Amended and updated notes on section 68 of Companies Act 2013. Detail discussion on provisions and rules related to restrictions on purchase by company or giving of loans by it for purchase of its shares.
Chapter IV (Sections 43–72) of the Companies Act, 2013 (CA 2013) deals with the provisions related to share capital and debentures. Section 68 of CA 2013 provides for restrictions on purchase by company or giving of loans by it for purchase of its shares.
Recently, we have discussed in detail section 67 (Restrictions on purchase by company or giving of loans by it for purchase of its shares) of CA 2013. Today, we learn the provisions of section 68 of Companies Act 2013 read with the Companies (Share Capital and Debentures) Rules, 2014.
Section 68 of the Companies Act, 2013 has been notified by the Ministry of Corporate Affairs (MCA) vide Notification No. S.O. 902(E) issued dated 27.03.2014. This notification was come into force from 1st April, 2014 i.e. the commencement date of section 68 is 1-4-2014.
| Name of Act | The Companies Act 2013 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Ministry of Corporate Affairs (MCA) |
| Number of Chapters | 29 |
| Number of Sections | 484 (470-43+57) |
| Number of Schedules | 7 |
| You are reading: | |
| Chapter No. | IV |
| Chapter Name | Share Capital and Debentures |
| Section No. | 68 |
| Section Name | Power of company to purchase its own securities |
| Monthly Updated Edition | Company Law PDF |
Section 68 of Companies Act 2013: Power of company to purchase its own securities
Section 68(1):
Sources of funds for buy-back: A company may buy-back i.e. purchase its own shares or other specified securities. Sources of funds for buy-back are:
- (a) Free Reserves;
- (b) Securities Premium Account; or
- (c) Proceeds of Issue of any shares or other specified securities.
Specified Securities includes employees’ stock option or other CG notified securities.
Source of funds not utilised for Buy-back: As per first proviso of section 68(1), buy-back cannot be made out of the proceeds of an earlier issue of the same kind of shares or other specified securities.
Section 68(2):
Conditions for buy-back: A company shall buy-back its own shares or other specified securities only if:
(a) Buy-back authorised by Articles;
(b) Buy-back authorised by passing SR in GM. No SR in GM required in case where:
- (i) Buy-back is up to 10% of total paid-up equity capital and free reserves; and
- (ii) Buy-back authorised by passing BR at BM;
(c) Buy-back is 25% or less of the aggregate of paid-up capital and free reserves: Note that buy-back of equity shares in any FY shall not be more than 25% of its total paid-up equity capital in that FY.
(d) Debt (secured and unsecured) to capital and free reserves ratio after buy-back is not more 2:1.
However, CG may notify a higher ratio of the debt to capital and free reserves for a class or classes of companies.
Note that the Central Government vide order number S.O.702(E) dated 10th March, 2016 notified that the debt to capital and free reserves ratio shall be 6:1 for government companies within the meaning of clause (45) of section 2 of the Companies Act, 2013 which carry on Non-Banking Finance Institution activities and Housing Finance activities.
(e) all the shares or other specified securities for buy-back are fully paid-up;
(f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance SEBI regulations; and
(g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with prescribed rules;
Buy-back offer shall not be made within 1 year from the date of the closure of the preceding offer of buy-back, if any.
Section 68(3):
Explanatory Statement: Notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement stating—
- (a) a full and complete disclosure of all material facts;
- (b) the necessity for the buy-back;
- (c) the class of shares or securities intended to be purchased under the buy-back;
- (d) the amount to be invested under the buy-back; and
- (e) the time-limit for completion of buy-back.
Section 68(4):
Time limit for completion of buy-back: Buy-back shall be completed within one year from the date of passing of special/board resolution.
Section 68(5):
Buy-back from whom: The buy-back may be—
- (a) from the existing shareholders or security holders on a proportionate basis;
- (b) from the open market;
- (c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Section 68(6):
Declaration of Solvency: Before making buy-back, the company must file a declaration of solvency with the Registrar and SEBI in Form No. SH-9 signed by at least 2 directors including one MD, if any.
Such declaration of insolvency shall be verified by an affidavit to the effect that the Board of Directors has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board.
There is no need to file declaration of solvency with SEBI if shares are not listed on any recognised stock exchange.
Section 68(7):
Destroy bought back Shares: Company shall extinguish and physically destroy the shares or securities so bought back within 7 days of the last date of completion of buy-back.
Section 68(8):
Cooling Period: Where a company completes a buy-back, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under section 62(1)(a) or other specified securities within a period of 6 months.
