Upon the introduction of the dividend distribution tax, companies in India have started utilizing the process of buyback of shares for the purposes of distribution of profits amongst its shareholders. Buyback is a corporate action in which a company buys back its shares or other specified securities[1] from the existing shareholders usually at a price higher than the market price. When a listed company (“Company”) buys back its shares, the number of shares outstanding in the market reduces. Buyback of shares also becomes the preferred route for listed companies with higher promoter shareholding. A Company may buyback its shares for various reasons including but not limited to improving its earnings per share; improving its return on net worth and to enhance the long-term shareholder value; enhancing consolidation of stake in the Company; for preventing unwelcome takeover bids etc. Buybacks can be carried out in the following ways:
a. Shareholders may be presented with a tender offer[2] whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them; or
b. Companies may buy back shares on the open market through book building process or stock exchanges over an extended period of time; or
c. From odd lot[3] holders.
1. The following laws/rules/regulations are applicable in to the process of buyback of a Company’s shares:
a. Section 68 (power of the Company to purchase its securities), Section 69 (transfer of certain sums to capital redemption reserve (CRR) account), Section 70 (prohibition for buyback in certain circumstances) and all other applicable provisions if any, of the Companies Act, 2013 (“Companies Act”);
b. Rule 17 (13) of the Companies (Share Capital and Debentures) Rules, 2014, which requires a Company to file form SH-11 with the Registrar of Companies (“RoC”) and Securities and Exchange Board of India (“SEBI”);
c. SEBI (Buy Back of Securities Regulations), 2018 (as amended from time to time) (“Buyback Regulations”); and
d. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2018 (as amended from time to time) (“Listing Regulations”).
2. Companies Act restrictions on buyback
2.1. As per Section 70 of the Companies Act, no Company shall directly or indirectly purchase its own shares:
a. through subsidiary companies; or
b. through an investment company or group of investment companies; or
c. if the Company has not complied with provisions of Section 92 (annual return), Section 123 (declaration of dividend), Section 127 (punishment for failure to distribute dividends) or Section 129 (financial statement); or
d. if a default made by the Company in repayment of deposits accepted, interest payment thereon, redemption of preference shares or debentures, payment of dividend to any shareholder, repayment of any term loan or interest payable thereon to a financial institution or banking company. However, if the default is remedied and 3 (three) years have elapsed after such default ceased to subsist, a Company may buyback its shares under the Companies Act.
3. Conditions of buyback
These conditions apply to all buybacks of listed companies. A Company cannot buyback its shares or specified securities unless the buyback is authorised by its articles of association. Furthermore, Regulation 4 of the Buyback Regulations sets out the following are the conditions and requirements of the buyback of shares and specified securities by a Company:
3.1. The maximum limit of any buyback has to be 25% (twenty-five per cent) or less of the aggregate of paid-up capital and free reserves of the Company for the financial year in which the buyback is being proposed (based on both standalone and consolidated financial statements of the Company). In case of buyback of equity shares, the maximum limit is 25% (twenty-five per cent) or less of the aggregate paid-up equity capital and free reserves of Company.
3.2. Debt to capital and free reserves ratio:
a. The ratio of the aggregate of secured and unsecured debts owed by the Company to the paid-up capital and free reserve after buyback must be less than or equal 2:1[4] (based on both standalone and consolidated financial statements of the Company) or
b. In case Company has subsidiary which is a non-banking financial company or housing finance company regulated by Reserve Bank of India or National Housing Bank, this ratio should be less than or equal to 2:1 (based on both standalone and consolidated financial statements of the Company), after excluding financial statements of all subsidiaries that are non-banking financial companies and housing finance companies regulated by Reserve Bank of India or National Housing Bank, as the case may be. Provided that such excluded subsidiaries should have their ratio of aggregate of secured and unsecured debts to the paid-up capital and free reserves of not more than 6:1 on standalone basis.
3.3. All shares or other specified securities for buyback have to be fully paid- up.
3.4. Who can participate in buyback?
A Company may buyback its shares or other specified securities from:
a. the existing shareholders or other specified securities holders on a proportionate basis through the tender offer; or
b. from the open market through book-building process or stock exchanges;
c. or from odd-lot holders.
