Buy Back

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Content- List
S. No. Particulars Page
No.
(i) Introduction 3
(ii) Benefits of buy back of shares and securities 5
(iii) History of Buy Back In India 8
(iv) Buy Back under US Law 9
(v) Buy Back under UK Law 13
(vi) Provision under companies Act,1956 20
(vii) Provision relating to buy back in New
Companies Bill
26
(viii) Time Schedule 36
(ix) Accounting Treatment 40
(x) Leading case laws relating to buy back of
securities in India law history
42

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Introduction
DEFINITION OF 'BUYBACK SHARES AND SECURITIES’
The repurchase of outstanding shares (repurchase) by a company in
order to reduce the number of shares on the market. Companies will buy
back shares either to increase the value of shares still available (reducing
supply), or to eliminate any threats by shareholders who may be looking
for a controlling stake
Now we disscuss about the various definition of buy back of shares
and securities.
“Buy back of shares and securitie” whole term, we divided in two parts
first one is buy back and other one is shares and securities. Now the
question is what is meaning of “buy back” or “shares and securities” .

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1. Buy back
The meaning of Buy back according to oxford dictionary is
“The buying back of goods by the original seller”.
2. Securities :- Securities means the securities as defined in clause (h)
of section 2 of the Securirties Contracts (Regulation) Act,1956.
3. Share :- share means a share in the share capital of a company and
includes stock.
Buy back of shares and securities means the purchase by the company of
its own shares. Buy back of equity shares is an important mode of
capital restructuring.
While buy-back of securities is not permitted as a treasuring option
under which the securities may be re-issued later a company can resort
to buy back to reduce the number of share issued and return surplus cash
to the share holder.
a. Buy back of share is a method of cancellation of share
capital.
b. Trever V. whitworth(1887) 12 App Cas App, it was held that
a company limited by shares may not purchasers it own
shares as this would amount to an unauthorized reduction of
capital.
c. The rationale for this decision is plain, namely, that the
creditors of the company make decision on its credit
worthiness on several grounds and the share capital is
important ground.

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Share purchase (or stock buyback) is the re-acquisition by a company of
its own stock. In some countries, including the US and the UK,
a corporation can repurchase its own stock by distributing cash to
existing shareholders in exchange for a fraction of the company's
outstanding equity; that is, cash is exchanged for a reduction in the
number of shares outstanding.
The company can buy back its shares in any of the following manners:
- From the existing shareholders on a proportionate basis through the
tender offer;
- From open market through:
- Book building process
- Stock exchange,
- From odd lot holders.
Benefits of buy back of shares and securities
(i) Increased Shareholder Value - There are many ways to value a
profitable company but the most common measurement is Earnings Per
Share (EPS). If earnings are flat but the number of outstanding shares
decreases. . Voila! . . A magical increase in period-to-period EPS will
result.
(ii)Higher Stock Prices - An increase in EPS will often alert investors
that a stock is undervalued or has the potential for increasing in value.

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The most common result is an increase in demand and an upward
movement in the price of a stock.
(iii) Increased Float - As the number of outstanding shares decreases,
the shares remaining represent a larger percentage of the float. If
demand increases and there is less supply, then fuel is added to a
potential upward movement in the price of a stock.
(iv) Excess Cash - Companies usually buy back their stock with excess
cash. If a company has excess cash, then at a minimum you can bank
that it doesn't have a cash flow problem. More importantly, it signals
that executives feel that cash re-invested in the corporation will get a
better return than alternative investments.
(v) Income Taxes - When excess cash is used to buyback company
stock, in lieu of increasing or paying dividends, shareholders often have
the opportunity to defer capital gains AND lower their tax bill if the
stock price increases. Remember that dividends are taxed as ordinary
income in the year they are received whereas the sale of appreciated
stock is taxed when sold. Also, if the stock is held for more than one
year the gain will be subject to lower capital gain rates.
(vi) Price Support - Companies with buyback programs in place use
market weakness to buy back shares more aggressively during market
pullbacks. This reflects confidence that a company has in itself and
alerts investors that the company believes that the stock is cheap.
Frequently you will see a company announce a buyback after its stock
has taken a hit, which is merely an overt action to take advantage of the
discount on the shares. This lends support to the price of the stock and
ultimately provides security for long-term investors during rough times.

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Reasons of buy back of shares
- To improve earnings per shares.
- To improve return on capital, return on net worth and to enhance
the long term share holder value.
- To provide on additional exit route to shareholders when hare are
under valued or are thinly traded.
- To enhance consolidation of state in the company.
- To present unwelcome takeover bids.
- To return surplus cash to shareholders.
- To achieve optimum capital structure.
- To support share price during periods of sluggish market
conditions.
- To service the equity more efficiently.
- To reduction of capital without requiring approval of the
court/NCLT.

