INTRODUCTION
A buy-back or repurchase of shares refers to the process of buying back own shares that were issued earlier by the company. The company does this by making a public announcement of the buy-back proposal to repurchase shares/securities from existing shareholders in a limited timeframe and typically at higher than market prices. Buy-Back can be done by both listed and unlisted companies.
RECENT BUY-BACK OF SHARES BY TATA CONSULTANCY SERVICES (TCS)
TCS, India’s largest IT services and consulting service provider and exporter announced a buy-back offer of 18,000 crore offering shareholders 4500rs per share against the current market price of 3833rs, which is a 17.4% higher buy-back price. The company is here offering a choice to shareholders, they can either tender their shares and get instant benefits or wait for long term benefits in form of dividends and an increase in share price.[1]
PURPOSE
Buy-Back or repurchase of shares is done by the companies mostly for the following reasons[2]
- To utilise the excess cash lying around (unused cash) when there are no good investment prospects.
- To increase the equity value of shares if they are undervalued.
- To look attractive financially.
- It results in higher earnings per share.
- To consolidate the company and strengthen promoters holding.
Buy-Back to be Performed by
The money used by the company for buy-back must be from[3] :
- Free Reserves
- Securities Premium Account
- Money obtained from the issue of any shares or other specified securities but other than that obtained from the earlier issue of the same type of shares.
Manner
Buy-Back of shares may be done in the following ways[4] :
- Buy-Back from existing members/shareholders on a proportional basis.
- Buy-Back from the Public.
- Buy-Back from employees having ESOP or sweat equity shares.
CONDITIONS
Conditions for buy-back or repurchase U/S 68[5] are
- AOA: The buy-back or repurchase must be authorized by the articles, otherwise articles must be altered accordingly.
- Approval: Approval from the board of directors by passing a board resolution for repurchase up to 10% of the wholly paid-up share capital and free reserves available. Approval of members by passing a special resolution(SR) up to 25% of the wholly paid-up share capital and free reserves available.
- The debt to equity ratio post-repurchase cannot be double.
- Only wholly paid-up shares can be bought back or repurchased.
- The buy-back shall be completed within 12 months of the passing of the BR(board) or SR(special) resolutions.
- The company can’t issue the same kind of shares, even the right issue of shares for 6 months after completion of the buy-back except for bonus issues or previous discharge obligations.
- The buy-back offer cannot be withdrawn once it has been notified to the shareholders.
Basis of repurchase or Buy-Back Price: The buy-back price is calculated based on:
- Audited accounts which are less than 6 months old from the date of the offer letter
- Unaudited accounts that are not older than 6 months than the offer document but subjected to limited review by the Auditor.
PROCEDURE[6]
Step 1: Convening meeting of the Board.
Step 2: Sending notice of the general meeting where a special resolution has to be passed along with an explanatory statement stating particulars such as all material facts, necessity, class of shares/securities, amount being invested, the time limit for completion etc. given U/S 68(3) [a to e] of Companies Act, 2013 and rule 17 under
Step 3: Offer Letter: Filing of letter of offer in electronic form with the registrar(ROC) and immediately dispatching the same to shareholders ensuring the particulars as prescribed under sub-rule 10 to 17 of The Companies (Share Capital and Debentures) Rules, 2014. The letter of offer must be kept open for 15 days and a max of 30 days. The period can be reduced below 15 days if all of the members agree.
Step 4: Solvency Declaration (Form SH-9): Along with the letter of offer (Form SH-8), the company must file the declaration of solvency (Form SH-9) signed by two directors.
Step 5: Acceptance: If the no. of shares offered is more than the total which is being repurchased, then the acceptance will be on a proportional basis.
Step 6: Opening of Separate Bank Account: The company has to immediately open a different bank account after the closure of the repurchase offer and deposit the sum which would be enough to pay back the entire due. The sum is the consideration for shares proposed for buy-back.
Step 7: Verification of offers: The company will complete the verification within 15 days from the closure of the offer. The shares will be held to be accepted if no rejection is communicated 21 days after closure.
Step 8: Payment and Return: Within 7 days of verification, the payment must be made for the accepted shares and the share certificates which are not accepted must be returned.
Step 9: Extinguishment: The shares which have been repurchased must be physically destroyed in 7 days of completion. Register of shares must be maintained by the company for shares that have been repurchased in Form SH-10.
RESTRICTIONS
A company shouldn’t buy back shares directly or indirectly from[7]
1) Subsidiaries and own subsidiaries
2)Investment companies and groups of investment companies
A company must not default in interest payment, repayment of deposits, repayment of term loans or redemption of debentures. The company will be prohibited for 3 years. This prohibition will be lifted after the default has been remedied and 3 years have elapsed.
PUNISHMENTS
If the company makes any type of default in following these requirements then the company will be liable for a fine of 1 lakh to 3 lakhs and the officers responsible for the default will be liable for a fine of Rs. 1 Lakh personally which maybe extended to Rs. 3 Lakh and imprisonment of 3 years or both.[8]
CONCLUSION
Buy-Back has both pros and cons, and it can influence the shareholders and people interested in the company both positively and negatively. On a positive note, it sends a signal that the management believes that the share is undervalued and the company doesn’t need cash for future commitments. But it can also send a negative signal to long term investors that the company doesn’t have profitable reinvestment opportunities. The investors have to analyze the buyback reasons and examine the direction company will be going in future.
Author’s Name: Naman Sinha (PLC Law College)
[1] Buyback offer: Should you accept the TCS buyback offer? (Financial Express, 17January 2022) <https://www.financialexpress.com/money/buyback-offer-should-you-accept-the-tcs-buyback-offer/2406939/>
[2] Share Buyback- Methods, Advantages and Disadvantages ( Finance management, 22 march 2021) <https://efinancemanagement.com/dividend-decisions/share-buyback-methods-advantages-and-disadvantages#:~:text=DISADVANTAGES%20OF%20SHARE%20BUYBACK,-Unrealistic%20Picture%20through&text=Share%20buyback%20boosts%20some%20ratios,an%20organic%20growth%20in%20profit>
[3] The Companies Act 2013, 68(1)
[4] The Companies Act 2013, s 68(5)
[5] The Companies Act 2013, s 68(2)
[6] The Companies Act 2013, s 68(6)
[7] The Companies Act, s 70
[8] The Companies Act, s 68(11)
