STEPS AND CHECKLIST FOR BUY BACK OF OWN SHARES OR

SECURITIES
AUTHOR :SIDJANI

https://taxguru.in/company-law/steps-checklist-buy-shares-securities.html

Siddharth Jani

Page Contents

Steps for Buy Back

Annexure 1
Details to be furnished in Explanatory Statement:
Annexure 2
Things that company needs to ensure while Buy Back
Checklist for Buy Back of Own Shares or Securities

Steps for Buy Back

1. Company should be authorized by Articles of Association to Buy Back its own share.

2. Maximum Limit: Buyback should be 25% or less than its paid up share capital & free reserves (In case of
Equity Shares – 25% of paid up equity share capital only)

3. Post Buy Back Debt Equity ratio should not exceed 2:1

4. Pass Board or Special Resolution as applicable

Board Resolution If Buy Back is 10% of the total paid-up Equity capital and free Reserves

Special Resolution If Buy Back is up to 25% of the total paid-up capital and free Reserves.

5. Time Gap between two buy back should be one year.

6. Under Section 70, no company shall directly or indirectly purchase its own shares or other specified
securities—

a) through any subsidiary company including its own subsidiary companies;

b) through any investment company or group of investment companies; or

c) if any 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 three years has lapsed after such default ceased to subsist.

d) No company shall, directly or indirectly, purchase its own shares or other specified securities in case such
company has not complied with the provisions of sections 92 Annual Return, 123 (Declaration of
Dividend), 127 (punishment for failure to distribute dividend) and section 129 (Financial Statement).

7. Methods of buy-back

The buy-back may be—

a. From the existing shareholders or security holders on a proportionate basis;

b. From the open market; (for listed companies only)

c. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or
sweat equity.

8. If Special Resolution is to be passed, Notice for the same has to be given to Shareholders at least 21 days
before the date on which passing Special Resolution.

9. Along with Notice, Explanatory Statement needs to be provided explaining the purpose of Buyback (Refer
Annexure 1 for details to be provided in Explanatory Statement)

10. Form MGT-14 should be filed with the Registrar along with fee within 30 days of passing the Special
Resolution.

11. After the Special Resolution but before the buy-back of shares, company should file with the Registrar of
Companies a letter of offer in Form No. SH-8, along with the fee & that needs to be signed by 2 directors, at
least one should be Managing director, if any.

12. File with the Registrar and the Securities and Exchange Board (in case of listed companies), a declaration of
solvency in Form SH-9, along with the letter of offer and fees which that needs to be signed by 2 directors, at
least one should be Managing director. in such form as may be prescribed and verified by an affidavit as
specified in said form.

13. Letter of offer needs to be dispatched to the Shareholders or security holders within 20 days from its filing
with Registrar of Companies.

14. The offer for buy-back should remain open for a period for a maximum period of 30 days from the date of
dispatch of the letter of offer. (Minimum period of 15 days is also prescribed)

15. If buy back by the company is over subscribed then the total number of the shares to be bought back, the
acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.

16. The company should complete the verifications of the offers received within 15 days from the date of
closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a
communication of rejection is made within 21 days from the date of closure of the offer.
17. The company shall immediately after the date of closure of the offer, open a separate bank account and
deposit therein, the total amount payable as consideration for the shares offered for buy back.

18. The company should make payment within 7 days from end of POINT 13 in cash to those shareholders or
security holders whose securities have been accepted. (Refer point 24. also)

19. Where the company buy backs its own shares and other securities, it shall extinguish and physically destroy
the shares and securities so bought back within 7 days of the last day of completion of buy back.

20. Every buy-back shall be completed within a period of one year from the date of passing of the special
resolution, or as the case may be, the resolution passed by the Board. (Refer Annexure 2 for the additional
requirement that companies need to comply with.)

21. The company, shall maintain a register of shares or other securities which have been bought-back in Form
No. SH.10. This register shall be maintained at registered office of the company, at the custody of the secretary
of the company or any other person authorized by the board in this behalf & entries in this register shall also be
made by the secretary of the company or any other person authorized by the board in this behalf.

22. A company should after the completion of the buy-back file with the Registrar and the Securities and
Exchange Board (in case of listed companies) a return Form No. SH.11 along with the ‘fee’ containing such
particulars relating to the buy-back within thirty days of such completion, as may be prescribed. There shall be
annexed to the return filed with the Registrar in Form No. SH-11, a certificate in Form No. SH- 15 signed by
two directors of the company including the managing director, if any, certifying that the buy-back of securities
has been made in compliance with the provisions of the Act and rules.

23. Penal Provisions: If a company makes any default in complying with the provisions of buy back or any
regulation made by the Securities and Exchange Board, (in case of listed companies), the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees
and every officer of the company who is in default shall be punishable with imprisonment for a term which
may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to
three lakh rupees, or with both.