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History of Buy back in India
The concept of buy back is a recent one so far as India is concerned. The
Companies Amendment Act, 1999 introduced the concept of buy back
of shares. Before this there is no concept and method of buy back of
shares and securities. It’s a big problem for companies to justified the
buy back of shares and securities statutes.
Situation of before this above said Act, not only statute, but also
common law, has upheld the ‘sanctity’ of a company’s capital. In Trevor
V. Whitworth(1887) 12 App Cas 409,it was held that a company limited
by shares may not purchase its own shares as this would amount to an
unauthorized reduction of capital. The rational for this reduction for this
decision is plain, namely, that the creditors of the company make
decision on its credit –worthiness on several grounds, but an important
ground is the amount of its share-capital.
In India ,the rule in trevor V. Whitwirth wasenshrined in section 77 of
the companies Act,1956 which prohibited company from buying or
cancelling its own share, unless it complied with the provision and
followed the procedure for reduction of share capital under sections 100
to 104 of the companies Act,1956 which involved confirmed by the
court.
However ,section 77A of the companies Act,1956 by the companies
amendment Act,1956 which was inserted in the Companies Act,1956 by
the companies (Amendment ) Act, 1999 with retrospective effect from

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31-10-1998 is an exception to the prohibition under section 77 and
section 100. Section 77A allows companies to buy back their own shares
as well as other specified securities. This is changed in statutes and law.
now the legislation taking good and liberalization approach towards the
subject of buy back of shares and securities in India.
Under USA law
Under US corporate law there are five primary methods of stock
repurchase: open market, private negotiations, repurchase 'put' rights and
two variants of self-tender repurchase: a fixed price tender offer and a
dutch action. In the late 20th and early 21st centuries, there was a sharp
rise in the volume of share repurchases in the US: US$ 5 Billion in 1980
rose to US$349 billion in 2005.
U.S. Securities and Exchange Commission (SEC) rule 10b-18 sets
requirements for stock repurchase in the United States .
Companies typically have two uses for profits. Firstly, some part of
profits can be distributed to shareholders in the form of dividends or
stock repurchases. The remainder, termedshareholders' equity, are kept

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inside the company and used for investing in the future of the company,
if profitable ventures for reinvestment of retained earnings can be
identified. However, sometimes companies may find that some or all of
their retained earnings cannot be reinvested to produce acceptable
returns.
Share repurchases are an alternative to dividends. When a company
repurchases its own shares, it reduces the number of shares held by the
public
1.Repurchasing shares when a company's share price is undervalued
benefits non-selling shareholders (frequently insiders) and extracts
value from shareholders who sell. There is strong evidence that
companies are able to profitably repurchase shares when the
company is widely held by retail investors who are
unsophisticated (e.g., small investors) and more likely to sell their
shares to the company when those shares are undervalued)
Methods
Open-market
The most common share repurchase method in the US is the open-
market stock repurchase, representing almost 75% of all repurchases. A
firm will announce that it will repurchase some shares in the open
market from time to time as market conditions dictate and maintains the
option of deciding whether, when, and how much to repurchase. Open-
market repurchases can span months or even years. There are, however,
daily buy-back limits which restrict the amount of stock that can be
bought over a particular time interval again ranging from months to even
years. Per SEC Rule 10b-18, The issuer can't purchase more than 25% of
the average daily volume.

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Open-market stock repurchases which greatly add to the long term
demand for shares in the market are likely to affect prices as long as the
repurchase operations continue. For example AstraZeneca Plc embarked
on an $11Bn share repurchase in 2011 & 2012 in a market which they
estimated had an annual turnover of $30Bn, when excluding short term
share transactions. AstraZeneca claimed at the 2013 AGM that their
open market interventions would not have temporary price effects whilst
the interventions continued,but offered no evidence.
Fixed price tender
Prior to 1981, all tender offer repurchases were executed using a fixed
price tender offer. This offer specifies in advance a single purchase
price, the number of shares sought, and the duration of the offer, with
public disclosure required. The offer may be made conditional upon
receiving tenders of a minimum number of shares, and it may permit
withdrawal of tendered shares prior to the offer's expiration date.
Shareholders decide whether or not to participate, and if so, the number
of shares to tender to the firm at the specified price. Frequently, officers
and directors are precluded from participating in the tender offer. If the
number of shares tendered exceeds the number sought, then the
company purchases less than all shares tendered at the purchase price on
a pro rata basis to all who tendered at the purchase price. If the number
of shares tendered is below the number sought, the company may choose
to extend the offer’s expiration date.
Dutch auction
The introduction of the Dutch auction share repurchase in 1981 allows
an alternative form of tender offer. A Dutch auction offer specifies a
price range within which the shares will ultimately be purchased.
Shareholders are invited to tender their stock, if they desire, at any price
within the stated range. The firm then compiles these responses, creating

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a demand curve for the stock. The purchase price is the lowest price that
allows the firm to buy the number of shares sought in the offer, and the
firm pays that price to all investors who tendered at or below that price.
If the number of shares tendered exceeds the number sought, then the
company purchases less than all shares tendered at or below the
purchase price on a pro rata basis to all who tendered at or below the
purchase price. If too few shares are tendered, then the firm either
cancels the offer (provided it had been made conditional on a minimum
acceptance), or it buys back all tendered shares at the maximum price.
The first firm to utilize the Dutch auction was Todd Shipyards in 1981.
Types
Selective buy-backs
In broad terms, a selective buy-back is one in which identical offers are
not made to every shareholder, for example, if offers are made to only
some of the shareholders in the company. In the US, no special
shareholder approval of a selective buy-back is required. In the UK, the
scheme must first be approved by all shareholders, or by a special
resolution (requiring a 75% majority) of the members in which no vote
is cast by selling shareholders or their associates. Selling shareholders
may not vote in favor of a special resolution to approve a selective buy-
back. The notice to shareholders convening the meeting to vote on a
selective buy-back must include a statement setting out all material
information that is relevant to the proposal, although it is not necessary
for the company to provide information already disclosed to the
shareholders, if that would be unreasonable.

