PROPER BOOKS OF ACCOUNT MAINTAINED UNDER COMPANIES ACT, 1956 The article mainly focus on proper books of account

i.e. accrual basis and double entry book keeping. Brief: Section 209 of the Companies Act provides books of account kept by the company. The books of accounts to be kept at registered office of the company in a proper manner. In a brief, the following details to be mentioned in the books of accounts 1) all sums of money received and expended by the company and the matters in respect to which the receipt and expenditure takes place 2) all sales and purchases of goods of the company 3) the assets and liabilities of the company In case of books of accounts are kept at other than registered office of the company at such other place in India as the board may decide the place and necessary intimation to Registrar of Companies a notice in writing giving the full address of that other place within seven days of decision taken in the board meeting. Sub Section (2) provides that the company is having branch office in or outside India, then it should also comply sub section (1) of the Companies act, 1956. Sub section (3) provides that for the purpose of sub section (1) and (2) proper books of account shall not be deemed to be kept to the matters specified therein Sub clause (a) of section 3 of Section 209 provides that books are not kept as are necessary to give true and fair view of the state of affairs of the company or branch office as the case may be and explain its transactions. Sub clause (b) of sub section 3 of section 209 provides that if such books are not kept on accrual basis and according to the double entry system of recording. In the above clause there are two point, one is accrual basis and another is double entry system of recording. If both the methods are not followed then it will not be treated as proper books of accounts maintained by the company as per Section 209 of the Companies Act, 1956 1

Sub clause(b) of sub section 3 of section 227 of the companies act, 1956 provides that the auditor has to state in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him; Sub clause (iii) of sub section (2AA) of Section 217 provides that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; From the above, Section 209, 217 and 227 emphasizing proper books of accounts to be maintained. Accrual basis: Accruals is nothing but accumulation. Accrual basis of accounting is a system of accounting that matches revenues and expenses, respectively, to the period they were earned and incurred. Under accrual basis accounting, revenue is recorded when product is shipped or services provided. Similarly, accrual basis accounting requires expenses be recorded in the period in which the related revenues were recognized. Accrual basis accounting differs from cash basis accounting, where revenue and expense are recorded when Cash is received or paid. Here's an example of accrual basis accounting: suppose a company sells and Motor pumps to a customer for Rs.10000 in year 1. The customer pays Rs.3000 in year 1 and Rs.7000 in year 2. Under accrual basis accounting, the entire Rs.10000would be reported as revenue in year 1, even though Rs.7000 wasn't received until year 2. Under accrual basis accounting, the company recognizes revenue when it has substantially fulfilled its obligations to the customer. Because accrual basis accounting requires allocating revenue and expense to different time periods, it is subject to both error and abuse. Nevertheless, only accrual basis accounting meets generally accepted accounting principles. AS-1 of Accounting Standard on Disclosure of accounting policies refers in its report that if the fundamental accounting assumptions viz going concern, consistency and accrual are followed in financial statements, then specific disclosure is not required. If the assumptions are not carried out, then necessary disclosure to be reported in the accounts.

Double Entry Book keeping: The double-entry bookkeeping system refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. There should be debit and credit for each transactions

The double entry accounting system records financial transactions in relation to asset, liability, income or expense related to it through accounting entries. Any accounting entry in double entry accounting system has two effects one of increasing one account and decreasing another account by equal amount The following example relates to double entry book keeping.

The golden rule of Double entry book keeping. Double entry book keeping: Debit the receiver credit the giver Debit what comes in and credit what goes out Debit all expenses and losses and credit all incomes and profits.

