The Companies (Amendment) Act, 1999 contains elaborate provisions enabling a company to buy-back its own securities. The word security here includes employee stock option, i.e., sweat equity share or any other security notified by the government. The word security includes both equity and preference share. But preference share can be redeemed, perhaps the reform is intended to equity share only. As per section 77A, a company may purchase its own shares or other specified securities (hereinafter referred to as “buy-back”) out of—
- its free reserves; or
- the securities premium account; or
- the proceeds of any earlier issue other than from issue of shares made specifically for buy-back purposes.
(2) No company shall purchase its own shares or other specified securities unless—
- the buy-back is authorised by its articles;
- a special resolution has been passed in general meeting of the company authorising the buyback; Provided that nothing contained in this clause shall apply in any case where (i) the buy-back is or less than 10 percent of the total paid-up equity capital and free reserve of the company and (ii)
such buy-back has been authorized by the Board by means of a resolution passed at its meeting.
- the buy-back is or less than twenty-five per cent, of the total paid-up capital (equity shares and preference shares) and free reserves of the company;
- The debt-equity ratio is not more than 2 : 1 after such buy-back : Explanation.—For the purposes of this clause, the expression “debt” includes all amounts of unsecured and secured debts;
- all the shares or other specified securities are fully paid-up;
- the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India;
- the buy-back in respect of shares or other specified securities other than those specified in clause
- is in accordance with the guidelines as may be prescribed.
3) The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating—
- a full and complete disclosure of all material facts;
- the necessary for the buy-back;
- the class of security intended to be purchased;
- the amount to be invested; and
- the time limit for completion of buy-back.
(4) Every buy-back shall be completed within twelve months from the date of passing the special resolution.
(5) The buy-back under sub-section (1) may be—
- from the existing security holders on a proportionate basis; or
- from the open market; or
- from odd lots,
- by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
(6) A solvency certificate to be filed before making buy-back.
(7) A company buy-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.
(8) A company shall not make further issue of same kind of shares (including allotment of further shares under clause (a) of sub-section (1) of section 81) or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
(9) A company maintains a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of existing and physically destroying of securities and such other particulars as may be prescribed.
(10) A company shall, after completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed : Provided that no return shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange. The auditor should ensure that the proper accounting entries have been passed immediately after the buy-back. Further prohibition to buy-back shares is contained in section 77B.