Write a short note on : Buy-back of shares.

Meaning of Buy-back of Shares:

The term buy-back of shares implies the act of purchasing its own share buy a company. The Companies (Amendment) Act, 1994 has introduced three new sections 77A, 77AA and 77B to enable companies to purchase their own shares.

Sources of Funds for Buy-back [Section 77A(1)]:

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

  • Its free reserve or
  • The securities premium account or
  • The proceeds of an earlier issue of shares or other specified securities.

Mode of Buy-back

 A company may buy-back its shares by any one of the following methods :

  • From the existing security holders on a proportionate basis or
  • From the open market or
  • From odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange or
  • By purchasing the securities issued to employees of the company pursuant to a scheme of stock-option or sweat equity.

Conditions for Buy-back

  • The buy-back should be authorized by the Articles of Association.
  • The special resolution must be passed in the General Meeting of the company authorizing the buy-back.
  • The buy-back of the shares should not exceed 25% of paid-up capital and free reserves of the company in a financial year.
  • The debt-equity ratio should not be more than 2:1 after such buy-back.
  • All the shares for buy-back should be fully paid-up.
  • The buy-back operations should be completed within 12 months from the date of passing the special resolution.
  • The company must file solvency declaration with the Registrar and SEBI in the form of an affidavit signed by at least two directors of the company.

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