ll.m.3rd.corporate reconstruction.ankita shukla.buyback of shares-an analysis.04

7/31/2019 LL.M.3rd.corporate Reconstruction.ankita Shukla.buyback of Shares-An Analysis.04

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Hidayatullah national law university

Corporate reconstruction

Project on:

Submitted to:

Dr.Dipak Das

Associate Professor (Law)

Submitted by:

Ankita Shukla

LL.M. 3rd SEM

Roll no.04


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This is to certify that project work on Buyback of Shares- An

Analysis submitted during Semester III of the LL.M.Program

embodies original work done by me by consulting relevant books and

websites as mentioned in the bibliography.

Ankita Shukla

Roll no- 04

LL.M. (3rdSemester)


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This project would not have been able to see the light of the day

without the profound interest shown by my course teacher Dr.Dipak

Das who had been there to assist me with his commitment and

professional skills.

An additional measure of thanks is due to my parents, siblings and pals

who have played a very important role at every stage of this project by

their meticulous attention to every detail and by their exemplary

edition wherever required.

Last but not the least a sincere thanks to the almighty who had beenthere with me through this journey so as to give me enough strength

and understanding to go about with this project successfully.

Ankita Shukla

Roll No.04

LL.M.3rdSEM


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EPS..........................................................Employee Plan Scheme

ESOP..............................................Employee Stock Option Plan

SEBI.............................Securities and Exchange Board of India


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Declarationi

Acknowledgement.......ii

Table ofAbbreviations...iii

-Introduction ...1

Historical Prospective......5

Procedures and Practices of Buyback of Share7

Indian and Global Scenario of Buyback of

Shares.20

-Conclusion........25

Bibliography27


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Share capital is a very essential part of a company, listed or unlisted. Share capital can be of

two types i.e. equity share capital or preferential share capital. The share capital of a company

has to be subscribed by one or more persons. After the share of a company has been allotted

to the subscribing members, the subscribers have no right over the money gone as proceeds

of the shares subscribed.

All that the shareholder has is the right to vote at the general meetings of the company or the

right to receive dividends or right to such other benefits which may have been prescribed.

The only option left with the shareholder in order to realise the price of the share is to transfer

the share to some other person. The concept of a company buying back its own shares is

unique so far as the Indian capital market operations are concerned; even through this has

been prevalent in other parts of the world for quite some time.

There has been a proliferation of public issues of securities in early 90's and for the years

late 90's this wave has subsided and in fact there is a lull in capital market operations

for the past few months. The month of November 1998 drew a blank corporate feel strongly

that to correct the imbalance in the market process of scrip's buy back securities can act as a

level playing ground.

But there are certain provisions in the companies act which allow the shareholders to sell

their shares directly to the company and such provisions are termed as buy back of shares.

Buy back of shares can be understood as the process by which a company buys its share back

from its shareholder or a resort a shareholder can take in order to sell the share back to the

company.


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A stock buyback, also known as a "share repurchase", is a company's buying

back its shares from the marketplace. You can think of a buyback as a company investing in

it, orusing its cash to buy its own shares.

Shares buy back means when a company repurchases its own shares from the existing share

holders. The basic idea is to boost the demand by reducing supply which in theory should

push the price up with repurchase of shares can reduce the number shares, which would

invariably enhance the earnings per share and thus improve investor sentiment.

Buyback is reverse of issue of shares by a company where it offers to take back its shares

owned by the investors at a specified price; this offer can be binding or optional to the

investors.

Buy back of shares is company sponsored and has several benefits. Firstly, after the buy back,

outstanding shares issued and paid up are extinguished to the extent of the shareholders and

accept by the company future earnings.

After the buyback these earnings are available for distribution over a smaller capital base and

hence their EPS increase in the share price of the company over a period of time. Further if

the dividend payout ratio is the same in the past buy back period, the dividend per share also

increases. Even for the shareholders who do not offer the shares for buy back process is

completed.

Thus the assets of the shareholders i.e. the market value of the shares in the post buy back

period will be more. This enhancement of shareholders value is a common goal in the

corporate sector.

