Section 68 - Power of Company to Purchase Its Own Securities (Buy-Back)

# Section 68 — Buy-Back of Securities

## What is Buy-Back?

Buy-back is the re-acquisition by a company of its own securities. It is a way of returning money to investors. Section 68 permits buy-back subject to strict conditions designed to protect creditors and minority shareholders.

## Sub-section (1) — Sources of Funds

A company may purchase its own shares or other specified securities out of:

1. Free reserves; or

2. Securities premium account; or

3. Proceeds of the issue of any shares or other specified securities.

Prohibition: Buy-back cannot be made out of the proceeds of an earlier issue of the same kind of shares or specified securities.

> Specified securities include employees' stock option or other securities as notified by the Central Government.

## Conditions for Buy-Back

### When is Special Resolution NOT Required?

Board resolution suffices when:

1. Buy-back is not exceeding 10% of (paid-up equity capital + free reserves); AND

2. Authorised by Board resolution at its meeting.

## Cooling Period Between Two Buy-Backs

No fresh offer of buy-back within one year reckoned from the closure of the preceding offer (Proviso to Section 68(2)).

> Explanation II: 'Free reserves' includes the securities premium account.

## Procedure Before Buy-Back — Explanatory Statement

The notice of the meeting (where special resolution is to be passed) must be accompanied by an explanatory statement stating:

1. Full and complete disclosure of all material facts;

2. Necessity for the buy-back;

3. Class of shares/securities intended to be purchased;

4. Amount to be invested under the buy-back;

5. Time limit for completion.

(Rule 17(1) lists 14 specific particulars to be disclosed.)

## Sub-section (5) — Sources of Securities for Buy-Back

Buy-back may be from:

1. Existing shareholders/security holders on a proportionate basis;

2. Open market;

3. Securities issued to employees under ESOP or sweat equity schemes.

## Declaration of Solvency (Form SH-9)

• Filed before buy-back commences.
• Verified by an affidavit.
• States that the Board has made a full inquiry into the company's affairs and the company is capable of meeting all its liabilities, and will not be rendered insolvent within 12 months from the date of declaration.
• Signed by at least two directors, one of whom must be the Managing Director (if any).

## Sub-section (4) — Time Limit for Completion

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

## Extinguishment of Securities

The securities bought back shall be extinguished and physically destroyed within 7 days from the last date of completion of buy-back.

## Cooling Period — No Fresh Issue

After completing buy-back, no fresh issue of the same kind of shares/securities within 6 months.

Exceptions:

• Bonus issue;
• Discharge of existing obligations: conversion of warrants, stock option schemes, sweat equity, conversion of preference shares or debentures into equity.

> The 6-month restriction applies only to the same type of security bought back — other types of securities can still be issued.

## Register of Buy-Back — Form SH-10

The company shall maintain a register in Form SH-10 containing:

• Shares/securities so bought;
• Consideration paid;
• Date of cancellation;
• Date of extinguishing and physical destruction;
• Other prescribed particulars.

Kept at the registered office in the custody of the secretary or another person authorised by the Board. Entries are to be authenticated by the secretary or authorised person.

## Filing Return of Buy-Back

• Form SH-11 with prescribed fee.
• Filed with the Registrar and with SEBI if shares are listed.
• Within 30 days of completion of buy-back.
• Accompanied by a certificate in Form SH-15, signed by two directors including the Managing Director (if any), certifying compliance with the Act and Rules.

## Sub-section (11) — Penalty