Companies Act Section 68

Companies Act Section 68: Power of a Company to Purchase Its Own Securities

Overview of Section 68

Section 68 of the Companies Act governs the conditions under which a company may purchase its own shares or specified securities, a process commonly referred to as "buyback." 

This section establishes a framework to ensure that such transactions are conducted in a manner that safeguards the interests of the company, its shareholders, and the broader market. 

It specifies the permissible sources of funds for the buyback, the required approvals, the conditions that must be met, and the reporting obligations following the completion of a buyback.

Key Provisions of Section 68

1. Authority for Buyback

General Power to Purchase Shares:

A company may repurchase its own shares or specified securities notwithstanding other provisions of the Companies Act, provided that it adheres to the conditions set forth in this section.

The sources from which the buyback can be financed include:

Free reserves: This refers to the surplus funds available after liabilities have been settled.

Securities premium account: This account comprises the amount received by the company over and above the face value of the shares.

Proceeds from the issuance of any shares or specified securities: Funds raised from new share issues can also be used for buyback.  

Prohibition on Use of Certain Proceeds:

Importantly, no buyback may occur from the proceeds of an earlier issue of the same type of shares or securities, ensuring that the company maintains a stable financial structure.

2. Conditions for Buyback

Authorization Requirements:

The company must ensure that:

The buyback is authorized by its articles of association.

A special resolution is passed at a general meeting authorizing the buyback. However, exceptions exist:

If the buyback is 10% or less of the total paid-up equity capital and free reserves, the Board may authorize it through a simple resolution without requiring a special resolution.  

Limitations on Buyback Amounts:

The buyback cannot exceed 25% of the aggregate of the company’s paid-up capital and free reserves. This is particularly relevant when assessing equity shares within any given financial year.

Debt to Capital Ratio:

The company must maintain a debt-to-capital ratio such that the total secured and unsecured debts owed by the company after the buyback do not exceed twice the paid-up capital plus free reserves. The Central Government reserves the right to specify a higher ratio for particular classes of companies.

Fully Paid-up Shares:

Only fully paid-up shares or specified securities can be included in the buyback, ensuring that there are no outstanding liabilities associated with the securities being repurchased.

Compliance with Regulations:

The buyback of shares listed on a recognized stock exchange must comply with regulations established by the Securities and Exchange Board of India (SEBI). Conversely, buybacks for unlisted shares must follow the rules prescribed by the Act.

Timeframe for Subsequent Buybacks:

No offer of buyback can be made within a period of one year from the closure of any preceding buyback offer, ensuring that companies do not engage in continuous buyback activities without shareholder oversight.

3. Disclosure and Reporting Requirements

Meeting Notice and Explanatory Statement:

The notice for the meeting where the special resolution will be proposed must include an explanatory statement with:

A full disclosure of all material facts.

The rationale for the buyback.

The class of shares or securities intended for buyback.

The total amount to be invested in the buyback.

The timeline for the completion of the buyback.

Completion Timeline:

All buybacks must be completed within one year from the date the special resolution is passed or from the resolution passed by the Board.

4. Methods of Buyback

The company can execute the buyback in various ways:

From existing shareholders or security holders on a proportionate basis, ensuring fairness to all shareholders.

From the open market, allowing flexibility in how shares are repurchased.

By purchasing securities issued to employees under stock option schemes or sweat equity arrangements, promoting employee ownership in the company.

5. Declaration of Solvency

Before proceeding with the buyback, the company must file a declaration of solvency with the Registrar and SEBI, signed by at least two directors (including the managing director, if applicable). 

This declaration must affirm that the Board has thoroughly evaluated the company’s financial position and believes it can meet its liabilities and will not face insolvency within a year following the declaration.

6. Extinguishment of Shares

Upon completion of the buyback, the company is required to extinguish and physically destroy the bought-back shares or securities within seven days of the final buyback date, ensuring that they are no longer part of the company's capital structure.

7. Restrictions on Future Issues

Following a buyback, a company is prohibited from issuing the same kind of shares or securities, including the allotment of new shares, for a period of six months, unless it is done through a bonus issue or to fulfill existing obligations like the conversion of stock options or preference shares.

8. Maintenance of Register

The company must maintain a register documenting:

The shares or securities bought back.

The consideration paid for these securities.

Dates of cancellation and destruction of the shares.

Other particulars as prescribed by the regulations.

9. Filing Requirements Post-Buyback

After the buyback is completed, the company must file a return with the Registrar and SEBI detailing particulars of the buyback within thirty days. This requirement does not apply to companies whose shares are not listed on a recognized stock exchange.

Penalties for Non-Compliance

Section 68 imposes stringent penalties for non-compliance with its provisions:

Company Penalties:

If a company fails to comply with any aspect of this section or related regulations by SEBI, it will incur a fine ranging from one lakh rupees to three lakh rupees.

Penalties for Officers in Default:

Officers of the company who are found to be in default of these provisions will also face fines ranging from one lakh rupees to three lakh rupees.

Definitions and Clarifications

Specified Securities: For the purposes of this section and related provisions, "specified securities" encompasses employee stock options and other securities as defined by the Central Government over time.

Free Reserves: The term "free reserves" is inclusive of the securities premium account, reinforcing the sources from which buybacks can be financed.