Buy-Back of Securities
INTRODUCTION TO BUY-BACK OF SHARES
Section 68(1) of the Companies Act , 2013 permits a company to buy back its own shares or other specified securities.
This power is available to both public companies and private companies
The purchase of its own shares or securities is referred to as “buy-back”.
Buy-back means the company repurchases its own securities from existing holders, thereby reducing outstanding capital.
PERMISSIBLE SOURCES FOR BUY-BACK
A company can undertake buy-back only out of the following three sources:
(i). Free Reserves
Free reserves are reserves that are available for distribution as dividend.
They include accumulated profits but exclude capital reserves.
Using free reserves for buy-back effectively means the company is returning surplus profits to shareholders.
This source is commonly used when the company has strong retained earnings.
(ii).Securities Premium Account
The securities premium account represents the premium received on issue of shares or other securities.
Since securities premium is treated as a capital account, its use is normally restricted.
Section 68(1) specifically allows this account to be used for buy-back, making it a statutory exception.
Buy-back from this account does not affect the company’s profit reserves, but reduces capital-related funds.
(iii). Proceeds of Any Shares or Other Specified Securities
A company may use the proceeds from a fresh issue of shares or specified securities to finance the buy-back.
However, the buy-back cannot be made out of the proceeds of an earlier issue of the same kind of shares or securities.
This prevents circular transactions where shares are issued only to finance their own repurchase.
RESTRICTIONS ON USING ISSUE PROCEEDS FOR BUY-BACK
A company cannot use the proceeds of an earlier issue of the same kind of shares or securities to finance a buy-back.
This restriction applies equally to: Shares, and other specified securities.
The purpose of this rule is to prevent circular financing, where a company issues securities only to buy them back.
Therefore, proceeds from:
Equity shares cannot be used to buy back equity shares.
The same rule applies to other specified securities of the same class.
At the time of buy-back, the company must have a sufficient balance in one or more of the following accounts:
Free reserve.
Securities premium account,
Proceeds of a fresh issue of a different kind of shares or securities.
The total value of the buy-back must be fully covered by the balance available in these permissible sources.
CONTRACTUAL OR MARKET BUY-BACK
Buy-back can refer to a situation where:
A person sells shares or specified securities, and later buys them again.
The purchase will be made according to a fixed or pre-arranged agreement.
This usage is common in commercial and investment arrangements, and does not necessarily involve statutory buy-back by the company.
CORPORATE BUY-BACK OF THE COMPANY
Buy-back also means the purchase by a company of its own shares or specified securities.
Such buy-back is usually from: An investor or A person who provided venture capital for the formation or growth of the company.
This form of buy-back is governed by Section 68 of the Companies Act, 2013 and related rules.
It is undertaken to:
Return surplus funds.
Restructure capital.
Provide an exit to early investors.
Example;
Prohibited Buy-Back (Not Allowed)
ABC Ltd. issues equity shares and raises ₹10 crore.
Out of this same equity issue, the company proposes to buy back its own equity shares.
This is not permitted under Section 68.
A buy-back cannot be made out of the proceeds of an earlier issue of the same kind of shares
Here, equity shares are issued and the proceeds are used to buy back equity shares again, which is prohibited.
Permitted Buy-Back Using Free Reserves (Allowed)
XYZ Ltd. has free reserves of ₹15 crore.
The company proposes a buy-back of equity shares worth ₹5 crore.
The buy-back is financed entirely from free reserves.
Buy-back is valid and lawful, as free reserves are a permitted source.
Permitted Buy-Back Using Securities Premium (Allowed)
PQR Ltd. has a securities premium account balance of ₹8 crore.
The company proposes to buy back shares worth ₹6 crore.
The amount is adjusted against the securities premium account.
Buy-back is valid, as securities premium is expressly allowed under Section 68(1).
Permitted Buy-Back from Proceeds of a Different Kind of Security
LMN Ltd. issues preference shares and raises ₹10 crore.