It is noteworthy that no buyback exceeding 15% (fifteen per cent) or more of the paid up capital and free reserves of the Company (based on both standalone and consolidated financial statements of Company) can be made from the open market.
3.5. A Company cannot buyback its shares or other specified securities so as to delist its shares or other specified securities from the stock exchange.
3.6. A Company cannot buyback its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions[5] or through any private arrangement.
3.7. A Company cannot make any offer of buyback within a period of 1 (one) year reckoned from the date of expiry of buyback period of the preceding offer of buyback, if any.
3.8. A Company cannot allow buyback of its shares unless the consequent reduction of its share capital is effected.
3.9. A Company may undertake a buyback of its own shares or other specified securities out of its free reserves, the securities premium account or the proceeds of the issue of any shares or other specified securities. No such buyback can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
4. Procedure for buyback by tender offer and odd lot
A Company intending to buyback its shares or specified securities through tender offer process and odd lot process[6] is required to follow the below process as per the Buyback Regulations:
4.1. Board resolution or EGM special resolution: The Company must pass a resolution of the board of directors or special resolution at general meeting of shareholders as the case may be.[7] Company may buyback its shares or specified securities without shareholders’ resolution, to the extent of 10% (ten per cent) of its paid-up equity capital and free reserves, based on both standalone and consolidated financial statements of the Company, provided a board resolution has authorised such buyback. However, if the Company intends to buyback its shares to the extent of more than 10% of its paid up capital and free reserves then the same has to be approved by shareholders by way of special resolution in term of the provisions of Companies Act.
4.2. The Company is required to make a public announcement within 2 (two) working days from the date of passing shareholders’ resolution/ board resolution in at least one English national daily, one Hindi national daily and one regional language daily, all with wide circulation at the place where the registered office of the Company is situated and the said public announcement must contain all the material information as specified in Schedule II of Buyback Regulations.[8]
4.3. A copy of the public announcement is required to be submitted to the SEBI, simultaneously, through a merchant banker.[9]
4.4. The Company must within 5 (five) working days of the public announcement file the following with SEBI:
a. a draft letter of offer along with a soft copy, containing disclosures as specified in Schedule III of Buyback Regulations through a merchant banker not associated with the Company;
b. a declaration of solvency signed by at least two directors of the Company, one of whom shall be the managing director, if any, in Form No. SH. 9 and verified by an affidavit to the effect that the board of directors of the Company has made a full inquiry 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 of one year from the date of declaration adopted by the board; and
c. fees specified in Schedule V of Buyback Regulations.
4.5. SEBI may provide its comments on the draft letter of offer within 7 (seven) working days of the receipt of the draft letter of offer.[10] In the event the SEBI has sought clarifications or additional information from the merchant banker to the buyback offer, the period of issuance of comments can be extended to the 7th (seventh) working day from the date of receipt of satisfactory reply to the clarification or additional information sought. The Company is required to make changes to the letter of offer to the extent of the changes suggested by SEBI before dispatching the same to its shareholders.
4.6. The Company making a buyback offer must announce a record date in the public announcement for the purpose of determining the entitlement and the names of the securityholders, who are eligible to participate in the proposed buyback offer.[11]
4.7. The letter of offer along with the tender form must be dispatched to the securityholders who are eligible to participate in the buyback offer, within 5 (five) working days from the receipt of communication of comments from SEBI.[12] The letter of offer may also be dispatched electronically as per Companies Act. Further, in case of electronic letter of offer, if any shareholders requests for physical copy of letter of offer, Company should provide the same and this should be disclosed in the letter of offer.[13] Even if an eligible public shareholder does not receive the tender offer/offer form, he may participate in the buyback offer and tender shares in the manner as provided by the SEBI. An unregistered shareholder may also tender his shares for buyback by submitting the duly executed transfer deed for transfer of shares in his name, along with offer form and other relevant documents as required for transfer, if any.
