Guidance Note on Share Buy-Back under Indian Company Law

Introduction

Share buy-backs are strategic financial maneuvers undertaken by companies to repurchase their own shares from existing shareholders. In India, the regulatory framework governing share buy-backs is primarily outlined in the Companies Act, 2013, and SEBI (Buy-back of Securities) Regulations, 2018. This guidance note aims to provide a detailed overview of the legal requirements, procedural steps, accounting treatment, and income tax implications associated with share buy-backs.

Legal Framework and Regulatory Compliance

1. Companies Act, 2013:

   • Section 68 governs the buy-back of shares, detailing conditions under which a company can repurchase its own shares.
   • A special resolution passed by shareholders is mandatory for initiating a share buy-back.

2. SEBI (Buy-back of Securities) Regulations, 2018:

   • Applicable to listed companies, these regulations provide guidelines to ensure transparency, fairness, and protection of minority shareholders.
   • SEBI approval and compliance with disclosure requirements are mandatory.

Procedural Steps

Step-by-Step Process of Share Buy-Back:

1. Special Resolution:

   • A special resolution must be passed at a general meeting of shareholders. The resolution must include an explanatory statement providing:
     • Full disclosure of material facts.
     • Justification for the buy-back.
     • Class of shares to be repurchased.
     • Timeframe for completion of the buy-back.

2. Public Announcement and Filing:

   • A public announcement of the buy-back must be made in newspapers and filed with SEBI and stock exchanges.
   • The company must file a return with the Registrar of Companies (ROC) and SEBI within 30 days of completing the buy-back.

3. Offer Price Determination:

   • The offer price must be determined based on SEBI guidelines, ensuring fairness and preventing market manipulation.

4. Opening and Closure of Offer:

   • The buy-back offer is opened and closed within the timeframe specified by SEBI regulations.

5. Acceptance and Payment:

   • Shareholders tender their shares during the buy-back offer period.
   • Payment to shareholders who tender their shares is made promptly.

6. Extinguishment of Shares:

   • Shares repurchased are extinguished, resulting in a reduction of the company's issued share capital.

Accounting Treatment

Detailed Accounting Entries:

1. Fresh Issue for Buy-Back:

   • Issue of Preference Shares:
     • At Par:
       • Debit Bank A/C
       • Credit Preference Share Capital A/C
     • At Premium:
       • Debit Bank A/C
       • Credit Preference Share Capital A/C
       • Credit Securities Premium Reserve A/C
     • At Discount:
       • Debit Bank A/C
       • Debit Discount on Issue of Debentures A/C
       • Credit Debentures A/C

2. Opening a Dedicated Bank Account:

   • Debit Buy-Back Bank A/C
   • Credit Bank A/C

3. Buy-Back of Shares:

   • Debit Equity Share Buy-Back Account
   • Debit Buy-Back Bank A/C

4. Cancellation of Shares Bought Back:

   • At Par:
     • Debit Equity Share Capital A/C
     • Credit Equity Share Buy-Back A/C
   • At Premium:
     • Debit Equity Share Capital A/C
     • Debit Premium Payable on Buy-Back A/C
     • Credit Equity Share Buy-Back A/C
   • At Discount:
     • Debit Equity Share Capital A/C
     • Credit Equity Share Buy-Back A/C
     • Credit Capital Reserve A/C

5. Transfer to Capital Redemption Reserve:

   • Debit Securities Premium Reserve A/C
   • Debit Free Reserve A/C
   • Credit Capital Redemption Reserve A/C

6. Adjustment of Premium Paid on Buy-Back:

   • Debit Securities Premium Reserve A/C
   • Debit General Reserve A/C
   • Debit Statement of Profit and Loss A/C
   • Credit Premium Payable on Buy-Back A/C

7. Buy-Back Expenses:

   • Debit Buy-Back Expenses A/C
   • Credit Bank A/C

Income Tax Implications

• Capital Gains:

  • Profit or loss from buy-back is treated as capital gains.
  • Short-term Capital Gains: If shares held for less than 36 months.
  • Long-term Capital Gains: If shares held for 36 months or more.

• Tax Deductibility:

  • Amount paid for share buy-back is not deductible for income tax purposes.

Conclusion

A well-executed share buy-back can enhance shareholder value and optimize capital structure. Companies must adhere strictly to legal requirements, follow prescribed procedures, maintain transparency, and ensure compliance with accounting standards and tax regulations. Understanding these complexities is crucial for corporate decision-makers and professionals involved in corporate finance and governance.

By following this guidance note, companies can navigate the intricacies of share buy-backs effectively, contributing to their strategic and financial objectives while safeguarding shareholder interests and complying with regulatory expectations.