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Other types
A company may also buy back shares held by or for employees or
salaried directors of the company or a related company. This type of
buy-back, referred to as an employee share scheme buy-back, requires an
ordinary resolution. A listed company may also buy back its shares in
on-market trading on the stock exchange, following the passing of an
ordinary resolution if over the 10/12 limit. The stock exchange's rules
apply to on-market buy-backs. A listed company may also buy
unmarketable parcels of shares from shareholders (called a minimum
holding buy-back). This does not require a resolution but the purchased
shares must still be cancelled.(The 10/12 limit refers to ASIC's
requirement that companies buy back no more than 10% of the voting
rights in the company within 12 months – Share Buy-backs

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Under UK Act
At one time it was completely prohibited for a company to buy its own
shares. Now buy-backs are permitted subject to quite restrictive and
detailed rules.
The problem with companies buying their own shares is that, if
completely unrestricted, there is a danger that creditors (and potential
creditors) may be misled as to the size of the company's capital. This is
part of the wider area of maintenance of capital. Under the Companies
Act 2006 a new procedure for the reduction of capital without a court
order was introduced, which will sometimes be used rather than a buy
back..
This is a very technical area. The rules are set out in some detail below,
but a summary of them is:
1. At common law companies were prohibited from buying their own
shares: Trevor v. Whitworth (1887) 12 App Cas 409.
2. Successive Companies Acts have made it possible for companies
to buy their own shares in a number of ways. The current
legislation is in Part 18 of the Companies Act 2006. These
provisions were amended by The Companies Act 2006
(Amendment of Part 18) Regulations 2013 SI 999 ("the 2013
Regulations"). The rules are relaxed a little for purchases under
an employees share scheme.
3. One way is for the company to create redeemable shares and then
redeem them. This has long been permitted and redeemable
preference shares are quite common. Redemption is subject to the
rules on finance mentioned below.
4. A company listed on the Stock Exchange can make a 'market
purchase' of its shares through the Exchange, if authorised to do so

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by an ordinary resolution in general meeting. This, too, is subject
to the rules on finance mentioned below.
5. Any company may make an 'off-market purchase' of its shares by
contract with one or more particular shareholders. The contract
must be approved by an ordinary resolution in general meeting.
Under the original legislation a special resolution was required, but
this was amended by the 2013 Regulations. The shares must be
cancelled when purchased or, again under the 2013 Regulations,
may be held as treasury shares. An off-market purchase is also
subject to the rules on finance mentioned next.
6. Redemption, market purchases and off-market purchases are all
subject to restrictions as to financing the redemption or purchase.
This may come from either distributable profits (i.e. profits which
could be paid out by way of dividend) or from the proceeds of
issuing new shares. In either case the company's capital is
maintained. These were relaxed slightly by the 2013 regulations.
See below.
Further, a private company (only) may make a 'permissible capital
payment' to finance a redemption or an off-market purchase. Any
available profits must be used first. The directors must make a
solvency statement which must be supported by the auditors, and
the payment must be approved by a special resolution and
advertised to creditors. Creditors and dissenting shareholders may
object to the court against such payment. The 2013 Regulations
relaxed the rules a little where the payment is made to finance a
buy back as part of and employee share scheme, as
explained below.
7. Shares may be bought back as part of a reduction of capital.
8. Special rules can apply to an off-market purchase under
an employees share scheme.

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In practice, redeemable shares and off-market purchases by private
companies are reasonably commonplace. The off-market purchase is
useful where a director/shareholder of a successful private company is
retiring and selling out his interest, or as a means of buying out a
dissenting shareholder. Purchase by the company is an alternative to
purchase by the other shareholders in the company. The off-market
purchase is also used as part of some management buyouts and
employee share schemes.
Care must be taken with regard to the taxation of the purchase price.
HMRC may treat any premium as if a distribution, and so liable to
income tax, rather than as a capital gain, unless certain requiements are
met. Discussion of these tax rules is beyond the scope of this database.
The following is a more detailed account of the statutory rules on
redemption and buy back.
Redemption of redeemable shares
By CA 2006, sec684 - sec689 a company can issue shares of any class

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which are to be redeemed, at the option of the company or the
shareholder subject to the following conditions:
(1) redeemable shares can be issued only if the company has other
shares which are not redeemable;
(2) redeemable shares may not be redeemed unless they are fully paid.
Shares redeemed must be cancelled on redemption and the amount of the
company's issued capital (but not its authorised capital) is diminished by
the nominal value of the shares.
Purchase by a company of its Shares
A company may purchase any of its shares (whether or not they are
expressed to be redeemable) under CA 2006, sec690 - sec708. The
purchase can be by means of a market purchase (PLCs only) or an off-
market purchase.
Market Purchase A market purchase is a purchase of
shares on the Stock Exchange and
must be authorised by ordinary
resolution which may give a
general authority to purchase the
company's own shares or be
limited to shares of a particular
class or description. The authority
may be unconditional or
conditional. The authority cannot
last for more than 18 months. It is
standard practice in many PLCs to
have such a resolution passed at
each AGM.

