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Section 77A(2) provides that no Company shall purchase its own shares unless the following conditions are met: ( a ) There must be a specific provision in the Articles of Association authorising the Company to buy back its own shares, otherwise the Articles must be amended by a special resolution to incorporate a suitable provision. Special resolution must also be passed in the General Meeting authorising Board of Directors to buy-back the shares of the Company or other specified securities. However no special resolution in General Meeting is required in case the buy-back is of or less than 10% of the total paid up equity capital and free reserves of the Company and the same is authorised by way of a resolution passed at a duly convened Board Meeting.
( b ) The quantum of buy back could be upto 25% of paid up capital and free reserves
provided the buy back of the equity shares in any financial year shall not exceed 25% of its total paid up equity capital in that financial year. ( c ) The company shall after the buy-back ensure that the debt of the Company viz., the amount of secured and unsecured debts shall not be more than twice the paid up capital and free reserves. It is open, however, for the Central Government to prescribe a higher ratio of debt for any class or classes of Companies. ( d ) All the shares or other specified securities involved in buy-back must be fully paid-up. ( e ) The explanatory statement sent to members along with the notice for passing the special resolution referred to in clause (a) above shall, inter-alia, set out the following particulars: A full and complete disclosure of all material facts ; The necessity for the buy-back ; The class of security proposed to be bought back ; The amount involved in the buy-back ; An indication of time limit for completion of buy-back. In any case, the buy-back should be completed within 12 months from the date of passing the special resolution. The Company shall make no offer of buy-back within a period of 365 days reckoned from the date of the preceding offer of buy-back, if any. Further the Company can not come out with a fresh issue of shares of the same class within a period of 6 months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, Stock options schemes, sweat equity or conversion of preference shares or debentures into equity shares.
(f)
( a ) From the existing shareholder holders on a proportionate basis through private offers. ( b ) By purchasing the securities issued to employees of the Company pursuant to a scheme of stock option or sweat equity. The buy-back under sub-section(1) may be(a) from the existing security-holders on a proportionate basis; (b) from the open market (c) from odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange (d) by purchasing the securities issued to employees of the company pursuant to scheme of stock option or sweat equity. CIRCUMSTANCES WHERE BUY-BACK IS NOT ALLOWED No Company shall directly or indirectly purchase its own shares: ( Section 77 B ) Through any subsidiary Company or its own subsidiaries if any; Through any investment Company or companies; If the Company commits a default in the repayment of deposit or payment of interest, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of term loans or payment of interest to any financial institution which is subsisting; The idea seems to be to stop accumulation of its shares by indirect means. Where a Company has not complied with the provisions of sections: 159 regarding Annual Return 207 regarding failure to pay dividend within 30 days of declaration; and 211 regarding disclosure of true and fair view in the Balance Sheet. Sub-section 211(3A) requires that every companys profit & Loss account and balance sheet shall comply with the accounting standards. There should be no subsisting default by the Company in payment ofi) any deposit or interest due thereon ii) redemption of debentures or preference shares iii) payment of dividend iv) any term loan or interest thereon to any financial institution or bank. SECURITIES NOT PURCHASABLE a) partly- paid securities b) securities which are subject to lock-in period or otherwise non- transferable. c) Securities held by promoters or persons in control of the company, if the buy-back is through stock exchange.
ESCROW ACCOUNT:
Deposit in an escrow account, on or before the opening of the offer the following sum by way of security for performances of obligations by the company under the Regulations: (a) if the consideration payable does not exceed Rs 100 crores ; 25% of the consideration payable; (b) if the consideration payable exceeds Rs.100 Crores ; 25% on 100 crores and 10% thereafter.
MAINTENANCE OF RECORD
A record of share certificates which have been cancelled and destroyed as prescribed in sub-section (9) of section 77A of the Companies Act 1956 has to be maintained in Form 4C of the Companies (Central Government's) General Rules & Forms, 1956.
Filing of Return of Buyback with ROC and SEBI in Form No. 4C, within 30 days of its
completion.
ACCOUNTING TREATMENT
TRASNSFER TO CAPTIAL REDEMPTION RESERVE ACCOUNT
Where a company purchases it own shares out of free reserves, then a sum equal to the nominal value of the shares purchased shall be transferred to the Capital Redemption Reserve (referred to in section 80(1) clause (d) & proviso) Account and details of such transfer will be shown in the balance sheet.(Sec.77 AA)