Buyback should only be attempted when the future earnings are forecasted to be strong and

buoyant and the company can leverage its market capitalization through buyback. If the

earning flow decline after the buyback, it would lead to a decline in the share price and

impose unnecessary costs on the company due to earlier buyback of shares at a higher price.


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Objectives of buyback

* Unused Cash:

If they have huge cash reserves with not many new profitable projects to invest in and if the

company thinks the market price of its share is undervalued. Eg. Bajaj Auto went on a

massive buy back in 2000 and Reliance's recent buyback. However, companies in emerging

markets like India have growth opportunities. Therefore applying this argument to these

companies is not logical..

* Tax Gains:

Since dividends are taxed at higher rate than capital gains companies prefer buyback toreward their investors instead of distributing cash dividends, as capital gains tax is generally

lower. At present, short-term capital gains are taxed at 10% and long-term capital gains are

not taxed.

* Market perception:

By buying their shares at a price higher than prevailing market price company signals that its

share valuation should be higher. Eg: In October 1987 stock prices in US started crashing.

Expecting further fall many companies like Citigroup, IBM et al have come out with buyback

offers worth billions of dollars at prices higher than the prevailing rates thus stemming the

fall.

* Exit option:

If a company wants to exit a particular country or wants to close the company.

* Escape monitoring of accounts and legal controls:

If a company wants to avoid the regulations of the market regulator by delisting. They avoid

any public scrutiny of its books of accounts.

* Increase promoter's stake:

Some companies buyback stock to contain the dilution in promoter holding, EPS and

reduction in prices arising out of the exercise of ESOPs issued to employees. Any such


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exercising leads to increase in outstanding shares and to drop in prices. This also gives scope

to takeover bids as the share of promoters dilutes.

Eg. Technology companies which have issued ESOPs during dot-com boom in 2000-01 have

to buyback after exercise of the same. However the logic of buying back stock to protect

from hostile takeovers seems not logical. It may be noted that one of the risks of public listing

is welcoming hostile takeovers.

This is one method of market disciplining the management. Though this type of buyback is

touted as protecting over-all interests of the shareholders, it is true only when management is

considered as efficient and working in the interests of the shareholders.

* Sometimes Governments nationalize the companies by taking over it and then compensates

the shareholders by buying back their shares at a predetermined price. Eg. Reserve Bank of

India in 1949 by buying back the shares.


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Prior to 1998 buybacks were not allowed in India. In the 1970s period, if MNCs

wantedt o c o n t i n u e d o i n g t h e i r b u s i n e s s i n I n d i a , t h e y c o u l d d o s o

o n l y b y d i l u t i n g t h e i r shareholding and getting listed on the exchange. They were

thus forced to go public. The buyback ordinance was introduced by the Government

of India (GOI) on October 31, 1998

There was Insertion of new sections 77A, 77AA and 77B in the Companies Law

which a l lowed buyback . The ma jo r ob jec t ive o f the buyback o rd inance

was to revive the capital markets and protect companies from hostile takeover bids. T he

buyback o f sha re s i s gove rned by the S ecu r i t i e s and Exchange Boa rd o f

In d ia s ( SEBI) Buy Back of Securities Regulation, 1998, and Securities and Exchange

Board of India's (SEBI) Substantial Acquisition of Shares and Takeover Regulations, 1997,

and the amended Companies Act 1956.

The ordinance was issued along with a set of conditions intended to prevent its misuse by

companies and protect the interests of investors. The buyback of shares was allowed only if

the Articles of Association of the company permitted it to do so and after

pass ing a special resolution at a general meeting

Prior to the amendment of the 1999 of the companies act there was no way a company couldbuy its shares back from the shareholders without a prior sanction of the court (except for the

preferential shares). The laws as to the buying of its share by the companies were very

stringent. Some of the ways by which a company could buy its shares back were as follows:-

(i) Reduction of share capital as given in sections 100 to 104.