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Off-market purchase This is any purchase of shares
other than through the Stock
Exchange. It can include shares in
a PLC bought other than through
the market, or any buy-back by a
private company. The statutory
provisions are to be found in CA
2006, sec 690 - 708.
Except where the purchase is in relation to an employee share scheme
under the 2013 Regulations, an off-market purchase may be made only
if the terms of the contract of purchase are authorized before the
company enters into the contract by an ordinary resolution. In most
cases this will be under a contract drawn up for the purposes of the
buyback, but it may also be done under the terms of a previously
authorized 'contingent purchase contract': a contract under which a
company may, subject to any conditions, become entitled or obliged to
purchase its own shares.
Where a company has purchased its own shares it must, within 28 days,
deliver to the Registrar a return (form SH03) stating the number and
nominal value of those shares and the date they were purchased. Stamp
duty must be paid on this form if the consideration paid by the company
for the shares is £1,000 or more.
In a private company the shares must be cancelled on buy-back or held
as treasury shares. If cancelled, the company must register another form,
SH06, which includes a statement of capital. If held as treasury shares,
the voting and dividend rights on the shares cannot be exercised until
such time (if ever) that the shares are sold.

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The company must keep a copy of any contract to purchase its own
shares, or a memorandum of its terms if it was not in writing, at its
registered office for 10 years. It must be made available for inspection
by members and, if a public company, by any other person.
Provision under companies Act, 1956

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The provisions regulating buy back of shares are contained in Section
77A, 77AA and 77B of the Companies Act, 1956. These were inserted
by the Companies (Amendment) Act, 1999. The Securities and
Exchange Board of India (SEBI) framed the SEBI(Buy Back of
Securities) Regulations,1999 and the Department of Company Affairs
framed the Private Limited Company and Unlisted Public company (Buy
Back of Securities) rules,1999 pursuant to Section 77A(2)(f) and (g)
respectively.
Objective of buy back in old Act: Shares may be bought back by the
company on account of one or more of the following reasons
(i) To increase promoters holding
(ii) Increase earning per share
(iii) Rationalise the capital structure by writing off capital not
represented by available assets.
(iv) Support share value
(v) To thwart takeover bid
(vi) To pay surplus cash not required by business
In fact the best strategy to maintain the share price in a bear run is to buy
back the shares from the open market at a premium over the prevailing
market price.
Resources of Buy Back
A Company can purchase its own shares from
(i) free reserves; Where a company purchases its own shares out of free
reserves, then a sum equal to the nominal value of the share so

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purchased shall be transferred to the capital redemption reserve and
details of such transfer shall be disclosed in the balance-sheet or
(ii)securities premium account; or
(iii) proceeds of any shares or other specified securities. A Company
cannot buyback its shares or other specified securities out of the
proceeds of an earlier issue of the same kind of shares or specified
securities.
Conditions of Buy Back
(a) The buy-back is authorised by the Articles of association of the
Company;
(b) A special resolution has been passed in the general meeting of the
company authorising the buy-back. In the case of a listed company, this
approval is required by means of a postal ballot. Also, the shares for buy
back should be free from lock in period/non transferability.The buy back
can be made by a Board resolution If the quantity of buyback is or less
than ten percent of the paid up capital and free reserves;
(c) The buy-back is of less than twenty-five per cent of the total paid-up
capital and fee reserves of the company and that the buy-back of equity
shares in any financial year shall not exceed twenty-five per cent of its
total paid-up equity capital in that financial year;
(d) The ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buy-back;
(e) There has been no default in any of the following
i. in repayment of deposit or interest payable thereon,
ii. redemption of debentures, or preference shares or

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iii. payment of dividend, if declared, to all shareholders within the
stipulated time of 30 days from the date of declaration of dividend or
iv. repayment of any term loan or interest payable thereon to any
financial institution or bank;
(f) There has been no default in complying with the provisions of filing
of Annual Return, Payment of Dividend, and form and contents of
Annual Accounts;
(g) All the shares or other specified securities for buy-back are fully
paid-up;
(h) The buy-back of the shares or other specified securities listed on any
recognised stock exchange shall be in accordance with the regulations
made by the Securities and Exchange.
(i) The buy-back in respect of shares or other specified securities of
private and closely held companies is in accordance with the guidelines
as may be prescribed.
nge Board of India in this behalf.
Disclosures in the explanatory statement
The notice of the meeting at which special resolution is proposed to be
passed shall be accompanied by an explanatory statement stating -
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of security intended to be purchased under the buy-back;
(d) the amount to be invested under the buy-back; and
(e) the time-limit for completion of buy-back

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Sources from where the shares will be purchased
The securities can be bought back from
(a) existing security-holders on a proportionate basis;
Buyback of shares may be made by a tender offer through a letter of
offer from the holders of shares of the company or
(b) the open market through
(i). book building process;
(ii) stock exchanges or
(c) odd lots, that is to say, where the lot of securities of a public
company, whose shares are listed on a recognized stock exchange, is
smaller than such marketable lot, as may be specified by the stock
exchange; or
(d) purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.
Filing of Declaration of solvency
After the passing of resolution but before making buy-back, file with the
Registrar and the Securities and Exchange Board of India a declaration
of solvency in form 4A. The declaration must be verified by an affidavit
to the effect that the Board has made a full inquiry into the affairs of the
company as a result of which they have formed an opinion that it is
capable of meeting its liabilities and will not be rendered insolvent
within a period of one year of the date of declaration adopted by the
Board, and signed by at least two directors of the company, one of
whom shall be the managing director, if any:
No declaration of solvency shall be filed with the Securities and
Exchange Board of India by a company whose shares are not listed on
any recognized stock exchange.
Register of securities bought back
After completion of buyback, a company shall maintain a register of the