Debit/credit Accou Deb Cred nt it it Assets Expens es Liabiliti

es Equity Revenu e

Inspection of Books of accounts: As per sub section (4) of section 209 of the companies act, the books of accounts and other books and papers shall be open to inspection by any director during business hours. In case the director wants to send his agents to inspect the books of accounts subject to the condition that the agent must give an undertaking to the company that he shall not pass on any information to any person other than the Director who has appointed him to carry out the inspection. ( Sugrabai Alibhain vs Amtee properties Private limited ) Preservation and destruction of books of accounts: As per sub section 4A of section 209, the books of accounts of the company together with the vouchers relevant to any entry in such books of account relating to a period not less than eight years immediately preceeding current year In case the incorportion of the company is less than eight years, then entire books of accounts preceeing current year shall be preserved. Non compliance of Section 209 of the Companies Act, 1956 : Sub section 5 of Section 209 provides that if any of the person referred in sub section 6 of section 209 fails to take reasonable steps to secure compliance by the company with requirements of this section or any wilful act then he will be liable for imprisonment for a term which may extend to six months or with a fine of Rs.ten thousand rupees or both. The person referred in sub section 6 are as follows Where the company has managing director or manager , such managing director or manager and all officers and employees of the company

In case the company has neither managing director or manager then every director of the company will be referred as person referred in sub section 6 of Section 209 of the Companies Act, 1956.

Maintenance of Books and Audit Every company is statutorily required under the Companies Act, 1956 to keep and maintain such books as are necessary to give a true and fair view of the state of affairs of the company. The Act provides that a company shall keep proper book of accounts in respect of the following: All sales and purchases of goods by the company

All sums of money received and expended by the company and the matters in respect of which these have taken place The assets and liabilities of the company

In case of companies which are engaged in production,manufacturing,mining or processing activities, particulars related to utilisation of material or labour or other items of cost as prescribed by Central Government. Provisions relating to Books of Accounts under the Companies Act (Section 209) All books of accounts shall be kept at the registered office of the company. But if they are kept at any other place in India as decided by the Board of Directors, the company shall send a notice in writing ( Form 23AA) to the Registrar of that place, mentioning the full address of the place. Such notice shall be filed within seven days of choosing that place. If a company has a branch office, proper books of accounts related to the branch business must be maintained at that office. But, summarized returns of these books shall be sent by the branch to the registered office every three months.

The books of accounts together with the vouchers, invoices and other connected documents or records shall be preserved in good order for a period of 8 years (or the entire period, if the company is less than 8 years old). The books of accounts must be maintained on accrual basis and according to the double-entry system of accounting. The books cannot be maintained on the cash basis.

The primary responsibility for making proper books of accounts of a company is that of the managing director or finance manager and all officers and other employees who have been authorised to maintain the books by the Board of Directors. But,if the company has neither a managing director nor manager,then every director of the company shall have the responsibility. If any company or any person who is responsible for maintaining proper books of accounts fails to take the required steps, it is liable to penalty of imprisonment or fine. The Act provides for the inspection of the books of accounts by the Registrar or by any officer authorised by Government to do so. The inspection may be conducted without giving prior notice to the company. It is the duty of the directors or officers of the company to provide all necessary support to the inspection officers in terms of books of accounts, other books, papers of the company and any other matter. Any default in this regard is a punishable offence. Broadly, the inspections are undertaken to serve one or more of the following objectives: To ensure compliance of various provisions of the Companies Act, 1956 and also to keep a watch on the performance/efficiency of the companies

To ensure that the company has not falsified its books of accounts or the companys funds have not been misappropriated or the management has not misused its fiduciary position for any personal advantage To see whether any unfair practices prejudicial to the public interest are being resorted to by any company To examine whether the companies are managed on sound business principles or whether there are acts of mismanagement which may ultimately affect the interests of shareholders, creditors, employees, consumers and the general public and

To see whether statutory auditors have carried out their duties properly while certifying true and fair view of the State of affairs of the company Provisions relating to the Auditors in the Companies Act (Section 224 to 233) Audit is the process of checking accounting entries as per norms and guideline by the accounting professionals. The Companies Act,1956 provides for compulsory appointment of an

independent person as the 'auditor' of the company whose responsibility is to examine the affairs of the company and to report it to the shareholders. The Act also contains provisions relating to appointment, removal, duties,etc of a company auditor.