The company uses this amount to buy back equity shares.
Buy-back is allowed, because the proceeds are from a different kind of security.
(A). Contractual Buy-Back
An investor sells shares to the promoter.
As per agreement, the promoter or company later buys the shares back at a fixed price.
This is a commercial or contractual buy-back.
(B). Statutory Buy-Back by Company
A venture capitalist invests in a start-up.
After 5 years, the company buys back the investor’s shares under Section 68.
This is a statutory buy-back regulated by the Companies Act, 2013.
NATURE OF THE BUY-BACK
Buy-back refers to the purchase by a company of its own shares from the open market.
The objective is to reduce the number of outstanding shares available in the market.
This form of buy-back is a recognised mode of capital restructuring.
It is a corporate action formally approved by the Board and/or shareholders, as required by law.
Pricing Aspect
The company usually buys back shares at a price higher than the prevailing market price.
The premium offered acts as an incentive for shareholders to tender their shares.
Effect on Share Capital
Once the shares are bought back, they are cancelled or extinguished.
As a result, the total number of shares outstanding in the market decreases.
The company’s paid-up share capital stands reduced to that extent.
Impact on Shareholding Structure
By reducing the number of outstanding shares, the proportionate ownership of remaining shareholders increases.
Even though no new shares are issued, existing shareholders’ percentage holding automatically rises.
This can strengthen:
Promoter control.
Earnings per share (EPS).
Commercial Significance
Open-market buy-backs are often used when a company believes its shares are undervalued.
They help in:
Returning surplus cash to shareholders.
Improving financial ratios.
Optimising capital structure.
SECTION 68 OF THE COMPANIES ACT , 2013 - POWER OF THE COMPANY TO PURCHASE ITS OWN SECURITIES
A Buy-back means when a company purchases its own shares from the shareholders.
This is usually done to reduce share capital, improve the company’s fin`ncial ratios, increase earnings per share, or consolidate ownership.
However, since such actions affect the company’s capital and creditors’ interests, the law lays down strict conditions, limits, and procedures.
68(1).
A company can buy back its own shares or specified securities from the following sources only:
(a). From its free reserves (accumulated profits available for distribution as dividends).
(b). From its securities premium account.
(c). From the proceeds of a fresh issue of any shares or other specified securities.
However, a company cannot use the proceeds of an earlier issue of the same kind of shares or securities to buy back those same kinds again.
For example, if a company has issued equity shares earlier, it cannot use the money raised from issuing new equity shares to buy back old equity shares.
68(2).
A company can buy back its shares only if it satisfies all the following conditions:
(a). The company’s Articles of Association (AOA) must authorise the buy-back. If not, the AOA must first be amended.
(b). A special resolution must be passed at a general meeting authorising the buy-back.
However, if the buy-back is 10% or less of the total paid-up equity capital and free reserves, then:
The company’s Board of Directors can approve it by passing a Board resolution.
No need for shareholder approval in such a small buy-back.
(c). The buy-back must not exceed 25% of the aggregate of paid-up capital and free reserves.
For equity shares, this 25% limit is calculated with reference to total paid-up equity capital of that financial year.
(d). After the buy-back, the company’s debt-equity ratio (total debts compared to paid-up capital and free reserves) must not be more than 2:1.
This makes sure that the company does not become over-leveraged or financially unstable.
However, the Central Government can prescribe a higher ratio for certain classes of companies.
(e). The shares or securities proposed to be bought back must be fully paid-up.
Partly paid-up shares cannot be bought back.
(f). If the shares or securities are listed on a recognised stock exchange, the buy-back must be carried out in accordance with SEBI regulations.
(g). If the shares are unlisted, the buy-back must follow the rules prescribed by the Central Government.
The law provides that no buy-back offer can be made within one year from the closure of any previous buy-back.
This prevents companies from continuously reducing their capital.
68(3).
When the company proposes to pass a special resolution for buy-back, the notice of the meeting must include an explanatory statement.