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securities/shares so bought and enter therein the following particulars
a. the consideration paid for the securities bought-back,
b. the date of cancellation of securities,
c. the date of extinguishing and physically destroying of securities and
d. such other particulars as may be prescribed
Where a company buys-back its own securities, it shall extinguish and
physically destroy the securities so bought-back within seven days of the
last date of completion of buy-back.
Issue of further shares after Buy back
Every buy-back shall be completed within twelve months from the date
of passing the special resolution or Board resolution as the case may be.
A company which has bought back any security cannot make any issue
of the same kind of securities in any manner whether by way of public
issue, rights issue up to six months from the date of completion of buy
back.
Filing of return with the Regulator
A Company shall, after the completion of the buy-back file with the
Registrar and the Securities and Exchange Board of India, a return in
form 4 C containing such particulars relating to the buy-back within
thirty days of such completion.
No return shall be filed with the Securities and Exchange Board of India
by an unlisted company.
Prohibition of Buy Back
A company shall not directly or indirectly purchase its own shares or
other specified securities -
(a) through any subsidiary company including its own subsidiary
companies; or

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(b) through any investment company or group of investment companies;
or
Procedure for buy back
a. Where a company proposes to buy back its shares, it shall, after
passing of the special/Board resolution make a public announcement at
least one English National Daily, one Hindi National daily and Regional
Language Daily at the place where the registered office of the company
is situated.
b. The public announcement shall specify a date, which shall be
"specified date" for the purpose of determining the names of
shareholders to whom the letter of offer has to be sent.
c. A public notice shall be given containing disclosures as specified in
Schedule I of the SEBI regulations.
d. A draft letter of offer shall be filed with SEBI through a merchant
Banker. The letter of offer shall then be dispatched to the members of
the company.
e. A copy of the Board resolution authorising the buy back shall be filed
with the SEBI and stock exchanges.
f. The date of opening of the offer shall not be earlier than seven days or
later than 30 days after the specified date
g. The buy back offer shall remain open for a period of not less than 15
days and not more than 30 days.
h. A company opting for buy back through the public offer or tender
offer shall open an escrow Account.
Penalty
If a company makes default in complying with the provisions the
company or any officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to two
years, or with fine which may extend to fifty thousand rupees, or with

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both. The offences are, of course compoundable under Section 621A of
the Companies Act,1956.
Provision relating to buy back in New Companies
Bill
We all know the Buy Back of Securities is a very important tool for
Companies who wants to reduce their Share Capital. First of all, here are
few preliminary notes of Buy Back:
• Governing Sections of Companies Act,2013:
-Section 68
-Section 69
-Section 70
• Specified Security: includes ESOP or other security as notified by
Central Government.
• Free Reserves: ‘Reserves which, as per latest audited balance sheet of
the company are free for distribution as dividend and shall include
balance to the credit of Security Premium A/c but shall not include
Share Application Money’.
PROVISIONS OF BUY BACK SIMPLIFIED:
Relevant Sections(modified according to rules):
68. (1) Purchase can be made out of:
(a) its free reserves;

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(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified
securities:
No buy-back of any kind of shares or other specified securities shall be
made out of the proceeds of an earlier issue of the same kind of shares or
same kind of other specified securities.
68. (2) Preliminary Conditions:
(a) must be authorized by its articles;
(b) a special resolution has been passed at a general meeting of the
company authorizing the buy-back, but the same is not required when:
i. the buy-back is 10% or less of the total paid-up equity capital
and free reserves of the company; and
ii. such buy-back has been authorized by the Board by means of a
resolution passed at its meeting;
(c) the buy-back is twenty-five per cent or less of the aggregate of
paid-up capital and free reserves of the company. But in case of Equity
Shares, the same shall be taken as 25% of paid up equity capital only.
(d) Debt equity ratio should be 2:1
Where: Debt is aggregate of secured and unsecured debts owed by the
after buy-back
Equity: is aggregate of the paid-up capital and its free reserves:
(e) all the shares or other specified securities for buy-back are fully
paid-up;
(f) If shares or securities are listed, buy back will be in accordance
with the regulations made by the Securities and Exchange Board in this
behalf; and
(g) the buy-back in respect of unlisted shares or other specified
securities is in accordance Share Capital and Debentures Rules, 2014.
h) No offer of buy-back shall be made within a period of one year from
the date of the closure of the preceding offer of buy-back, if any.

