Buy-Back Of Share Company Law 2013
1. Introduction
Buyback of shares has become an important instrument and strategy for many businesses. It has especially become extremely important in cooperate finance where the market faces many unpredictable fluctuations. Buyback of shares is governed by the regulatory framework of the Companies Act, of 2013, the concept of buyback of shares has become an important facet for firms in making their decisions.
This article will look at the complexities of buyback shares as well as the legal provisions and how businesses use buy back of shares as a financial strategy. Further also examines the various types of buyback of shares and the sources for it. Our exploration aims to shed light on the multifaceted nature of share buy-backs.
2. Legal Framework:
a. Section 68: Authorization for Buy-Back:
In the companies act 2013, section 68 basically sets down the foundation by giving details as to under what company is authorized to buy back its own shares. It states that a firm may only repurchase shares if permitted by its articles of association and if the shareholders have approved the repurchase through a special resolution.
b. Section 68(1): Sources of Buy-Back:
Section 68(1) mentions its sources from which a company can fund its share buy-back. Companies are permitted to utilize free reserves, securities premium account, or the proceeds of an earlier issue of the same kind of shares.[1]
c. Section 70: Conditions for Buy-Back:
Section 70 of the Companies Act states the maximum number of shares that a firm may buy back has been limited under the Companies Act of 2013. 25% or less of the total of its free reserves and paid-up share capital is the limit. This cap makes sure the business has enough money for operations and doesn't spend all of its resources on buybacks.[2]
3. Types of Buy-Back:
a. Open market offer:
The corporation repurchases its shares on the exchange through an open-market offer, typically facilitated by brokers. Among the many benefits of the open market option is that it lets businesses purchase stocks at the going rate without having to pay a premium.
b. Fixed-price tender offer:
The corporation launches a tender to buy back shares at a fixed price on a certain date via a fixed-price tender process. Almost invariably, the price specified in the tender exceeds the price that is being offered in the market. Depending on the price, the shareholders can decide whether to accept or reject the offer.
c. Dutch auction tender offer:
The Dutch auction is a special process in which the firm offering to buy back shares announces a tender with a minimum price that is typically higher than the going rate as well as a range of reasonable rates. As a result, bids are placed on certain share quantities and the lowest price at which shareholders are prepared to sell their shares.[3]
4. Sources of Funding:
a. Free reserves:
Companies have free reserves which is their accumulated profits. Free reserves do not have any particular use such as they can be profits from dividends or stocks. Therefore by making use of this free reserves, it ensures a company has made profits and funds are available for buyback of shares.
b. Security Premium Account:
The buy-back may also be financed through the security premium account, which is where the premium amounts for the securities that were received during the share issue are kept.[4]
c. Proceeds of Earlier Issues:
Businesses can finance the buyback with the money they get from the sale of shares or other designated securities. It's crucial to remember that the buyback cannot be funded by funds from an earlier issuance of the same kind of shares or securities.[5]
5. CORPORATE GOVERNANCE AND BUY BACK OF SHARES:
A corporation that practices corporate governance controls its operations in a way that is answerable to and responsible to its shareholders. A broader definition of corporate governance takes into account a company's responsibility to its stakeholders, which include the local community, suppliers, consumers, and employees. There is a article of association it contains rules and regulations for the management and day to day functioning of the company. The Companies Act of 2013 states that unless a buy-back is authorised by the articles, it cannot occur. This illustrates the role that corporate governance plays in the initial buyback of shares, since it is up to the business's promoters and stakeholders to determine if they would like to retain the possibility of a buyback by adding a clause to the articles of incorporation.[6]
6. CASE STUDY: SUN PHARMA:
Recently the company sun pharma declared buy back of shares 7.5 million shares at price of Rupees 900 per share and promoters were interested in participating. There were some opinions from analysts they felt that this method was a tax efficienct tool because of the issue's magnitudeit is worth $100 million USDand the promoters' involvement in the process, not because of "attractive valuations. The analyst goes on to say that he would have been concerned if the business had disclosed a larger buyback in addition to the dividend, which would have been determined by valuations. This path is perceived as having been selected "as an alternative route for cash distribution. The analysts do not concur that they view the company's valuation to be alluring as indicated by the buy-back offer, notwithstanding the promoters' involvement in the process (tender offer) and the 20% premium granted to the shareholders.
Furthermore, it's probable that the company's declared dividends may continue to decline following this buyback, which would be against the interests of the shareholders.[7]
7. Conclusion:
Therefore, while navigating the Companies Act 2013, we understood the financial strategy of buyback of shares that holds profound implications for companies, shareholders, and the broader market. As companies find ways to optimize their profits and enhance shareholder value the buy-back of shares emerges as a strategic tool, offering flexibility and adaptability to diverse corporate objectives. Looking at various types of buybacks from open market offers to Dutch auction tender companies can pick their strategies that meets goals and objectives.
8. Citations:
1. Buy-Back Of Share Company Law 2013 by Amish7 available at https://www.legalserviceindia.com/legal/article-6063-buy-back-of-share-company-law-2013.html ( last visited 20-12-2023)
2. Khurana and Khurana, Buy Back of Securities under the Companies Act, 2013, available at https://www.khuranaandkhurana.com/2023/04/25/buy-back-of-securities-under-the-companies-act-2013/ (last visited 21-12-2023)
3. Different buyback methods: Comparison by angel one , available at https://www.angelone.in/knowledge-center/share-market/comparison-of-different-buyback-methods#: ( last visited 24-12-2023)
4. Ahuja and Ahuja Buy Back of Shares by Company: All You Need to Know, available at https://www.ahujaandahuja.in/buy-back-of-shares-by-company/#: ( last visited 24-12-23)
5. Ahuja and Ahuja Buy Back of Shares by Company: All You Need to Know, available at https://www.ahujaandahuja.in/buy-back-of-shares-by-company/#: ( last visited 24-12-23)
6. Ipleaders, What is the role of Corporate Governance in the buy back of Shares, available at https://blog.ipleaders.in/role-of-corporate-governance-in-the-buy-back-of-shares/ (last visited 24-12-2023)
7. Ipleaders, What is the role of Corporate Governance in the buy back of Shares, available at https://blog.ipleaders.in/role-of-corporate-governance-in-the-buy-back-of-shares/ (last visited 24-12-2023)
