BUY-BACK OF SHARES

“A company’ cannot buy-back its own shares”, eXI)lain. Are there any exceptions to it?

Section 77 of the Companies Act does lIot permit a company to purchase its own shares, for it involves permanent reduction in share capital which is a

cushion to the creditors. The Companies Act also does not allow

reduction of share capital except for certain legitimate purposes by adapting’

the procedure given in Sections 100 to t03. .

There has been persistent demand from the corporate sector, in its endeavour to meet the international practices, to allow companies to buyback their

own securities (shares or debentures). Responding to this demand,

.the Government amended the Companies Act and allowed the corporate sector to buy-back its own shares vide Companies (Amendment) Act 1999. By

this Act a new Section 77 A was inserted containing the provisions permitting the companies to buy-back their own securities subject to certain conditions.

The major reasons for buy-back may be one or more of the following: (a) To increase underlying share value, as EPS (earning per sharc)

increases after buy-back. In turn. it will push up the market value of the remaining shares.

(b) For adjusting the capital base, if the company is over-capitalised

andor to achieve optimum debt-equity ratio.

© To p,’event hostile takeover as it will reduce the floating stock from

the market and s: JTe prices will also be increased in the market.

Excitations. The provision of Section 81 do not apply

(i) to a private company unless its Articles provide otherwise.

(i i) to the increase of subscribed capital of public company caused by the exercise of an option by convertible debentures or loans, as per terms of issue,

provided the terms of issue are duly approved: (a) by the Central Government; and (b) by a special resolution of the company.

Where the convertible debentures are issued to or loan is obtained from the Government, or any institution specified by the Goverrunent in this behalf.

the Government approval and passing of special resolution is not necessary.

What are Bonus Shares ‘! When are they issued? State the legal provisions in relation to the issue of such shares.

When a company accumulates large free reserves and intends to bridge the gap between the capital and fixed assets, it issues Bonus Shares to its equity

(ordinary) shareholders. Therefore a bonus issue cannot be made where there is no undistributed profits or reserves with the company since the nlain

purpose of issue of Bonus Shares is to capitalise proh,s which are available for distribution as dividend. For this purpose the SecmitiesPremium Account

uls 78 (2) and the Capital Redemption Reserve Account (us 80 (5), can also be applied for the issue of bonus shares.

Companies issue Bonus Shares out of its accumulated profits and reserve and the shareholders do not pay anything to the issue of bonus shares.

For making an issue of bonus shares, the following conditions must be complied with:

I. Sufficient undistributed profits must be there. The two other sources from which bonus shares may be financed are Securities Premium Account

and Cal)ital Rcdcml)tion Resenre Account [Section 78 (2) & 80 (5)].

2. Articles must permit such an issue.

3. Suitable resolution by the Board of Directors must be passed. 4. Formal approval of the shareholders in a general meeting must be secured. For this

purpose, ordinary resolution must be passed.

Point of DistinctIon Public Company Private Company

1. Minimum number A public company must .A private company must
of members have at least seven have at least 2 members.
members.
2. Maximum number I No limit I Its members should not
of members exceed 50 in number (ex-
elusive of past and
present employees).
3. Minimum number I Three I Two
of directors
4. Public invitation for I It is free to invite the It cannot invite the public
capital public to buy its shares to buy its shares and de-
and debentures. dentures.
5. Commencement of I It cannot commence It can commence business
business business after incor- immediately after incor-
proration unless cer- proration.
certificate of commence-
meant of business is
obtained.
6. Prospectus I It must issue and file a Need not issue and file a
prospectus or state- prospectus or a statement
meant in lieu of pro- in lieu of prospectus.
conspectus before al1ot-
ing shares.
7. Allotment of shares I It cannot allot shares It can allot shares without
without receiving the raising the minimum
minimum subscription. subscription.
8. Statutory meeting I It 0 must hold a statutory It is not required to hold
meeting and must file the statutory meeting and
statutory report with the to file statutory report.
Registrar within six
months from the date of
obtaining the certificate
to commence business.
9. Transfer of shares I Its shares are freely I Its shares are not freely
transferable. transferable.


10. Minimum paid-up
capital
11. Share warrants

11. Rulc3 regarding
directors

12. Managerial
remuneration

13. End-words of the
name
14. Quorum


Five lakh at the time of incorporation.
It cannot issue share warrants.
Appointment, re-appointment etc. of directors suhject to Government approval.
Legal restrictions. Total managerial remuneration in a public company cannot exceed 11 % of the nct profits (Section 198).
Public Ltd. or Ltd.

If the articles of a company do not provide for a large quorum, 5 members personally present are quorum for a meeting.


One lakh at the time of incorporation.
It can issue share warrants.

No Government approval required for appointment, re-appointment etc. of directors.
No such restriction applies to a private company.

Private Ltd.

It is 2 in the case of II private company.


In addition to the above, a private company enjoys special privileges. A public company enjoys no such privileges.

The Indian Companies Act 1956

1. as regards the State of Nagaland, it applies, subject to such modifications, if any, as the Central Govemment, by notification in the Official Gazette
specify
2. as regards the State of Go a and Union Territory of Daman and Diu, such of the provisions of the Act shall not apply or shall apply with such exceptions
and modification for such period or periods with effect from the 26th January 1963 or any subsequent date, to any existing company or any company
registered under this Act on or after 26th January 1963, as may be specified by the Central Government by notification in the official Gazette (Sec 620-B),
and
3. as regards the State of Jammu and Kaslunir, such of the provisions of the Act shall not apply or shall apply with such exceptions and modifications, with


effect from the commencement of the Central Laws (Extension to Jammu and Kashmir) Act 1968 (Le. 15th August 1968) or any subsequent date, to any
existing company or any company registered under this Act after 15th August 1968, as may be specified by the Central Government by notification in the
official Gazette
Main Ob.iectives. The main objectives of new Companies Act of 1956 are as under
(i) To protect the interests of large number of shareholders as there exists separation of ownership from management in company form of organisation.
(ii) To safeguard the interests of the creditors in view of the limitedliability feature of the company.
(iii) To help the development of companies in India on healthy lines as corporate form of orgamsation constitutes a very important sector of the economy.
(iv) To help the achievement of socio-economic policy of the Government of India namely, establishing a socialistic pattern of society.
(v) To equip the Government with necessary powers to intervene directly in the affairs of the company in the public interest so that the interests of various
sections of the society e.g. consumers. labourers, shareholders, suppliers etc., may be protected from unscmpulous management.