| Introduction: | | | | (c) from odd lots, that is to say, where the lot |
| When a company has substantial cash resources , it | | | | of securities of a public company, whose shares |
| may like to purchase its own shares from the market | | | | are listed on a recognized stock exchange, is smaller |
| particularly when the prevailing rate of its share in the | | | | than such marketable lot, as may be specified by the |
| market is much lower than the book value .the legal | | | | stock exchange; or |
| aspects involved in this connection are described as | | | | (d) By purchasing the securities issued to |
| under: | | | | employees of the company pursuant to a scheme of |
| Under section 77A of the Indian companies Act, | | | | stock option or sweat equity. |
| 1956, a company may purchase its own shares or | | | | (6) Where a company has passed a special resolution |
| other specified securities out of - its free reserves; | | | | under clause (b) of sub-section (2) or the Board has |
| or the securities premium account; or the proceeds | | | | passed a resolution under the first proviso to clause |
| of any shares or other specified securities. but no | | | | (b) of that sub-section to buy-back its own shares or |
| buy-back of any kind of shares or other particular | | | | other securities under this section, it shall, before |
| securities shall be made out of the proceeds of an | | | | making such buy-back, file with the Registrar and the |
| earlier issue of the same kind of shares or same kind | | | | Securities and Exchange Board of India a declaration |
| of other specified securities. | | | | of solvency in the form as may be prearranged and |
| (1)There is also an embargo that no company | | | | verified by an affidavit to the effect that the Board |
| shall purchase its own shares or other specified | | | | has made a full inquest into the affairs of the |
| securities unless the buy-back is authorized by its | | | | company as a result of which they have formed an |
| articles; a special resolution has been passed in | | | | opinion that it is capable of meeting its liabilities and |
| general meeting of the company authorizing the | | | | will not be rendered insolvent within a period of one |
| buy-back. However, the buy-back is of less than ten | | | | year of the date of declaration adopted by the |
| per cent of the total paid-up equity capital and free | | | | Board, and signed by at least two directors of the |
| reserves of the company; and such buy-back has | | | | company, one of whom shall be the managing |
| been authorized by the Board by means of a | | | | director, if any : |
| resolution passed at its meeting then the articles | | | | Provided that no declaration of solvency shall be filed |
| approval and special resolution is not required. A | | | | with the Securities and Exchange Board of India by a |
| company is prohibited from going for further | | | | company whose shares are not listed on any |
| buy-back within a period of three hundred and | | | | recognized stock exchange. |
| sixty-five days, reckoned from the date of the | | | | (7) Where a company buys-back its own securities, it |
| earlier offer of buy-back. | | | | shall extinguish and physically destroy the securities |
| It is very clear that, unless the company enforces | | | | so bought-back within seven days of the last date of |
| strict corporate governance principles it is hard to | | | | completion of buy-back. |
| expect from the company’s board that, it will | | | | (8) Where a company completes a buy-back of its |
| fairly exercise the power granted to buy back shares | | | | shares or other specified securities under this section, |
| upto ten per cent of the of paid up capital and free | | | | it shall not make further issue of the same kind of |
| reserves. | | | | shares (including allotment of further shares under |
| (2) A company cannot buy back its shares from the | | | | clause (a) of sub-section (1) of section 81) or other |
| market more than twenty-five per cent of the total | | | | *specified securities within a period of six months |
| paid-up capital and free reserves of the company at | | | | except by way of bonus issue or in the discharge of |
| a time. Further, buy-back of equity shares in any | | | | subsisting obligations such as conversion of warrants, |
| financial year shall not exceed twenty-five per cent | | | | stock option schemes, sweat equity or conversion of |
| of its total paid-up equity capital in that financial year, | | | | preference shares or debentures into equity shares. |
| while the debts (of all types) of the company shall | | | | |
| not be more than twice the capital and its *free | | | | (9) Where a company buys-back its securities under |
| reserves after such buy-back. For certain companies | | | | this section, it shall maintain a register of the |
| the Central Government may prescribe a higher ratio. | | | | securities so bought, the consideration paid for the |
| It gives capricious to the Central Government | | | | securities bought-back, the date of cancellation of |
| regarding prescribing a higher ratio for certain | | | | securities, the date of extinguishing and physically |
| companies. The ratio of buyback of shares upto 25% | | | | destroying of securities and such other particulars as |
| may have been restricted to less than 20%, as the | | | | may be prescribed. |
| present limit is 1/4th of the capital of the company. | | | | |
| In case of securities listed in the recognized stock | | | | (10) A company shall, after the completion of the |
| exchange, the company planning for buyback should | | | | buy-back under this section, file with the Registrar |
| get the permission of SEBI. It is important to note | | | | and the Securities and Exchange Board of India, a |
| that, only fully paid up shares can be redeemed. No | | | | return containing such particulars relating to the |
| partly paid up shares can be redeemed. | | | | buy-back within thirty days of such completion, as |
| (3) The notice of the meeting at which special | | | | may be prescribed. Provided that no return shall be |
| resolution is proposed to be passed shall be | | | | filed with the Securities and Exchange Board of India |
| accompanied by an explanatory statement | | | | by a company whose shares are not listed on any |
| stating— | | | | recognized stock exchange. |
| (a) Full and complete disclosure of all material | | | | |
| facts; | | | | (11) If a company makes default in complying with |
| (b) The inevitability for the buy-back; | | | | the provisions of this section or any rules made there |
| (c) The class of security intended to be | | | | under, or any regulations made under clause (f) of |
| purchased under the buy-back; | | | | sub-section (2), the company or any officer of the |
| (d) The amount to be invested under the | | | | company who is in default shall be punishable with |
| buy-back; and | | | | imprisonment for a term which may extend to two |
| (e) The time limit for completion of buy-back. | | | | years, or with fine which may extend to fifty |
| | | | | thousand rupees, or with both. |
| (4) Every buy-back shall be completed within twelve | | | | |
| months from the date of passing the special | | | | Notes: |
| resolution or a resolution passed by the Board under | | | | (a) “Specified securities” includes |
| clause (b) of sub-section (2). | | | | employees’ stock option or other securities as |
| | | | | may be notified by the Central Government from |
| (5) The buy-back under sub-section (1) may be— | | | | time to time; |
| (a) from the existing security holders on a | | | | (b) “free reserves” shall have the |
| proportionate basis; or | | | | meaning assigned to it in clause (b) of Explanation to |
| (b) from the open market; or | | | | section 372A. |