(ii) Redemption of redeemable preferential shares under section 80.

(iii) Purchase of shares under an order of the court for scheme of arrangement

under section 391 in compliance with the provisions of sections 100 to 104.


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(iv) Purchase of shares of minority shareholders under the order of the company law

board under section 402(b).

Though there were ways by which a company could buy its shares back from the

shareholders but it could not be done without the sanction of the court. This was done to

protect the rights of the creditors as well as the shareholders. But the need of less complex

ways of buying its shares back by the company was always felt. The much needed change in

the companies act was brought about by the companys amendment act 1999.Sections 77A;

77AA and 77B were inserted in the companies act by this amendment.


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HOW TO BUY BACK?

A company may buy back its shares by any one of the following method.

a) From the existing shares on a proportionate basis through tender offer.

b) From odd-lot holder.

c) From open market through.

i. Book building process,

ii. Stock exchange.

SPECIAL RESOLUTION

1. For the purpose of resolution under sub-section (2) of section 77A of the companies

Act, the explanatory statement to be annexed to the notice for the general meeting pursuant to

section 173 of the companies Act shall contain disclosures as specified in schedule 1.

2. A company of the resolution passed at the general meeting under sub-section (2) of

section 77 A of the companies Act. Shall be filled with the board and the stock exchangeswhere the shares of the company are listed, within seven days from the date of passing of the

resolution.

BUY BACK THROUGH TENDER OFFER

Buy back of shares from existing shareholders;- A company may buy back its shares from its

existing shareholder on proportionate basis.


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PROCEDURE:

1. Filling of offer document: The Company which has been authorized by a special

resolution shall before buy back of shares make a public announcement in at least one

English daily, on national Hindi daily and the daily regional language with wide circulation

where the registered office of the company is situated.

2. Offer procedure:

The offer for buy back will remain open to the members for not less than 15 days and

not exceeding than 30days.

The date of opening of offer shall not earlier than several days or later than thirty days

after the period.

The company shall complete the verifications of the offer received with in fifteen

days of the closure of the offer.

3. Escrow account:

The company shall as and by way of security for performance of is obligation under the

regulations, on or before the opening of the deposit is an escrow account such sum as

specified below.

i. if the consideration payable does not exceed 100crores-25% up to of the consideration

payable.

ii. If the consideration payable exceeds 100crores-25% up to first 100crores and 10%

thereafter.

4. Payment to share holders:

The Company shall within several days of the time specified make the payment of

consideration in cash to those shareholders whose offer has been accepted of return the share

certificate to the shareholders.

5. Extinguishments of certificate:

The Company shall extinguish and physically destroy the share certificates so brought back

in the presence of the register of the merchant banker and the statutory auditor within seven


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days from the date of acceptance of the shares. The share certificate if already dematerialized

shall be extinguished and destroyed as per procedures laid down in the SEBI (Depositories

and participants rules 1998.)

BUY BACK FROM OPEN MARKET

1. through stock exchange:

a) In the purchased made through the stock exchanges, the details of purchase under the

buyback scheme shall be made available to public regularly.

b) The details in turn shall be made available to public regularly.

c) Extensive disclosures need to be made in the explanatory statement to be annexed for

the notice for general meeting and the letter of offer.

d) Pre and post buy back holding of promoters need to be disclosed carefully.

e) Buy back through negotiated deals, spot transactions or a private arrangement is not

permitted.

f) The buyback shall be made only on the stock exchanges with electronic trading

facility.

g) The buyback offer shall not be from the promoters.

h) The company shall appoint a merchant banker to the issue.

i) The public announcement shall be made at least seven days prior to the buy back.

BUY BACK THROUGH BOOKBUILDING

a) The public announcement shall be made at least seven days prior to the

commencement of the buy back.

b) The company shall appoint a merchant banker.

c) The public announcement shall contain the detailed methodology the book


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building process, the manner of the acceptance, the format of acceptance to be sent by the

share holders pursuant to the public announcement and the details of bidding centres.

d) The book building process shall be made determine the buyback price based on the

acceptances received.

e) The merchant banker and the company together shall determine the buyback price

based on the acceptances received.

f) The final buy back price, which shall be the highest price, accepted should be paid to

all share holders whose shares have accepted for buy back.

g) The offer for buy back shall remain open to the shareholders for a period not less than

fifteen days and not exceeding thirty days.

