Buy-Back of Shares in Unlisted Indian Companies: The Rules and the Process

Rules relating buy back of shares of Indian Companies under the Companies Act and Companies (Share Capital and Debentures) Rules, 2014.

The provisions relating to buy-back of shares in India are governed by Section 68 to Section 70 of the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014.

Buy-back of Shares of Indian Companies – The Conditions

  1. Conditions for Buy-Back (Section 68): A company may purchase its own shares or other specified securities out of:
    • its free reserves;
    • the securities premium account; or
    • the proceeds of the issue of any shares or other specified securities.

However, no buy-back of any kind of shares can be made out of the proceeds of an earlier issue of the same kind of shares. The buy-back is subject to certain conditions: the company’s articles must authorize it, a special resolution has been passed in general meeting, and the debt-to-equity ratio after the buy-back is not more than 2:1, among others.

  1. Procedure for Buy-Back (Rule 17, Companies (Share Capital and Debentures) Rules, 2014): The company must create a separate bank account and deposit the amount of consideration payable for the buy-back. A public notice must be published specifying the details of the buy-back and a declaration of solvency must be filed with the Registrar and SEBI (in case of listed companies).
  2. Completion of Buy-Back (Section 68(9)): The buy-back must be completed within one year from the date of passing the special resolution or board resolution.
  3. Extinguishment of Certificates (Rule 17(12), Companies (Share Capital and Debentures) Rules, 2014): The certificates of security bought back must be physically destroyed within seven days of the last date of completion of buy-back.
  4. Prohibition on Further Issue of Shares (Section 68(8)): Once the buy-back is authorized, the company cannot issue the same type of shares including by way of bonus for a period of six months except by fulfilling certain conditions.
  5. Declaration of Solvency (Section 68(6)): The company and its directors must make a declaration of solvency, stating that they have made a full inquiry into the company’s affairs and that they have formed the opinion that the company is capable of meeting its liabilities and will not be rendered insolvent by the buy-back.
  6. Restrictions on Buy-Back (Section 70): A company cannot buy-back its shares if it has defaulted in repayment of deposits, interest payment thereon, redemption of debentures or preference shares, or payment of dividend or repayment of any term loan to banks or public financial institutions.

These provisions ensure that buy-backs are conducted in a fair, transparent, and efficient manner, protecting the interests of all shareholders and maintaining the integrity of the capital markets.

Process of Buying Back Shares of Indian Companies (Non-Listed)

The process of share buy-back in India requires the preparation and submission of several documents. Here is a list of the key documents that are generally required:

  1. Board Resolution: A resolution passed by the board of directors proposing the buy-back and authorizing the initiation of the process.
  2. Letter of Offer: A document detailing the offer for buy-back, including the number of shares, the price at which the shares are being bought back, the method of buy-back, and other relevant details.
  3. Public Announcement: A public announcement must be made to the shareholders through at least one English national daily, one Hindi national daily and a regional language daily, all with wide circulation at the place where the registered office of the company is situated.
  4. Declaration of Solvency: A declaration by the directors that the company is solvent and would not be rendered insolvent by the buy-back. This declaration, verified by an affidavit, must be accompanied by a certificate by the company’s auditors.
  5. Special Resolution/Board Resolution: A special resolution passed by the shareholders in a general meeting, if the buy-back is more than 10% and up to 25% of the total paid-up equity capital and free reserves. If it’s up to 10%, a board resolution is sufficient.
  6. Letter of Confirmation to SEBI: A letter confirming the extinguishment and physical destruction of the bought-back shares, to be sent to SEBI within seven days of completion of the process.
  7. Return of Buy-back: A return in the form of Form SH-11, containing particulars of the buy-back, needs to be filed with the Registrar of Companies within 30 days of completion of the buy-back.

Wrapping it up

Remember, this is a generalized list, and the specific requirements might vary based on the company’s status, the method of buy-back, and other factors. Always consult with a legal or financial advisor to ensure full compliance.

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