Learning No. 14Month: June 2021
BUY-BACK OF
SECURITIES: ALTERNATIVE MODE FORCAPITAL RE-DESIGNING!!
INTRODUCTION
“Buy-back of securities” (“The Buy-back”) is a
corporate financial strategy which helps the companies to restructure its
capital. It is basically a purchase of its own shares or other specified
securities by a company from its shareholders. Normally, a company can reward its
members in3 ways – by way of dividend or by issue of bonus shares or through a Buy-back
of shares. Unlike debenture holders, who gets fixed return in the form of
interest, equity shareholders who undertake greater risk don’t get fixed dividend
every year (ie., it depends upon performance of the Company).When a company is
prosperous and has accumulated distributable profits in its balance sheet, other
than issue of bonus shares, Buy-back is
the best mode to compensate its members, provided the company has enough
liquidity and these liquid funds are not required by the company in the short
run. The pricing of shares for buy back is normally at a price higher than the
market price.
During
the initial stage of CoVID-19 pandemic, stock markets across the globe crashed
drastically in the mid of March and April 2020. At that point of time, many big
companies bought back its shares from the stock markets to support the sluggish
movements of share price, pay off its members and try to boost the share prices.
Promoters of around 200 companies from the Sensex and Nifty 500 index had
acquired shares from the open market to increase stake in their companies. Buy-back
by the companies as well as promoters shows positive sign among the investors
about the confidence of the management in running the business. The details of
Buy-back offer made during the year 2020 are as give below:
It
is pertinent to note that the company can buy-back equity as well as preference
shares. It is not necessary that preference shares must always be redeemed as
they can also be the subject of a buy-back of shares. Thus, securities included
in Buy-back means securities as defined under Section 2(h) of the Securities
Contracts (Regulation) Act, 1956 (“SCRA, 1956”). Currently, many big corporates
are using this mode of corporate restructuring. The shares bought back must be
compulsorily extinguished and destroyed and leads to reduction of capital. Buy-back
is generally looked at as a simple way to pay-off investors and reduce the
overall cost of capital. This article portrays
the concept Buy-back, its regulations in India for both listed and unlisted
companies, its methods and broad process along with case studies.
HISTORY
Prior
to the amendments in the year 1999in the Companies Act, 1956 (“the 1956 Act”), no
company limited by shares and by guarantee having share capital could buy its
own securities unless it complies with the provisions of capital reduction under
Sections 100 to 104 of the 1956 Act, for which High Court approval was
required.
The
concept of Buy-back was introduced in the 1956 Act by the Companies (Amendment)
Act, 1999 (“the 1999 Amendment Act”) by the insertion of Sections 77A, 77AA and
77B. Apart from the above provisions, a company was required to comply with the
conditions mentioned in Section 77 of the 1956 Act as well as Private Limited
Company & Unlisted Public Limited Company (Buy-back of Securities) Rules,
1999 simultaneously. Also listed companies were required to additionally comply
with the SEBI (Buy-Back of Securities) Regulations,1999 (“BRR, 1999”). Compared
to the developed nations, it was relatively a fresh idea in India at that point
of time. Once the 1956 Act was amended in the year 1999, Buy-back started
gaining momentum. The practice of Buy-back has now spread across the corporate gamut
across the globe.
Currently, Buy-back is
governed by following regulatory framework:
Unlike
section 67 of the 2013 Act, which prohibits a company to Buy-back its own
shares unless reduction of capital is effected, Sec 68 dilutes this general
prohibition and allows a company whether public or private, to Buy-back out of requisite
sources of funds.
BENEFITS OF
THE BUYBACK
The
Companies buying back its securities from its members on account of following
reasons:
(a) Increase in Promoters Stake: Consequent
upon decrease in public shareholding through Buy-back, promoters’ stake shall
be increased. It shows promoters confidence in the Company.
(b) Increase in EPS: The
EPS (Earning per shares) will be improved as no. of shares is getting reduced. Thus,
profit if any, gets divided among fewer shares, as illustrated below:
(c) Anti-Takeover Mechanism:
It is an Anti-takeover mechanism whereby management can defend against the
treat of hostile takeover, arising out of greater stake of promoters.
(d) Return to the Shareholder: It
is a substitute for dividend, in the form of surplus cash paid to the
shareholders which are not required by the business.