4.8. The date of the opening of the offer should be not later than 5 (five) working days from the date of dispatch of the letter of offer[14].
4.9. The offer for buyback should remain open for a period of 10 (ten) working days[15].
4.10. The Company must facilitate tendering of shares by the shareholders and settlement of the same, through the stock exchange mechanism in the manner as provided by the SEBI under Buyback Regulations.[16]
4.11. The Company is required to accept shares or other specified securities from the securities holders on the basis of their entitlement as on record date.[17]
4.12. The shares proposed to be bought back are to be divided into two categories; (a) reserved category for small shareholders [18] and (b) the general category for other shareholders, and the entitlement of a shareholder in each category should be calculated accordingly. For the purpose of calculation, holdings of multiple accounts should be clubber together if sequence of permanent account number is matching and the holdings under folios of physical shareholding should be clubbed together in case the sequence of names of joint holders is matching.[19]
4.13. The Company is required to, as and by way of security for performance of its obligations under the Buyback Regulations, on or before the opening of the offer, deposit in an escrow account a certain security amount. The escrow security amount is to be paid in the following manner:
a. if the consideration payable does not exceed Rs. 100 Crores (Rupees One Hundred Crores); 25% (twenty-five per cent) of the consideration payable; or
b. if the consideration payable exceeds Rs. 100 crores (Rupees One Hundred Crores); 25% (twenty-five per cent) up to Rs. 100 Crores (Rupees One Hundred Crore) and 10% (ten per cent) thereafter.
4.14. The Company must complete the 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 holders within 7 (seven) working days of the closure of the offer.
4.15. On payment of consideration to all the securityholders who have accepted the offer and after completion of all formalities of buyback, the amount, guarantee and securities in the escrow, if any, has to be released to the Company.[20] SEBI may in the interest of the shareholders may in case of non-fulfilment of obligations under the Buyback Regulations by the Company, forfeit the escrow account either in full or in part.[21]
4.16. The Company must extinguish and physically destroy the securities certificates bought back under buyback offer in the presence of a registrar to issue or the merchant banker and the statutory auditor within 15 (fifteen) days of the date of acceptance of the shares or other specified securities. This 15-days period should not extend in any case beyond 7 (seven) days of expiry of buyback period. The Company is required to ensure that all the securities bought-back are extinguished within 7 (seven) days of expiry of buyback period. If the shares or other specified securities offered for buyback are already dematerialised, then the same should be extinguished and destroyed in the manner specified under SEBI (Depositories and Participants) Regulations, 1996, and the bye-laws, the circulars and guidelines framed thereunder. The Company must also furnish the particulars of the securities certificates extinguished and destroyed, to the stock exchanges where the shares of the Company are listed within 7 (seven) days of extinguishment and destruction of the certificates.
4.17. The Company is required to also furnish within 7 (seven) days of extinguishment and destruction of the certificates, a certificate to the SEBI duly certifying the compliance with the Buyback Regulations. Such certificate must be verified by: a) the registrar and whenever there is no registrar, by the merchant banker; b) two directors of the Company, one of whom must be a managing director, where there is one; and c) the statutory auditor of the Company.
4.18. The Company is required to maintain a register of the shares or securities so bought, in form SH -10 in pursuance of section 68(9) of the Companies Act.
5. Procedure for buyback by open market buyback
5.1. The buyback of shares or other specified securities by a Company from the open market can be made either through stock exchange, or through the book-building process.[22] In case of buyback from open market, no draft letter of offer/ letter of offer is required to be filed with SEBI.[23] The Company must ensure that at least 50% (fifty per cent) of the amount earmarked for buyback, as specified in the resolution of the board of directors or the special resolution, as the case may be, is utilized for buying back the shares or other specified securities.[24]
5.2. Open market buyback by book building process:
a. A Company may buyback its shares or other specified securities through the book-building process by passing a shareholders’ resolution or a board resolution, as the case may be.