24. Section 115QA of the Income Tax Act applies to buy back of unlisted companies shares (equity &
preference). Company has to pay distribution tax @ 20% on the amount of distributed income
(consideration paid by the company for the purchase of its own unlisted shares LESS sum received at the
time of issue of shares), within 14 days from payment of consideration to shareholders, which will be
exempt in the hands of shareholders u/s 10(34A). One should not forget to consider the Interest and penal
provisions u/s 115QB & 115 QC.

For Companies Listed on recognised stock exchange, Section 46A will apply i.e. Capital gains provisions are
applicable & no distribution tax is payable by the company.

Annexure 1

Details to be furnished in Explanatory Statement:

1. Full and complete disclosure of all material facts;

2. The necessity for the buy-back;

3. The class of shares or securities intended to be purchased under the buy back;

4. The amount to be invested under the buy-back; and

5. The time-limit for completion of buy-back:

In Addition to above information, Share Capital & Debentures Rules 2014 provide that the following
disclosures in explanatory statement with respect to private companies and unlisted public companies
need to be made:

6. The date of the board meeting at which the proposal for buyback was approved by the board of directors of the
company;

7. The objective of the buy-back;

8. The class of shares or other securities intended to be purchased under the buy-back;

9. The aggregate shareholding of the promoters and of the directors of the promoter, where the promoter is a
company and of the directors and key managerial personnel as on the date of the notice convening the general
meeting.

10. The aggregate number of equity shares purchased or sold by persons mentioned in point no. 11, during a
period of twelve months preceding the date of the board meeting at which the buy-back was approved and from
that date till the date of notice convening the general meeting.

11. The maximum and minimum price at which purchases and sales referred to in point no. 12 were made along
with the relevant date;

12. If the persons mentioned in point 11 intend to tender their shares for buy-back –

i. the quantum of shares proposed to be tendered;

ii. the details of their transactions and their holdings for the last twelve months prior to the date of the board
meeting at which the buy-back was approved including information of number of shares acquired, the price
and the date of acquisition;

13. A confirmation that there are no defaults subsisting in repayment of deposits, interest payment thereon,
redemption of debentures or payment of interest thereon or redemption of preference shares or payment of
dividend due to any shareholder, or repayment of any term loans or interest payable thereon to any financial
institution or banking company.

14. A confirmation that the Board of directors have made a full enquiry into the affairs and prospects of the
company and that they have formed the opinion-

i. that immediately following the date on which the general meeting is convened there shall be no grounds
on which the company could be found unable to pay its debts;

ii. as regards its prospects for the year immediately following that date, that, having regard to their
intentions with respect to the management of the company’s business during that year and to the amount
and character of the financial resources which will in their view be available to the company during that
year, the company shall be able to meet its liabilities as and when they fall due and shall not be rendered
 insolvent within a period of one year from that date;

iii. the directors have taken into account the liabilities(including prospective and contingent liabilities), as if
the company were being wound up under the provisions of the Companies Act, 2013

15. A report addressed to the Board of directors by the company’s auditors stating that-

i. they have inquired into the company’s state of affairs;

ii. the amount of the permissible capital payment for the securities in question is in their view properly
determined;

iii. that the audited accounts on the basis of which calculation with reference to buy back is done is not more
than six months old from the date of offer document; and

iv. the Board of directors have formed the opinion as specified in point 14 on reasonable grounds and that
the company, having regard to its state of affairs, shall not be rendered insolvent within a period of one year
from that date.

Annexure 2

Things that company needs to ensure while Buy Back

1. The letter of offer shall contain true, factual and material information and shall not contain any misleading
information and must state that the directors of the company accept the responsibility for the information
contained in such document;

2. The company shall not issue any new shares including by way of bonus shares from the date of passing of
special resolution authorizing the buy-back till the date of the closure of the offer under these rules, except those
arising out of any outstanding convertible instruments;

3. The company shall confirm in its offer the opening of a separate bank account adequately funded for the
purpose of Buy back and to pay the consideration only by way of cash;

4. The company shall not withdraw the offer once it has announced the offer to the shareholders;

5. The company shall not utilize any money borrowed from banks or financial institutions for the purpose of
buying back its shares; and

6. The company shall not utilize the proceeds of an earlier issue of the same kind of shares or same kind of other
specified securities for the buy-back.

7. Transfer to and application of Capital Redemption Reserve Account:

When a company purchases its own shares 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. The capital redemption reserve account may be
applied by the company, in paying up unissued shares of the company to be issued to members of the company
as fully paid bonus shares.
Checklist for Buy Back of Own Shares or Securities

Sr. No. Particulars Yes/ No/NA Remarks

Whether Board Meeting is held to decide the details of proposed buy
1.
back of shares? (It is required to be held)
Whether the company is authorised to buy back its shares or securities by
2. (i)
Articles of Association (AOA)?
If No, alteration of AOA is to be initiated or not? (AOA has to be
amended by passing a Special resolution) File MGT-9 within 30 days.

