SEBI (Buy-Back of Securities) Regulations, 2018 – Securities Laws and Capital Markets Important Questions

SEBI (Buy-Back of Securities) Regulations, 2018 – Securities Laws and Capital Markets Important Questions

Question 1.
State the conditions which are required to be satisfied by a company for the purpose of buy-back of shares under the Companies Act, 2013. [Dec 2009 (10 Marks)], [Dec 2010 (8 Marks)]
Answer:
Conditions for buy-back of shares: No company shall purchase its own shares or other specified securities, unless

  • The buy-back is authorized by its articles.
  • A special resolution has been passed at a general meeting of the company authorizing the buy-back where buy-back is above 10% but up to 25% of the aggregate of paid-up capital and free reserves of the company.

However, for buy-back up to 10% of paid-up capital and free reserves of the company Board resolution is sufficient.

In respect of the buy-back of equity shares in any financial year, the reference to 25% shall be construed with respect to its total paid-up equity capital that financial year.

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves ie. to say –
\(\frac{\text { Secured + Unsecured Debts }}{\text { Paid-up Capital + Free Reserves }}\) < 2

The Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies.

  • All the shares or other specified securities for buy-back are fully paid up.
  • The buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the SEBI (Buy-Back of Securities) Regulations, 2018.
  • The buy-back in respect of shares or other specified securities for unlisted public companies and private companies is in accordance with the Companies (Share Capital & Debentures) Rules, 2014.
  • No offer of buy-back shall be made within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back if any. (in simple words, there should be a gap of 1 year between two buybacks)

Question 2.
It is a well-known fact that to maximize the shareholder’s value, a company having surplus funds often induced to buy back its own shares. What are common reasons which usually induce a company to resort to buy-back? [June 2011 (5 Marks)]
Answer:
Good corporate governance calls for maximizing shareholder value. When a company has surplus funds for which it does not have good avenues for deployment assuring an average return on capital employed and earnings per share, the company’s financial structure requires balancing.

The reasons/objectives for buy-back may be one or more of the following:

  • To improve earnings per share (EPS).
  • To improve return on capital, return on net worth, and to enhance the long-term shareholder value.
  • To provide an additional exit route to shareholders when shares are undervalued or are thinly traded.
  • To enhance consolidation of stake in the company.
  • To prevent unwelcome takeover bids.
  • To return surplus cash to shareholders.
  • To achieve optimum capital structure.
  • To support share price during periods of sluggish market conditions.
  • To service the equity more efficiently.

The decision to buy back is also influenced by various other factors relating to the company, such as growth opportunities, capital structure, sourcing of funds, cost of capital, and optimum allocation of funds generated.

Question 3.
ABC Ltd. has completed the buy-back of equity shares on 30th April 2019. The company desires to make a further issue of equity shares on 31st August 2019. Can the company proceed and allot further equity shares on 31st August 2019 assuming that all other requirements are complied with or will be complied with?
Will your answer be different, if the company desires to issue and allot on the very same day (i.e., 31st August 2019), preference shares instead of equity shares assuming that all other requirements are complied with or will be complied with? [Dec 2014 (5 Marks)]
Answer:
As per Section 68(8) of the Companies Act, 2013, where a company completes a buy-back of its shares or other specified securities, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares u/s 62( 1 )(a) [i.e. right issue]or other specified securities within a period of 6 months. However, bonus issues, conversion of warrants, stock option schemes, sweats equity, or conversion of preference shares or debentures into equity shares will be allowed.

As per the facts given in the case, ABC Ltd. has completed the buy-back of equity shares on 30th April 2019. As per Section 68(8) of the Companies Act, 2013, it cannot issue further equity shares for the next 6 months ie. up to 30th September 2019. Thus, ABC Ltd. cannot proceed and allot further equity shares on 31st August 2019.

However, if ABC Ltd. desires to issue and allot on the very same day i.e., 31st August 2019, preference shares instead of equity shares, it can do so as a restriction in Section 68(8) extends to ‘same kind of shares’. Preference shares being separate class, it will not be covered by the restriction covered u/s 68(8) and the company can issue such shares in the next 6 months after completion of buy-back of equity shares.

