buy back of shares - vinodkothari.com
TRANSCRIPT
Buy Back of Securities
by Harsh Juneja
MeaningBUY-BACK IS A CORPORATE ACTION IN WHICH A COMPANY BUYS BACK ITS SHARES FROM THE EXISTING SHAREHOLDERS USUALLY AT A PRICE HIGHER THAN MARKET PRICE.
Reasons• To increase promoters holding
• Increase EPS
• Maintaining shareholders’ value in a situationof poor state of secondary market by a returnof surplus cash to the shareholders
• Restructuring the debt-equity mix
• To counter a hostile takeover
• To return surplus cash not required bybusiness to shareholders
Economics
Surplus Cash • Excess of
Working Capital
Intrinsic Value > Market
Value
• Best time to buy back when shares are cheaper
Increase in Market Price post buy back
• This increase is due to high demand at the time of buy back
Market Price stabilizes
• Once this arbitrage is covered, the prices of securities settles down at Intrinsic Value
Legal framework
Listed Companies Private Companies / Unlisted Public Companies
SEBI (Buy-Back of Securities)
Regulations, 2018
Section 68, 69 and 70 of the Companies Act, 2013
Rule 17 of the Companies (Share
Capital and Debentures) Rules, 2014
Section 68 - Power of Company to Purchase its Own Securities
Securities Premium Account
Proceeds of the issue of any shares or other specified
securities
Free Reserves
A company may buy-back its own shares or other specified securities out of-
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 kindof other specified securities.
•Authorization by AOA
•Board Resolution (at board meeting) is required if buy-back is up to 10% of the aggregate of paid up equity capital and freereserves
•Special resolution will be passed if the company wants to buy back more than 10% of the aggregate of the paid up capital (equityand preference) and free reserves
• In the case of buy back of equity shares only, the buy back in any financial year shall not exceed 25% of the paid up equity capital
•Debt-Equity Ratio post buy back ≤ 2:1
•All securities are fully paid up
• For listed companies, in accordance with SEBI Regulations
• For unlisted companies, in accordance with rules
•No offer of buy-back under this sub-section shall be made within a period of 1 year from the date of the closure of the precedingoffer of buy-back, if any.
Conditions
Section 68 - Power of Company to Purchase its Own Securities
Example• 60,000 equity shares of Rs. 100 each
• General Reserve – Rs. 36,00,000
• P&L(Cr) – Rs. 40,00,000
• Security Premium – Rs. 4,00,000
• Secured Loans – Rs. 40,00,000
• Unsecured Loans – Rs. 20,00,000
• Offer Price – Rs. 250
Workings
Conditions Workings Amount
Free Reserves 80 Lacs 80 Lacs
Paid-up Capital 25% 0F 60 Lacs = 15 Lacs15 Lacs/100 = 15000 shares15000 x 250 = 37.5 Lacs
37.5 Lakhs
Debt-Equity Ratio 140 Lacs (–) 50% of 60 Lacs 110 Lacs
Paid up Capital & Free Reserves 25% of 140 Lacs 35 Lacs
Number of shares for buy-back 35 Lacs/250 14000 shares
Buy-back
Securities Premium AccountFree Reserves
Capital Redemption Reserve
Section 69 – Transfer of certain sums to Capital Redemption Reserve
Section 70 - Prohibition for Buy-Back in Certain Circumstances
Pro
hib
itio
n f
or
Bu
y-B
ack
Subsidiary company
Investment company or a group of investment
companies
If a default is made in-
Repayment of Deposits or interest thereon
If the default is remedied and a period of 3 years has
lapsed
Redemption of debentures or preference shares
Payment of dividend to any shareholder
Repayment of any term loan or interest payable to any
financial institution or bank
BOD Resolution/SR File SH-8 (Draft LOD) with SH-9 Dispatch of LOD to shareholders
Open a special bank accountAll shares lodged with the
Company shall be verified within 15 days from closure of the offer
Offer shall be kept open for minimum 15 days and maximum
30 days
Maintain register of shares bought back in SH-10
Extinguish certificates within 7 days from payment
Within 7 days from verification, payment to be made or shares to be given back, as the case may be
File SH-11 and SH-15 after the completion of buy-back
Procedure for Pvt Co./Unlisted Public Co.