This statement should contain all relevant information so that shareholders can make an informed decision.
This statement must include:
(a). Full disclosure of all material facts.
(b). The reason or necessity for the buy-back.
(c). The class of shares or securities to be bought back.
(d). The amount of money to be invested in the buy-back.
(e). The time limit within which the buy-back will be completed.
68(4).
Once approved, every buy-back must be completed within one year from the date of the passing of:
The special resolution (in case of shareholder approval).
The Board resolution (in case of buy-backs within 10%).
68(5).
A company can buy back its shares or securities in any of the following ways:
(a). From existing shareholders or security holders on a proportionate basis. (Offering to buy back 10% from all shareholders equally).
(b). From the open market (for example, through stock exchange purchases).
(c). By purchasing shares issued to employees under employee stock option plans (ESOP) or sweat equity schemes.
68(6).
Before making the buy-back, the company must file a Declaration of Solvency with:
The Registrar of Companies (ROC).
The Securities and Exchange Board of India (SEBI) (if the company’s shares are listed).
This declaration must:
Be signed by at least two directors, one of whom must be the Managing Director.
Be verified by an affidavit.
Confirm that the company has made full inquiry into its affairs and believes that it will remain solvent for at least 1 year after the buy-back.
Unlisted companies only need to file the declaration with the Registrar, not SEBI.
68(7).
After completion of the buy-back, the company must extinguish and physically destroy the shares or securities that it brought,
This must be done within seven days from the last date of the buy-back.
68(8).
Once a company completes a buy-back, it cannot issue the same kind of shares or securities for a period of six months, except in limited cases such as:
Issue of bonus shares.
Conversions arising from existing obligations (like converting debentures, warrants, ESOPs, sweat equity, or preference shares).
68(9).
The company must maintain a register recording complete details of the buy-back, such as:
Number of shares or securities bought.
Consideration paid.
Date of cancellation.
Date of extinguishment and destruction.
Other prescribed particulars.
68(10).
After completing the buy-back, the company must file a return with:
The Registrar of Companies.
SEBI (in case of listed companies) within 30 days of completion.
The return must contain all prescribed particulars of the buy-back process.
Unlisted companies need to file the return only with the Registrar.
68(11).
If the company fails to comply with any provision of this section or SEBI regulations (in case of listed securities), it will face penalties.
The company can be fined between ₹1,00,000 and ₹3,00,000.
Every officer in default will also be fined between ₹1,00,000 and ₹3,00,000.
Explanation:
Specified securities include employees’ stock options and any other securities as may be notified by the Central Government.
Explanation
Free reserves also include the securities premium account, meaning the balance in the premium account can be used for buy-back purposes.
MODES OF BUY BACK
TENDER OFFER
In a tender offer, the company makes a formal offer to buy back its shares or other specified securities.
The offer is made directly to existing security holders, not through the open market.
The company specifies:
The number of shares/securities it intends to buy back, and on a fixed buy-back price.
Shares are bought back on a proportionate basis from all eligible shareholders.
So:
If the company proposes to buy back, for example, 25% of the shares, then:
Each shareholder can tender 25% of their holding.
No shareholder can tender more than their proportionate entitlement unless the rules permit otherwise.
The tender offer method ensures equal treatment of all shareholders.
Small shareholders and large shareholders are given the same opportunity to participate.
The company cannot selectively buy back shares from chosen shareholders only.
Pricing and Incentive
The buy-back price is usually higher than the prevailing market price.
The premium encourages shareholders to offer their shares to the company.
Tender offer buy-back is considered fair and transparent.
It reduces the risk of:
Price manipulation.
Discrimination among shareholders.
This method is therefore preferred where shareholder equality is a key concern.
OPEN MARKET PURCHASE
In an open market purchase, the company buys back its shares from the market, not directly from shareholders.
The company decides in advance:
The maximum number of shares to be bought back, and a price cap (upper price limit).
The company may purchase shares at any price up to the fixed upper limit, depending on market conditions.
