Buy Back of Securities

by Harsh Juneja

MeaningBUY-BACK IS A CORPORATE ACTION IN WHICH A COMPANY BUYS BACK ITS SHARES FROM THE EXISTING SHAREHOLDERS USUALLY AT A PRICE HIGHER THAN MARKET PRICE.

Reasons• To increase promoters holding

• Increase EPS

• Maintaining shareholders’ value in a situationof poor state of secondary market by a returnof surplus cash to the shareholders

• Restructuring the debt-equity mix

• To counter a hostile takeover

• To return surplus cash not required bybusiness to shareholders

Economics

Surplus Cash • Excess of

Working Capital

Intrinsic Value > Market

Value

• Best time to buy back when shares are cheaper

Increase in Market Price post buy back

• This increase is due to high demand at the time of buy back

Market Price stabilizes

• Once this arbitrage is covered, the prices of securities settles down at Intrinsic Value

Legal framework

Listed Companies Private Companies / Unlisted Public Companies

SEBI (Buy-Back of Securities)

Regulations, 2018

Section 68, 69 and 70 of the Companies Act, 2013

Rule 17 of the Companies (Share

Capital and Debentures) Rules, 2014

Section 68 - Power of Company to Purchase its Own Securities

Securities Premium Account

Proceeds of the issue of any shares or other specified

securities

Free Reserves

A company may buy-back its own shares or other specified securities out of-

No buy-back of any kind of shares or other specified

securities shall be made out of the proceeds of an

earlier issue of the same kind of shares or same kindof other specified securities.

•Authorization by AOA

•Board Resolution (at board meeting) is required if buy-back is up to 10% of the aggregate of paid up equity capital and freereserves

•Special resolution will be passed if the company wants to buy back more than 10% of the aggregate of the paid up capital (equityand preference) and free reserves

• In the case of buy back of equity shares only, the buy back in any financial year shall not exceed 25% of the paid up equity capital

•Debt-Equity Ratio post buy back ≤ 2:1

•All securities are fully paid up

• For listed companies, in accordance with SEBI Regulations

• For unlisted companies, in accordance with rules

•No offer of buy-back under this sub-section shall be made within a period of 1 year from the date of the closure of the precedingoffer of buy-back, if any.

Conditions

Section 68 - Power of Company to Purchase its Own Securities

Example• 60,000 equity shares of Rs. 100 each

• General Reserve – Rs. 36,00,000

• P&L(Cr) – Rs. 40,00,000

• Security Premium – Rs. 4,00,000

• Secured Loans – Rs. 40,00,000

• Unsecured Loans – Rs. 20,00,000

• Offer Price – Rs. 250

Workings

Conditions Workings Amount

Free Reserves 80 Lacs 80 Lacs

Paid-up Capital 25% 0F 60 Lacs = 15 Lacs15 Lacs/100 = 15000 shares15000 x 250 = 37.5 Lacs

37.5 Lakhs

Debt-Equity Ratio 140 Lacs (–) 50% of 60 Lacs 110 Lacs

Paid up Capital & Free Reserves 25% of 140 Lacs 35 Lacs

Number of shares for buy-back 35 Lacs/250 14000 shares

Buy-back

Securities Premium AccountFree Reserves

Capital Redemption Reserve

Section 69 – Transfer of certain sums to Capital Redemption Reserve

Section 70 - Prohibition for Buy-Back in Certain Circumstances

Pro

hib

itio

n f

or

Bu

y-B

ack

Subsidiary company

Investment company or a group of investment

companies

If a default is made in-

Repayment of Deposits or interest thereon

If the default is remedied and a period of 3 years has

lapsed

Redemption of debentures or preference shares

Payment of dividend to any shareholder

Repayment of any term loan or interest payable to any

financial institution or bank

BOD Resolution/SR File SH-8 (Draft LOD) with SH-9 Dispatch of LOD to shareholders

Open a special bank accountAll shares lodged with the

Company shall be verified within 15 days from closure of the offer

Offer shall be kept open for minimum 15 days and maximum

30 days

Maintain register of shares bought back in SH-10

Extinguish certificates within 7 days from payment

Within 7 days from verification, payment to be made or shares to be given back, as the case may be

File SH-11 and SH-15 after the completion of buy-back

Procedure for Pvt Co./Unlisted Public Co.