An Auditor occupies a very important position and has been assigned several duties: He shall submit 'Auditors Report' to the members stating that:o Whether he has obtained all informations and explanations which are necessary for the purpose of audit;
o

Whether in his opinion proper books of accounts, as required by law, have been kept by the company; Whether the company's balance sheet and profit and loss account are in agreement with the books, accounts and returns;

Whether the profit and loss account and balance sheet comply with the accounting standards. He should check not only the arithmetical accuracy of books of accounts but also ensure that they show the true financial position of the company. He is required to enquire into the following matters:o Whether loans and advances made by the company have been shown as deposits and have been made on the basis of proper security;
o o

Whether personal expenses have been charged to revenue account; Whether transactions represented merely by book entries are not prejudicial to the interest of the company;

Whether cash has actually been received in respect of the shares that have been allotted for cash,and if no cash has been received, whether the position shown in the books and balance is correct,regular and not misleading. He also has the duty to assist the inspector in his investigation by producing all books and papers of the company which are in his custody or power.
o

Where 'special audit' has been ordered by the Central Government, he shall make his report to the Government.

The first auditors of a company are appointed by the Board of Directors within one month of incorporation. The auditors so appointed shall hold office until the conclusion of the first Annual General Meeting. They may, however, be removed before the expiry of their term and another person appointed in their place. Subsequent auditors are appointed every year by the shareholders in the Annual General Meeting by passing an ordinary resolution. The auditors so appointed shall hold office until the conclusion of the next Annual General Meeting. The Central Government is empowered to appoint auditors in the following cases: Where no auditors have been appointed at the Annual General Meeting, the company shall intimate the fact to the Central Government within 7 days of the meeting, and thereupon the Central Government will make the appointment. Where the company was responsible for making the appointments of auditors by passing a special resolution, but the company has failed to do so. Appointment of auditors of a government company is made by the Central Government on the advice of Comptroller and Auditor General of India. There is a special arrangement for the audit of companies where the equity participation by Government is 51 percent or more. The primary auditors of these companies are Chartered Accountants, appointed by the Union Government on the advice of the Comptroller & Auditor General, who gives the auditors directions on the manner in which the audit should be conducted by them. He is also empowered to comment upon the audit reports of the primary auditors. In addition, he conducts a supplementary audit of such companies and reports the results of his audit to Parliament and State Legislatures. A person can be appointed an auditor only if he is a 'chartered accountant' within the meaning of Charted Accountants Act, 1949. Only a practicing chartered accountant can be appointed an auditor of a company. None of the following can be appointed as an auditor of a company : A body corporate;

An officer or employee of the company; 8

Partner of the company; Person holding securities carrying voting rights of the company; Person who is indebted to the company.

Under the companies Act, an auditor enjoys the following powers: The auditor shall have access at all times to the books of accounts and vouchers of the company. He may obtain from the officers of the company such information and explanations as he may consider necessary. If the branch accounts have been audited by a person other than the company's auditors, the latter shall have a right to visit the branch office and have access to all books of accounts, etc, if he considers it necessary for the performance of his duties. He has the right to receive notice of and to attend General Meeting. He has the right to recover remuneration for auditing the accounts of the company. He also has the right to seek expert opinion from bankers, lawyers, engineers, etc.

