BUY-BACK OF SECURITIES UNDER SECTION 77A OF THE COMPANIES ACT, 1956 Prior to 1999, the Section 77 (read along

with Section 100) of the Companies Act prevented the buyback of shares without the prior sanction of the court. The Working Group on the Companies Act, 1956 which submitted its report on 12th February, 1997 recommended providing for buyback of shares in the Act subjected to certain provisions. By the 1999 amendment act, Section 77A, 77AA and 77B have been inserted to provide for the buyback of its own securities by the company subjected to the safeguards that are mentioned within. Section 77A (2) clause (f) provides that the buyback of securities that are listed on any of the stock markets should be done in accordance of the rules made by the SEBI and clause (g) reads as follows: The buyback in respect of shares or other specified securities other those specified in clause (f) is in accordance with the guidelines as may be prescribed. In pursuance of this, the Ministry of Corporate Affairs has come up with the Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 19991 which are applicable to the buyback of shares by the Private limited companies and unlisted public limited company which are not listed on the stock exchange. SEBI made the rules2 for the buyback of securities with respect to the listed companies.

BUY-BACK UNDER THE PRIVATE LIMITED COMPANY AND UNLISTED PUBLIC LIMITED COMPANY (BUYBACK OF SECURITIES) RULES, 1999
1 2

http://www.mca.gov.in/Ministry/actsbills/rules/PLCaUPLCBBoSR 1999.pdf http://www.sebi.gov.in/cms/sebi_data/attachdocs /1328613895121.pdf

MODES OF BUY-BACK A private company may buy-back its shares by either of the following methods: 1. from the existing shareholders on a proportionate basis through private offers; 2. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. RESOURCES OF BUY-BACK: i) Free ReservesFree Reserves means those reserves which, as per latest audited balance sheet of the company, are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money. As per Section 77AA, where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the shares so purchased, shall be transferred to the capital redemption reserve account. ii) Securities premium account iii) The proceeds of any shares or specified securities CONDITIONS FOR BUY-BACK
1. The Articles authorise Buy-back of securities. 2. Where the buyback is more than 10% of the total paid up equity capital and free reserves of

the company, a Special Resolution was passed at the General Meeting approving the buyback of securities and the same was field along with Form No. 23 with ROC within 30 days from the date of passing the resolution. 3. The buyback was made only out of the companys free reserves, securities premium account, the proceeds of any shares or other specified securities. 4. The buyback was not made out of an earlier issue of the same kind of shares/securities.
5. The aggregate value of buyback doesnt exceed 25% of the total paid up capital and free

reserved of the company or in case of buyback of equity shares in the financial year, it did not exceed 25% of the total paid-up equity capital in that financial year.
6. All the shares/securities so bought back are fully paid up.

7. the ratio of debt including all the amounts secured and unsecured owned by the company is

not more than twice the capital and its free reserves after such buyback, except where higher ratio has been prescribed by the Central Government for a class or classes of companies.
8. The buyback process is completed within 12 months from the date of the passing of the

Special Resolution or a resolution passed by the board; if it is not completed within the stipulated time also check whether the reasons thereof were stated in the Boards report.
9. The buyback is made in accordance with the Private Limited Company and Unlisted Public

Limited Company (Buyback of Securities) Rules, 1999 issued by the Department of Company affairs [now the Ministry of Company Affairs].

PROCEDURE FOR BUY-BACK

1. SPECIAL RESOLUTION Passing of a special resolution under section 77A (2) and the explanatory statement is to be annexed to the notice for the general meeting containing all disclosures as specified in Schedule I of the Rules. Contents of the Statement a) the date of the Board meeting at which the proposal for buy back was approved, b) the necessity for the buy-back; c) the class of security intended to be purchased under the buy-back;
d) the method to be adopted for the buy-back;

e) the basis of arriving at the buyback price;

f) the time limit for the completion of buy-back; g) It will also state that the BOD has checked that the company would be able to pay all

its debts.etc. 2. LETTER OF OFFER

The Company, authorized by a special resolution, shall file with the Registrar of Companies a draft letter of offer before the buy-back of shares. IT shall also declare solvency in Form No. 4A in accordance with section 77A (6). 3. CONTENTS OF LETTER OF OFFER a) Details of the offer including the total number and percentage of the total paid up capital and free reserves proposed to be bought back and price; b) the proposed time table from opening of the offer till the extinguishment of the certificates; c) disclosure of all material facts, d) The necessity for the buy back, process, e) brief information about the company;
f) Audited Financial information for the last 3 years Present capital structure (including

the number of fully paid and partly paid securities) and shareholding pattern; g) The capital structure including details of outstanding convertible instruments, if any, post buy-back; h) The letter of offer shall contain pre and post buy-back debt equity ratios etc. 4. DISPATCH LETTER OF OFFER The letter of offer shall be dispatched immediately after filing with Registrar of Companies but not later than 21 days from its filing with Registrar of Companies 5. BUYBACK PERIOD The offer for buyback shall remain open to the members for a period not less than 15days and not exceeding 30 days from the date of dispatch of letter of offer. 6. SHARES TENDERS EXCEEDS LIMIT In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the company, the acceptance per shareholder shall be on proportionate basis. 7. VERIFICATION PROCESS

The company shall complete the verifications of the offers received within 15 days from the date of closure of the offer and the shares lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the closure of the offer. 8. PAYMENT TO THE MEMBERS The Company shall immediately after the date of closure of the offer, open a special bank account and deposit therein, which would make up the entire sum due and payable as consideration for the buy-back. After the 21 days the company shall within 7 days make payment of consideration in cash or bank draft/pay order to those shareholders whose offer has been accepted or return the share certificates to the shareholders forthwith 9. FILING OF RETURNS WITH THE ROC A return on Buy-back of securities shall be filed by the company with the ROC in the form specified in Annexure A to the Rules after completion of buy-back. 10. EXTINGUISHMENT CERTIFICATE The company shall physically destroy the bought back share certificates in the presence of the Company Secretary within 7 days from the acceptance of the shares. A certificate in this behalf shall be filed within 7 days thereafter with the ROC verified by two whole-time directors including MD and Company Secretary. 11. REGISTER OF BUY-BACK OF SECURITIES The company shall maintain a register of shares bought back in Form at Annexure B to the rules. GENERAL OBLIGATIONS OF THE COMPANY The company shall ensure that:
a) The letter of offer shall contain true, factual and material information i.e. no

misleading information and state that the directors of the company accept the responsibility for the information contained in such document;
b) The company shall not issue any shares including by way of bonus till the date of the

closure of the offer under these rules;

c) The company shall confirm in its offer the opening of separate bank account and pay the

consideration only by way of cash or Bank draft/pay order;

d) The company shall not withdraw the offer once the draft letter of offer has been filed

with the Registrar of Companies; and

e) The company shall not utilize any money borrowed from Banks/Financial Institutions

for the purpose of buying back its shares.