(b)Buy-back of shares
Meaning
Buy-back of shares refers to a company repurchasing its own shares from existing shareholders, thereby reducing the outstanding share capital. It is governed by Sections 68–70 of the Companies Act, 2013.
Sources of Funds (Section 68(1))
- Free reserves
- Securities premium account
- Proceeds of the issue of any shares or specified securities (but not from proceeds of an earlier buy-back)
Conditions (Section 68(2))
| Condition | Details |
|---|---|
| Maximum limit | 25% of aggregate paid-up capital and free reserves (by special resolution); 10% in a financial year by board resolution |
| Debt-equity ratio | Post buy-back, ratio of secured and unsecured debt must not exceed 2:1 |
| Fully paid-up shares | All shares bought must be fully paid-up |
| Cooling-off period | No buy-back within 1 year of the date of closure of previous buy-back |
| Completion | Buy-back must be completed within 1 year from the date of the special resolution |
Procedure
- Board or shareholders pass a resolution.
- Declaration of solvency filed with RoC within 30 days.
- Public announcement within 2 working days.
- Shares bought are extinguished and physically destroyed within 7 days.
Post Buy-back — Capital Redemption Reserve (Section 69)
A sum equal to the nominal value of shares bought back must be transferred to the Capital Redemption Reserve Account out of free reserves or securities premium.
Prohibition (Section 70)
No buy-back is permitted if the company has defaulted in repayment of deposits, debentures, or dividend, or has not complied with Sections 92, 123, 127, or 129.
Purposes of Buy-back
- Return surplus cash to shareholders.
- Improve earnings per share (EPS) and shareholder value.
- Prevent hostile takeover by reducing floating shares.
- Support the share price in depressed markets.