(e) To
support share price during the period of sluggish market situation.(Please
refer figure no. 2 and table no. 11 below)
(f) Exit route to the
Shareholders:
It gives an exit opportunity to those
shareholders who wish to sell the shares of the Company which are traded at the
undervalued price.
In
a nutshell, the best strategy to keep the share price in a bear run is to do a Buy-back.
SOURCES
OF BUY-BACK
The
buy-back of securities can be made only out of:
(a) Free
Reserves;
(The term “Free Reserve” is defined under Sec 2 (43)
of the 2013 Act)
(b) Share
Premium Account;
(c) Proceeds
from issue of shares or other specified securities.
However,
Buy-back can’t be made out of proceeds of an earlier issue of the samekind of
securities. As per Reg 2(n) of BRR, 2018, ‘specified securities’ includes
employees’ stock option or other securities as may be notified by the Central
Government from time to time.
MODES
OF BUY-BACK
The
buy-back offers are made out of following methods:
(i)
Buy-back from existing
security holders on a proportionate basis through tender offer;
(ii)
Buy-back from the open market
on the stock exchange;
(iii)
Buy-back from the open
market through book-building;
(iv) Buy-back
from odd-lot holders.
(i)
BUY-BACK
THROUGH TENDER OFFER METHOD
This
mode of Buy-back is done through a tender offer, wherein a company proposes to re-purchase
fixed no. of securities from its securities holders of the company at a fixed
price through a Letter of Offer (LOO). Here, members who wish to sell
securities can submit the no. of shares which they are interested to sell back
to the company. If total no. of shares tendered by the shareholders exceeds the
shares required by the company, shares are bought back on a pro-rata basis. The
tender offer shall be for a specific period and is generally for a short time.
This method can be conducted quickly but it can be costlier than buying shares
back from the open market. As per Reg 2 (q) of the BRR, 2018, ‘tender offer’
means an offer by a company to buy-back its own shares or other specified
securities through a LOO from the holders of the shares or other specified
securities of the company.
(ii) BUY-BACK FROM THE OPEN
MARKET – ON THE STOCK EXCHANGE
In
this mode, the company buys its own securities from the stock market. This Buy-back
happens for an extended period of time as a large block of shares needs to be
bought and such transaction happens through company’s brokers. Also, the
company can cancel the repurchase programme whenever it chooses to.
(iii)
Buy-back from the open market through book-building
Here,
the company offers a price band to the shareholders. Under this method, interested
members can participate by tendering number of shares at any price range given
in price band and the buyback price is determined by the merchant banker based
on the bids submitted. It is similar to public issue which is done through book
building. This is also known as Dutch Auction Tender Offer. The final price
shall be highest price quoted by the shareholders.
(iv)
BUY-BACK
FROM ODD-LOT HOLDERS
Buy-back
from odd-lot holders happens when a company offers to purchase its shares back
from shareholders who are holding lesser quantity (typically 100). This helps
small shareholders to understand the value of their investment to sell their
holding without suffering dealing charges. From the company's perspective, it helps
to reduce the small shareholders from the members’ register and thereby save
its administration costs. As per Reg 2(j) of BRR, 2018, ‘Odd lots’ means the
lots of shares or other specified securities of a company, whose shares are
listed on a recognized stock exchange, which are smaller than such marketable
lots, as maybe specified by the stock exchanges.
COMPLIANCE
FRAMEWORK
I. Companies
Act, 2013
i) CAPITAL REDEMPTION RESERVE ACCOUNT:
As per Sec 69 of the 2013 Act, if the buy-back of
shares is made 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. Such reserve may be applied by the company, in
paying up fully paid bonus shares to members of the company.
ii) PROHIBITIONS FOR BUY-BACK IN CERTAIN SITUATIONS:
As per Sec 70 of the 2013 Act, a Company shall not
directly or indirectly purchase its own shares or other specified securities: -
·
through
any subsidiary company including its own subsidiary companies; or
·
through
any investment company or group of investment companies; or
·
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.
however, the buy-back is not prohibited, if the
default is remedied and a period of 3 years has lapsed after such default
ceased to subsist.
·
if
the company has not complied with the provisions of Section 92 (Annual
Return), Section 123 (Declaration of Dividend), Section 127 (punishment for
failure to distribute dividend) and Section 129 (Financial Statement).
iii)
PROCEDURE FOR BUY-BACK OF SHARES
CONDITIONS OF BUY-BACK
1. Articles
of Association(AOA)
of the company should authorize Buy-Back. if no provision in AOA, then first
alter the AOA.
2.