Most companies prefer the open market route because it:
Offers flexibility in pricing.
Allows gradual buy-back over time.
Enables better market timing.
TENDER OFFER VS OPEN MARKET PURCHASE
The main difference between the two methods is the price mechanism:
In a Tender Offer the Buy-back price is fixed in advance.
In an Open Market Purchase the Price is not fixed and only a maximum cap is specified.
In open market buy-back, shareholders sell voluntarily in the market at prevailing prices.
MODES OF BUY-BACK FROM THE OPEN MARKET
Buy-back from the open market can be carried out through either of the following:
(a). Book Building Process
Under the book building process, shareholders:
Indicate the price at which they are willing to sell.
The company determines the buy-back price based on demand and supply.
This process helps in discovering a fair market-driven price.
(b). Stock Exchange
Under the stock exchange method, the company:
Purchases shares through the recognised stock exchange.
Complies with SEBI regulations on trading, timing, and disclosures.
Purchases are made like normal market transactions, subject to the approved price cap.
ADVANTAGES OF BUY BACK
Alternative Mode of Reduction of Capital (Without NCLT Approval)
Buy-back allows a company to reduce its share capital without approaching the National Company Law Tribunal, unlike reduction under Section 66.
It is governed by Section 68, making the process faster and procedurally simpler.
This saves time, cost, and regulatory complexity.
Improvement in Earnings Per Share (EPS)
Buy-back reduces the number of outstanding shares in the market.
With the same level of profits spread over fewer shares, EPS increases.
Higher EPS often improves market perception and investor confidence.
Improvement in Return on Capital and Net Worth
Reduction in equity capital leads to better Return on Capital Employed (ROCE) and Return on Net Worth (RONW).
Capital efficiency improves as excess or idle funds are eliminated.
This enhances long-term shareholder value.
Exit Route for Shareholders
Buy-back provides an assured exit option to shareholders.
This is especially useful when shares are undervalued or thinly traded.
Investors can liquidate holdings at a premium price.
Consolidation of Stake in the Company
When some shareholders exit through buy-back, the percentage holding of remaining shareholders increases.
Promoters can strengthen control without acquiring additional shares.
This leads to ownership consolidation.
Defence Against Unwelcome Takeover Bids
Reduction in free-floating shares makes hostile takeovers more difficult.
Increased promoter holding acts as a protective shield.
Buy-back signals management’s confidence in the company’s value, discouraging bidders.
Return of Surplus Cash to Shareholders
Buy-back enables the company to distribute excess cash efficiently.
It is an alternative to dividends, particularly when the company has no immediate expansion plans.
Shareholders receive value without recurring dividend obligations.
Achievement of Optimum Capital Structure
Excess equity is reduced, helping the company maintain a balanced debt–equity ratio.
A leaner capital structure lowers the cost of capital.
This results in financial stability and efficiency.
Support of Share Price During Sluggish Market Conditions
Buy-back increases demand for shares, which supports or stabilises the market price.
It sends a positive signal that the management believes the shares are undervalued.
This helps restore investor confidence during weak market phases.
More Efficient Use of Equity Capital
Buy-back eliminates idle or underutilised equity capital.
Funds are redirected from low-yield uses to value-generating shareholders.
This improves overall capital allocation efficiency.
AUTHORISATION
The Articles of Association of the company must contain an express provision authorising buy-back of shares or other specified securities.
If the Articles do not permit buy-back, the company cannot proceed with buy-back.
In such a case, the company must first alter its Articles of Association to include a buy-back enabling clause.
Alteration of the Articles must be done in accordance with the Companies Act, 2013, by following the prescribed procedure.
Approval for Buy Back
Buy-back can be undertaken only after obtaining the required corporate approvals.
Depending on the quantum (size) of the proposed buy-back, approval may be:
By the Board of Directors.
By the shareholders through a special resolution.
Board approval at a duly convened Board meeting is sufficient only when the buy-back is within the statutory limits prescribed for Board-approved buy-back.
