Background

Under Section 68(1), a company is empowered to purchase its own shares or other specified securities (buy-back), notwithstanding anything contained in the Act, subject to compliance with Section 68(2) and related rules.

Buy-back may be undertaken out of:

• • free reserves;
  • securities premium account; or
  • proceeds of the issue of shares or other specified securities (Section 68(1)(a)–(c)).

Proviso to Section 68(1): Buy-back shall not be made out of the proceeds of an earlier issue of the same kind of shares or securities.

Compliance Requirements under the Act in Accordance with Rule 17(3) of the Companies (Share Capital and Debentures) Rules, 2014

• Preconditions for Buy-back

A company shall not undertake buy-back unless the following conditions under Section 68(2) are satisfied:

1. 1. Authorization in Articles: The buy-back must be authorized by the Articles of Association (Section 68(2) (a)).
   2. Approval of Shareholders / Board: Buy-back must be approved by a special resolution at a general meeting (Section 68(2) (b)).

Proviso: Where the buy-back is 10% or less of the total paid-up equity capital and free reserves, approval by the Board resolution is sufficient.

1. 3. Quantum Limits: Buy-back shall not exceed 25% of the aggregate of paid-up capital and free reserves (Section 68(2) (c)).

Proviso:
In case of equity shares, the 25% limit shall be with reference to paid-up equity capital in that financial year.

1. 4. Debt–Equity Ratio Post buy-back, the ratio of aggregate secured and unsecured debts shall not exceed twice the paid-up capital and its free reserves (Section 68(2) (d)).

Exception:
The Central Government has notified debt to capital and free reserves ratio as  6:1 ratio for Government companies engaged in NBFC and Housing Finance activities (MCA Order S.O. 702(E), 10.03.2016).

1. 5. Fully Paid-up Securities

Only fully paid-up shares or specified securities may be bought back (Section 68(2)(e)).

1. 6. Regulatory Compliance
      • Listed securities: compliance with SEBI regulations (Section 68(2) (f))
      • Unlisted securities: compliance with prescribed rules (Section 68(2) (g)).

• Cooling-off Period

No fresh buy-back offer shall be made within one year from the closure of the preceding buy-back (Proviso to Section 68(2)).

• Disclosures and Procedural Requirements

1. 1. Explanatory Statement

The notice for the special resolution shall include detailed disclosures as specified under Section 68(3) and Rule 17(1), including objectives, class and number of securities, buy-back price, funding sources, promoters’ shareholding, auditor’s report, and solvency confirmations.

1. 2. Time-limit for Completion

Buy-back shall be completed within one year from the date of passing of the special resolution or Board resolution (Section 68(4)).

1. 3. Modes of Buy- back

Buy-back may be undertaken:

• • • from existing shareholders on proportionate basis;
    • from open market; or
    • from employees under ESOP or sweat equity schemes (Section 68(5)).

1. 4. Offer Letter

The company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a letter of offer in Form No. SH.8, along with the fee which shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director, where there is one. (Rule 17(2))

• Declaration of Solvency

Prior to buy-back, a declaration of solvency shall be filed with the Registrar (and SEBI, in case of listed companies) in Form SH-9, signed by at least two directors, including the managing director, if any (Section 68(6), Rule 17(3)).

• Post Buy-back Compliances

1. 1. Extinguishment of Securities

Bought-back securities shall be extinguished and physically destroyed within seven days of completion (Section 68(7)).

1. 2. Restriction on Further Issue

No further issue of the same kind of securities shall be made within six months, except for bonus issues or conversion of existing obligations (Section 68(8)).

1. 3. Maintenance of Register

A register of bought-back securities shall be maintained in Form SH-10 (Section 68(9), Rule 17(12)).

1. 4. Return of Buy-back

A return in Form SH-11 shall be filed with the Registrar (and SEBI, where applicable) within 30 days of completion of the buy-back (Section 68(10), Rule 17(13)–(14))

There shall be a declaration with the return filed with the Registrar in Form No. SH.11, signed by two directors of the company including the managing director, if any, certifying that the buy-back of securities has been made in compliance with the provisions of the Act and the rules made thereunder.

Penalty & Punishment

Any default in compliance with Section 68 or SEBI regulations shall attract:

• • fine on the company ranging from ₹1 lakh to ₹3 lakh; and
  • fine and/or imprisonment up to three years for officers in default (Section 68(11)).