b. Upon passing the resolution, the Company is required to appoint a merchant banker and make a public announcement having disclosures in accordance with Schedule II of the Buyback Regulations. Such public announcement must be made at least 7 (seven) days prior to the commencement of buyback.[25]
c. A security deposit in the escrow account by the Company must be made before the date of the public announcement. The amount to be deposited in the escrow account by the Company is to be determined with reference to the maximum price as specified in the public announcement.[26]
d. A copy of the public announcement is mandated to be filed with SEBI within 2 (two) days of such announcement along with the fees as specified in Schedule V of the Buyback Regulations.[27] The public announcement must also contain the detailed methodology of the book-building process, the manner of acceptance, the format of acceptance to be sent by the shareholders pursuant to the public announcement and the details of bidding centres.[28]
e. The book-building process is to be made through an electronically linked transparent facility with atleast 30 (thirty) bidding centres, each having at least 1 (one) electronically linked computer terminal at all bidding centres.[29]
f. The offer for buyback must remain open to the securities holders for a period not less than 15 (fifteen) days and not exceeding 30 (thirty) days.[30]
g. The merchant banker and the Company are required to determine the buyback price based on the acceptances received. The final buyback price, which is the highest price accepted is to be paid to all holders whose shares or other specified securities have been accepted for buyback.
h. The process of verification of acceptances, the payment of consideration and extinguishing the security certificates is the same as mentioned above in this note for the tender process buyback.
5.3. Open market buyback by stock exchange process:
The buyback through stock exchange process can be made only on stock exchanges having nationwide trading terminals.[31] The promoters or persons in control of the Company cannot buyback the shares or other specified securities through the stock exchange process.[32] The process for buyback of shares through stock exchanges is as follows:
a. A Company may buyback its shares or other specified securities through the stock exchange process by passing a shareholders’ resolution or a board resolution, as the case may be.
b. Upon passing the resolution, the Company is required to appoint a merchant banker and make a public announcement in accordance with Regulation 7 of the Buyback Regulations.[33] The public announcement must contain disclosures regarding details of the brokers and stock exchanges through which the buyback of shares or other specified securities would be made.[34] Such public announcement must be made at least 2 (two) working days from the date of passing the shareholders’ resolution or a board resolution, as the case may be and shall contain disclosures as specified in Schedule IV of the Buyback Regulations.[35]
c. Simultaneously with the issue of such public announcement, the Company must file a copy of the public announcement with SEBI along with the fees specified in Schedule V of the Buyback Regulations.[36]
d. The buyback offer must open not later than 7 (seven) working days from the date of public announcement and should close within 6 (six) months from the date of opening of the offer.[37]
e. The Company is required to submit the information regarding the shares or other specified securities bought back, to the stock exchange on a daily basis in such form as may be specified by SEBI and the stock exchange is required to upload the same on its official website immediately.[38] The Company must upload the information regarding the shares or other specified securities bought back on its website on a daily basis.[39]
f. The Company must, before opening of the offer, create an escrow account and deposit in the escrow account 25% (twenty five per cent) of the amount earmarked for the buyback as specified in the board resolution or the shareholders’ resolution of the Company, as the case may be.[40] The escrow account may be in the form of either cash deposited with any scheduled commercial bank; or bank guarantee issued in favour of the merchant banker by any scheduled commercial bank.
g. For such part of the escrow account as is in the form of a cash deposit with a scheduled commercial bank, the Company must while opening the account, empower the merchant banker to instruct the bank to make payment of the amounts lying to the credit of the escrow account, to meet the obligations arising out of the buyback.
h. For such part of the escrow account as is in the form of a bank guarantee the same must be in favour of the merchant banker and is to be kept valid for a period of 30 (thirty) days after the expiry of buyback period of the offer or till the completion of all obligations under the Buyback Regulations, whichever is later and shall not be returned by the merchant until the obligations are met.
i. The escrow amount may be released for making payment to the shareholders subject to at least 2.5% (two decimal five per cent) of the amount earmarked for buyback as specified in the resolution of the board of directors or the special resolution, as the case may be, remaining in the escrow account at all points of time.[41]
j. On fulfilling the obligation, the amount and the guarantee remaining in the escrow account, if any, must be released to the Company. In the event of forfeiture of security for non-fulfilment of obligations specified under the Buyback Regulations, the amount forfeited is to be deposited in the Investor Protection and Education Fund of SEBI.[42]
k. The process of verification of acceptances, payment of consideration and extinguishing the security certificates is the same as mentioned above in this note for the tender process buyback except the following:
(i) The verification of acceptance must be done by Company within 15 (fifteen) days of the payout.