However, the company may issue share or other securities by way of:
- A bonus issue; or
- In the discharge of subsisting obligations such as:
- conversion of warrants,
- stock option schemes,
- sweat equity; or
- conversion of preference shares; or
- debentures into equity shares.
Section 68(9):
Register of Buy Back: Company shall maintain a register in Form No. SH-10 of the shares or securities bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other prescribed particulars.
Section 68(10):
Filing of Buy Back Return: After the completion of the buy-back, a company shall file with the Registrar and the SEBI a return in Form No. SH-11 containing prescribed particulars relating to the buy-back within 30 days of such completion.
No return shall be filed with the SEBI by a company whose shares are not listed on any recognised stock exchange.
Section 68(11):
Penalty for Default: If a company makes any default in complying with the provisions of section 68 or any regulation made by the SEBI, for the purposes of clause (f) of sub-section (2) of section 68,
- The company shall be punishable with fine of ₹1 Lakh to ₹3 Lakh; and
- Every default officer shall be punishable with:
- Imprisonment up to 3 Years; or
- Fine of ₹1 Lakh to ₹3 Lakh; or
- With both
Section 52(2)(e): The securities premium account may be applied by the company for the purchase of its own shares or other securities i.e. buy-back under section 68.
Section 52(3)(c): The securities premium account may be applied by prescribed class of companies and whose financial statement comply with AS prescribed for such class of companies under section 133 for buy-back under section 68.
Section 66(6): Any provisions of section 66 shall not apply to buy-back of securities under section 68.
Section 230(10): No compromise or arrangement in respect of any buy-back of securities under section 230 shall be sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68.
Rule 22(16)(g) of the Companies (Management and Administration) Rules, 2014: Pursuant to section 110(1)(a), buy-back of shares by a company under section 68(1) shall be transacted only by means of voting through a postal ballot.
Section 68 of Companies Act 2013: Power of company to purchase its own securities
Section 68 shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
(1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2), a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of—
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities:
Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
(2) No company shall purchase its own shares or other specified securities under sub-section (1), unless—
- (a) the buy-back is authorised by its articles;
- (b) a special resolution has been passed at a general meeting of the company authorising the buy-back:
Provided that nothing contained in this clause shall apply to a case where—- (i) the buy-back is, ten per cent or less of the total paid-up equity capital and free reserves of the company; and
- (ii) such buy-back has been authorised by the Board by means of a resolution passed at its meeting;
- (c) the buy-back is twenty-five per cent or less of the aggregate of paid-up capital and free reserves of the company:
Provided that in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent in this clause shall be construed with respect to its total paid-up equity capital in that financial year; - (d) the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves:
Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies;
The Central Government vide order number S.O.702(E) dated 10th March, 2016 notified that the debt to capital and free reserves ratio shall be 6:1 for government companies within the meaning of clause (45) of section 2 of the Companies Act, 2013 which carry on Non-Banking Finance Institution activities and Housing Finance activities.
- (e) all the shares or other specified securities for buy-back are fully paid-up;
- (f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board in this behalf; and
- (g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with such rules as may be prescribed:
Provided that no offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.
(3) The notice of the meeting at which the special resolution is proposed to be passed under clause (b) of sub-section (2) shall be accompanied by an explanatory statement stating—
- (a) a full and complete disclosure of all material facts;
- (b) the necessity for the buy-back;
- (c) the class of shares or securities intended to be purchased under the buy-back;
- (d) the amount to be invested under the buy-back; and
- (e) the time-limit for completion of buy-back.
(4) Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board under clause (b) of sub-section (2).
(5) The buy-back under sub-section (1) may be—
- (a) from the existing shareholders or security holders on a proportionate basis;
- (b) from the open market;
- (c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
(6) Where a company proposes to buy-back its own shares or other specified securities under this section in pursuance of a special resolution under clause (b) of sub-section (2) or a resolution under item (ii) of the proviso thereto, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board, a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, in such form as may be prescribed and verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board:
Provided that no declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange.
(7) Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
(8) Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub-section (1) of section 62 or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
(9) Where a company buys back its shares or other specified securities under this section, it shall maintain a register of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed.
(10) A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed:
Provided that no return shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange.
(11) If a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, for the purposes of clause (f) of sub-section (2), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.
Explanation I: For the purposes of this section and section 70, “specified securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time.
Explanation II: For the purposes of this section, “free reserves” includes securities premium account.