SEBI (Buy-Back of Securities)

Regulations, 2018

Tender Offer Open market

Book-building process

Stock Exchange

Odd-lot holders

Tender Offer

Reservation for small shareholders

Number of securities entitled as per their shareholding

15% of the number of securities which the company proposes to buy-

back

Whichever is higher

Small shareholders means shareholders holding shares of a company whose market value as on record date is not more than Rs. 2 Lacs

Date of passing SR/BR

Satisfactory reply

SEBI may seek clarification/ additional information

Submit public announcement to SEBI

Public announcement Indicating record date

File draft LOO and Declaration of Solvency with SEBI

Incorporate SEBI comments/changes

Dispatch LOO and tender form

Opening offer date

Offer closing date

2 working days

Same day

5 working days

7 w

orkin

g days

At the earliest

7 working days

5 working days

5 working days

Min. 10 working days

Extinguish securities

Within 15 days

Extinguish all securities

Complete verification of offers

Return remaining securities

Pay consideration

Particulars of destroyed certificates to stock exchange

Compliance certificate to SEBI

7 w

orkin

g days

7 d

ays

Book Building

BOD Resolution/SR

Open Escrow Account

Date of opening buyback offer

BoD and Merchant Banker shall determine cut-off price

Date of Closing buyback offer

Within 7 working days

Bidding shall take place through minimum 30 electronically linked bidding terminals all over India

Buy-back shall be kept open for Min – 15 Days & Max – 30 Days

P.A. in newspapers

Same cut-off price shall be paid to all successful bidders (SHs) who have bid

at or below the cut-off price

File the copy of PA to SEBI

Within 2 working days

BOD Resolution/SR

Public announcement in newspaper and submit the same to SEBI

Date of opening buyback offer

Extinguish all shares received in BuybackDate of Closing buyback offer

Within 2 working days

Within 7 working days

Extinguish shares within 15 days from receipt

Within 7 working days

Inform SE on daily basis about quantum of shares bought

back

Special note: Promoters cannot sell or tender their shares to the company during

the 6 months buyback period

Buyback shall be completed within 6 months

Stock Exchange

Basis of distinction Tender Offer Open Offer

Promoter Participation ✓ x

Allotment on Pro rata ✓ x

First-cum, first-serve x ✓

Special Bank Account ✓ x

Reservation for Small Shareholders

✓ x

Letter of Offer ✓ x

Tender Period Minimum 10 Working Days 6 months

Spill Over ✓ x

Buy Back Price Fix Fluctuates

Record Dates ✓ x

Tender Offer vs Open Offer

SEBI Informal Guidance in the matter of M/s Infosys Limited

•Regulation 24(i)(b) does not prohibit a company from issuing stock options grant letters during the offer period.

•A company may issue Grant Letters granting ESOPs to eligible employees during the Buyback period in accordance with its Plan

•The minimum vesting period of one year to be computed from the date of issue of grant letters.

The Informal Guidance can be accessed here

Taxation Aspects

Taxation Aspect

Shares

Domestic Company

Taxable u/s 115QA/115QB/115QC

Other than Domestic Company

Section 46A

In the hands of Shareholder

Capital Gain u/s 46A

In the hands of Company

No Impact

Domestic Company

In the hands of Company

20% of value + 12%Surcharge +

4% H&E Cess

In the hands of Shareholders

Exempt under section 10(34A)

Section 115QA/QB/QC

Value

Amount Received by Shareholder

Amount Received by

Company(-)

As an example, suppose XYZ originally issued shares for Rs 10. The shareholder bought the

shares at Rs 400. The company XYZ goes for buy-back of shares at Rs 600. In such case, as per

Section 115QA, tax is payable on Rs 590 (Rs 600 – Rs 10).

Credit -http://www.lawstreetindia.com/experts/column?sid=510

Parameters Reduction of Capital Share buy-back

Restrictions on size No restrictions Restricted upto 25% of paid-up capital and free reserves

Regulatory process/ approvals

SEBI, Lenders, NCLT Board of Directors approval and under section 68 of the Companies Act, the Special Resolution, but subject to limitations of quantum and Compliance with SEBI Regulations

Income tax · Upto to the extent it is treated as deemed dividend – maximum 30% plus surcharge/cess.· Beyond such deemed dividend, taxable as capital gains at the rate of 20% plus surcharges, if long-term in nature and 15%, if short term.

20% plus surcharge/cesspayable by the company