If the proposed buy-back exceeds the limits permitted for Board approval, the company must obtain prior approval of shareholders.
Shareholder approval must be obtained by passing a special resolution in a general meeting.
In the case of a listed company, shareholder approval cannot be obtained through a physical general meeting.
For listed companies, approval of shareholders must be obtained only by way of postal ballot.
No buy-back can be implemented unless the relevant approval (Board or shareholders, as applicable) is obtained first.
Thus, authorisation in Articles and proper approval based on the quantum of buy-back are mandatory pre-conditions for a valid buy-back.
QUANTUM OF BUY-BACK
(a).
The Board of Directors is empowered to approve a buy-back without shareholder approval, subject to limits prescribed by law.
The Board can approve a buy-back up to 10% of the total paid-up equity capital and free reserves of the company.
The calculation of the 10% limit is based on the aggregate of paid-up equity capital and free reserves as per the latest audited financial statements.
Any buy-back within this 10% limit does not require a special resolution of shareholders.
Such buy-back must be authorised by the Board of Directors through a resolution.
The resolution must be passed at a duly convened meeting of the Board.
Approval cannot be given by circulation; it must be taken only at a Board meeting.
Once the Board resolution is passed, the company may proceed with the buy-back in compliance with other applicable conditions of Section 68.
If the proposed buy-back exceeds 10%, Board approval alone is not sufficient, and shareholder approval becomes mandatory.
(b).
The shareholders of a company can approve a buy-back by passing a special resolution in a general meeting.
Through a special resolution, shareholders may authorise a buy-back up to 25% of the total paid-up capital and free reserves of the company.
This 25% limit is calculated on the basis of the aggregate of paid-up capital and free reserves as per the latest audited financial statements.
In addition to the overall limit, there is a specific annual restriction relating to equity shares.
In any one financial year, the buy-back of equity shares cannot exceed 25% of the total paid-up equity capital of the company.
This means that even if free reserves are substantial, the equity buy-back in a single financial year is capped at 25% of paid-up equity capital.
Shareholder approval by special resolution is mandatory where:
The buy-back exceeds the 10% limit permitted to the Board.
The company proposes a buy-back up to the maximum statutory limits.
Without passing the special resolution, the company cannot legally undertake a buy-back beyond the Board’s approval threshold.
Thus, shareholder approval acts as a higher-level safeguard for significant buy-back transactions.
POST BUY-BACK DEBT EQUITY RATIO
After the completion of a buy-back, the aggregate of secured and unsecured debts of the company must be examined.
The total debt outstanding after buy-back must not exceed twice the sum of:
The paid-up capital.
The free reserves of the company.
This means the debt–equity ratio (debt : paid-up capital + free reserves) must not exceed 2 : 1.
The purpose of this restriction is to make sure that buy-back does not excessively increase the company’s leverage and does not prejudice creditors.
The Central Government has the power to relax this limit.
By issuing a notification or order, the Central Government may prescribe a higher debt-to-capital ratio.
Such relaxation may be granted for a specific class or classes of companies, considering their business nature or capital needs.
Unless such higher ratio is specifically notified, the statutory limit of 2 : 1 continues to apply.
Another mandatory condition is that all shares or other specified securities proposed to be bought back must be fully paid-up.
Partly paid-up shares or securities are not eligible for buy-back under any circumstances.
This requirement makes sure that the company does not forgive unpaid capital through the buy-back process and maintains capital discipline.
Failure to satisfy either the debt–equity ratio requirement or the fully paid-up condition makes the buy-back invalid under law.
BUY-BACK BY LISTED/UNLISTED COMPANIES
Where the shares or other specified securities proposed to be bought back are listed on a recognised stock exchange then:
The buy-back must strictly comply with the regulations framed by the Securities and Exchange Board of India (SEBI).
SEBI regulations govern all aspects of such buy-back, including:
Method of buy-back.
Pricing norms.
Disclosures.
Timelines.