The Central Government has the power to direct special audit of a company's accounts in the following cases: Where the affairs of any company are not being managed in accordance with sound business principles, or prudent commercial practices, or Where the company is being managed in a manner which is likely to cause serious injury or damage to the interest of the trade, industry or business to which it pertains, or Where the financial position of any company is such as to endanger its solvency. The Central Government may appoint a chartered accountant or the auditor of the company itself to conduct the special audit. Though his powers and duties shall be similar to that of an auditor of a company, but he must submit his report to the Central Government. On receipt of the report, the Central Government may take such action on the report as it considers necessary. If no action is contemplated, then it must send a copy of the report with its comments to the company for circulation among members or for reading at the next Annual General Meeting. The expenses of audit, as determined by the Central Government, shall be borne by the company.

alteration of share capital Definition Increase or decrease in (or rearrangement of) the authorized share capital of a firm, as permitted in its articles of association. Any such change requires (1) passing of a resolution to the effect in the firm's general meeting, and (2) filing of the notice of alteration with the appropriate governmental office such as (in the UK) the Registrar Of Companies. Preferential allotment When a listed company doesn't want to go for further public issue and the objective is to raise huge capital by issuing bulk of shares to selected group of people, preferential allotment is a good option. A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956, which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines, in addition to the requirements specified in the Companies Act. In short, preferential issue means allotment of equity to some selected people by a company which has its share already listed. EMPLOYEE STOCK OPTION SCHEME Employee Stock Option Scheme means the option given to the Whole Time Directors, Officers and Employees of the Company which gives them a right or benefit to purchase or subscribe the securities offered by the Company at a predetermined price at a future date. The idea behind sock option is to motivate the employees by linking the profitability of the Company. Eligibility to participate in ESOS:Option shall be granted only to the eligible permanent employees of the Company subject to the following:10

An employee who is a promoter or belongs to the promoter group shall not be eligible to participate in the ESOS. A director who either by himself or through his relative or through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company shall not be eligible to participate in the ESOS. Disclosure to the Grantees:No ESOS can be offered by the Company unless the disclosure regarding risk involve, brief of Company, Terms and Conditions of ESOS has been made to the prospective grantees. Compensation Committee:No ESOS can be offered unless the company has constituted a Compensation Committee for administration and superintendence of the ESOS. The Compensation Committee, consisting of the majority of independent directors, shall formulate the detailed terms and conditions of the ESOS. Shareholders Approval:Shares can be issued under ESOS with the approval of shareholders by way of Special Resolution. The explanatory statement of the notice and the resolution proposed to be passed in general meeting shall include details regarding the ESOS. Approval of shareholders by way of separate resolution in the general meeting shall required in case grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital of the company. Variation of terms of ESOS:The Company, by special resolution, may variate the terms, including the pricing, of the ESOS offered but not yet exercised by the employees provided such variation is not prejudicial to the interest of the option holders. Lock in Period:-

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There shall be a minimum period of one year between the grant of option and vesting of option. However the Company shall have the freedom to specify the lock in period for the shares issued pursuant to exercise of option. The employees shall not have any right to receive dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till the shares are issued on exercise of option. Non transferability of option:The option granted to an employee shall not be transferable to any person, the option can only be exercised by the employee to who the option is granted. The option cannot be transferred, pledged, hypothecated, mortgaged or otherwise alienated in any manner. This is a personal right only to the offeree. Disclosure in Directors Report:The Board of Directors shall disclose either in Directors Report or in the annexure to the Directors Report the details of ESOS. Certificate from the Auditors:The Board of Directors shall place before the shareholders a certificate from the auditors of the company that the scheme has been implemented in accordance with these guidelines and in accordance with the resolution of the company in the general meeting. Accounting Policies:In respect of any option granted during any accounting period, the accounting value of the option shall be treated as another form of employee compensation in the financial statements of the Company. The accounting value of option shall be equal to aggregate, over all employee stock options granted during the accounting period, of the intrinsic value of the option or , if the company so chooses, the fair value of the option. Where the Accounting value is accounted for as employee compensation, as above, the amount shall be amortised as under:-