3.
Following
things/ limits must be kept in mind:
a.
Buy-back
shall not exceed 25% of aggregate paid up share capital and free reserves during
the life of the Company.
b.
Buy-back
shall not exceed 25% of paid up equity capital in a financial year.
c.
Ratio
of secured and un-secured loan owed by the Company shall not exceed twice the
paid up capital and free reserve.
d.
Partly
paid up shares must be made fully paid up.
e.
Buy-back
shall be completed within a period of 1 (one) year from the date of passing of
Special Resolution or Board Resolution, as the case may be.
4. Hold a
Board Meeting and pass the resolutions for the following:
a.
The
notice of the general meeting along with explanatory statement as prescribed
under SCD Rules, 2014. In case of listed companies, it shall also comply
with BRR, 2018.
b.
Approve
draft LOO.
c.
Approve
and sign the Declaration of Solvency.
d.
Mode
of Buyback of shares& its price.
5. Hold the general meeting and pass the Special Resolution.
LETTER
OF OFFER
6. LOO shall be dispatched to the shareholders immediately
after filing the same with the RoC but not later than 20 days of its filing.
OFFER PERIOD FOR THE BUY-BACK
AND THE TIME-PERIOD
7. The Buy-back offer shall remain open for
a period between 15 days and 30 days from the date of dispatch of LOO. (Period may be less than 15 days, if all the members agree.)
VERIFICATION OF DOCUMENTS
8. The company shall complete the verifications of the
offers received within 15 days from the closure of offer and the shares lodged
shall be deemed to be accepted unless a communication of rejection is made
within 21 days from closure date.
OPENING
OF NEW BANK ACCOUNT AND PAYMENT OF CONSIDERATION
9.
After
the closure of the buy-back offer, the company shall immediately open a
separate bank account and deposit therein, consideration payable for the shares
tendered for the Buy-back.
10.
Within
7 days from the date of verification of the offers:
·
Make payment
of consideration to those shareholders whose shares have been accepted.
· Return the share certificates to those shareholders whose shares are not accepted or the balance of shares, if partly accepted.
EXTINGUISHMENT
OF CERTIFICATE
11.
The
company shall extinguish and physically destroy the shares bought
back within 7 days of the last date of completion of buy back.
FILING OF EFORMS AND RECORDS
12.
Special resolution
authorizing the Buy-back shall be filed in e-form MGT-14.Copy
of such resolution shall also to be filed with SEBI and stock exchanges within
7 days of approval.
13.
Before
buying back the shares, the company shall file with the Registrar of Companies
(RoC) a LOO in e-form SH-8.
14. The company shall file with the RoC, along with the LOO, a declaration of solvency in e-Form SH-9. Additionally, listed companies shall file such documents with SEBI.
15. The Company shall maintain a Buy-back register in Form SH-10.
16.
The
Buy-back return shall be filed with the RoC in e-Form SH-11 on
completion of buy back along with the certificate in Form
SH-15 certifying that the Buy-back has been made in compliance with the
provisions of the 2013 Act and rules made thereunder, within 30 days of such
completion.
COMPLIANCES
POST BUY-BACK:
17.
The
company shall not make a further issue of the same kind of shares including
allotment of new shares under Sec 62 (1) (a) within a period of 6 months
except by way of a bonus issue or 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. But in case
of listed companies, it is 1 year from the expiry of buy-back
period.
18.
No
offer for Buyback shall be made by the Company within 1 year reckoned from the
closure if preceding Buy-back offer.
II. SEBI
(Buyback of Securities) Regulations, 2018
For instance, SEBI has denied permission for its Rs
9,000 crores share buyback offer by engineering major M/s. Larsen & Toubro
(L&T) in the year January 2019 due to the reason of debt-equity ratio of
the company after buy-back would be more than 2:1 based on consolidated
financial statements.
2. The
buy-back from open market shall be < 15% of the paid up capital and
free reserves of the company, based on both standalone and consolidated
financial statements of the company.
3. A
company shall not buy-back so as to delist its shares or other specified
securities from the stock exchange.
4. A
company cannot do Buy-back from any person through negotiated deals, whether on
or off the stock exchange or through spot transactions or through any private
arrangement.
5. A
company cannot allow buy-back of its shares unless the consequent reduction of
its share capital is effected.
6. Where
the buy-back is through tender offer method or from open market either through
the stock exchange or through book building, the resolution of board of
directors/ special resolution as the case may be, shall specify the maximum
price at which the buy-back shall be made.
