{"id":50871,"date":"2022-11-21T14:55:15","date_gmt":"2022-11-21T09:25:15","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=50871"},"modified":"2022-11-21T14:55:17","modified_gmt":"2022-11-21T09:25:17","slug":"buyback-of-shares-meaning-and-legal-implications","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/","title":{"rendered":"Buyback of Shares: Meaning and Legal Implications"},"content":{"rendered":"\n<p>Buyback of shares refers to a process of share acquisition from the shareholders for an amount greater than the market price. This process reduces the shares available in the market, thereby ensuring high <strong><em>earnings per share<\/em><\/strong> for the company. It is an option accessible to <a href=\"https:\/\/corpbiz.io\/shareholders-agreement\"><strong>shareholders<\/strong><\/a> to depart from the company business. The concept of Buyback of shares is mentioned in section 68 of the <strong>Companies Act, 2013<\/strong><sup><a href=\"https:\/\/www.mca.gov.in\/content\/mca\/global\/en\/acts-rules\/companies-act\/companies-act-2013.html\"><strong>[1]<\/strong><\/a><\/sup>.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/#Reasons_why_Buyback_of_shares_makes_sense_to_the_business\" >Reasons why Buyback of shares makes sense\nto the business<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/#Methods_for_performing_Buyback_of_Shares\" >Methods for performing Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/#Sources_relating_to_Buyback_of_Shares\" >Sources relating to Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/#Legal_implications_around_Buyback_of_Shares\" >Legal implications around Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/#Other_norms_around_the_Buyback_of_shares\" >Other norms around the Buyback of shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/#What_is_the_role_Capital_Redemption_Reserve_Account_in_Buy_back_of_shares\" >What is the role Capital Redemption Reserve\nAccount in Buy back of shares?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/#Conditions_that_deter_companies_from_performing_buyback_activity\" >Conditions that deter companies from\nperforming buyback activity<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-meaning-and-legal-implications\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Reasons_why_Buyback_of_shares_makes_sense_to_the_business\"><\/span><strong>Reasons why Buyback of shares makes sense\nto the business<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>It amplifies the earnings per share;<\/li><li>It prevents shareholders from being discouraged owing\nto the price fall<\/li><li>It can amplify the shareholding of the promoters,\nthereby mitigating the chance of the takeover<\/li><li>It can elevate the return on capital and net worth <\/li><li>It ensures the availability of surplus cash to the\nshareholder <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Methods_for_performing_Buyback_of_Shares\"><\/span><strong>Methods for performing Buyback of Shares<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A Company can conduct\na buyback of shares and other securities from:<\/p>\n\n\n\n<ul><li>The active shareholders on a proportionate basis via\nthe tender offer <\/li><li>The open market via Stock Exchange or Book-building\nprocess, as long as no buyback for 15% or more of the paid-up capital and company&#8217;s\nreserve can be made via an open market. <\/li><li>From odd-lot holders.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Sources_relating_to_Buyback_of_Shares\"><\/span><strong>Sources relating to Buyback of Shares <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A Company can\nacquire its shares and other securities via<\/p>\n\n\n\n<ul><li>It&#8217;s free to reserve; or<\/li><li>Securities premium account; or<\/li><li>The issue proceeds concerning any share or other securities.<\/li><\/ul>\n\n\n\n<p>However, the\nBuy-back of any type of shares or securities cannot be possible via proceeds of\nthe erstwhile issue of the same shares or securities. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Legal_implications_around_Buyback_of_Shares\"><\/span><strong>Legal implications around Buyback of Shares<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Section 68 of the Companies Act 2013<\/strong>\npens down the following conditions around the Buyback of shares: <\/p>\n\n\n\n<ul><li>The article must authenticate buyback conditions; if\nnot, it must undergo an amendment via a special resolution passed in a General\nMeeting, <\/li><li>Buyback cannot be possible without being approved in\nthe general meeting via special resolution. <\/li><\/ul>\n\n\n\n<p><strong><em>Note:\ncompanies are not required to comply with the above conditions and can go for\nBuyback directly if the Buyback amounts to less than 10 percent of the total\npaid-up capital and the company&#8217;s free reserves<\/em><\/strong><\/p>\n\n\n\n<ul><li>There is a limit on how much amount of shares a company\ncan acquire in an FY. In Buyback, this limit has been capped at 25% of the\npaid-up share capital. Anymore more than that is not legally permissible. <\/li><\/ul>\n\n\n\n<p><strong><em>Note:\nThe paid-up share capital comprises preference and equity share capital.\nWhereas free reserves entail securities premiums. <\/em><\/strong><\/p>\n\n\n\n<ul><li>After the Buyback, the company must ensure that the\ndebt-to-equity ratio does not surpass 2:1.