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Where the scheme does not provide for graded vesting, the amount shall be amortised on a straight line basis over the vesting period. Where the scheme provide for graded vestingo The vesting period shall be determined separately for each separate vesting portion of the option, as if the option was, in substance, multiple option and the amount of employee compensation cost shall be accounted for and amortised accordingly on a straight line basis over the vesting period; or o The amount of employee compensation cost shall be accounted for and amortised on a straight line basis over the aggregate vesting period of the entire option (i.e. over the vesting period of the last separately vesting portion of the option). Provided that the amount of employee compensation cost recognized at any date at least equals the fair value or the intrinsic value, as the case may be, of the vested portion of the option at that date. When an unvested option lapses by virtue of the employee not conforming to the vesting conditions after the accounting value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expenses equal to the amortized portion of the accounting value of the lapsed options and a credit to deferred employee compensation expense equal to the unamortized portion. When a vested option lapses on expiry of the exercise period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense.

Determination of Exercise Price:Exercise price means the price payable by the employee for exercising the option granted to him. The companies will have the freedom to determine the exercise price subject to conforming to the accounting policies. In case the company calculates the employees compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options, shall be disclosed in the Directors Report and also the impact of this difference on profits and on EPS of the company shall also be disclosed in the Directors Report.

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Determination of Fair Market Value in case of Listed Companies:1. When the shares of the company are listed on an Indian recognized stock exchange:When the shares are traded on the date of vesting, FMV is the average of the opening price and the closing price on the stock exchange on the date of vesting of option in the hands of the employee. When the shares are not traded on the date of vesting, FMV is the closing price on a date closest to the date of vesting of the option and immediately preceding such date. 2. When the shares are listed on more than one Indian recognized stock exchanges:When the shares are traded on the date of vesting, FMV is the average of the opening price and the closing price on the stock exchange, which records the highest volume of trading in shares, on the date of vesting of option in the hands of the employee. When the shares are not traded on the date of vesting, FMV is the closing price on a date closest to the date of vesting of the option and immediately preceding such date which records the highest volume of trading in shares. Tax Implications:If the following conditions are satisfied, value of shares allotted to employees under Employee Stock Option Scheme will be taxable in the hands of employee: The security or shares involved are Specified Security or Sweet Equity Shares. (for this purpose specified securities means securities as defined under section 2(h) of Securities Contracts (Regulation) Act) Specified Securities or Sweet equity shares must be allotted to the employee on or after 1st April, 2009. If shares or securities are transferred during 1st April, 2007 to 31st March, 2009, then employer is liable to pay FBT under section 115 WB(1)(d) of Income Tax Act, 1961. Securities are allotted by the employer to the employee or former employee.(Directly or Indirectly) These securities or shares are transferred to the employee either free of cost or at a concessional rate. 14

If the above conditions are satisfied perquisite will be taxable in the hands of employee in the assessment year relevant to the previous year in which shares or securities are allotted or transferred to the employees. Value of Perquisite will be the difference between the fair market value of shares on the date of exercise of option and the amount actually paid or recovered from the employee in respect of such shares. Details to Stock Exchange Certain details of the Company along with the details of ESOS are required to be given to the Stock Exchange. Previous and after intimation of Board Meeting in which the matter is to be discussed is required to be given to Stock Exchange. Copy of Scheme, notices of EGM/AGM for approving the scheme, certified copy of special resolution, list of promoters, copy of latest audited annual report, certificate of auditors, specimen copy of share certificate, undertaking all certificate by Company Secretary are required to be given to Stock Exchange. The shares issued and allotted under ESOS should be listed immediately upon allotment in the recognized stock exchange where the securities of the company are listed. The company has to file a statement with the Stock Exchange before the exercise of the option and should obtain in principle approval from such Stock Exchange. And as and when the ESOS are exercised, the company should notify the SE.