ODD LOT BUY BACK

The provisions pertaining to buy back through tender shall applicable to the odd lot shares.

GENERAL OBLIGATIONS

Obligation of the company

1. The company shall ensure that the letter of offer, the public

announcement of the offer or any other advertisement, circular, brochure, publicity material

shall contain true, factual and material information and contain any misleading

2. Information and mist state that the directors of the company accept the responsibility

for the information contained such documents.

a) The company shall not withdraw the offer to buy back after the draft letter of offer is

field with the board of public announcement of the offer to buy back is made.

b) The promoter or the person shall not deal in the shares of the company in the stock

exchange during the period the buyback offer is open.

3) No public announcement of buy back shall be made during the pendency of any

scheme of amalgamation or compromise or arrangement pursuant to the provision of the

companies Act.


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4) The company to the stock exchanges shall furnish the particulars of the share

certificates extinguished and destroyed where the shares of the company are listed within

seven days of extinguishments and destruction of the certificates.

5) The company shall nominate a compliance officers and investors service centre for

compliance with the buyback regulation and to redress the receive the investors

6) The company shall not buy back the locked in shares and non-transferable shares till

the tendency of the lock-in or till shares become transferable.

7) The company shall within two days of the completion of buy back issue a public

advertisement in a national daily, disclosing.

a) Number of shares bought.

b) Price at which the shares bought.

c) Total amount invested in buy back.

d) Details of the shareholders from whom shares exceeding one-percent of total shares

bought back and

e) The consequent changes in the capital structure and the shareholding pattern after and

before the buy-back.

8) The company in addition to these regulations shall comply with the provision of buy

back as contained in the companies act other applicable laws.

OBLIGATION OF THE MERCHANT BANKER

The merchant banker shall ensure that:-

1) The company is able to implement the offer.

2) The provisions relating to escrow account as referred to in regulation 10 has been

made.

3) Firm arrangement for money for payment to fulfil the obligations under the offer is in

place.


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4) The public announcement of buy back is made in terms of the regulations.

5) The merchant banker shall furnish to the board a due diligence certificate, which shall

accompany the draft letter of offer.

6) The merchant banker shall ensure that the content of the public

announcement of as well as the letter of offer are true, fair and adequate and quoting the

source wherever necessary.

7) The merchant banker shall ensure compliance of section 77A and section 77B of the

company Act, and other laws or rules, as many are applicable in this regard.

8) The merchant banker shall end a final report to the board in the form specified within

15 days of closure of the buyback offer.

SHARE HOLDERS RIGHTS

The shareholders of the company are entitled to seek information from the board of

directors any clarification, information or disclosure in their opinion which may be necessary

for the purpose of taking an informed decision of the matter.

They have the right to know about:

1) The date of board meeting at which the proposals for buy back has been approved.

2) The necessities for buy back.

3) The maximum amount required under the buy back and the sources of funds from

which the buyback would be financed.

4) The basis of arriving at the buyback price.

5) The number of securities that the company proposes to buy back.

6) Intention of the promoters and persons in controls of the company to tender shares for buys

back, indicating the number of shares, details of acquisition with dates and prices.


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(i) The Memorandum Articles of Association and Articles of Association of the Company

(ii) The Companies Act 1956: sections 77A, 77AA and 77B (Section 80 for buy back of

preference shares) and the Private Limited Company and Unlisted Public Limited Company

(Buy-back of Securities) Rules, 1999 ('the Rules').

Alternative to buy-back can be by following procedure under the Companies Act for either

(a) reduction of share capital (section 100) or (b) under a scheme of arrangement (Sections

391/394).

