Buy back of shares in Private Limited Companies The concept of buy back of securities is just over a decade old

and is normally resorted to reorganize the capital structure. It means buying the shares allotted to shareholders at a predetermined price. Buy back results in cancellation of capital leading to an improved EPS in future. Buy back in case of private limited companies are governed by Sections 77A/77AA/77B and the Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999. Prohibition: Kindly note that a Company which has defaulted in 1. 2. 3. 4. 5. 6. 7. Repayment of Deposits Payment of interest on deposits Redemption of debentures Redemption of preference shares Payment of dividend to any shareholders Repayment of interest or principal to any financial institution or bank Complying with the provisions of Section 159 (filing of annual return) section 207 (distribution of dividend within 42 days) or Section 211 (annual accounts) of the Companies Act,

is not eligible to buy back its shares. Sources of buyback: The Company can buy back its shares only out of companys free reserves or its securities premium account or out of the proceeds of any shares or other specified securities. Ceiling per financial year: 25% of the paid up capital + free reserves However the buyback of equity shares should not be more than 25% of paid up equity share capital.

Debt Equity Ratio: You have to maintain debt equity ratio of 2:1(post buy back) Authority: Board of Directors: Upto 10% of the paid up capital and free reserves per financial year. Shareholders: More than 10% and up to 25% of the paid up capital and free reserves.

Procedures in brief: 1. Hold a Board Meeting to get the approval of the Board for the buyback proposal (if the buy back is up to 10% of the paid up capital and free reserves). 2. The Article of Association of the Company must authorize the Company to buy back its own share. If the Article of Association is silent on buyback provisions then the Company should hold a shareholders meeting to alter the Article of Association of the Company to include buy back provisions.

3. Hold a Board Meeting to get the approval of the Board for the buyback proposal and to convene a General Meeting for taking necessary approval from the shareholders (if the buy back is more than 25% of the paid up capital and free reserves) 4. Hold a shareholders meeting to take the approval of the shareholders for such buyback. 5. File Form 23 for registering the special resolution passed at the general meeting within 30 days with ROC. 6. File Form 62 attaching draft letter of offer along with the declaration of solvency in Form 4A (prescribed format) with ROC. 7. Issue the letter of offer to the shareholders not later than 21 days from its filing with ROC. The offer made to shareholders will remain open for not less than 15 days and maximum of 30 days from the date of dispatch of such letter. The shares can only be bought back if the offer is accepted by the shareholders. 8. Open a separate bank account for the payment of consideration to shareholders who have accepted the offer. 9. Offer once made cannot be withdrawn. 10. Extinguish the share certificates bought back within 7 days after completing buy back. 11. Intimate ROC about buy back in E-Form 4C. 12. Update the register of Buy Back. Buyback of shares issued to non residents: It will be considered as transfer from nonresident to resident and applicable FEMA provisions in respect of transfer of securities from non-resident to resident in terms of RBI Master Circular No.13/2010-11 dated 1st July, 2010 will have to be complied with. (((((((((()))))))))) Vivek Hegde Practicing Company Secretary Prabhat Joshi Student CS