2. (ii) (If the Resolution of Buy back and alteration of AOA is done in the same
general meeting, then the Resolution of alteration of AOA should precede
the resolution of Buy back)

Have you determined the quantum of buy back of shares? What is the
3. (i)
quantum of the shares to be bought back?
If the buy back is less than 10% of paid up equity share capital & free
3. (ii) reserve, then Board resolution will suffice, therefore is the Board
resolution passed for the same purpose?
But if the buy back is more than 10% but less than 25% of paid up
capital and free reserve then Special resolution is required, is it passed?
3. (iii)
(Maximum permissible in a year is 25% of paid up capital + free reserves
)
Whether have you checked that Number of shares to be bought back in
3. (iv) respect of Equity shares should not exceed 25% of its total paid up
equity share capital?
 Whether the restriction related to buy back u/s 70 are checked? No buy
back will be permitted if the buyback falls under the clause of Section 70?

(1. through any subsidiary company including its own subsidiary

companies;

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

3. if any 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
4. 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 three years has lapsed after such default ceased to subsist.

4. No company shall, directly or indirectly, purchase its own shares or

other specified securities in case such company has not complied with the
provisions of sections 92 Annual Return, 123 (Declaration of Dividend),
127 (punishment for failure to distribute dividend) and section 129
(Financial Statement)

Whether there is a gap of more than one year from the closure of
5.
previous buy back?
If special resolution is to be passed, whether the notice of the same is
6.
given at least 21 days prior to the date of passing the Special Resolution?
Along with Notice, Explanatory Statement also needs to be provided to
7.
Shareholders?
Whether have you checked that explanatory statement contains all the
required information as per SEBI regulations (for listed companies) and
8.
Companies (Share Capital and Debenture) Rules 2014 (for unlisted
companies)?
Whether Form MGT-14 is filed with the registrar along with the fees
9.
within 30 days from passing board resolution or special resolution?
Whether the company has after passing Special resolution but before buy
10 back of shares, has filed with the Registrar of Companies a letter of offer
in Form No. SH-8?
Have you verified that Form Sh-8 needs to be signed by at least 2
11. directors; out of which at least one should be Managing director, if any?
(verify same condition for Form SH.9 & Form SH.11 too)
Whether the company has along with Form SH-8, filed with the Registrar
12. of Companies & SEBI (for listed companies) a declaration of solvency in
Form SH-9?
Have you verified that Form Sh-9 needs to be signed by at least 2
13. directors; out of which at least one should be Managing director, if any in
affidavit under rule 17(3)?
 Whether have you ensured that letter of offer is dispatched to the
Shareholders or security holders within 20 days from its filing with
14. Registrar of Companies?

Whether have you checked that the offer of buy back has remained open
15. for a period of minimum 15 days and maximum 30 days from the date
of dispatch of letter of offer?
If bought back shares are oversubscribed by the shareholders or security
holders, whether the acceptance per shareholder is done on proportionate
16.
basis out of the total shares offered for being bought back, restricting it to
the maximum number of shares to be bought back?
Whether have you checked that verifications of shares bought back are
17. completed from the date of closure of the offer of the offers received
within 15 days?
If the shares are to be rejected whether the communication for rejection
18.
of shares has been made within 21 days from the date of closure of offer?
Has the company immediately after the closure of the offer, opened a
19. bank account and deposited therein the total amount payable as
consideration for the shares offered for buy back?
Whether within 7 days from completion of verification of records, has the
20.
company made payment to shareholder?
Whether within 7 days from completion of buy back, has the company
21. extinguish and physically destroy the shares and securities so bought
back from the shareholders?
In case of unlisted companies buy back of shares, whether within 14 days,
22. company has paid additional tax u/s 115QA @ 20% on distributed
income?
Has the company maintained a register of shares or other securities
23.
which have been bought-back in Form No. SH.10?
Where is the register maintained & in how’s custody, who is making
24. entries in that register, is these question in accordance with the provision
of Section 68 or not?
Has the company, after the completion of the buy-back, filed with the
Registrar and with the Securities and Exchange Board of India (in case of
25.
a listed company), a return in the Form No. SH.11 within thirty days of
completion of buy back?
Is there annexed a certificate in Form No. SH- 15 to the return filed with
26.
the Registrar in Form No. SH-11?
If the company has purchased its shares out of free reserves or securities
premium account, a sum equal to the nominal value of the shares so
27.
purchased shall be transferred to the capital redemption reserve account
?
 Whether the buy back is completed within one year from the date of
28.
passing board resolution or Special resolution?
If there is a default by the company in any of the above mentioned points,
29. whether the company has been informed about the penal provisions
relating to buy back on company and every officer of the company?
(Author is Currently working as an Article assisstant at B.D.Jokhakar & Co. Mumbai)