The repurchase of outstanding shares (repurchase) by a company

in order to reduce the number of shares on the market. Companies

will buy back shares either to increase the value of shares still
available (reducing supply), or to eliminate any threats by
shareholders who may be looking for a controlling stake.

Investopedia explains Buyback

A buyback allows companies to invest in themselves. By reducing

the number of shares outstanding on the market, buybacks
increase the proportion of shares a company owns.

A company may buy-back its securities out of :

-its free reserves; or
-the securities premium account; or
-the proceeds of issue of any shares or other specified
securities.
Provided that 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 kind of other specified securities.
[Section 77A(1)]

Free reserves and securities premium account

Where a company purchases its own shares out of free
reserves, then a sum equal to the nominal value of the share so
purchased shall be transferred to the capital redemption reserve
and details of such transfer shall be disclosed in the balance-sheet
While the surplus in the profit and loss account can be used for
buy-back of securities, in case the profit and loss account shows a
debit balance, such debit balance should first be deducted from
free reserves.
Capital redemption reserve, revaluation reserve, investment
allowance reserve, profit on re-issue of forfeited shares, profits
earned prior to incorporation of the company and any other
specific reserve are not available for distribution as dividend and
hence do not form part of free reserves for the purpose of buy-
back.
Even though Section 77A(1) provides that a company may buy-
back its securities out of securities premium account, sub-section
(2) of Section 78 does not mention buy-back of securities as one of
the purposes for which the balance in the securities premium
account may be utilised. However, by virtue of the non obstante
clause in Section 77A, namely ‘Notwithstanding anything
contained in this Act….’, Section 77A prevails over Section 78.
Therefore, the securities premium account can be utilized for buy-
back of securities.

Proceeds of issue
Buy-back may be made out of the proceeds of an issue of
securities other than the same kind of securities as are proposed
to be bought back.
The proceeds of an earlier issue of one kind of securities may be
used for the purpose of buy-back of any other kind of securities.
The proceeds of an issue of preference shares may be used to
buy-back equity shares and the proceeds of an issue of equity
shares may be used to buy-back preference shares.
However, the proceeds of issue of preference shares carrying
differential rights as to dividend, voting etc. cannot be utilized inter
se for the purpose of buy-back. For instance, the proceeds of issue
of 10% preference shares cannot be utilized for buy-back of 8%
preference shares, as these are of the same kind, though of
different classes of shares.
There should be no direct nexus between the proceeds of an issue
and buy-back of securities of a company. For instance, if equity
shares had been issued by a company in 1994 and the funds
raised therefrom were deposited in a bank account, buy-back of
equity shares by the company in 2003 will be permissible from the
funds in that account, if there is evidence to prove that, over the
years, the aforesaid bank account has functioned as common pool
for deposit of all the funds raised and no direct nexus can be
established between the proceeds of the issue in 1994 and the
buy-back in 2003.

Borrowings from banks/financial institutions

Where a company has borrowed any money from
banks/financial institutions for any purpose, it should not utilize
such money for buy-back of securities. [Rule 8(e)]. Further, if any
approval is required to be obtained from banks/financial
institutions, such approval should be obtained before passing the
Board resolution for buy-back of securities.
Objectives of Buy Back:
Shares may be bought back by the company on
account of one or more of the following reasons
i. To increase promoters holding
ii.Increase earning per share
iii.Rationalise the capital structure by writing off
capital not represented by available assets.
iv.Support share value
v.To thwart takeover bid
vi.To pay surplus cash not required by business
Infact the best strategy to maintain the share price in a
bear run is to buy back the shares from the open market
at a premium over the prevailing market price.

modes
Sources from where the shares will be
purchased
The securities can be bought back from
(a)existing security-holders on a proportionate basis;
Buyback of shares may be made by a tender offer through
a letter of offer from the holders of shares of the company
or
(b)the open market through
(i). book building process;
(ii) stock exchanges or
(c)odd lots, that is to say, where the lot of securities
of a public company, whose shares are listed on a
recognized stock exchange, is smaller than such
marketable lot, as may be specified by the stock
exchange; or
(d) purchasing the securities issued to employees of
the company pursuant to a scheme of stock option or
sweat equity
Conditions of Buy Back
(a)The buy-back is authorised by the Articles of association
of the Company;

(b)A special resolution has been passed in the general

meeting of the company authorising the buy-back. In the case of a
listed company, this approval is required by means of a postal
ballot. Also, the shares for buy back should be free from lock in
period/non transferability.The buy back can be made by a Board
resolution If the quantity of buyback is or less than ten percent of
the paid up capital and free reserves;

(c) The buy-back is of less than twenty-five per cent of the

total paid-up capital and fee reserves of the company and that the
buy-back of equity shares in any financial year shall not exceed
twenty-five per cent of its total paid-up equity capital in that
financial year;

(d)The ratio of the debt owed by the company is not more

than twice the capital and its free reserves after such buy-back;

(e)There has been no default in any of the following

i.in repayment of deposit or interest payable thereon,
ii.redemption of debentures, or preference shares or
iii. payment of dividend, if declared, to all shareholders
within the stipulated time of 30 days from the date of
declaration of dividend or
iv.repayment of any term loan or interest payable
thereon to any financial institution or bank;

(f)There has been no default in complying with the provisions

of filing of Annual Return, Payment of Dividend, and form
and contents of Annual Accounts;

(g)All the shares or other specified securities for buy-back

are fully paid-up;

(h)The buy-back of the shares or other specified securities

listed on any recognised stock exchange shall be in accordance
with the regulations made by the Securities and Exchange Board
of India in this behalf; and

(i)The buy-back in respect of shares or other specified

securities of private and closely held companies is in accordance
with the guidelines as may be prescribed.

