BUYBACK OF SECURITIES

(LEGAL ASPECTS OF M & A)

Conditions Of Buy-back And General Obligations Of The Company

a) A company can buy back its shares or other specified securities only by any of the following methods
From existing share/security holders on a proportionate basis through tender offer From open market through:
Book building process Stock exchange

From odd lot shares

A company cannot buy back shares or other specified securities through negotiated deals.

Conditions Of Buy-back And General Obligations Of The Company

b) A company cannot buy back its shares or other specified securities in such a manner that it would be required to delist. c) Consideration for buy-back has to be paid in cash only.

d) A company cannot withdraw the offer to buy back after the draft letter has been filed with SEBI or the public announcement of the offer for the buy-back has been made. e) A company cannot issue any shares or other specified securities including by way of bonus shares till the date of the closure of the offer.

Conditions Of Buy-back And General Obligations Of The Company

f) The promoters or their associates cannot deal in the shares or other specified securities of the company in the stock exchange during the period when the buy-back offer is open.

g)

No public announcement of a buy-back can be made during the pendency of any scheme of amalgamation or arrangement or compromise. A company intending to buy back its shares or other specified securities has to appoint a compliance officer and investor service centre. Normally, the company secretary is appointed as the compliance officer.

h)

Conditions Of Buy-back And General Obligations Of The Company

i) Details of shares bought back and extinguished and destroyed have to be informed to the concerned stock exchange (s) within seven days of the extinguishment and destruction.

j)

A company cannot buy back locked-in securities during the lock-in period.
Within two days of the completion of a buy-back, a company has to issue a public announcement giving certain details and in a prescribed manner.

k)

Requirements Of The Special And Board Resolutions

The SEBI buy-back regulations specify certain matters in relation to passing of special and board resolutions. They are: 1. In case where a special resolution is passed in the general meeting, the explanatory statement to the notice of general meeting, should contain information as per schedule I of the regulations. A copy of the special resolution passed should be filed with SEBI and the relevant stock exchange(s) within seven days of the passing.

2.

Requirements Of The Special And Board Resolutions

3. With regard to the buy-back made under the board resolution, apart from the company being required to file a copy of the board resolutions with SEBI and the relevant stock exchange(s) within two days. It is also required to give a public notice in at least one English national daily, one Hindi national daily and one regional daily within two days of passing of the resolution.

This may be a matter of debate that what is achieved by this extra requirement of the public notice giving so much information after the resolution has been already approved by the board.

Buy-back Through Tender Offer

Procedure
1.
The starting point is the passing of the special resolution by the general body or the board resolution as the case may be. Thereafter, the company is required to make a public announcement in at least one English national daily, one Hindi national daily and one regional language daily. The draft letter of offer is required to be filed with SEBI. In case, the number of securities offered by the security holders is in excess of the securities to be bought back, the acceptances from all the security holders are required to be on a proportionate basis.

2. 3.

There is a peculiar confusion in the regulations, as to who is making an offer and who is accepting it. A company intending to buy back under tender offer sends a letter of offer to the security holders. Thus, it is the company who is making an offer. Therefore, the security holder should have a right to either accept the offer or reject it.

Buy-back Through Tender Offer

4.

Regulation 11(2) requires a company to make the payment of the consideration in cash to those security holders whose securities have been accepted and return the securities not accepted within seven days of the completion of verification. Regulation 12 (1) prescribes the manner in which accepted securities which are in the physical form, are to be destroyed and extinguished within seven days of the date of the completion of the buy-back.

5.

Escrow Account
Regulation 10 (1) requires that the company should open an 1 escrow account and deposit in it such sum of money as is specified in regulation 10 (2) on or before the opening of the open offer.

2 payable under buy-back does not exceed Rs.100 crore, the

amount to be deposited in the escrow account shall be 25 per cent of the consideration payable. However, if the consideration payable is in excess of Rs.100 crore, the amount would be 25 per cent of the first Rs.100 crore and 10 per cent of the excess over Rs.100 crore.

Regulation 10 (2) specifies that in case, the total consideration

Escrow Account

Regulation 10 (3) permits that the deposit in the escrow account can be in the form of cash, deposited with a scheduled commercial bank or a bank guarantee in favour of the merchant banker or acceptable securities with appropriate margin deposited with the merchant banker or a combination thereof. However, in terms of regulation 10(8), minimum 1 per cent of the total consideration payable must be in the form of cash deposited with the scheduled commercial bank. So far as the cash deposited with a commercial bank is concerned, regulation 11 (1) allows the company to utilize 90 per cent, thereof, by transfer to the special account to be opened for payment of consideration to the security holders. The regulation further requires the company to immediately fund the balance amount to make up the entire amount due.

Escrow Account
5 Bank guarantees and securities deposited in the escrow account, however, can be returned to the company only after the payment of consideration has been fully made and all formalities relating to the tender offer have been fully complied.

Odd Lot buy-back

Regulation 13 stipulates, that provisions pertaining to buy-back through tender offer shall be applicable mutatis mutandis to odd lot shares or other specified securities.

Buy-Back from the Open Market

A company can buy-back its shares from the open market by 1. Stock Exchange 2. Book Building Process

Buy-back Through Stock Exchange

The resolution passed by the general body or the board has to specify the maximum price. The Company shall appoint a merchant banker. Public announcement has to be made at least seven days before commencement of purchase from the stock market and within two days of the announcement a copy, thereof, needs to be filed with SEBI. Additionally, the public announcement shall disclose the names of stock exchanges and brokers through which buy-back is to be affected. Buy-back can be done only through nationwide exchanges and through the normal order matching mechanism.

Buy-back Through Stock Exchange

Identity of the company as a purchaser must appear on the electronic screen when the order is placed. The company and the merchant banker are required to submit to the stock exchange, information regarding shares or other specified securities bought on a daily basis. They are also required to publish this information in a national daily on a fortnightly basis as also every time an additional 5 per cent purchase is made. The company has to complete the verification of the securities bought within fifteen days of the pay out, and the securities have to destroyed and extinguished in the same manner and time frame as in the case of buy-back through tender offer.

Buy-back through book building

The resolution passed by the general body or the board has to specify the maximum price. The company shall appoint a merchant banker. Public announcement has to be made at least seven days before commencement of buy-back and within two days of the announcement a copy, thereof, needs to be filed with the SEBI. The Public announcement has to contain details about the book building process, the manner of acceptance, the format of acceptance to be sent by the security holder and the details of the bidding centers. Book building process has to be made through electronically linked transparent facility.

Buy-back through book building

The number of bidding centers shall not be less than thirty. The offer has to remain open for a minimum of fifteen days and a maximum of thirty days. The final buy-back price, being the highest accepted price, shall be paid to all the shareholders. The provisions relating to the verification of securities, opening of a special account for making payment of the consideration and extinguishment of securities shall apply as in the case of buy-back through tender offer.

Obligations Of The Merchant Banker

Ensuring that the company has an ability- financial or otherwiseto carry out the buy-back and firm arrangements have been made for the payment of consideration. Ensuring adequacy of the escrow account and releasing it only after all obligations of the company under the regulation have been met with. Ensuring that the contents of the public announcement and letter of offer are true, fair and adequate. Ensuring compliance with the SEBI regulations, the Companies Act, 1956, and any other applicable laws, rules and regulations.