as follows:-
a) From the existing security holders on a proportionate basis
or
b) From the open market, through;
i) Stock market
ii) Book building process
c) From odd lots, that is to say where the lot of securities of a
public company, whose Shares are listed on a recognised
stock exchange, is smaller than such marketable Lot, as may
be specified by the stock exchange; or
d) by purchasing the securities issued to employees of the
company under a scheme Of stock option or sweat equity.

11. DECLARATION OF SOLVENCY
DHARMENDRA SHARMA
:
Where a company has passed a special resolution under
clause b of sub-section (2) or a board resolution has been
passed under some circumstances to buy back its own
shares or other specified securities, under the section, it
shall before making such buy back ,file with the registrar
and the securities and exchange board of India a
declaration of solvency in the form as may be prescribed
and verified by an affidavit to the effect that the board has
made a full enquiry 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 within a period one year of the date of declaration
adopted by the board, and signed by at least two directors
of the company, one of whom shall be the managing
director, if any.

12. REGISTER OF SECURITIES BOUGHT BACK
DHARMENDRA SHARMA
Section 77A (9) prescribes for the manner in which a register
shall be maintained a register of shares so bought back and
enter therein the following particulars:-
i) The consideration paid for the securities bought back.
ii) The date of cancellation of securities
iii) The date of extinguishing and physically destroying of
securities.
iv) Other particulars as may be prescribed.
The shares or the securities so bought back shall be
physically destroyed within seven days from the last date of
completion of such buy back.

13. DHARMENDRA SHARMA
Every buy back shall be completed within twelve
months from the date of passing the special
resolution or the board resolution as the case may
be. After the buy back is completed the company is
not allowed to issue the bought back shares for the
period of six months by any means including further
issue of shares under section 81(1)(a) of the
companies act 1956. It may however issue bonus
shares or discharge its subsisting obligation of
converting preference shares or other specified
securities into equity shares.

14. PROCEDURE FOR BUY BACK
DHARMENDRA SHARMA
a) Where a company proposes to buy back its shares, it shall, after passing of
the special/Board resolution make a public announcement at least one English
National Daily, one Hindi National daily and Regional Language Daily at the
place where the registered office of the company is situated.
b) The public announcement shall specify a date, which shall be "specified
date" for the purpose of determining the names of shareholders to whom the
letter of offer has to be sent.
c) A public notice shall be given containing disclosures as specified in
Schedule I of the SEBI regulations.
d) A draft letter of offer shall be filed with SEBI through a merchant Banker.
The letter of offer shall then be dispatched to the members of the company.
e) A copy of the Board resolution authorising the buy back shall be filed with
the SEBI and stock exchanges.
f) The date of opening of the offer shall not be earlier than seven days or later
than 30 days after the specified date.
g) The buy back offer shall remain open for a period of not less than 15 days
and not more than 30 days.
h) A company opting for buy back through the public offer or tender offer shall
open an escrow Account.

15. PROHIBITION OF BUY BACK IN CERTAIN
CIRCUMSTANCES
DHARMENDRA SHARMA
 Section 77B holds the restrictions on
the companies to buy back its shares.
No company shall buy its own shares or
other specified securities –
 A) through any subsidiary company
including its own subsidiary company.
 B) Through any investment companies
or group of investment companies.

16. PENALTY
DHARMENDRA SHARMA
If a company makes default in complying
with the provisions the company or any
officer of the company who is in default
shall be punishable with imprisonment for
a term which may extend to two years, or
with fine which may extend to fifty
thousand rupees, or with both. The
offences are, of course compoundable
under Section 621A of the Companies
Act, 1956.