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68. (3) Explanatory Statement:
The notice of the meeting at which the special resolution is proposed to
be passed shall be accompanied by an explanatory statement stating—
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of shares or securities intended to be purchased under
the buy-back;
(d) the amount to be invested under the buy-back; and
(e) the time-limit for completion of buy-back.
As per the rules, following more details is to be included in the
Explanatory Statement:
(f) the date of the board meeting at which the proposal for buy-back
was approved by the board of directors of the company;
(g) the number of securities that the company proposes to buy-back;
(h) the method to be adopted for the buy-back;
(i) the price at which the buy-back of shares or other securities shall
be made;
(j) the basis of arriving at the buy-back price;
(k) the maximum amount to be paid for the buy-back and the sources
of funds from which the buy-back would be financed;
(l) Shareholding:
i. the aggregate shareholding of the promoters and of the directors of the
promoter, where the promoter is a company and of the directors and key
managerial personnel as on the date of the notice convening the general
meeting;
ii. the aggregate number of equity shares purchased or sold by persons
mentioned in sub-clause (i) during a period of twelve months preceding
the date of the board meeting at which the buy-back was approved and
from that date till the date of notice convening the general meeting;

29
iii. the maximum and minimum price at which purchases and sales
referred to in sub-clause (ii) were made along with the relevant date;
(m) if the persons mentioned in l(i) intend to tender their shares for
buy-back –
i. the quantum of shares proposed to be tendered;
ii. the details of their transactions and their holdings for the last twelve
months prior to the date of the board meeting at which the buy-back was
approved including information of number of shares acquired, the price
and the date of acquisition;
(n) a confirmation that there are no defaults subsisting in repayment
of deposits, interest payment thereon, redemption of debentures or
payment of interest thereon or redemption of preference shares or
payment of dividend due to any shareholder, or repayment of any term
loans or interest payable thereon to any financial institution or banking
company;
(o) a confirmation:
i. that the Board of directors have made a full enquiry into the affairs
and prospects of the company and that they have formed the opinion-
general meeting is convened there shall be no grounds on which the
company could be found unable to pay its debts;
ii. as regards its prospects for the year immediately following that date,
that, having regard to their intentions with respect to the management of
the company’s business during that year and to the amount and character
of the financial resources which will in their view be available to the
company during that year, the company shall be able to meet its
liabilities as and when they fall due and shall not be rendered insolvent
within a period of 1 year from that date; and
iii. the directors have taken into account the liabilities(including
prospective and contingent liabilities), as if the company were being
wound up under the provisions of the Companies Act, 2013

30
(p) A report addressed to the Board of directors by the company’s
auditors stating that-
i. they have inquired into the company’s state of affairs;
ii. the amount of the permissible capital payment for the securities in
question is in their view properly determined;
iii. that the audited accounts on the basis of which calculation with
reference to buy back is done is not more than six months old from the
date of offer document; and
iv. the Board of directors have formed the opinion as specified in point
‘o’ on reasonable grounds and that the company, having regard to its
state of affairs, shall not be rendered insolvent within a period of one
year from that date.
68. (4) Time Limit:
Every buy-back shall be completed within a period of one year from the
date of passing of the special resolution, or as the case may be, the
resolution passed by the Board.
68. (5) Options for Buy back:
The buy-back can be from:
(a) from the existing shareholders or security holders on a
proportionate basis;
(b) from the open market;
(c) by purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.
68. (6) Solvency Declaration:
Before making such buy-back, file with the Registrar, a declaration of
solvency signed by at least two directors of the company, one of whom
shall be the managing director, if any, Form No. SH.9 may be prescribed
and verified by an affidavit to the effect that the Board of Directors of
the company has made a full inquiry into the affairs of the company as a
result of which they have formed an opinion that it is capable of meeting

31
its liabilities and will not be rendered insolvent within a period of one
year from the date of declaration adopted by the Board.
68. (7) Extinguishment of Certificate:
Company shall extinguish and physically destroy the shares or securities
so bought back within seven days of the last date of completion of buy-
back.
68. (8) No further issue till 6 months:
Where a company completes a buy-back of its shares or other specified
securities, it shall not make a further issue of the same kind of shares or
other securities including allotment of new shares or other specified
securities within a period of six months except by way of:
(a) a bonus issue or
(b) in the discharge of subsisting obligations such as conversion of
warrants, stock option schemes, sweat equity or conversion of
preference shares or debentures into equity shares.
68. (9) Register to be maintained:
Company shall maintain a register in Form No. SH.10 of the shares or
securities so bought, the consideration paid for the shares or securities
bought back, the date of cancellation of shares or securities, the date of
extinguishing and physically destroying the shares or securities. The
register of shares or securities bought-back shall be maintained at the
registered office of the company and shall be kept in the custody of the
secretary of the company or any other person authorized by the board in
this behalf. The entries in the register shall be authenticated by the
secretary of the company or by any other person authorized by the Board
for the purpose.
68. (10) Return of Buy Back & a Declaration:
A company shall, after the completion of the buy-back under this
section, file with the Registrar a return in Form No. SH.11 containing
such particulars relating to the buy-back within thirty days of such

32
completion. There shall be annexed to the return, a certificate in Form
No. SH.15 signed by two directors of the company including the
managing director, if any, certifying that the buy-back of securities has
been made in compliance with the provisions of the Act and the rules
made thereunder.
68. (11) Punishment for any Default:
If a company makes any default in complying with the provisions of this
section, the company shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to three lakh rupees and
every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine
which shall not be less than one lakh rupees but which may extend to
three lakh rupees, or with both.
69. (1) Capital Redemption Reserves:
Where a company purchases its own shares out of free reserves or
securities premium account, a sum equal to the nominal value of the
shares so purchased shall be transferred to the capital redemption reserve
account and details of such transfer shall be disclosed in the balance
sheet.
69. (2) Utilization of Capital Redemption Reserves:
The capital redemption reserve account may be applied by the company,
in paying up unissued shares of the company to be issued to members of
the company as fully paid bonus shares.
70. (1) Restriction on Buy Back:
No company shall directly or indirectly purchase its own shares or other
specified securities—
(a) through any subsidiary company including its own subsidiary
companies;
(b) through any investment company or group of investment
companies; or