7. Insider
shall not deal in shares or other specified securities of the company on the
basis of unpublished price sensitive information (“UPSI”) relating to such Buy-back.
|
Sl.
No. |
Particulars |
Different modes of Buy-back |
||
|
Tender
Offer |
Open Market |
|||
|
Stock
Market |
Book-Building |
|||
|
1 |
Buyback
price |
Fixed Price |
At market related prices but maximum price must
be fixed |
bids are received from shareholders |
|
2 |
Public
Announcement |
Within 2 working days of declaration of Results
containing details given in Sch. II to the regulations. |
Within 2 working days of declaration of Results
containing details given in Sch. IV to the regulations. Shall be published in English daily, Hindi daily and regional language daily with wide circulation in registered office of the Company. |
at least 7days prior to the commencement of
buy-back containing the disclosures as given in Sch. II to the Regulations. |
|
3 |
letter of offer |
Submit a draft LOO containing disclosures as
specified in Sch. III through a merchant banker with SEBI within 5 working
days of Public Announcement. SEBI in turn, shall give comments within 7 working days of receipt of draft LOO. LOO along with tender form shall be dispatched to the securities holder based on record date within 5 working days from the receipt of comments of SEBI. |
In case of the buy-back from open market, no
draft letter of offer/ letter of offer is required to be filed with the SEBI. |
- |
|
4 |
Time
for which Buy-back remains open |
The date of the opening of the offer shall be not
later than 5 working days from the date of dispatch of the LOO. |
· The
buy-back offer shall open not later than 7 working days from the date of
public announcement · It
shall close within 6 months from the date of opening of the offer. |
Min. 15 days and Max. 30 days of the date of
dispatch of the LOO. |
|
5 |
Escrow
Account |
·
25% of
consideration for a consideration up to Rs. 100 Cr + 10% for excess. |
·
deposit
in escrow account 25 % of the amount earmarked for the buy-back. |
25% of consideration for a consideration up to
Rs. 100 Cr + 10% for excess |
|
6 |
Verification
of offers received on Buyback and payment of consideration |
Within 7 working days of closure of offer. |
Within 15 days of payout. |
Within 7 working days of closure of offer. |
|
7 |
Can
Promoters participate in the buy-back |
Yes |
No |
Yes |
|
8 |
other
compliances |
Buyback shall be on proportionate basis and 15%
of no. of securities which proposes to buyback shall be reserved for small
shareholder. |
· The
buy-back has to be made only on stock exchanges having nationwide trading
terminals. · The
company shall submit the shares or other specified securities bought-back
details, on a daily basis with SEBI, stock exchanges and website |
The number of bidding centers shall not be less
than thirty and there shall be at least one electronically linked
computer terminal at all the bidding centers |
Table no. 8
GENERAL COMPLIANCE
1. The company shall not withdraw
the offer to buy-back after the draft LOO is filed with the Board or public announcement
of the offer to buy-back is made;
2. The promoter(s) or his/their
associates shall not deal in the shares or other specified securities of the
company in the stock exchange during the period from the date of passing the
resolution of the board of directors or the special resolution, as the case may
be, till the closing of the offer.
3. The company shall within 2 days of expiry of buy-back period issue a public advertisement in a national daily containing other requisite details
III. SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND
TAKEOVERS) REGULATIONS, 2011 ("SAST REGULATIONS, 2011")
Reg 10 of SAST Regulations, 2011 inter alia provides for provides for exemption from the obligation to make an open offer in the event of increase in voting rights pursuant to a buy-back under Sec 68 of the 2013 Act:
a) If pursuant to a buy-back, the increase in voting
rights in a target company of any shareholder is beyond the limits under
regulation 3(1) of SAST Regulations, 2011 i.e. 25%, the shareholder shall be exempt
from the obligation to make an open offer, provided such shareholder reduces
the excess voting rights to the threshold level under regulation 3(1) within90
days from the closure of said Buy-back offer.(Reg 10(3))
b) If the shareholder holds more than 25% but less
than the maximum permissible non-public shareholding, and the buy-back results
in increase in voting rights of more than 5 % in a financial year, then
exemption from making an open offer will be available if:
·
the
shareholder has not voted on the resolution authorizing the buy-back (either
shareholders' resolution or Board resolution) and
·
such
increase does not result in acquisition of control by such shareholder over the
target company. (Reg 10(4)(c))
Case no 1: a promoter is holding 22% of the total
voting rights and is not participating in the buy-back. Post buy-back, his voting
rights increase by 8%, i.e. his aggregate voting rights post buy-back is 30%.