Question 4.
Brown Ltd. (listed company) committed certain defaults in repayment of deposits. Subsequently, the said defaults were remedied and a period of 30 months has elapsed after such defaults ceased to subsist. Brown Ltd. desires to purchase its own shares. Do you think Brown Ltd. is entitled to proceed with the proposed buy-back of shares? Give reasons for your answer quoting the relevant provisions applicable to the issue under consideration. [June 2015 (5 Marks)]
Answer:
According to Section 70(l)(c) of the Companies Act, 2013 read with Regulation 4(10) of the SEBI (Buy-Back of Securities) Regulations, 2018, no company shall directly or indirectly purchase its own shares or other specified securities if a default, is made by the company, in the repayment of deposits, interest payment thereon, the 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 institution or banking company.

However, the buy-back is not prohibited, if the default is remedied and a period of 3 years has elapsed after such default ceased to subsist.

Since a period of 3 years has not lapsed such default ceased to subsist Brown Ltd. is not entitled to proceed with the proposed buy-back of shares. Thus, the company will have to wait another 6 months, and then it will be entitled to proceed with the proposed buy-back of shares

Question 5.
No offer of buy-back shall be made by the listed entity within a period of 180 days from the date of the Board meeting or meeting of shareholders, as the case may be, in respect of the preceding offer of buy-back. [June 2016 (3 Marks)]
Answer:
As per Section 68(2) of the Companies Act, 2013, read with Regulation 4(7) of the SEBI (Buy-Back of Securities) Regulations, 2018, no offer of buyback shall be made within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back, if any.

Thus, the next offer of buy-back can be made after 1 year from the closure of the earlier back-back of shares.

Hence, the given statement “no offer of buy-back shall be made by the listed entity within a period of 180 days from the date of a Board meeting or meeting j of shareholders as the case may be, in respect of the preceding offer of buyback” is incorrect.

Question 6.
Circumstances that prohibit buy-back of shares or other specified securities under the Companies Act, 2013. Comment. [Dec 2016 (3 Marks)]
Answer:
Prohibition for buy-back in certain circumstances [Section 70]: No company shall directly or indirectly purchase its own shares or other specified securities:
(a) Through any subsidiary company including its own subsidiary companies;
(b) Through any investment company or group of investment companies; or
(c) If a default, is made by the company, in the repayment of deposits, interest payment thereon, the 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 institution or banking J company.

However, the buy-back is not prohibited, if the default is remedied and a period 5 of 3 years has elapsed after such default ceased to subsist.

No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of the following sections:

  • Section 92 [Annual Return]
  • Section 123 [Declaration of dividend]
  • Section 127 [Punishment for failure to distribute dividend]
  • Section 129 [Financial Statements]

Question 7.
“Measuring the shareholders’ value” is the objective of Good Corporate Governance. Comment on the statement, how buyback of shares achieves [June 2017 (5 Marks)]
Answer:
Good corporate governance calls for maximizing shareholder value. When a company has surplus funds for which it does not have good avenues for deployment assuring an average return on capital employed and earnings per share, the company’s financial structure requires balancing.

The reasons/objectives for buy-back may be one or more of the following:

  • To improve earnings per share (EPS).
  • To improve return on capital, return on net worth, and to enhance the long-term shareholder value.
  • To provide an additional exit route to shareholders when shares are undervalued or are thinly traded.
  • To enhance consolidation of stake in the company.
  • To prevent unwelcome takeover bids.
  • To return surplus cash to shareholders.
  • To achieve optimum capital structure.
  • To support share price during periods of sluggish market conditions.
  • To service the equity more efficiently.

The decision to buy back is also influenced by various other factors relating to the company, such as growth opportunities, capital structure, sourcing of funds, cost of capital, and optimum allocation of funds generated.

Question 8.
Discuss briefly conditions and requirements for buy-back of shares and specified securities under the SEBI (Buy-Back of Securities) Regulations, 2018.
You are the Company Secretary & Compliance Officer of XYZ Ltd. (listed company). In a meeting of directors, they are discussing the forthcoming plan of buy-back of equity shares.

Following questions are raised by some of the directors in the meeting:
(i) Which methods of buy-back are applicable to the listed company?
(ii) One director suggested that the company should buy back 20% of the paid-up capital and free reserves from the open market? Is it possible?
(iii) Can a company buy back its shares through negotiated deals?
(iv) What should be the gap between two buy-back?
Answer the above questions explaining directors of your company relevant provisions of the SEBI (Buy-Back of Securities) Regulations, 2018.
Answer:
Conditions and requirements for buy-back of shares and specified securities [Regulation 4]:
1. Maximum limit for buy-back: The maximum limit of any buy-back shall be 25% or less of the aggregate of paid-up capital and free reserves of the company.

Explanation. In respect of the buy-back of equity shares in any financial 1 year, the reference to 25% shall be construed with respect to its total paid-up equity capital in that financial year.