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Procedure for Granting of Shares Under ESOS 1. Hold board meeting for a. Approving the ESOS b. Calling and Approving the notice of AGM/EGM for passing special resolution c. Constituting the compensation committee 2. In case of listed company advance notice to the Stock Exchange and after the Board Meeting, outcome of the Board Meeting is also to be notified immediately. 3. Send three copies of notice to the Stock Exchange. 4. Make disclosures to the grantees. 5. Hold general meeting and pass required special resolution. 6. Intimation to SE along with the certified copy of special resolution. 7. The company shall appoint a registered merchant banker for the implementation of ESOS as per guidelines till the stage of framing the ESOS and obtaining in principal approval from the stock exchange. 8. File form 23 within 30 days of the special resolution to register the resolution with ROC. 9. Obtain in principal approval from SE. 10. Prepare a list of options exercised by employees. 11. Hold board meeting for allotment of shares. 12. File a return of allotment in form 2 to the ROC within 30 days. 13. Give intimation to NSDL/CDSL regarding corporate actions. BUY BACK OF SECURITIES AN OVERVIEW By Abhinav Singh IV year B.S.L L.L.B, MM Law College, Pune INTRODUCTION Share capital is a very essential part of a company, listed or unlisted. Share capital can be of two types i.e. equity share capital or preferential share capital. The share capital of a company has to be subscribed by one or more persons. After the share of a company has been allotted to the subscribing members, the subscribers have no right over the money gone as proceeds of the shares subscribed. All that the shareholder has is the right to vote at the general meetings of the company or the right to receive dividends or right to such other benefits which may have been prescribed. The only option left with the shareholder in order to realise the price of the share is to transfer the share to some other person. But there are certain provisions in the companies act which allow the shareholders to sell their shares directly to the company and such provisions are termed as buy back of shares. Buy back of shares can 16

be understood as the process by which a company buys its share back from its shareholder or a resort a shareholder can take in order to sell the share back to the company. HISTORY Prior to the amendment of the 1999 of the companies act there was no way a company could buy its shares back from the shareholders without a prior sanction of the court (except for the preferential shares). The laws as to the buying of its share by the companies were very stringent. Some of the ways by which a company could buy its shares back were as follows:(i) Reduction of share capital as given in sections 100 to 104. (ii) Redemption of redeemable preferential shares under section 80. (iii) Purchase of shares under an order of the court for scheme of arrangement under section 391 in compliance with the provisions of sections 100 to 104. (iv) Purchase of shares of minority shareholders under the order of the company law board under section 402(b). Though there were ways by which a company could buy its shares back from the shareholders but it could not be done without the sanction of the court. This was done to protect the rights of the creditors as well as the shareholders. But the need of less complex ways of buying its shares back by the company was always felt. The much needed change in the companies act was brought about by the companies amendment act 1999.Sections 77A, 77AA and 77B were inserted in the companies act by this amendment. REASONS FOR BUY BACK In the words of the working group which recommended the introduction of buy back in the companies act: It is an erroneous belief that the sole reason for buy back is to block hostile take-overs. In this connection it is pertinent to list five reasons why the bank of England favoured the making of law to allow companies to repurchase their shares of which blocking take-over was only one: (i) To return surplus cash to shareholders (ii) To increase the underlying share value (iii) To support the share prices during temporary weakness. (iv) To achieve or maintain a target capital structure. (v) To prevent or inhibit unwelcome take-over bids. Briefly a company resorting to the buy back may have surplus cash, and it may not have found the right avenue to invest such surplus cash, during such period of dilemma the company may decide to return the surplus cash by buying back its shares, with a hope that at a later time when the company brings on an expansion the investors do not loose their faith in the company. Secondly the company might as 17