(iii) The Income Tax Act 1961: Capital Gains in hands of investors/shareholders. In case of

non-resident shareholders, TDS may require to be deducted and may be at special rate.

Reference to Double Taxation Avoidance Agreement may also be required.

(iv) The Foreign Exchange Management Act 1999

(v) For securities in demat form, Procedure of Depositories, namely CDSL and NSDL in co-

ordination with Share Transfer Agent.

For listed companies:

(i) The Securities Exchange Board of India (SEBI): the SEBI (Buy-back of Securities)

Regulations, 1998 ('the Regulations').

(ii) The listing agreement particularly clauses 19(a), 20(c), 40A (vi) (to ensure minimum

public shareholding)

(iii) The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 if buy

back results into increase in shareholding beyond various limits prescribed under takeover

regulations.

(iv) The SEBI (Prohibition of Insider Trading) Regulations 1992 - Any person or an insider

shall not deal in securities of the company on the basis of unpublished information relating to

buy-back of shares or other specified securities of the company.

Prohibition on buy back of securities:

A company shall not directly or indirectly purchase its own shares or other specified

securities-


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(a) Through any subsidiary company including its own subsidiary companies; or

(b) Through any investment company or group of investments companies

Listed companies shall not buy-back its shares or other specified securities so as to delist its

shares or other specified securities from the stock exchange.

Funds represented by which accounting head can be utilised for buy back of

shares/securities:

A company can purchase its own securities from:-

Free reserves:Free reserves have the same meaning as under clause (b) of section 372A of the

Companies Act. Where a company purchases its own shares (equity/preference) out of

free reserves, then a sum equal to the nominal value of the shares so purchased shall be

transferred to the capital redemption reserve and details of such transfer shall be disclosed

in the balance-sheet; or

Securities premium account; or Proceeds of any shares or other specified securities:

However, a company cannot buy-back its shares or other specified securities out of the

proceeds of an earlier issue of the same kind of shares or other specified securities.

In case of unlisted companies, the company shall not utilise any money borrowed from

Banks/Financial Institutions for the purpose of buy back its shares/securities.

Buy back of shares/securities can be by a letter of offer or from open market:

The shares/securities can be bought back by a company from:

(a) Existing share/security holders, on a proportionate basis.

Buy-back of shares/securities may be made by a tender offer through a letter of offer to the

holders of shares of the company, or

(b) Through a book building process of stock exchanges, or

From open stock exchanges; or


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-from holders of odd lot shares.

In case of unlisted companies, only option (a) is available.

Conditions of buy back of securities:

(a) The buy-back is authorised by the Articles of Association of a company.

(b) With consent of shareholders by way of a special resolution in the general meeting of a

company authorising the buy-back.

In the case of a listed company, (a) this approval is required by means of a postal ballot; and

(b) the securities for buy-back should be free from lock in period/non transferability.

Alternatively, buy-back can also be made by obtaining consent of the Board of Directors, if

the quantity of buy-back is or less than 10% of paid-up share capital and free reserves. If buy

back is made by authority of board resolution, then company cannot make further offer of

buy-back for next 365 days.

The resolutions passed for buy back are only an enabling one and a company is under no

obligation to buy back its securities even when the required resolutions have been duly

passed.

However in case of unlisted companies, the company shall not withdraw the offer once the

draft letter of offer has been filed with the Registrar of Companies. And in case of listed

companies, buyback offer cannot be withdrawn once the draft letter of offer is filed with the

SEBI or public announcement of the offer to buy-back is made.

(c) The buy-back is or less than 25% of total paid-up capital and free reserves of the company

and that the buy-back of equity shares in any financial year shall not exceed 25% of the total

paid-up equity capital in that financial year.

(d) The ratio of debt owed by equity is not twice the capital and its free reserves after such

buy-back

(e) There has been no default in any of the following:

-in repayment of deposit or interest payable thereon

-redemption of debentures, or preference shares


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-payment of dividend, if declared to all the shareholders within the stipulated time of 30 days

from the date of declaration of dividend

-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 Annual return,

Payment of Dividend, 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 or other specified securities listed on any recognised stock exchange shall

be in accordance with the regulations made by SEBI.

