One of the first points of interest is the various modes through which a company can execute a share buyback. These are the various modes described below –
1. Proportionate Basis:
A company can choose to buy back shares from its existing shareholders or security holders on a proportionate basis. This means that the allocation of buyback shares is directly proportional to their current ownership in the company.
2. Open Market:
Alternatively, companies can opt to buy back shares from the open market. This method involves purchasing shares from the open stock market, which provides more flexibility and less direct influence over the shareholders involved.
3. Employee Schemes:
Another avenue for buyback lies in purchasing securities issued to employees through schemes like stock options or sweat equity. This approach aligns with incentivizing and rewarding the company’s workforce.
Sources for Buyback of Shares of Private/Unlisted Company
Equally important is understanding where the funds for share buybacks can be sourced from. Companies have several options, including:
A. Free Reserves:
Utilizing the accumulated free reserves of the company to fund the buyback process.
B. Securities Premium Account:
Tapping into the securities premium account to finance the buyback.
C. Proceeds from Share or Securities Issuance:
Alternatively, companies can use the proceeds generated from the issuance of new shares or securities to facilitate the buyback. However, it’s vital to note that the source of funds for buybacks cannot come from the proceeds of a prior issuance of the same category of shares or securities. This rule ensures the integrity of the buyback process and prevents any misuse of funds.
Essential Conditions for Buyback of Shares of Private/Unlisted Company –
For a successful and compliant buyback, certain conditions must be met:
1. Authorization by Company’s Articles:
The company’s articles of association must specifically authorize share capital buybacks. In cases where the articles lack relevant provisions, they need to be modified in accordance with the provisions of the Companies Act, 2013.
2. Shareholder Approval via Special Resolution:
Except for specific cases, buybacks require shareholder approval through a special resolution passed in a general meeting. However, if the buyback is 10% or less of the company’s total paid-up equity capital and free reserves, board authorization through a board resolution is sufficient.
3. Maximum Limit:
The aggregate value of the shares bought back should not exceed 25% of the paid-up share capital and free reserves of the company.
4. Debt-Equity Ratio Post-Buyback:
Following the buyback, the debt-equity ratio of the company must not exceed 2:1.
5. Fully Paid-Up Shares or Securities:
Only fully paid-up shares or securities can be bought back.
6. Completion Period:
Every buyback process must be completed within one year from the date of passing the special resolution or board resolution, as the case may be.
7. Minimum Gap Between Buyback Offers:
There must be a minimum gap of one year between two successive buyback offers. These conditions ensure that buybacks are conducted with transparency, accountability, and adherence to regulatory norms.
Step-by-Step Process for Buyback of Shares of Private/Unlisted Company
Let’s navigate through the step-by-step process that private or unlisted companies need to follow for a successful buyback:
1. Article Authorization:
Ensure that the company’s articles of association authorize the buyback of share capital. In case of the absence of relevant provisions, modify the articles in line with the provisions of the Companies Act, 2013.
2. Convene a Board Meeting:
If the buyback constitutes 10% or less of the company’s total paid-up equity capital and free reserves, the Board of Directors can authorize the proposal through a resolution passed during a board meeting.
3. Convene a General Meeting:
For any buyback exceeding the 10% threshold, the proposal must be authorized by a special resolution passed in a duly convened General Meeting.
4. File Form MGT-14 with ROC:
Within 30 days of passing the Board Resolution or Special Resolution in the General Meeting, as the case may be, file Form MGT-14 with the Registrar of Companies (ROC). This submission should include requisite documents and fees as specified in the Companies (Registration offices and fees) Rules, 2014.
5. Declaration of Solvency:
Prior to the buyback, file a declaration of solvency in Form SH.9 along with the letter of offer in Form SH-8. This declaration should be signed by a minimum of two directors, with one of them being the managing director, if applicable. The declaration should affirm that the Board of Directors has conducted a thorough assessment of the company’s financial affairs and ascertained its capability to meet its liabilities without rendering the company insolvent within a year from the declaration’s adoption.
6. Dispatch the Letter of Offer:
Once the necessary filings are made, dispatch the letter of offer to shareholders or security holders. This should occur promptly after filing but not later than 20 days from the filing date with the Registrar of Companies.
7. Offer Period:
The offer for the buyback should remain open for a period of not less than 15 days and not exceeding 20 days from the date of dispatch of the letter of offer. However, in cases where all members of the company are in agreement, the offer period may be less than 15 days.
8. Verification of Offer:
The company is required to complete the verification of offers received within 15 days from the closure of the offer. If no communication of rejection is conveyed within 21 days from the closure date, the shares or other securities lodged will be deemed accepted.
9. Open a Separate Bank Account:
Following the closure of the offer, the company must immediately open a separate bank account. This account will hold the necessary funds to cover the entire sum due and payable as consideration for the shares tendered for buyback, as per the stipulated rules.
10. Extinguishment of Shares/Securities:
Within seven days of the last date of completion of the buyback, the company should extinguish and physically destroy the shares or securities that were bought back. This step ensures the removal of such shares or securities from circulation.
11. File Form SH-11:
After the completion of the buyback, the company should file a return in Form No. SH.11 within 30 days of the completion date. This filing should be made with the Registrar, accompanied by stipulated fees and specific documents, including a description of the bought-back shares or securities, particulars relating to holders of securities before the buyback, a certified true copy of the special resolution passed at the general meeting, a certified true copy of the board resolution authorizing the buyback, the company’s balance sheet, and a declaration certifying that the buyback was conducted in compliance with the provisions of the Companies Act and the relevant rules.
12. Maintain the Statutory Register:
The company is also obligated to maintain a register of shares or other securities that have been bought back. This register, Form No. SH.10, should be housed at the company’s registered office and be in the custody of the Company Secretary or another individual authorized by the board for this purpose. The entries in this register should be authenticated by the Company Secretary or the authorized individual.
Over 2 lakh crore! TCS, Wipro and 5 other companies that spent highest on buybacks in past decade –
48 companies spent Rs 48,079 crore on buying back their stocks in 2023, according to data from Prime Database. Like Apple in the US, IT giant TCS in India has spent the most on buying back its shares over the past decade. Most firms that have gone for buybacks are typically from the cash-generating and low capex sectors such as IT, FMCG and pharma. Here’s a look at companies that spent the highest amount on buying back their shares:
Top Spenders –
1. Wipro
Buybacks in past decade: 5
Amount spent: Rs 45,500 crore
2. Infosys
Buybacks in past decade: 4
Amount spent: Rs 39,760 crore.
3. L&T
Buybacks in past decade: 1
Amount spent: Rs 10,000 crore.
4. NMDC
Buybacks in past decade: 3
Amount spent: Rs 9,906 crore.
5. HCL Tech
Buybacks in past decade: 2
Amount spent: Rs 7,500 crore.
6. NHPC
Buybacks in past decade: 3
Amount spent: Rs 5,584 crore.
7. TCS
Buybacks in past decade: 5
Amount spent: Rs 83,000 crore.
