The below mentioned article provides a study note on the Buy-back of Shares:- 1. Conditions for Buy-back of Shares 2. Restrictions on Buy-back of Shares 3. Contents of Notice of Meeting 4. Time-limit 5. Sources 6. Picking Shares 7. Declaration of Solvency 8. Method of Fixation of Price 9. Deposit in an Escrow Account 10. Important Things After 11. Advantages 12. Entries.
- Conditions for Buy-back of Shares
- Restrictions on Buy-back of Shares
- Contents of Notice of Meeting
- Time-limit for Buy-back of Shares
- Sources for Buy-back of Shares
- Picking Shares for Buy-back
- Declaration of Solvency
- Method of Fixation of Price for Buy-back of Shares
- Deposit in an Escrow Account
- Important Things After Buy-back of Shares
- Advantages of Buy-back of Shares
- Entries for Buy-back of Shares
1. Conditions for Buy-back of Shares:
For a buy-back of shares, the following conditions have to be satisfied:
(a) The buy-back is authorised by the Articles of Association of the company.
(b) A special resolution has been passed in general meeting of the company authorizing the buy-back.
However, as per the Companies (Amendment) Act, 2001 the Board of Directors is now empowered to buy-back up to 10 per cent of the total paid-up capital and free reserves of the company without approval of shareholders in the general meeting.
(c) The buy-back does not exceed 25 per cent of the total paid-up capital and free reserves of the company. Further, the buy-back of equity shares in any financial year cannot exceed 25 per cent of its total paid-up equity capital in that financial year.
(d) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back. However, the Central Government may prescribe a higher ratio of the debt than that specified in this clause for a class or classes of companies.
(e) All the shares are fully paid-up.
(f) The buy-back of the shares listed on any stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India (SEBI) in this behalf. The buy-back of shares which are not listed on any stock exchange has to be in accordance with the guidelines as may be specified.
2. Restrictions on Buy-back of Shares:
A buy-back cannot be made:
(i) Through any subsidiary company including its own subsidiary company; or
(ii) Through any investment company or group of investment companies; or
(iii) If a default by the company is subsisting in repayment of deposit or interest payable thereon, redemption of debentures or preference shares or payment of dividend to any shareholders or repayment of any term loan or interest payable thereon to any financial institution or bank.
3. Contents of Notice of Meeting:
The notice of the meeting at which special resolution is proposed to be passed for buy-back has to be accompanied by an explanatory statement stating:
(i) A full and complete disclosure of all material facts;
(ii) The necessity for the buy-back;
(iii) The class of shares intended to be purchased under the buy-back;
(iv) The amount to be invested under the buy-back; and
(v) The time limit for completion of buy-back.
4. Time-limit for Buy-back of Shares:
In any case, the buy-back has to be completed within twelve months from the date of passing the special resolution.
5. Sources for Buy-back of Shares:
The company may purchase its own shares from out of:
(i) Its free reserves, or
(ii) The securities premium account; or
(iii) The proceeds of any shares or other specified securities like employees’ stock option.
No buy-back of shares can be made out of the proceeds of an earlier issue of the same kind of shares.
6. Picking Shares for Buy-back:
The buy-back may beta) from the existing shareholders on a proportionate basis; or
(a) From the open market; or
(b) From odd lots, that is to say, where the lot of shares of a public company whose shares are listed on a recognised stock exchange is smaller than such marketable lot as may be specified
(c) By the stock exchange; or
(d) By purchasing the shares issued to employees of the company pursuant to a scheme of stock option or sweat equity.
7. Declaration of Solvency:
Before a buy-back, a listed company has to file with the Registrar of companies and the SEBI, a declaration of solvency stating that the Board of Directors has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that the Company is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board.
The declaration has to be signed by at least two directors of the company, one of them being managing director, if any.
8. Method of Fixation of Price for Buy-back of Shares:
The price at which the shares are bought-back may be decided by either of the following methods:
The company may fix a price for buy-back of shares and invite its shareholders to offer within a specified period of time shares at the fixed price for buy-back. In case of oversubscription, all applications are accepted on a pro-rata basis.
Alternatively, the company may announce a range of price called a band and invite its shareholders to submit tenders within the specified period of time offering shares at prices within the announced band The company will choose the lowest offered price at which it is able to repurchase the requisite number of shares.
Different shareholders may have quoted different prices but all the shareholders whose shares are bought-back get the same price.
9. Deposit in an Escrow Account:
The SEBI requires the company going in for a buy-back of shares to deposit in an escrow account a specified percentage of total consideration payable for the buy-back Escrow account means an account in which money is held until a specified duty has been performed; in the present case it means till the consideration for buy-back of shares has been paid to the shareholders.
The escrow account, in case of buy-back, may consist of:
(i) Cash deposited with a scheduled commercial bank,
(ii) Bank guarantee in favour of merchant banker handling the buy-back and
(iii) Deposit of acceptable securities with appropriate margin, with the banker.
10. Important Things After Buy-back of Shares:
After the buy-back, the company is required to extinguish and physically destroy the shares so bought-back within 7 days of the last date of completion of buy- back The company is not allowed to make further issue of the same kind of shares as bought-back within a period of 24 months of the buy-back.
The Companies (Amendment) Act, 2001 has reduced this period of 24 months to 6 months. But the company may issue bonus shares. It may also discharge its subsisting obligations such as conversion of preference shares or debentures into equity shares.
11. Advantages of Buy-back of Shares:
The main advantage of buy-back of shares is that it facilitates capital restructuring of the company. By getting rid of the capital not required by it, the company is able to step-up its earnings per share. The buy-back can also be used by the company to thwart or frustrate the hostile take -over of the company by undesirable persons.
12. Entries for Buy-back of Shares:
(i) If buy-back is made out of the proceeds of a fresh issue, first of all entries for the issue of new shares should be made.
(ii) If the shares are bought-back at their face value, Share Capital Account will be debited and Bank, credited.
(iii) If the shares are bought-back at a price higher than their face value, the amount paid over and above the face value will be debited to General Reserve or Securities Premium Account.
(iv) If shares are bought back at a discount, the amount of the discount will be credited to Capital Reserve.
(v) If the buy-back is made out of free reserves, the nominal value of the shares purchased shall be transferred to Capital Redemption Reserve Account. Free reserves mean those reserves which as per the latest audited balance sheet of the company, are free for distribution as dividend and will include Securities Premium Account.
Zaveri Ltd. resolved to buy back 3,00,000 of its fully paid equity shares of Rs 10 each at Rs 12 per share. For the purpose, it issued 10,000 13% preference shares of Rs 100 each at par, the total sum being payable with applications. The company uses Rs 8,50,000 of its balance in Securities Premium Account apart from its adequate balance in General Reserve Account to fulfill the legal requirements regarding buy-back.
Pass journal entries for all the transactions involved in the buy-back.