Buy-back of shares refers to the buying of sold shares. In case of buy-back, the company buys the shares back from the shareholders.
A company may buy its shares back from its shareholders for one or more of the following reasons −
● For increasing promoters holding.
● For increasing the earnings per share.
● For rationalizing the capital structure by writing off capital not represented by capital assets.
● For supporting share value.
● For paying surplus pay back not required by business.
The shares of a company can be bought back by the company from the following resources −
● Free reserves
● Securities premium account
● Proceeds of any shares or any specified securities.
The authorization of the buy-back is done by the articles of association of the company. For authorization of buy-back, a special resolution has to be passed at the general meeting.
● The shares involved in the buyback must be free from non-transferability.
● The buy-back must be less than twenty-five percent of the total paid-up capital.
● The ratio of debts taken by the company should not exceed twice the capital and its free reserves.
When a company decides to buy-back its shares, it should publish an announcement notice about the decision in at least one English, one Hindi and one regional language daily newspapers in the place where the registered office of the company is located. The notice of announcement must include a specific date for determining the names of the shareholders to whom the letter of offer is to be sent.
● A public notice containing the disclosures as specified in accordance with the SEBI regulations must be given.
● A draft containing the offer letter shall be filed with SEBI through a merchant banker. This offer letter shall be dispatched to the members of the company.
● A copy of board resolution should authorize the buy-back and should be filed with the SEBI and stock exchanges.
● The opening date of the offer letter should neither be earlier than seven days nor be later than thirty days of the specified date.
● The offer shall remain open for at least fifteen days and thirty days at the most.
● An escrow account should be opened by a company opting for buy-back through public offer or tender offer.
If a company is found to be a defaulter, the company or any of its officers who is found guilty may be punished in accordance with Section 621A of the Companies Act, 1956.
The punishment may include imprisonment of up to two years and/or fine up to fifty thousand rupees.