2. Post-buy-back debt-equity ratio: The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and free reserves. However, if a higher ratio of the debt to capital and free reserves for the company has been notified under the Companies Act, 2013, the same shall prevail.

3. Only a fully paid-up share can be brought back: All shares or other specified securities for buy-back shall be fully paid up.

4. Methods for buy-back: A company may buy back its shares or other specified securities by any one of the following methods:
(a) From the existing shareholders or other specified securities-holders on a proportionate basis through the tender offer.

(b) From the open market through:

  1. Book-building process
  2. Stock exchange.

(c) From odd-lot holders.
No offer of buy-back for 15% or more of the paid-up capital and free | reserves of the company shall be made from the open market.

5. Buyback is not allowed for delisting purposes: A company shall not buy back its shares or other specified securities so as to delist its shares or j other specified securities from the stock exchange.

6. Buy-back through negotiated deals not allowed: A company shall not J buy-back its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions, or through any private arrangement.

7. Gap of 1 year between two buy-back: A company shall not make any offer of buy-back within a period of one year reckoned from the date of expiry of buyback period of the preceding offer of buy-back if any.

Reduction of share capital: A company shall not allow buy-back of its shares unless the consequent reduction of its share capital is effected. Sources for buyback: A company may undertake a buy-back of its own shares or other specified securities –
(a) out of its free reserves or
(b) out of the securities premium account or
(c) out of the proceeds of the issue of any shares or other specified securities.

However, no such buy-back shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Prohibition on buyback: No company shall directly or indirectly purchase its own shares or other specified securities:
(a) Through any subsidiary company including its own subsidiary companies.
(b) Through any investment company or group of investment companies.
(c) If a default is made by the company in the repayment of deposits interest payment thereon, the 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 institution or banking company.

However, the buy-back is not prohibited, if the default is remedied and a period of 3 years has elapsed after such default ceased to subsist.

Question 9.
In what ratio the listed company can buy-back its shares from the shareholders? Also, state whether it is necessary to make reservations for small shareholders?
Answer:
Buy-back from existing security-holders [Regulation 6]: A company may buy back its shares or other specified securities from its existing security-holders on a proportionate basis.

Reservation for small shareholders: 15% of the number of securities which the company proposes to buy back or a number of securities entitled as per their shareholding, whichever is higher, shall be reserved for small shareholders.

Small shareholder means a shareholder of a listed company, who holds shares or other specified securities whose market value, on the basis of the closing price of shares or other specified securities, on the recognized stock exchange in which highest j trading volume in respect of such security, as on record date is not more than ₹ 2 lakh. [Regulation 2(1a)]

Question 10.
Explain Buy-back of shares through book-building route. [June 2014 (5 Marks)]
Answer:
Buy-back through book building [Regulation 22]: A company may buy back its shares or other specified securities through the book-building process as stated below:
1. The Special resolution or board resolution shall be passed as per Regulation 5.

2. Disclosures, filing requirements, and timelines for the public announcement:
(a) The company shall appoint Merchant Banker and make a public announcement as per Regulation 7.
(b) The disclosures in the public announcement shall also be in accordance with Schedule II.
(c) The public announcement shall be made at least 7 days prior to the commencement of buy-back.

3. The provision of Regulation 9 relating to the Escrow Account also applies for buy-back under this method. Additional provisions relating to Escrow Account are as follows:
(a) The deposit in the escrow account shall be made before the date of the public announcement.
(b) The amount to be deposited in the escrow account shall be determined with reference to the maximum price as specified in the public announcement.

4. A copy of the public announcement shall be filed with the SEBI within 2 days of such announcement along with the fees as specified in Schedule V.

5. The public announcement shall also contain the detailed methodology of the book-building process, the manner of acceptance, the format of acceptance to be sent by the securities holders pursuant to the public announcement, and the details of bidding centers.

6. The book-building process shall be made through an electronically linked transparent facility.

7. The number of bidding centers shall not be less than 30 and there shall be at least one electronically linked computer terminal at all the bidding centers.

8. The offer for buy-back shall remain open to the securities holders for a period not less than 15 days and not exceeding 30 days.

9. The Merchant Banker and the company shall determine the buy-back price based on the acceptances received.

10. The final buy-back price, which shall be the highest price accepted shall be paid to all holders whose shares or other specified securities have been accepted for buy-back.

11. The provisions of Regulation 10 pertaining to verification of acceptances and opening of special account and payment of consideration shall be applicable mutatis mutandis.