Procedural safeguards for investors.
Compliance with SEBI regulations is mandatory for listed securities.
A listed company cannot rely solely on the Companies Act provisions if SEBI regulations prescribe additional or stricter requirements.
Where the buy-back relates to shares or other specified securities that are not listed, SEBI regulations do not apply.
In case of unlisted securities, the buy-back must be carried out in accordance with the rules made under Chapter IV of the Companies Act, 2013.
These rules prescribe the procedure, conditions, filings, and timelines applicable to buy-back by unlisted companies.
TIME GAP
A company cannot make successive buy-back offers without a time gap.
If a company has already completed a buy-back, it must wait for a minimum period of one year before making another buy-back offer.
The one-year period is from the date of closure of the preceding buy-back offer, not from the date of approval or commencement.
During this one-year cooling-off period, the company is barred from making any fresh buy-back offer.
This restriction applies to all kinds of buy-back offers under this sub-section.
The objective of this provision is to:
Prevent frequent or repetitive buy-backs.
Protect creditors’ interests.
Maintain financial stability of the company.
Any buy-back offer made in violation of this one-year restriction is invalid under the Companies Act, 2013.
UNDERSTANDING SECTION 68(3) OF THE COMPANIES ACT AND REGULATION 17(1) OF SEBI BUY-BACK REGULATIONS
The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by a statement containing:
(a). Full and Complete Disclosure of All Material Facts
All facts that may influence shareholders’ decision must be disclosed.
This includes financial position, reserves, impact on capital structure, and post buy-back position.
No material information can be concealed or selectively disclosed.
(b) Necessity for the Buy-Back
The company must clearly explain why the buy-back is required.
Reasons may include surplus cash, undervaluation of shares, or capital restructuring.
This helps shareholders assess the commercial justification of the proposal.
(c). Class of Shares or Securities to Be Bought Back
The specific class of shares or securities must be mentioned.
Examples include equity shares, preference shares, or other specified securities.
This avoids ambiguity regarding which security holders are affected.
(d). Amount to Be Invested in the Buy-Back
The total monetary value proposed to be spent on the buy-back must be stated.
It must be within the statutory limits prescribed under the Act.
Shareholders can assess the financial impact on the company.
(e). Time-Limit for Completion of Buy-Back
The company must specify the period within which the buy-back will be completed.
This makes sure that the buy-back is not open-ended.
It promotes certainty and regulatory compliance.
(f). Date of Board Meeting Approving the Buy-Back
The exact date of the Board meeting where the buy-back was approved must be disclosed.
This confirms that the proposal has been duly authorised by the Board.
It strengthens transparency and procedural validity.
(g). Objective of the Buy-Back
The primary objectives of the buy-back must be clearly stated.
Objectives may include increasing EPS, consolidating promoter holding, or returning surplus cash.
Shareholders can judge whether the buy-back aligns with long-term company strategy.
(h). Number of Securities Proposed to Be Bought Back
The exact number of shares or securities proposed for buy-back must be disclosed.
This helps shareholders understand the extent of capital reduction.
It also shows compliance with percentage limits under the Act.
(i). Method of Buy-Back
The method to be adopted must be specified.
This may include tender offer, open market purchase, or other permitted methods.
The method affects pricing, fairness, and shareholder participation.
(j). Buy-Back Price
The price at which shares or securities will be bought back must be clearly stated.
In tender offers, the price is fixed; in open market buy-back, a price cap may be disclosed.
Transparency in pricing protects shareholder interests.
(k). Basis for Determining the Buy-Back Price
The company must explain how the buy-back price was arrived at.
This may include market price trends, valuation reports, or financial performance.
This prevents arbitrary or unfair pricing.
(l). Maximum Amount Payable and Source of Funds
The maximum total amount payable for the buy-back must be stated.
The sources of funds such as free reserves, securities premium, or permitted issue proceeds—must be disclosed.
This assures shareholders and creditors of financial discipline and legality.