&nbsp;\n<\/li><li>Only fully paid-up shares can make their way to the\ncompany in an FY. <\/li><li>A company must share its insolvency via <strong>Form SH-9<\/strong> to RoC. The form must enclose\nthe signature of at least 2 directors. <\/li><li>The notice concerning the meeting should be accompanied\nby an annexure highlighting the following details:<\/li><\/ul>\n\n\n\n<ol><li>Comprehensive details about the material facts;<\/li><li>Reasons for Buyback of shares <\/li><li>Class of shares falling under Buyback<\/li><li>The amount invested relating to the Buyback <\/li><li>Time requires for performing the buyback activity <\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Other_norms_around_the_Buyback_of_shares\"><\/span><strong>Other norms around the Buyback of shares<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Following are\nsome other norms around the Buyback of Shares:<\/p>\n\n\n\n<ul><li>Companies must keep track of their Buyback in the\nregister based on Form SH-10. <\/li><li>Return filing of the Buyback is mandatory. Hence,\ncompanies must file it without fail via form SH-11. The said should be\naccompanied by Form SH-15 (compliance certificate) enclosing the signature of 2\ndirectors. <strong><em>Note: In companies where the managing director exists, the signature of\nsuch personnel is compulsory on the said forms. <\/em><\/strong><\/li><\/ul>\n\n\n\n<ul><li>A physical copy of the acquired share must cease to\nexist within 7 days of the Buyback. <\/li><\/ul>\n\n\n\n<ul><li>There should be a difference of six months between the\nact of Buyback and the release of new shares <\/li><\/ul>\n\n\n\n<ul><li>Two buybacks cannot occur in the same year.&nbsp; There should be a difference of one year. <\/li><li>The buyback formalities must be completed within 1 year\nfrom the date on which it was approved via special resolution. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_role_Capital_Redemption_Reserve_Account_in_Buy_back_of_shares\"><\/span><strong>What is the role Capital Redemption Reserve\nAccount in Buy back of shares? <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>According to\nsection 69 of the Companies Act, 2013, if any company performs buyback activity\nby leveraging free reserves or a security premium account, the company must\ntransfer the amount equivalent to the share\u2019s nominal value to the Capital\nRedemption Reserve Account. The balance sheet must reflect such transfer\nwithout fail as it is a mandate. The said account can be used to pay unissued\nshares to the members in the form of fully paid bonus shares.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conditions_that_deter_companies_from_performing_buyback_activity\"><\/span><strong>Conditions that deter companies from\nperforming buyback activity <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In the purview\nof section 70 of the Companies Act, 2013, a company is restrained from\nperforming Buyback of its securities, directly or indirectly;<\/p>\n\n\n\n<ul><li>Via any subsidiary, including those owned by the\ncompany<\/li><li>Via investment or pool of invested companies <\/li><li>When a company has flagged for payment default\nconcerning deposits or interest thereon or in debentures\u2019 redemption or\npreference shares or term loan\u2019s repayment. The prohibition will cease to exist\nif such defaults are corrected and no other default is committed for the\nsubsequent 3 years. <\/li><li>When a company has been flagged by authority for filing\ndefault concerning annual returns and declaration of financial statements and\ndividends. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p> A surplus fund is a boon for any organization. But its effective utilization can be tricky. Some companies try to allocate such funds to the acquisition or other business areas but often fail to avail of the expected outcomes. Buyback of shares has remained one of the prominent choices for companies that sit on healthy cash surplus. It is a kind of strategic investment that mitigates fundamental issues like reduced earnings per share, sub-par debt-to-equity ratio, high liquidity, and chances of a takeover. The Buyback of shares is a win-win proposition for both companies and shareholders. <\/p>\n\n\n\n<p class=\"text-left\"><b>Read our Article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/buyback-of-shares-and-other-securities\">Buyback of Shares and other Securities: A Complete Overview<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Buyback of shares refers to a process of share acquisition from the shareholders for an amount greater than the market price. This process reduces the shares available in the market, thereby ensuring high earnings per share for the company. It is an option accessible to shareholders to depart from the company business. The concept of [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":50872,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[120],"tags":[2884],"acf":{"service_id":"321"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":3500,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/50871"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=50871"}],"version-history":[{"count":2,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/50871\/revisions"}],"predecessor-version":[{"id":50874,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/50871\/revisions\/50874"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/50872"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=50871"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=50871"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=50871"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}