Issue of further shares after buy back:

Every buy-back shall be completed within 12 months from the date of passing the special

resolution or Board resolution as the case maybe.

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, ESOP (though option

can be granted) up to six months from the date of completion of buy-back.

Disclosures in Explanatory Statement to notice for buy back:

Where buy-back of securities is proposed after obtaining consent of shareholders, the notice

of the general meeting at which special resolution is proposed to be passed shall be

accompanied by an explanatory statement stating-

(i) A full and complete disclosure of all the material facts

(ii) The necessity for the buy-back

(iv) The class of security intended to be purchased under buy-back

(v) The amount to be invested in buy-back

(vi) Time- limit for completion of buy-back

In case of unlisted companies, an explanatory statement shall contain, amongst other things,

disclosures specified under Schedule I to the Rules and in case of listed companies,

disclosures specified under Schedule I to the Regulations. Further in case of listed companies,


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if buy back is through tender offer, additional disclosures as specified in Regulation 7 shall be

made.

After resolution and before making buy-back, file declaration of Solvency:

After the passing of resolution but before making buy-back, company is required to file with

the Registrar of Companies and in case of a listed company, also with the SEBI, a declaration

of solvency in the prescribed form 4A [prescribed under the Companies (Central

Government's) General Rules and Forms, 1956].

The declaration must be verified by an affidavit to the effect that the Board of Directors of

the company have made a full enquiry 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 MD, if any.

Register of Securities Bought Back:

After completion of buy back, a company shall maintain a register of the 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

(d) Such other particulars as may be prescribed

Where a company buy-backs its own securities, it shall extinguish and physically destroy

securities so bought back within seven days of the last date of completion of buy-back.

The company should extinguish and physically destroy the share certificates so bought-back

in the presence of Company Secretary in Practice within seven days from the date of

acceptance of the shares. [Rule 10 (1)].

Penalty on violation of law:

For violation of provisions of the Companies Act:


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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 a fine which may extend to Rs. 50, 000, or with both. The

offences are compoundable under section 621A of the Act.

For violation of provisions of the Listing Agreement:For non compliance of clause 19 of listing agreement, person contravening the provision is

liable u/s.23(1)(c) of SCRA to fine up to Rs.25,00,00,000/- or imprisonment up to 10 years or

both; for non compliance of clause 40A of listing agreement, company is liable u/s. 23E, to

fine up to Rs.25,00,00,000/- and for non compliance of clause 20 of listing agreement,

person contravening the provision is liable u/s.23H of SCRA to fine up to Rs.1,00,00,000/-.

For violation of provisions of the SEBI Act and regulations made there under:Liability may vary. For instance, for not filing with SEBI, any return or document or

information within prescribed time or not maintaining records or failure to redress investors

grievance, penalty (u/Ss.15A and 15C) could be Rs100,000/- per day of Rs.100,00,000/-

whichever is less.

For defaults under insider trading regulations or under the takeover regulations, penalty(u/Ss.15G and 15H) could be up to Rs.25,00,00,000/- or 3 times of profit made, whichever is

higher. Further SEBI may issue directions thereby prohibiting access to securities market,

disgorgement of ill gotten gains, and prohibition from dealing in securities. And criminal

prosecution under section 24 of SEBI Act.


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Law governing repurchase of Shares in India

a) Introduction

Section 77 of the Companies Act, 1956 prohibits a company limited by shares or limited by

guarantee and having share capital, from repurchasing its shares unless it leads to a reduction

of capital in pursuance of sections 100 to 103 or section 403.

The procedure prescribed under sections 100 to 103 for reduction of capital is the passing of a

special resolution by the company for the aforesaid purpose, confirmation of the reduction of

capital by the court4 and the registration of the court's order and minutes of reduction with

the Registrar.

Section 402 deals with a situation where pursuant to an application under section 397/ 398

dealing with mismanagement and oppression of the minority, the Company Law Board

orders a company to repurchase its shares from any of its members.