SEBI (Buy-Back of Securities)
Regulations, 2018
Tender Offer Open market
Book-building process
Stock Exchange
Odd-lot holders
Tender Offer
Reservation for small shareholders
Number of securities entitled as per their shareholding
15% of the number of securities which the company proposes to buy-
back
Whichever is higher
Small shareholders means shareholders holding shares of a company whose market value as on record date is not more than Rs. 2 Lacs
Date of passing SR/BR
Satisfactory reply
SEBI may seek clarification/ additional information
Submit public announcement to SEBI
Public announcement Indicating record date
File draft LOO and Declaration of Solvency with SEBI
Incorporate SEBI comments/changes
Dispatch LOO and tender form
Opening offer date
Offer closing date
2 working days
Same day
5 working days
7 w
orkin
g days
At the earliest
7 working days
5 working days
5 working days
Min. 10 working days
Extinguish securities
Within 15 days
Extinguish all securities
Complete verification of offers
Return remaining securities
Pay consideration
Particulars of destroyed certificates to stock exchange
Compliance certificate to SEBI
7 w
orkin
g days
7 d
ays
Book Building
BOD Resolution/SR
Open Escrow Account
Date of opening buyback offer
BoD and Merchant Banker shall determine cut-off price
Date of Closing buyback offer
Within 7 working days
Bidding shall take place through minimum 30 electronically linked bidding terminals all over India
Buy-back shall be kept open for Min – 15 Days & Max – 30 Days
P.A. in newspapers
Same cut-off price shall be paid to all successful bidders (SHs) who have bid
at or below the cut-off price
File the copy of PA to SEBI
Within 2 working days
BOD Resolution/SR
Public announcement in newspaper and submit the same to SEBI
Date of opening buyback offer
Extinguish all shares received in BuybackDate of Closing buyback offer
Within 2 working days
Within 7 working days
Extinguish shares within 15 days from receipt
Within 7 working days
Inform SE on daily basis about quantum of shares bought
back
Special note: Promoters cannot sell or tender their shares to the company during
the 6 months buyback period
Buyback shall be completed within 6 months
Stock Exchange
Basis of distinction Tender Offer Open Offer
Promoter Participation ✓ x
Allotment on Pro rata ✓ x
First-cum, first-serve x ✓
Special Bank Account ✓ x
Reservation for Small Shareholders
✓ x
Letter of Offer ✓ x
Tender Period Minimum 10 Working Days 6 months
Spill Over ✓ x
Buy Back Price Fix Fluctuates
Record Dates ✓ x
Tender Offer vs Open Offer
SEBI Informal Guidance in the matter of M/s Infosys Limited
•Regulation 24(i)(b) does not prohibit a company from issuing stock options grant letters during the offer period.
•A company may issue Grant Letters granting ESOPs to eligible employees during the Buyback period in accordance with its Plan
•The minimum vesting period of one year to be computed from the date of issue of grant letters.
The Informal Guidance can be accessed here
Taxation Aspects
Taxation Aspect
Shares
Domestic Company
Taxable u/s 115QA/115QB/115QC
Other than Domestic Company
Section 46A
In the hands of Shareholder
Capital Gain u/s 46A
In the hands of Company
No Impact
Domestic Company
In the hands of Company
20% of value + 12%Surcharge +
4% H&E Cess
In the hands of Shareholders
Exempt under section 10(34A)
Section 115QA/QB/QC
Value
Amount Received by Shareholder
Amount Received by
Company(-)
As an example, suppose XYZ originally issued shares for Rs 10. The shareholder bought the
shares at Rs 400. The company XYZ goes for buy-back of shares at Rs 600. In such case, as per
Section 115QA, tax is payable on Rs 590 (Rs 600 – Rs 10).
Credit -http://www.lawstreetindia.com/experts/column?sid=510
Parameters Reduction of Capital Share buy-back
Restrictions on size No restrictions Restricted upto 25% of paid-up capital and free reserves
Regulatory process/ approvals
SEBI, Lenders, NCLT Board of Directors approval and under section 68 of the Companies Act, the Special Resolution, but subject to limitations of quantum and Compliance with SEBI Regulations
Income tax · Upto to the extent it is treated as deemed dividend – maximum 30% plus surcharge/cess.· Beyond such deemed dividend, taxable as capital gains at the rate of 20% plus surcharges, if long-term in nature and 15%, if short term.
20% plus surcharge/cesspayable by the company