In simple terms, Buyback of Equity Shares means taking back equity shares from the holder of it at their will for pre determined consideration. It can be done to increase Earning per Share, defence mechanism against hostile takeover, provide additional exit route to shareholders or to return surplus cash to shareholders. It can be done out of free reserves, securities premium reserves or out of proceeds of fresh issue of other class of shares. It should be authorised by its Article of Association.
A company can buy back a maximum of 25% of Paid up Equity Share Capital in one Financial Year. By passing Board Resolution, it can buy back up to 10% of Paid Up Equity Share Capital and Free Reserves and Securities Premium Reserves. By passing a Special Resolution, it can buy back up to 25% of its paid up share capital and Free Reserves and Securities Premium Reserve. Paid up share capital includes Equity as well as Preference Share Capital. For example, a company has paid up equity share capital of ₹10 lakhs, preference share capital of ₹2 lakhs, free reserves of ₹5 lakhs and securities premium reserve of ₹1 lakhs then by passing board resolution it can buy back shares of face value of maximum ₹1.6 lakhs (10% of 10L+5L+1L) and by passing special resolution maximum of ₹ 4.5 lakhs (25% of 10L+2L+5L+1L) but it can buy back more than ₹2.5L in a financial year. So, even by passing a special resolution it can buy back a maximum of ₹2.5L.
Debt-Equity ratio after buyback should not be more than 2:1. It means if there is 1rs of equity share capital the company can have borrowing of maximum ₹2. For example, If a company has equity share capital after buyback of ₹5 lakhs then it should have borrowings of maximum ₹10 lakhs. Also, shares to be bought back should be fully paid up and buyback should not be made within a period of 1 year from closure of previous buyback. If a company is listed then it has to comply with rules and regulations issued by Securities and Exchange Board of India.
The Buy back can be made from existing shareholders on a proportionate basis, open market or stock exchange on book building method or from odd lot holders i.e, ESOP, sweat equity shares, promoters holdings etc. company can’t adopt multiple methods in a single buy back. After passing resolution, the company needs to file a declaration of solvency with the Registrar of Companies and if listed, with SEBI also. This declaration should be signed by at least two directors one of whom should be managing director if any. Company must destroy the shares bought back within 7 days of completion of buyback. Company can’t make an issue of the same class of shares for six months except bonus issue, conversion of warrant, stock option scheme, sweat equity or conversion of convertible securities.
Company cannot buy back the shares through any subsidiary company or any investment company. Buyback is not allowed if a company has made default in paying interest on deposit, loan or debentures and repayment thereon, dividend on preference/equity shares after declaration, filing accounts and returns with Registrar of Companies and for 3 years after making the repayment and filing.
Company should transfer the face value of shares bought back to Capital Redemption Reserve which can be used to issue fully paid up bonus shares only. The company shall maintain a register of buyback in form No. SH-10. After the completion of buy back, the company shall file with the Registrar of companies and SEBI, if listed a return in Form No. SH-15 within 30 days of completion.
In case of default, company and officers in default shall be punished with fine of ₹1,00,000 to ₹3,00,000.
Also read: Share and Share Capital | Meaning, Types, Issue & Allotment of Securities