It is clear from the aforesaid provisions that substantially, section 77 envisages the second

method of repurchase of shares were repurchased shares are extinguished and do not remain

as assets of the company.

But the procedure prescribed in sections 100 to 103 including confirmation by the court may

become very onerous and time consuming for the company.

b) Rationale behind Section 77

Section 77 is a crystallisation of a catena of English decisions starting from the well-known

decision of the House of Lords in Trevor v. Whitworth.' A summary of this decision would

suffice to understand the rationale behind section 77. The House of Lords struck down the


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purchase of its own shares by a company even though it was authorised by the company's

articles for the following reasons:

i) Purchase of its own shares is a reduction of capital. The Act' in sanctioning reduction

of capital under certain conditions and with certain safeguards, impliedly prohibits it unless

these conditions and safeguards are complied with.

ii) The Act impliedly prohibits the return of capital to its members. Purchasing its own

shares would in effect mean returning the capital to its members.

The court, according to section 10 of the Companies Act, 1956 would mean the High Court

having jurisdiction in relation to the place at which the registered office of the company is

situated unless the Central Government has by notification conferred jurisdiction on the

District Court subordinate to that High Court.

BUY BACK LIMIT

UNDER SECTION 77a(2)(c)no company can buy back its shares or other specified securities

unless the buyback is less than 25% of its total paid up capital and free reserve of company

purchasing its shares provided the buyback of equity shares in any financial year shall not

exceed 25% of total paid up capital in that year. Further company can alone bring thesecurities, which are fully paid up, back.

According to a report in the economics time some 200 companies have already passed

shareholder resolutions empowering buy back equity. These include most of the top

corporate and also mid-cap companies. However, it is to be significant way. Some of the

companies, which have successfully completed the buyback of its own shares, are:

1. Coromandal fertilizer.

2. Aarti industries limited.

3. Finoloex cable limited.

4. Bhagyanagar metals limited.

5. Indian rayon.


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Law governing repurchase under English Law

Under English law, substantial amendments have been made regarding repurchase of shares.

Section 162 of the Companies Act, 1985, provides that subject to certain provisions, a

company if authorized so to do by its articles, may purchase its own shares. Shares

repurchased have to be cancelled and cannot be held as treasury shares by the company:4

For the purpose of repurchase, a dual classification has been made in the Act-market & off

market purchases.

Under section 164, a company can make an off-market purchase only through a specific

contract which has received advance authorization by a special resolution of the company.

Under section 166, a Company can make market purchases of its own shares if authorized by

ordinary resolution in general meeting.

The effect of these provisions is that the procedure for repurchase of shares in U.K. is not as

rigorous as in India. A major distinction is the absence of court's intervention in the process

of 'repurchase'.

Law governing repurchase under U.S. Law

The law relating to repurchase of shares in the U.S. differs from state to state. Most of the

states follow either the 1971 or the 1979 version of the Model Business Corporation Act.

In both the versions, a company has been given the general power of repurchasing its shares

subject to the condition that even after such repurchase, the company must have a surplus of

assets over its liabilities and stated capital.

But the crucial difference between the two versions is that under the former, the repurchased

shares are allowed to remain as treasury stock and could be resold by the company whereas in

the latter, these shares are extinguished and the share capital reduced to that extent.

As in the U.K. law lays down stringent guidelines with reference to buy back of shares. One

of the legal safeguards to prevent the company from jacking up its share prices at the time of

public offer is to prohibit it from buying back its shares within a year of capital issue. Further,

the volume of shares repurchased on any day in the capital market cannot exceed 5% of the

trading volume of the shares on the particular day.''


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PROS AND CONS OF BUY BACK

1. It is considered an additional form of rewarding the shareholder in the year of mega

profit of landslide earnings as opposed to miniscule dividend.

2. Since the company could maintain the same level of income even after purchasing its

share are spread over the quantum of share capital there by inversing the EPS.

3. It reflects the positive thinking by the management and in still confidence among the

investors.

