Group Leader : Aashay J. ShahContact No. : +919892264220

WRO 0388624

Group Members :

Tayyeb Rangwala – WRO

Santosh Gupta – WRO

Nipun Gupta – WRO

Centre Name : Thakur House, Kandivali (E)Batch Timing : 8 a.m. – 12 p.m.

Batch Commencement Date : 27th December 2010

Compliance Relating to Buy Back Of Shares

Buy Back of Shares

Definition:

“Buyback is the reverse of issue of shares by a Company where it offers to take back its own shares held by shareholders at a specific price”

Objectives of Buyback

→ Protection from Hostile take over.→ Increase earning per share→ Support the share value.→ Effectively deploy surplus cash not required by

business.→ Company wants to indicate to the

shareholders that it has huge confidence in itself.

→ Strategy to maintain the share price in the bear run

Legislation for Buy Back

• The provisions regulating the buy back of shares is contained in Section 77A, 77AA and 77B of the Companies Act,1956 which were inserted by the Companies (Amendment) Act 1999.

• The securities and Exchange Board of India (SEBI) framed the SEBI (Buy Back of securities) Regulations,1999.

Buy Back of Shares

The companies (amendment) act 1999 has introduced section 77A in the Companies Act 1956, allowing the companies to buy back their own shares

Buy back of shares can be made out of Its free reserves The securities premium account The proceeds of any shares

The important provisions relating to buy back are :-

1. No company shall purchase its own shares unless The buy back is authorised by its articles A special resolution has been in the general meeting of the company

authorising the buy back of shares The buy back is of less than 25% of the total paid up capital and free

reserves of the company The ratio of the debt owned by the company is not more than twice the

capital and its free reserves after such buy back ( debts include secured and unsecured loans) All the shares for buy back are fully paid up The buy back also has to be in accordance with the regulations of

securities and exchange board of India (SEBI)

2. Every buy back shall be completed within 12 months from the date of passing the special resolution

3. The buy back may be

From the existing equity share holders on a proportionate basis

From the open market

By purchasing the securities issued to the employees of the company under the stock option plan or sweat equity shares.

4. After passing the special resolution the company has to file a Declaration of Solvency with the

Registrar of companies Securities and Exchange Board of IndiaThe declaration has to be signed by at least two directors of the

company, one of whom shall be the managing director, if any. In the above declaration the board has to clearly state that it has made a full enquiry into the affairs of the company and has formed a opinion that it is capable of meeting its liabilities and will not be insolvent within one year from such declaration

No such declaration shall be filled with the SEBI if the shares of the company are not listed on any recognized stock exchange.

5. Where a company buys back its own equity shares

The company shall extinguish

And

Physically destroy the shares so bought back

Within seven days of the last date of completion of buy back of equity shares

6. Where a company completes a buy back of its shares under this section

It shall not make further issue of same kind of shares within a period of 24 months

Except for the purpose of Bonus issue Or Discharging of subsisting obligations such as ESOP conversion of Preference shares or debentures into Equity shares The same kind of shares can be issued

Provisions Of Section 77B Of Companies Act

• No company shall directly or indirectly purchase its own shares:– Through any subsidiary company including its own subsidiary

company.– Through any investment company or group of investment companies.– If a default, by the company, in repayment of deposit or interest

payable 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 institutions or bank, is subsisting.

• No company shall purchase its own shares in case such company has not complied with provisions of Sections 159, 207 and 211.

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.

Journal Entries Regarding Buy-Back

Entry for fresh issue.

Entry for Buy-Back.

Entry for writing of the premium.

Entry for creation of Capital Redemption Reserve, if required.

Entry for payment to the Shareholders.

Buy Back-Case Studies

• Buy back can be a weapon against take over threat: e.g. Great Eastern Shipping Cooperation brought back its own shares when its sister concern Gesco faced a takeover threat from Dalmias.

• MICO made three buyback in less than 2 years (April 2000 to Jan 2002) and price fell from Rs. 4200 to Rs. 3800 and to Rs. 2500.

• June 2010- Hindustan Unilever Ltd, (HUL) announced share buy back subject to approval of members of the Company at a price not exceeding Rs. 280/- per share up to an aggregate account of Rs. 630 cores.

Conclusion

Bibliography

• www.google.com• www.wikipedia.com• Newspaper: The Business Standard• CA journal 2004• ICAI module