I am a qualified Company Secretary and Lawyer.

When a Company has excess cash they may either use it for Investment, Acquisition of another company, repay debt or Buyback of shares. Buyback of shares in common parlance may be described as a procedure followed by a Company wherein it offers to purchase shares from its shareholders.

Buyback of share is an indicator that a company believes its shares are undervalued and is very coherent strategy to give money back to its shareholders. The section commences with a non- obstante clause i. This would imply that, it gives an overriding effect to the said provision and is a complete code for buy-back of shares. Therefore the company desiring to buy-back its equity shares must follow procedure as set down in the provision.

INDIAN CORPORATE LAW: Amount paid for buyback of shares allowed as business expenditure

The section provides a detailed framework for a Company to Buyback its own shares. There is a clear distinction of the fund from which a buy-back can be financed. A buy-back exercise can be carried out only up to an amount up to 25 per cent of the paid-up equity capital in that financial year of the Company and the debt to paid up capital and free reserves ratio should not go beyond 2: The shares to be bought back should be fully paid.

There should be authorization in the articles of the company, a declaration of solvency and it shall be authorized by a special resolution of a company at its general meeting so as to ensure shareholder protection. Promoters holdings is diluted if, allotted ESOPs are exercised by employees. Due to dilution of their holdings the entity is prone to unwelcome takeover bids.

Thus Buyback of shares assist in consolidating the stake and averting such bids. Exit opportunity to shareholders: Abbott India Limited 1 buyback case in where price at which the buy-back is proposed is Rs.

Increase in Earning per share: For instance, if we consider a case of Deepak Industries Limited where the Company had proposed Buyback of 13,24, paid up equity shares.

Buy back of Shares – Need of Listed and Unlisted Companies | Corporate Law Reporter

They projected EPS would surge from Rs. Pitfalls in Buyback of shares. It was held in In Re: Shalibhadra InfoSec Ltd 2 case in March where their Key personnel were is charged with having issued misleading and unsubstantiated advertisements regarding buyback of shares even when the company was not performing well.

The announcement was issued with a view to create investor interest in the scrip even though the Company did not have sufficient resources to meet the buyback obligations. In case if any provision are not adhered to than it would attract penalty and officer in default are punishable with imprisonment. In Essar Bulk Terminals case 3 in wherein the only observation raised by Regional Director was pertaining to the compliance with the procedure prescribed under Sec. In Continental Controls Ltd.

In the said case a close accomplice i. Favourabl e conditions were created to operate in the market in the backdrop of such advertisements and sell the shares of the Company to the gullible public thereafter, another aspect that was pointed out was that the whole funding of Buyback was been accrued in future from a proposed technology transfer deal. It was held that such a said method of funding was not acceptable as per provision of Section 77A and such an information being a price sensitive information should have been disclosed to SEBI.

Buyback of shares —Evasion of Tax? The Regional Director via an affidavit dated October 1, had raised objection and opposed sanction of the Scheme. Petitioner contented, Regional Director has no locus standi in respect of tax matter particularly when Income Tax authorities have not broached any objections.

Sterilite Industries India Limited 6 wherein it was held that, The legislative intention behind the introduction of section 77A is to provide an alternative method by which a company may buyback upto 25 per cent of its total paid up equity capital in any financial year subject to compliance with Subsections buyback of shares indian law3 and 4. Section 77A is a facilitating provision which enables companies to Buyback their shares without having to approach the court and Prior to the introduction of section 77A, the only manner in which a company could buyback its shares was by following the procedure set cibc foreign exchange rates for buying and selling cash under sections to and section of Companies Act Buy Back of shares in accordance to Section 77A of Companies Act Thus if the Buyback of shares was carried out through Section of Companies Act the said tax obligation was not triggered.

Thus, Finance Act has amended Section QA of Income Tax wherein the provision will be applicable to buy back of unlisted share undertaken by the company in accordance with the provisions of the law relating to the Companies and not necessarily restricted to section 77A of the Companies Act, Buyback of shares — Unilateral Purchase of Shares?

Here we analyze Godrej Industries Ltd. After sanction from High Court, GIL sent letter of offer to all its shareholders. The Complainant held 45 shares, paid up value Rs.