4. This can bring over the increase in promoter's holding without taking the route of take

over.

5. This can enhance the market value shares in circulation and lesser number of

shareholders, the quality of service can be improved.

6. This can be used as a mechanism against the hostile takeover.

7. The lesser number of shares in circulation and lesser number of

shareholders, the quality of service can be improved.

8. On the positive side, the share price of the company would improve on account of the

buyback programme. This improve share price, if sustained over a period of time, would

open the opportunity for mobilizing equity funds at a future.

CONS:

1. This will lead to manipulation of shares in the market due to price rigging which may

work to the prejudice of the shareholders.

2. Likely increase in gearing.

This buyback programme essentially involves reduction in equity capital/free reserves and to

this extent, the gearing of the company would depend increases, The extent of increase in

leveraging would depend on whether the company funds the buy back through reduction of

its current assets (such as cash balance, marketable securities, etc) or through incremental

borrowings.


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Any increase in leveraging reduces the protection level available to the creditors and hence,

any buyback programme has a negative impact depends on several factors such as extent of

reduction in net worth, nature of funding for the buyback programme, the strike price for the

buy back and the post-buyback financial ratios.

The impact is most significant in case the buy back is to the maximum extent possible (25%)

and is funded entirely out of fresh borrowings.

3. Reduce profitability:

A buyback programme also has a negative impact on the profitability of the company. The

profitability would reduce because of increase in interest out go-

4. Impact on mobilization of funds:

Also, the increase in debt equity ratio would negatively impact the financial flexibility

of the company to raise additional debt for its operations. Moreover, the company will be

prohibited from issuing equity for 2 years.


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The basic premise in any proposal for amendment is that the ground realities

have changed and thus the legislation has to be altered accordingly. To put it in a

different way, amendments make sense when the purpose for which the original

section was enacted has itself become obsolete.

Buy back means purchase of securities by a company from its shareholders. It is not

purchase by promoters of company, but it is purchase of its shares by the company

itself. Even promoters may participate in buy-back of securities and to that extent

those managing companies need to be extra careful in discharging their duties of

care and trustee towards funds of the company

The purpose of section 77 is primarily to protect the interest of the creditors of

the company and also to prevent the company and the management from

unjustly enriching themselves by trafficking in the company's own shares. The

question is whether this purpose has lost its significance.

The doctrine of capital maintenance for protection of creditors and the need

for safeguards against artificial manipulation of prices by companies are relevant

even now and perhaps more so in the liberalised environment.

The regulatory authorities including SEBI are yet to get a grip over insider

trading and rigging of prices. Dr. D.C. Gupta, Director, Society for Capital

Market Research & Development states that "buy back will only give one more

opportunity to managements to manipulate prices".

Also, a simplistic view of the issue may lead to difficulties later. For example, whatwill be the shareholder's rights if the company is allowed to purchase its own shares?

As an eminent lawyer27 states : "Tomorrow if a company purchases shares from

only some 'earmarked' shareholders, can other shareholders object to this as

being discriminatory and favouring only certain shareholders?"

Such issues form an integral part of the topic under consideration and needs to

be studied in detail before any decision is arrived at.

Any amendment to corporate law provisions have to conform to the


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accompanying environment in the country. In India at present, despite

the institution of SEBI, the market regulatory mechanisms are faulty and

inadequate as evidenced by the various scams.

Therefore, in such a situation, allowing buy back of shares can result in increasing

share price manipulation and concentration of power in the hand of the

management at the cost of small investors.

Further, the fact that there are adequate safeguards against hostile takeovers in

the Indian company law itself makes the proposition of allowing companies

complete freedom to buy their own shares look increasingly unattractive.

It may be remembered that buyback has no impact on the fundamentals of the

economy or the company. Therefore investors should be cautious of

unscrupulous promoters' traps.


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K.R.Sampath, Law and Procedure for Mergers/Joint Ventures

Amalgamations Takeovers & Corporate Restructure;

Dr.Avtar Singh, Company Law;

TaxmannsCompany Law.

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