33
(c) if a default, is made by the company, in the repayment of deposits
accepted either before or after the commencement of this Act, interest
payment thereon, redemption of debentures or preference shares or
payment of dividend to any shareholder, or repayment of any term loan
or interest payable thereon to any financial institution or banking
company. Provided that the buy-back is not prohibited, if the default is
remedied and a period of three years has lapsed after such default ceased
to subsist.
70. (2) No Buy Back if:
No company shall, directly or indirectly, purchase its own shares or
other specified securities in case such company has not complied with
the provisions of:
(a) Sections 92: Annual Return
(b) Section 123: Declaration and Payment of Dividend
(c) Section 127: Failure to pay Dividend
(d) Section 129: Failure to give True and Fair Statement
Other Conditions:
(a) The company which has been authorized by a special resolution
shall, before the buy-back of shares, file with the Registrar of
Companies a letter of offer in Form No. SH.8, along with the fee.
(b) Provided that such letter of offer shall be dated and signed on
behalf of the Board of directors of the company by not less than two
directors of the company, one of whom shall be the managing director,
where there is one.
(c) The letter of offer shall be dispatched to the shareholders or
security holders immediately after filing the same with the Registrar of
Companies but not later than twenty days from its filing with the
Registrar of Companies.

34
(d) The offer for buy-back shall remain open for a period of not
less than fifteen days and not exceeding thirty days from the date of
dispatch of the letter of offer.
(e) In case the number of shares or other specified securities offered
by the shareholders or security holders is more than the total number of
shares or securities to be bought back by the company, the acceptance
per shareholder shall be on proportionate basis out of the total shares
offered for being bought back.
(f) The company shall complete the verifications of the offers
received within fifteen days from the date of closure of the offer and the
shares or other securities lodged shall be deemed to be accepted unless a
communication of rejection is made within twenty one days from the
date of closure of the offer.
(g) The company shall immediately after the date of closure of the
offer, open a separate bank account and deposit therein, such sum, as
would make up the entire sum due and payable as consideration for the
shares tendered for buy-back in terms of these rules.
(h) The company shall within seven days of the time specified in
sub-rule (7)-
i. make payment of consideration in cash to those shareholders or
security holders whose securities have been accepted; or
ii. return the share certificates to the shareholders or security holders
whose securities have not been accepted at all or the balance of
securities in case of part acceptance.
(i) The company shall ensure that—
i. the letter of offer shall contain true, factual and material
information and shall not contain any misleading information and must
state that the directors of the company accept the responsibility for the
information contained in such document;

35
ii. the company shall not issue any new shares including by way of
bonus shares from the date of passing of special resolution authorizing
the buy-back till the date of the closure of the offer under these rules,
except those arising out of any outstanding convertible instruments;
iii. the company shall confirm in its offer the opening of a separate
bank account adequately funded for this purpose and to pay the
consideration only by way of cash;
iv. the company shall not withdraw the offer once it has announced
the offer to the shareholders;
v. the company shall not utilize any money borrowed from banks or
financial institutions for the purpose of buying back its shares; and
vi. the company shall not utilize the proceeds of an earlier issue of the
same kind of shares or same kind of other specified securities for the
buy-back.

36
Time Schedule Summarized:
Time Taken Procedure
Starting Day say
‘X’
Obtaining:
Auditors Report stating maximum amount permissible for
buy back
Board of Directors Affidavit regarding Solvency of
company for one year.
Then holding Board Meeting for considering proposal of
buy back, getting resolution passed and determine price for
such buy back.
X + 2 Issue of notice with Explanatory Statement (along with
disclosures mentioned below) to all members.
X + 23 Holding EGM and passing special resolution, if required.
X + 24 Obtaining
Declaration of Solvency (verified by an affidavit in e-form
SH9)
Filing draft letter of Offer with the ROC along with
declaration of Solvency and e-form SH8
Filing of e-form for registration of such resolution with
MCA21.
X + 44 Maximum time for dispatch of letter of offer to all

37
members
Within 15 days
from the closure
of offer
Verification of offer to be completed.Note: Offer for buy
back shall remain open to the members for a period not
less than 15 days and not exceeding 30 days from the date
of dispatch of letter of offer.
The shares or other securities lodged shall be deemed to be
accepted unless a communication of rejection is made
within twenty one days from the date of closure of the
offer.
Immediately on
Closure of offer
Open a Special Bank Account with Schedule Bank.
Within 7 days
from completion
of Verification
Making payment in cash to those shareholders whose offer
has been accepted or return the share certificates to the
shareholders forthwith.
Within 7 days
from completion
of Acceptance
Extinguish and physically destroy the share certificates of
shares bought back.
After
completion of
buy back
File requisite return in e-form SH 11 with MCA21 and a
declaration signed by 2 directors, one of whom shall be
Managing Director, if any in e-form SH 15
Tax Summarized:

38
Tax Company Shareholder
DDT (Section
115-O)
NOSince here payment
is made as per Section
77A of Companies Act
and not from
accumulated profits.
NA
Additional Tax
(Chapter XII-
DA)(wef
01.06.2013)
YES20% of
(Consideration received
by shareholder –
amount received by a
company for issue of
such shares)*
NA
Capital Gain NA No (wef 01.06.2013)
Stamp Duty
NOShares are cancelled
by buy back and
therefore are not
transferred.
NA
• * This tax of 20% is increased by 10% surcharge (if applicable) and EC
& SHEC which makes it equivalent to 22.66%. This levy is mandatory
irrespective of whether the company is liable to tax or not on its income.
The tax shall be deposited with the Government within 14 days from the
date of payment of any consideration to the shareholder. The aforesaid
taxes are not creditable by any person under the provisions of the Indian
income-tax law; and in case of failure to deposit taxes on time, the
principal officer or the company:
o Shall be deemed to be ‘assessee in default’; and

39
o Will be subject to simple interest at the rate of 1% of every month or
part thereof.