The Complainant was in receipt of a Cheque amounting Rs. The Complainant than sent a letter to GIL stating that she did not receive any buyback offer and nor did she exercise any option of buy indian spiced cashew nuts recipe of shares.

The Complainant further stated such an act amounted to a unilateral purchase of share and amounted to compulsory acquisition of shares. The Complainant had stated that option form stated by GIL has not been received thus question of sbi forex rates in chennai would not arise and there is no evidence of actual delivery of the form. The Complainants counsel further argued that holding shares in Company is similar to possessing a property and the same could not be purchased by GIC in the manner, stated by them.

They further stated that after Scheme was sanctioned no public notice was issued and implied consent for Buy-Back. GIL counsel referring to Scheme of Arrangement stated unless the shareholder expressed its desire in written intimation to Company within 30 days of record date it is presumed that consent is accorded for Buyback of shares.

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They further stated that meeting of shareholders was convened via publication of notices and still the Complainant did not prefer any objection to the Scheme.

GIC further contended that The Company had, therefore, acted in accordance with provisions of the Scheme and the procedure laid down in the Companies Act. The decision was in favour of GIC wherein it was directed to make the payment along with interest. For the first instance in given caseas per the scheme if the shareholder did not exercise the option to retain shares within specified time limitit was assumed that shareholder accorded for buying back the shares and the shareholder did not prefer any objection when scheme was known to shareholders through notices and publication.

For second instance, since the scheme has been duly approved by the Court, the Company is well within their rights to proceed with the approved scheme and the Company has taken appropriate steps to apprise shareholders about the Scheme. Buyback of shares — Reduction of Capital?

In the present case of Goldman Sachs India Securities Pvt. Ltd 8 which was a wholly owned subsidiary of Goldman Sachs Mauritius LLC. The Indian entity of Goldman Sachs had remitted certain amount to its parent entity under Buy Back of Shares Scheme which was over and above the face value as approved in General Meeting.

The Tax authorities contented that Buy Back carried out by the Company amounted to reduction of Capital. The tax authorities were of view that, such a remittance of an amount which is above face value represents income by way of Dividend and hence tax at source should be deducted.

Following queries were deliberated in the said case: Does Buy Back Deal be termed as Colourable Device? Since the deal entered in by the Entity is in compliance to applicable laws and does not violate any provisions of the Act.

Even If the Buy Back transaction in said scenario leads to non-payment or lesser payment of Tax it cannot be held as a Colourable transactions.

Can Assesse be held in default for non-deduction of Tax at source? Profit arising out of Buy Back is taxed as Capital Gain, the said Capital Gain arised is taxable at hands of parent company in Mauritius however under Indo — Mauritius Treaty capital gain is not taxable to parent Company.

Since the Assesse is not liable to deduct tax as per provision of Income Tax Act it cannot be held as Assesse in Default, thus the penal provision of Income Tax would not be applicable. Can Buy Back of share be equated to reduction of Capital? Here we have to consider two provisions Section 2 22 d and Section 46A of Income Tax Act.

Section 46A on other hand asserts the difference between the cost of acquisition and value of consideration received by the shareholder or the holder of others specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or holder of specified securities. Thus we conclude after considering both sections of the Act that Buyback of shares and reduction of capital are two different concepts and Buyback of shares by Corporate Entity cannot be characterized by deemed dividend but profits arising out of Buyback is taxed under the head Capital Gain.

Secondly, Is Buyback of share and Reduction of shares one and the same, it is pertinent to note that there is a vast difference between both. In addition to difference mentioned above, in case of Buyback of shares there are limitations on quantum of Buyback, the sources of funding and conditions as specified for Buyback. In Buyback of shares consent of members in suffice, however in case of Reduction of Capital must be approved by the Court, Creditors and Members.

As we have seen objectives and pitfalls of buyback of shares along with few judicial pronouncement pertaining Buyback of shares. Abbott India Limited on 24 January,Securities Appellate Tribunal, Bench — G Anantharaman.

Shalibhadra Infosec Limited on3 March,Securities Appellate Tribunal, Bench — V Chopra.

Buyback of Shares Colourable Device Evasion of Tax? INSIDER TRADING Pitfalls in Buyback of shares Reduction of Capital Unilateral Purchase of Shares. Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. Author Profile Mandar R Rane I am a qualified Company Secretary and Lawyer. Buyback of Shares — A Judiciary Prospective.

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