In this case, the shareholder will have to reduce his shareholding to 25% within
90 days, else, he will be required to make an open offer pursuant to the SAST
Regulations, 2011.
Case no. 2: a promoter is holding 48% of the total
voting rights and is not participating in the buy-back. Post buy-back, his voting
rights increase by 14%, i.e. his aggregate voting rights post buy-back is 62%.
He can claim exemption under regulation 10 of SAST Regulations, 2011 as given in
(b) above, either by satisfying the conditions or reducing the additional
voting rights to 5%.
IV. INCOME
TAX ACT, 1961
Buy Back of shares is taxable pursuant to Section 115QA of the Income Tax Act, 1961 at the rate of 20% on the distributed income plus surcharge and cess thereon as applicable. The provisions of this section are also applicable to a listed company in respect of which public announcement is made after 5th July, 2019 pursuant to SEBI (Buy Back of Securities) Regulations, 2018. It has been explained that the term "distributed income" means the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed.
V. FEMA
The term “Buy Back” is not specifically covered in
FEMA, though in practice it is being treated as a transfer by a Non-Resident
(Person Resident outside India) to an Indian Company. Rule 9 of the FEMA
(Non-Debt Instruments) Rules, 2019 deals with “Transfer of equity instruments
of an Indian company by or to a person resident outside India”.
As per sub-rule 2 of the said rules, a person
resident outside India, holding equity instruments of an Indian company or
units in accordance with these rules may transfer the same to a person resident
in India by way of sale or gift or may sell the same on a recognised stock
exchange in India in the manner specified by the Securities and Exchange Board
of India. It is further provided that the transfer by way of sale shall be in
compliance with and subject to the adherence to pricing guidelines,
documentation and reporting requirements for such transfers as may be specified
by the Reserve Bank in consultation with the Central Government from time to
time
BUYBACK CASES
The companies
had announced buyback offers during the FY 2018-19, the highest ever in the
history of stock market as given below:
PRICE MOVEMENT OF DALMIA BHARAT LTD.
POST BUYBACK
The given
below is the case study of price movements of M/s. Dalmia Bharat Ltd. where the
Buy-back offer was approved on March 21, 2020. The Company announced Buy-back
of shares of face value of Rs. 2 each from its shareholders for an aggregate
amount of Rs. 500 crores (“Maximum buyback size”) and price fixed is not
exceeding Rs. 700 (“Maximum buyback price”) payable in cash from open market
through stock exchange mechanism. Closing price of the Company on Friday, March
23, 2020 was Rs. 511.10. Maximum buyback price was 40% higher than closing
price as above. The maximum buyback size represents around 6.7% and 5% of paid
up capital and free reserve of the Company based on standalone and consolidated
financial statements as at March 31, 2019.Public Announcement of such Buy-back was
published on March 24, 2020. The Buy-back commenced on April 3, 2020 and closed
on October 1, 2020.The Company bought-back and extinguished a total of 61,66,540
equity shares utilizing a total of around 330 crores representing 65.6% of
buyback size. Highest price at which the equity shares were bought back was Rs.
697.97.Closing price of the company as on Thursday, October 1, 2020 is Rs.
772.60 i.e.51% higher than closing price as on the date of Buy-back approval.
The study itself shows that Buy-back mode of restructuring helps the company to
increase of share price even in case of sluggish movement.
CONCLUSION
New SEBI Regulations brings better clarity, simple
to understand and are in line with the 2013 Act. Many big corporates with huge
reserves mainly IT companies like TCS, Wipro Ltd., declared Buy-back due to the
reason of overcapitalized company and its undervalued stock in the stock market.
It also provides an exit opportunity to the investors who are intending to sell
at the sluggish movements in the Stock Market. Hence, professionals must be well
acquainted with the provisions relating to buy back and other methods of
capital re-designing, so that they are in a position to appropriate guidance to
their respective Companies/ Clients in line with the latest amendments in law.
Reference:
1.
National
Stock Exchange of India Limited: https://www.nseindia.com/
2.
BSE
Limited: https://www.bseindia.com/
3.
Companies
Act, 2013 and respective rules
4. SEBI Annual Reports: https://www.sebi.gov.in/
5. SEBI (buy-back of securities) regulations 2018
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