well think of buying its shares with a view to increase the value of the shares which after the process of buy back still remain in the market. For after the shares are bought back the number of marketable shares become less and thus the prices increase. Thirdly, at times there is a slump in the share market due to no fault of the company. Though the slouch may be temporary but may have continued far too long .The management then may decide to give value to the shareholders and buy back there shares at a price higher than the market price. This is generally done to instill faith in the minds of the shareholders. Saving a company from hostile take-over has always been seen as a major force behind bringing about this amendment, the company may use the surplus cash available in buying back its shares and bringing the number of floating shares down, resulting in the suitor not finding it a worthy investment or a profitable acquisition. These could be certain reasons why a company may resort to buy back of its shares. RESOURCES OF BUY BACK: The companies amendment act 1999 under section 77A prescribes for the sources of buying back of shares or other specified securities by a company, which are as follows-: i) Free reserves- a company may buy back out of its free reserves but a sum equal to the nominal value of the shares so purchased must be deposited in the capital redemption reserves account. ii) Securities premium account. iii) The proceeds of any shares or specified securities. No buy back of any shares or securities shall be made out of the proceeds of an earlier issue of the same kind of shares of same kind of securities CONDITIONS FOR A BUY BACK : Sub clause (2) of section 77A enshrines the conditions for a buy back, which are as follows : a) It should be authorised by the articles of association of the company. b) A special resolution has been passed at the general meeting of the company authorising the buy back. If the buy back is or less than 10 percent of the total paid up equity share capital, a resolution at the general meeting is not needed to be passed rather a simple board resolution is enough. Provided that no offer of buy back shall be made within three sixty five days reckoned from the date of proceeding offer of buy back. c) The buy back is or less than 25 percent of the total paid up equity share\ capital and free reserves d) The ratio of debt owned by the company is not more than twice the capital and its free reserves after such buy back. 18

e) All the shares or other specified securities for buy back are fully paid up. f) The buy back of 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 in this behalf: g) The buy back in respect of shares and other specified securities other than those specified in the aforesaid clause is in accordance with the guidelines specified. DISCLOSURE IN THE EXPLANATORY STATEMENT : Notice of the meeting at which a resolution for buy back is proposed to be passed has to be accompanied by an explanatory statement stating a) a full and complete disclosure of all material facts b) the necessity for buy back c) class of securities intended to be bought back under the buy back d) the amount to be invested under buy back. MODES OF BUY BACK : Buy back of shares or other specified securities can be done through various sources which have been illustrated under sub section 5 of section 77A, they are as follows:a) From the existing security holders on a proportionate basis or b) From the open market, through ; i) stock market ii) book building process c) From odd lots, that is to say where the lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or c) by purchasing the securities issued to employees of the company under a scheme of stock option or sweat equity. DECLARATION OF SOLVENCY: Where a company has passed a special resolution under clause b of sub-section (2) or a board resolution has been passed under some circumstances to buy back its own shares or other specified securities, under the section, it shall before making such buy back ,file with the registrar and the securities and exchange board of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the board has made a full enquiry 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 one year of the date of declaration 19

adopted by the board, and signed by at least two directors of the company, one of whom shall be the managing director, if any. REGISTER OF SECURITIES BOUGHT BACK : Section 77A(9) prescribes for the manner in which a register shall be maintained a register of shares so bought back and enter therein the following particulars:i) the consideration paid for the securities bought back. ii) the date of cancellation of securities iii) the date of extinguishing and physically destroying of securities. iv) other particulars as may be prescribed. The shares or the securities so bought back shall be physically destroyed within seven days from the last date f completion of such buy back. PROHIBITION ON FURTHER ISSUE OF SHARES AFTER BUY BACK : Every buy back shall be completed within twelve months from the date of passing the special resolution or the board resolution as the case may be. After the buy back is completed the company is not allowed to issue the bought back shares for the period of six months by any means including further issue of shares under section 81(1)(a) of the companies act 1956. It may however issue bonus shares or discharge its subsisting obligation of converting preference shares or other specified securities into equity shares. 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. 20

PROHIBITION OF BUY BACK IN CERTAIN CIRCUMSTANCES : Section 77B holds the restrictions on the companies to buy back its shares. No company shall buy its own shares or other specified securities a) through any subsidiary company including its own subsidiary company. b) Through any investment companies or group of investment companies. 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.

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