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Buy-back of Securities pursuant to section 77A of the companies Act, 1956

 1.  A company can buy-back securities u/s. 77A. The following regulations and rules are relevant :

  1. Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998 (18 SCL (St.) 233) (as amended from time to time). These regulations are applicable to buy-back of shares or other specified securities of a company listed on a stock exchange. Buy-back cannot be for delisting of a company’s shares from the stock exchange.

  2. Private

Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999 (21 SCL (St.) 109).

2.  Buy-back of securities can be done out of free reserves or securities premium account or proceeds of issues of any shares or other specified securities. Proceeds out of issue of same kind of securities cannot be used. Buy-back can be of preference shares also.

3.  U/s. 77A, the following conditions have to be satisfied:

  1. Authorisation under Articles for buy-back.

  2. Special resolution in General Meeting except as under:

i. buy-back is less than 10% of paid-up capital and free reserves; and

ii. such buy-back is authorised by a Board Resolution.

  1. Buy-back is up to or less than 25% of total paid-up capital and free reserves subject to buy-back in a financial year not to exceed 25% of total paid-up equity capital.

  2.  Debt equity ratio post buy-back not to exceed 2:1. Debt includes secured and unsecured debts.

  3. Securities under buy-back are fully paid-up.

  4. Securities under buy-back should be in accordance with applicable regulations as listed at 1(a)/(b) above.

  5. Buy-back should be completed within 12 months of passing special resolution. No buy-back shall be made within 365 days from the date of preceding offer of buy-back.

  6. The notice for special resolution should contain prescribed particulars giving full and complete disclosure of buy-back.

  7. Securities bought back shall be extinguished/physically destroyed within 15 days of the date of acceptance of the securities. All the securities bought back shall be extinguished within 7 days of the last date of completion of buy-back.

  8.  Declaration of solvency to be filed in Form No. 4A before buy-back with ROC duly verified by Affidavit by Board of Directors to the effect that the company is capable of meeting its liabilities and will not be rendered insolvent within one year. The declaration is to be signed by at least two Directors, including one Managing Director.

  9. Further issue of same kind of securities cannot be made by the company for a period of six months except bonus issues or discharging subsisting obligations like conversion of warrants, stock option schemes, sweat equity or conversion of preference shares of debentures.

  10. Register of buy-back to be maintained in Form No. 4B detailing consideration paid for buy-back, date of cancellation and other similar information.

  11. Return to be filed with ROC on completion of buy-back within 30 days containing particulars as contained in Form No. 4C.

4.  Where buy-back is out of free reserves, amount equal to par value of securities paid back to be transferred to capital redemption reserve account with appropriate disclosure in the Balance Sheet (Sec. 77AA).

5.  U/s. 77B, the buy-back of Securities cannot be done

  1. through any subsidiary company,

  2. through any investment company or group of investment companies,

  3. if company has defaulted in repayment of deposit or interest payable thereon, in redemption of debentures or preference shares or in payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or bank,

6.  if a company has not complied with provisions of sub-sections 159, 207 and 211. Default in compliance with provisions relating to buy-back would lead to two years imprisonment or a fine of `50,000/- or both to every person connected with the default.

Companies Bill, 2012

The following are key changes proposed by the Companies Bill, 2012:

  1. Decision of buy-back cannot be considered by passing a resolution by circulation. [Clause 68(2)(b)]

  2. Companies will not be permitted to use “odd lot purchase“ method for buy-back of securities.  [Clause 68(5)]

  3. Securities bought back will be required to be extinguished/physically destroyed within 7 days from the last date of completion of buy-back instead of 15 days of the date of acceptance of the securities at present. [Clause 68 (7)]

  4. Any default in compliance with the provisions related to buy-back will be punishable with a fine which shall not be less than ` 1,00,000 but which may extend to ` 3,00,000 and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or fine or both. [Clause 68(11)]

  5. Buy-back will not be permitted in case of any default till expiry of 3 years after such default has ceased to subsist. Specified defaults include repayment of deposits or payment of interest thereon, redemption of debentures or preference shares or payment of dividend to any share holder, or repayment of any term loan or interest payable thereon to any financial institution or banking company. [Clause 70(1)(c)]

  6. No compromise or arrangement in respect of any buy-back of securities shall be sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68 and it will not be possible to exceed limits specified for buy-back. [Clause 230(10)]

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