Extinguishment of certificates [Regulation 23]: The provisions pertaining to the extinguishment of certificates for tender offer shall be applicable mutatis mutandis to the buy-back through book building.

Question 11.
Elucidate the obligations of Merchant Banker under the SEBI (Buy-Back of Securities) Regulations, 2018. [Dec 2016 (5 Marks)]
Answer:
Obligations of the Merchant Banker [Regulation 25]: The Merchant Banker shall ensure that –

  • The company is able to implement the offer.
  • The provision relating to the escrow account has been complied with.
  • Firm arrangements for monies for payment to fulfill the obligations under the offer are in place.
  • The public announcement of buy-back is made in terms of these regulations.
  • The letter of offer has been hied in terms of the regulations.
  • A due diligence certificate along with the draft letter of offer has been furnished to the SEBI.
  • The contents of the public announcement of the offer as well as the letter of offer are true, fair, and adequate, and quoting the source wherever necessary.
  • Due to compliance with Sections 68, 69 & 70 of the Companies Act, 2013 and no other laws or rules have been made.
  • The bank with whom the escrow or special amount has been deposited releases the balance amount to the company only upon fulfillment of all obligations by the company under the regulations.
  • A final report is submitted to the SEBI in the form specified within 15 days from the date of expiry of the buy-back period.

Question 12.
Can a company buy back its own shares or any specified securities through negotiated deals or through any private arrangements? Comment with methods allowed for buy-back. [June 2019 (5 Marks)]
Answer:
Methods for buy-back: A company may buy back its shares or other specified securities by any one of the following methods:
(a) From the existing shareholders or other specified securities-holders on a proportionate basis through the tender offer.

(b) From the open market through:

  1. Book-building process
  2. Stock exchange.

(c) From odd-lot holders.
No offer of buy-back for 15% or more of the paid-up capital and free reserves of the company shall be made from the open market.

Buy-back through negotiated deals not allowed: A company shall not buy-back | its shares or other specified securities from any person through negotiated | deals, whether on or off the stock exchange or through spot transactions or I through any private arrangement.

Question 13.
Financial data of a listed company as of 31st March 2018 are as follows:
Authorized equity share capital (1 Crore shares of ₹ 10 each) – ₹ 10 Crore
Paid-up equity share capital – ₹ 5 Crore
General reserve – ₹ 3
Crore Debenture redemption reserve – ₹ 2 Crore
The Board of directors of your company passed a resolution by circulation for buy-back of shares to the extent of 9% of the company’s paid-up share capital and free reserves. You are required to examine the validity of the proposal with reference to the provisions of the SEBI Regulations. [June 2019 (4 Marks)]
Answer:
As per Section 68(2) of the Companies Act, 2013 read with SEBI Regulations, the board of directors is authorized to buy back up to 10% of the total paid-up equity capital and free reserves of the company by passing a resolution at its meeting.

Under Section 179(3)(b), the Board of Directors of a company has given the power to buy back securities as per Section 68 by passing resolutions at meetings of the Board.

Therefore, in the present case, the Board of Directors is authorized to buy back the shares of the company up to 10% of the paid-up capital and free reserves, provided the resolution authorizing the buy-back is passed at the Board meeting and not by circular resolution.

As per the facts given in the case, the board of directors of Pious Ltd. desires to buy back 9% of paid-up capital and free reserve. This can be done by passing Board Resolution at the board meetings.

Total shares that can be brought back by passing Board Resolution are calculated as follows:
[₹ 5 Crore (Paid-up Capital) + ₹ 3 Crore (General Reserve)] × 9% = ₹ 0.72 Crore

The company should also comply with the other conditions specified in Section 68 and SEBI Regulations.

Question 14.
A listed entity facing some problems while complying with some provisions of the SEBI (Buy-Back of Securities) Regulations, 2018, can it apply to SEBI from exemptions from applicability of the provisions?
Answer:
Exemption from enforcement of the regulations in special cases [Regulation 25A]:
The SEBI may, exempt any person or class of persons from the operation of all or any of the provisions of these regulations for a period as may be specified but not exceeding 12 months, for furthering innovation in technological aspects relating to testing new products, processes, services, business models, etc. in the live environment of a regulatory sandbox in the securities markets.

Any exemption granted shall be subject to the applicant satisfying such conditions as may be specified by the SEBI including conditions to be complied with on a continuous basis.

Explanation: or the purposes of these regulations, “regulatory sandbox” means a live testing environment where new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be specified by the SEBI.

Securities Laws and Capital Markets Questions and Answers

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