(m). Shareholding and Trading Details of Promoters, Directors and KMP
(i). Aggregate Shareholding as on the Date of Notice
The total shareholding of the following persons must be disclosed:
Promoters.
Directors of the promoter (where the promoter is a company).
Directors of the company.
Key managerial personnel (KMP).
The shareholding must be stated as on the date of the notice convening the general meeting.
This disclosure provides clarity on control and ownership concentration before the buy-back.
(ii). Aggregate Number of Shares Purchased or Sold
The total number of equity shares bought or sold by the persons mentioned in sub-clause (i) must be disclosed.
The disclosure period covers:
The twelve months preceding the date of the Board meeting approving the buy-back.
The period from that Board meeting date up to the date of the notice convening the general meeting.
(iii) Maximum and Minimum Price of Such Transactions
The highest and lowest price at which the purchases or sales referred to in sub-clause (ii) were made must be stated.
The relevant dates of such transactions must also be disclosed.
This helps shareholders assess whether the buy-back price is fair and free from insider advantage.
(n). Intention of Promoters, Directors and KMP to Tender Shares
(i). Quantum of Shares Proposed to Be Tendered
If the persons mentioned in points (l) and (m) intend to participate in the buy-back, they must disclose:
The exact number of shares they propose to tender.
This makes sure shareholders are aware of the extent of insider participation in the buy-back.
(ii). Past Transaction and Holding Details for Twelve Months
Detailed information must be provided regarding:
Shareholding, and transactions of such persons.
This information should be from for the twelve months prior to the date of the Board meeting approving the buy-back.
The disclosure must include:
Number of shares acquired.
Price at which they were acquired.
Date of acquisition.
(o). Confirmation of No Subsisting Defaults
The company must expressly confirm that no defaults are subsisting as on the date of the notice.
This confirmation must cover:
Repayment of deposits and interest thereon.
Redemption of debentures and payment of interest thereon.
Redemption of preference shares.
Payment of dividend due to any shareholder.
Repayment of term loans or payment of interest thereon to any financial institution or banking company.
The purpose is to make sure that a company in financial default cannot divert funds towards buy-back.
(p). Declaration of Solvency and Opinion of the Board
The Board of Directors must confirm that they have made a full enquiry into the affairs and prospects of the company.
Based on such enquiry, the Board must form and declare the following opinions:
(i). Immediate Solvency Post General Meeting
That immediately after the date of the general meeting, there shall be no grounds on which the company could be found unable to pay its debts.
(ii). Ability to Meet Liabilities for One Year
That, for the one year immediately following the date of the general meeting:
Having regard to the intended management of the company’s business, and
Considering the financial resources expected to be available,
The company shall be able to meet its liabilities as and when they fall due.
The company shall not be rendered insolvent within a period of one year from that date.
(iii). Consideration of All Liabilities
The directors must take into account all liabilities, including:
Existing liabilities.
Prospective liabilities.
Contingent liabilities.
This assessment must be made as if the company were being wound up under the Companies Act, 2013.
(q). Auditor’s Report to the Board of Directors
A report must be submitted by the company’s auditors, addressed to the Board of Directors, stating the following:
(i). Inquiry into the State of Affairs
The auditors have inquired into the company’s state of affairs.
This confirms independent verification of the company’s financial position.
(ii). Determination of Permissible Capital Payment
The auditors must confirm that the amount of permissible capital payment for the buy-back is, in their opinion, properly determined.
(iii). Age of Financial Statements Used
The audited accounts used for buy-back calculations must be not more than six months old from the date of the offer document.
If audited accounts are more than six months old:
Calculations must be based on unaudited accounts.
Such unaudited accounts must be not older than six months.
They must be subjected to a limited review by the auditors.
(iv). Auditor’s Confirmation of Board’s Solvency Opinion
The auditors must confirm that the Board’s opinion referred to in clause (p) has been formed on reasonable grounds
They must further state that, considering the company’s financial position, it will not become insolvent within one year from the relevant date.