Disclosures in the explanatory statement

The notice of the meeting at which special resolution is proposed
to be passed shall be accompanied by an explanatory statement
stating -
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of security intended to be purchased under the
buy-back;
(d) the amount to be invested under the buy-back; and
(e) the time-limit for completion of buy-back

Procedure for buy back

a.Where a company proposes to buy back its shares, it shall,
after passing of the special/Board resolution make a public
announcement at least one English National Daily, one Hindi
National daily and Regional Language Daily at the place where the
registered office of the company is situated.
b.The public announcement shall specify a date, which shall
be "specified date" for the purpose of determining the names of
shareholders to whom the letter of offer has to be sent.
c.A public notice shall be given containing disclosures as
specified in Schedule I of the SEBI regulations.
d.A draft letter of offer shall be filed with SEBI through a
merchant Banker. The letter of offer shall then be dispatched to the
members of the company.
e.A copy of the Board resolution authorising the buy back
shall be filed with the SEBI and stock exchanges.
f.The date of opening of the offer shall not be earlier than
seven days or later than 30 days after the specified date
g.The buy back offer shall remain open for a period of not
less than 15 days and not more than 30 days.
h.A company opting for buy back through the public offer or
tender offer shall open an escrow Account.
 Penalty
If a company makes default in complying with the provisions the
company or any officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to two
years, or with fine which may extend to fifty thousand rupees, or
with both. The offences are, of course compoundable under
Section 621A of the Companies Act,1956

Buybacks can be carried out in two ways:

• Open Offer Purchase - In an open offer, a company
can buy its shares directly from the stock market through brokers.
Open-market purchases are resorted to when the number of
shares to be bought back is relatively small. The company has to
fix a maximum price for an open market offer, stipulate the number
of shares it intends to purchase, and announced the closing date
of the offer.

• Tender Offer - A tender offer is made when the number

of shares to be bought back is large. Such an offer is a fixed price
offer, i.e., the company fixes a particular price for the maximum
number of shares it is willing to purchase. It also fixes an outer
time limit for accepting the offer. The offer price is usually fixed at a
premium in order to encourage shareholders to surrender their
shares. The company accepts the shares on a proportionate basis
if the offer is over subscribed. But if offer is under-subscribed, the
company may either accept whatever is tendered or extend the
time limit.
The fundamental difference between an open offer and a tender
offer depends on the price at which the shares are repurchased. In
a tender offer, a company is forced to pay the price that it had fixed
for the repurchase, whereas in an open offer, the company only
fixes a maximum price, but the repurchase is made at the
prevailing market price. Apart from the above two buyback
methods, companies can use the targeted buyback methods to
repurchase shares from a select group of shareholders. This kind
of buyback is called greenmail[21]and is undertaken with the
objective of eliminating unfriendly/hostile shareholders from the
company and protecting it from any hostile takeovers.
 Filing of Declaration of solvency
After the passing of resolution but before making buy-back, file
with the Registrar and the Securities and Exchange Board of India
a declaration of solvency in form 4A. The declaration must be
verified by an affidavit to the effect that the Board has made a full
inquiry into the affairs of the company as a result of which they
have formed an opinion that it is capable of meeting its liabilities
and will not be rendered insolvent within a period of one year of
the date of declaration adopted by the Board, and signed by at
least two directors of the company, one of whom shall be the
managing director, if any:
No declaration of solvency shall be filed with the Securities and
Exchange Board of India by a company whose shares are not
listed on any recognized stock exchange.

Register of securities bought back

After completion of buyback, a company shall maintain a register
of the securities/shares so bought and enter therein the following
particulars
a.the consideration paid for the securities bought-back,
b.the date of cancellation of securities,
c. the date of extinguishing and physically destroying of
securities and
d.such other particulars as may be prescribed
Where a company buys-back its own securities, it shall extinguish
and physically destroy the securities so bought-back within seven
days of the last date of completion of buy-back.

Issue of further shares after Buy back

Every buy-back shall be completed within twelve months from the
date of passing the special resolution or Board resolution as the
case may be.
A company which has bought back any security cannot make any
issue of the same kind of securities in any manner whether by way
of public issue, rights issue up to six months from the date of
completion of buy back
 Filing of return with the Regulator
A Company shall, after the completion of the buy-back file with the
Registrar and the Securities and Exchange Board of India, a return
in form 4 C containing such particulars relating to the buy-back
within thirty days of such completion.
No return shall be filed with the Securities and Exchange Board of
India by an unlisted company.

Prohibition of Buy Back

A company shall not directly or indirectly purchase its own shares
or other specified securities-
(a) through any subsidiary company including its own
subsidiary companies; or
(b) through any investment company or group of investment
companies; or