40
Accounting Treatment:
• In case Investment are sold for Buy Back:
Bank…………………………Dr
To Investment Account
(The difference if any will be credited to Profit on Sale of Investment
Account or debited to Loss on Sale of Investment Account which in turn
will be transferred to Profit and Loss Account)
• In case proceeds of Fresh Issue are issued for Buy Back:
Bank Account……………….……………………Dr
To Debentures/Other Investment Account
To Security Premium Account (if any)
• For Buy Back of Shares:
Equity Shareholders Account……..Dr
To Bank Account
(With the amount paid)
• For Cancellation of Shares Bought Back:
Equity Share Capital A/c…………………Dr (Nominal Value)
Free Reserve/Security Premium A/c……..Dr (With the excess
amount)
To Equity Shareholders A/c (Amount Paid) (Amount Paid)
• If Shares are bought back at a discount:
Equity Share Capital Account……………Dr
To Equity Shareholders A/c
To Capital Reserve A/c
• For transfer of nominal value of shares purchased out of free
reserves/Security Premium to Capital Redemption Account:

41
Free Reserves…………………………….……….Dr
Security Premium A/c………………………….…Dr
To Capital Redemption Reserve Account
• For Expenses incurred in Buy Back:
Buy Back Expenses A/c……………..Dr
To Bank
Profit & Loss A/c……..Dr
To Buy Back Expenses A/c
provisions of the above sections of which in its view should be complied
Rules. Once the Company meets the eligibility criteria, the next step
would be how to go ahead with the Buy back.
Separate rules and procedures are laid in the Act as well as in the rules.
We shall go step by step. There are about eleven points which the
Company should follow for complying with the process of Buy Back.

42
LEADING CASE LAWS RELATING TO BUY BACK
OF SECURITIES IN INDIA LAW HISTORY
1. Union of India V. Sterlite Industries (India) Ltd.(2003)-
(113)-Comp. Cas 0273 ,(Bom), the court observed that
the non obstante clause in section 77A namely “
Notwithstanding the provision of section 77 and section
100 to 104 ,the company can buy back its shares subject
to compliance with the condition mentioned in Section
77 A without approaching the court under section 100
to 104 or section 391. Therefore, section 77A is an
enabling provision and the court’s powers under section
100 to 104 and section 391are not in any way curtailed
or affected. The provisions of section 77A are
applicable only to buy back of securities under section
77A and the conditions applicable to section 100 to 104
and section 391 cannot be imported into or made
applicable to buy back of securities under 77A
.similarly the conditions for buy back of securities
under section 77A cannot be applied to a scheme under
100 to 104 and section 391,as the two operate in
independent fields.

43
2. Himachal Telematics Ltd. V. Himachal Futuristic
Communications Ltd. (1996) 86 Comp Cas 325 (Del) a
scheme of amalgamation was to be undertaken.
However, the transferee company had a subsidiary
which was holding shares of the transferor company.
An objection was raised that the sanction of the scheme
of amalgamation would result in the buying back by the
transferee company of shares of its subsidiary and
would thereby violate the provisions of section 42 and
77 of the Act. Dealing with the argument regarding
violation of section 77,it was held that no violation
would result as a consequence of sanctioning the
scheme of amalgamation as the transferee company was
not buying any of its own shares.
3. Gurmit Singh V. Polymer papers Ltd. (2003) 45 SCL
251 (CLB-N. Delhi), petition were filed under section
397 and 398 which empower the CLB to make such
order as it deems fit with a view to put an end to the
matters against which complaints were raised. Section
402 specifically empower the CLB to order purchases
of the shares or intersest of any matter to the company
by other members or by the company and consequent
reduction in the share capital. The issue considered in
this case was whether this power of CLB is subject to
compliance with the provisions of Section 77A in view
of its non-obstance clause.it was observed that the
object of section 77A is to put some checks and

44
balances when a a company , on its own ,desired to buy
back its own shares and as such Section 77A has no
application in a case where the CLB exercise its power
under section 402.

45
REFERENCE
1. THE BOOK ON “CORPORATE RESTRUTING AND INSOLVENCY”.
2. THE BOOK ON “COMPANY LAW”.
3. WWW.CACLUB.IN
4. Investoped
5. Bagwell, Laurie Simon, "Dutch Auction Repurchases: An Analysis of Shareholder
Heterogeneity" 1992, Journal of Finance, Vol. 47, No. 1, page 73.
6. CORPORATE LAW REPORTER article of PCS K.S. Ramasubramanian.
7. .( Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed and Michael Simkovic, "The
Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions",
2010
8. Taxman company law.
9. Detailed notes on new company law:- Advocate Bhasker Sharma.
10. Buy-Back detailed analysis- Mr. Soumya Sharma.

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