by The Securities and Exchange Board of India (SEBI) regulates buy-back of shares for listed companies through the SEBI (Buy-Back of Securities) Regulations, 2018, framed under the SEBI Act, 1992. These regulations work alongside Section 68, 69, and 70 of the Companies Act, 2013, ensuring transparency, investor protection, and fair pricing during buy-back transactions. SEBI mandates disclosure norms, prescribes permissible methods of buy-back, sets timelines, and restricts companies from manipulating share prices or misusing buy-back as a tool for insider benefit rather than genuine shareholder value creation.
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Modes of Buy-Back Permitted
SEBI regulations allow buy-back through three recognized modes: the tender offer method, the open market through stock exchange, and the open market through book-building process. Each mode has distinct procedural and disclosure requirements. The tender offer route requires a fixed price offer to all shareholders proportionately, while the open market route allows purchases over a specified period at prevailing market prices, subject to daily volume and price limits to prevent market manipulation and ensure equitable treatment of all shareholder categories, including retail and institutional investors, throughout the buy-back window.
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Buy-Back Size and Sources
As per Section 68 of the Companies Act, 2013, a company cannot buy back more than 25% of its total paid-up capital and free reserves in a financial year, and buy-back of equity shares alone is capped at 25% of paid-up equity capital. Funding sources permitted include free reserves, securities premium account, and proceeds of an earlier issue other than the same kind of shares. SEBI regulations reinforce these caps for listed entities, requiring board or shareholder approval depending on the buy-back size before execution begins.
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Escrow Account and Security Deposit
Under the SEBI (Buy-Back of Securities) Regulations, 2018, companies opting for the tender offer or book-building method must deposit a specified percentage of the buy-back consideration in an escrow account with a scheduled commercial bank or deposit securities. This deposit, ranging typically between 25% based on offer size, ensures the company’s financial commitment and protects shareholders against default risk, guaranteeing that funds are genuinely available to honour the buy-back offer once shareholder tenders are accepted and finalized.
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Disclosure and Filing Requirements
SEBI mandates that companies file a public announcement, letter of offer, and declaration of solvency with SEBI and stock exchanges before commencing buy-back, as prescribed under Regulation 7 and Regulation 9 of the 2018 Regulations. Companies must also appoint a merchant banker to manage the process and ensure compliance. Post buy-back, a compliance report must be filed within stipulated timelines, ensuring transparency for shareholders and regulators regarding the actual quantity bought, price paid, and utilization of funds earmarked for the buy-back.
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Prohibitions and Restrictions
SEBI regulations prohibit buy-back if the company has defaulted in repayment of deposits, debentures, or preference shares, or if it has not filed annual returns and financial statements as required under the Companies Act, 2013. Additionally, a company cannot make a further buy-back offer within one year from the closure of a preceding buy-back, and cannot issue same-kind securities, including bonus shares, until six months after buy-back completion, safeguarding against manipulative repeated capital restructuring.
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Time Limit for Completion
As per Regulation 24 of the SEBI (Buy-Back of Securities) Regulations, 2018, a company must complete the buy-back process within one year from the date of passing the special resolution or board resolution authorizing it. For the tender offer route, the verification of acceptances, payment to shareholders, and extinguishment of shares must occur within a strictly defined timeline, generally within 15 days of closure of the offer. Delays beyond prescribed limits attract regulatory scrutiny, and companies must promptly extinguish and physically destroy the bought-back securities within seven days of completing the buy-back, preventing re-circulation of repurchased shares.
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Extinguishment of Securities
Under Section 68(7) of the Companies Act, 2013 read with SEBI norms, a company must extinguish and physically destroy the shares or securities bought back within seven days of the last date of completion of buy-back. This ensures the reduction in share capital is genuine and permanent, preventing companies from reissuing repurchased shares to manipulate ownership structures. The Registrar of Companies (ROC) must also be intimated, and the company’s records, including the register of securities bought back, must be updated to reflect the revised capital structure accurately.
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Declaration of Solvency
Before undertaking a buy-back, the company’s Board of Directors must file a Declaration of Solvency with SEBI and the Registrar of Companies, verified by an affidavit, confirming that the company will not become insolvent within one year from the date of declaration. This is mandated under Section 68(6) of the Companies Act, 2013 and reinforced through SEBI’s 2018 Regulations for listed companies. The declaration must be signed by at least two directors, one of whom should be the managing director, if any, ensuring accountability for the company’s financial soundness post buy-back.
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Post Buy-Back Debt-Equity Ratio
SEBI regulations, aligned with Section 68(2)(d) of the Companies Act, 2013, require that after completion of buy-back, the company’s debt-equity ratio should not exceed 2:1, based on aggregate secured and unsecured debts against paid-up capital and free reserves. This ceiling can be relaxed by the Central Government for specific classes of companies. The provision safeguards creditors’ interests by preventing companies from over-leveraging their balance sheets through excessive cash outflow toward shareholders, maintaining a reasonable balance between shareholder returns and long-term financial stability of the enterprise.