(ii) Company must extinguish and physically destroy the security certificates bought back during a month in the month in the presence of a merchant banker and the statutory auditor, on or before the 15th (fifteenth) day of the succeeding month:
(iii) Further, Company must ensure that all the securities bought-back are extinguished within 7 (seven) days of expiry of buyback period.
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Footnotes:
[1] Regulation 2(1)(n) of the Buyback Regulations defines ‘specified securities’ as including employees’ stock option or other securities as may be notified by the Central Government from time to time. [2] Regulation 2(1)(q) of the Buyback Regulations defines ‘tender offer’ as an offer by a company to buyback its own shares or other specified securities through a letter of offer from the holders of the shares or other specified securities of the company. [3] Regulation 2(i)(j) of the Buyback Regulations defines ‘odd lots’ as the lots of shares or other specified securities of a Company, whose shares are listed on a recognised stock exchange, which are smaller than such marketable lots, as may be specified by the stock exchange. [4] If a higher ratio of the debt to capital and free reserves for the Company has been notified under the Companies Act, the same will prevail over this. [5] A spot trade, also known as a spot transaction, is when a trader buys or sells a financial instrument, commodity, or foreign currency on a specific date (the spot date). [6] As per Regulation 12 of Buyback Regulations, the process for odd lot buyback process is same as tender offer buyback process. [7] Section 68(2)(b) of Companies Act read with Regulation 5(b) of Buyback Regulations. [8] Regulation 7(i) of Buyback Regulations. [9] Regulation 7(ii) of Buyback Regulations [10] Regulation 8(iii) of Buyback Regulations. [11] Regulation 9(i) of Buyback Regulations. [12] Regulation 9(ii) of Buyback Regulations. [13] Explanation to Regulation 9(ii) of Buyback Regulations. [14] Regulation 9(v) of Buyback Regulations. [15] Regulation 9(vi) of Buyback Regulations. [16] Regulation 9(vii) of Buyback Regulations. [17] Regulation 9 (viii) of Buyback Regulations. [18] ‘small shareholder’ means a shareholder of a company, who holds shares or other specified securities whose market value, on the basis of closing price of shares or other specified securities, on the recognised stock exchange in which highest trading volume in respect of such securities, as on record date is not more than Rs. 2,00,000 (Rupees two lakh). [19] Explanation to Regulation 9 (ix) of Buyback Regulations [20] Regulation 9(xi)(i) of Buyback Regulations. [21] Regulation 9(xi)(j) of Buyback Regulations. [22] Regulation 14 of Buyback Regulations. [23] Explanation to Regulation 16 of Buyback Regulations. [24] Regulation 15 of Buyback Regulations. [25] Regulation 22 of Buyback Regulations. [26] Regulation 22(iii) of Buyback Regulations [27] Regulation 22(iv) of Buyback Regulations [28] Regulation 22(v) of Buyback Regulations [29] Regulation 22(vi) and 22(vii) of Buyback Regulations [30] Regulation 22(viii) of Buyback Regulations [31] Regulation 16(i) of Buyback Regulations. [32] Regulation 16(ii) of Buyback Regulations. [33] Regulation 16(iv)(a) of Buyback Regulations [34] Regulation 16(iv)(d) of Buyback Regulations [35] Regulation 16(iv)(b) of Buyback Regulations [36] Regulation 16(iv)(c) of Buyback Regulations [37] Regulation 17(ii) of Buyback Regulations [38] Regulation 18(i) of Buyback Regulations [39] Regulation 18(ii) of Buyback Regulations [40] Regulation 20(i) of Buyback Regulations [41] Regulation 20(vi) of Buyback Regulations [42] Regulation 20(ix) of Buyback Regulations