Buy-Back through Tender Offer
Regulation 6. Buy-Back through Tender Offer
A company is permitted to buy-back its securities.
The buy-back can include shares, or other specified securities.
The buy-back must be done from existing security holders only.
It must be carried out on a proportionate basis (i.e., fairly among all eligible holders).
The entire process must be in accordance with the provisions of this Chapter.
Special Reservation Requirement
A portion of the buy-back must be reserved for small shareholders.
The reserved portion is calculated as:
(i). 15% of the total number of securities proposed to be bought back; or
(ii). Number of securities entitled to small shareholders based on their shareholding;
Whichever of the above is higher must be reserved.
This ensures that small shareholders get fair participation in the buy-back.
Regulation 7. Disclosures, filing requirements and timelines for public announcement
7(i).
A company must be authorized to undertake buy-back.
Such authorization may be given by:
A special resolution (through postal ballot), or
A Board of Directors’ resolution, as applicable.
After approval, the company must make a public announcement.
This public announcement must be made within 2 working days from:
The date of declaration of postal ballot results, or
The date of Board resolution.
The mode of publication is as follows:
At least one English National Daily.
At least one Hindi National Daily.
At least one Regional language daily.
All the above newspapers must have wide circulation in the place where the registered office of the company is located.
The public announcement must contain all material information.
The material information is specified in Schedule II of these regulations.
7(ii).
The company must take an additional filing step along with the public announcement.
This must be done simultaneously with the public announcement made earlier.
The company is required to file a copy of the public announcement.
The mode of filing should be in electronic form.
This is required to be filed :
With the Securities and Exchange Board of India (SEBI)
With the stock exchanges where its securities are listed
Such filing must be accompanied by fees specified in Schedule V.
7(iii).
Once the stock exchange receive the public announcement, they must act immediately.
The stock exchanges are required to disseminate (circulate/share) the announcement.
The dissemination must be made to the public.
7(iv).
A copy of the public announcement must be made easily accessible.
It must be placed on the websites of the following:
The stock exchange(s) where the securities are listed.
The merchant banker involved in the buy-back.
The company undertaking the buy-back.
Regulation 8. Disclosures, filing requirements and timelines fo letter of offer
8(i).
The company is required to make a filing.
The filing must be done within two working days from the record date.
The filing must be in electronic mode.
The filing must be made with the Securities and Exchange Board of India.
The company must file the specified documents/information as required under the regulation.
(a).
The company must file a letter of offer.
The letter of offer must contain disclosures as specified in Schedule III.
The filing must be done through a merchant banker.
The merchant banker must not be an associate of the company.
(aa).
The company must file a certificate.
The certificate must be in the form specified by the Board (Securities and Exchange Board of India).
The certificate must be issued by a merchant banker.
The merchant banker must not be an associate of the company.
The certificate must confirm that:
The buy-back offer complies with these regulations.
The letter of offer contains all required information under the regulations.
Explanation:
The term “associate” shall have the meaning assigned to it in regulation 21A of the Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, as amended from time to time.
(b).
The company must file a declaration of solvency.
The declaration must be in the specified form.
It must be prepared in accordance with Section 68(6) of the Companies Act, 2013.
This declaration confirms that the company is financially capable of carrying out the buy-back.
(c). Omitted
Explanation:
If the buy-back is through a tender offer then:
In such cases, the company is not required to file a draft letter of offer.
Therefore, only the final letter of offer is filed, not a draft.
8(ii). Omitted
Regulation 9. Offer procedure
9(i).
The company must announce a record date.
The record date must be mentioned in the public announcement.
The purpose of the record date is to:
Determine the entitlement of security holders.
Identify the names of eligible security holders.
Only those security holders whose names appear as on the record date are eligible.
These eligible holders can participate in the buy-back offer.
9(ii).
The company must send (dispatch) the letter of offer.
The letter of offer must be sent along with the tender form.
These documents must be sent to eligible security holders only.
Eligible holders are those entitled to participate in the buy-back.
Explanation:
The public announcement must contain a specific disclosure.
It must state that the letter of offer will be dispatched through electronic mode.
Such dispatch must be in accordance with the Companies Act, 2013.
The Letter of Offer must be dispatched within two working days from the record date.
It must also state that: If any shareholder requests a physical copy of the letter of offer, then the company shall provide the same.
9(iii).
Even if an eligible public shareholder does not receive the tender offer / offer form:
He is still allowed to participate in the buy-back offer.
The shareholder can tender shares despite non-receipt of documents.
Participation must be done in the manner specified by the Securities and Exchange Board of India.
9(iv).
Even a unregistered shareholder is also allowed to participate in the buy-back
He may tender his shares for buy-back
He must submit a duly executed transfer deed.
The transfer deed should be for transferring shares in his name.
He must also submit:
The offer form, and
Other documents required for transfer, if any.
9(v).
There is a time limit for opening the buy-back offer.
The offer must open within a prescribed period.
The offer must open Not later than four working days from the record date.
9(vi).
The offer for buy-back shall remain open for a period of five working days.
9(vii).
The company has a duty to facilitate the buy-back process.
It must enable shareholders to tender their shares.
It must also ensure settlement of such tendered shares.
This must be done through the stock exchange mechanism.
The process must follow the manner specified by the Securities and Exchange Board of India.
9(viii).
The company must accept shares or other specified securities.
Acceptance must be from security holders participating in the buy-back.
The acceptance is based on their entitlement.
Such entitlement is determined as on the record date.
9(ix).
The shares proposed to be bought back must be divided into two categories.
The two categories are:
(a). Reserved category for small shareholders.
(b). General category for other shareholders.
Shareholders are placed into the appropriate category based on their status.
The entitlement of each shareholder is calculated separately within their category.
9(x).
After acceptance of shares based on entitlement:
If any shares are still left to be bought back in a category, further allocation is done.
First step:
Accept additional shares from shareholders in the same category.
This is for shares tendered over and above their entitlement.
Such acceptance is done on a proportionate basis.
Second step:
If shares still remain, accept from shareholders of the other category.
Again, only those who have tendered above their entitlement.
Explanation:
Identifying Small Shareholders
If a person holds shares in multiple demat accounts, such holdings will be clubbed together
This clubbing will be done if the Permanent Account Number (PAN) sequence of all holders matches
This prevents splitting of holdings across accounts to artificially qualify as a small shareholder
Similarly, in case of physical shareholders:
If the sequence of names of joint holders is the same, then holdings under different folios will be clubbed together.
Example:
A company announces a buy-back of 1,000 shares.
As per the rule, at least 15% must be reserved for small shareholders.
That means a minimum of 150 shares will be set aside for them.
Even if their proportionate entitlement is lower, the company must still reserve 150 shares because the law requires taking the higher number.
Now, the shares are divided into two categories.
The small shareholders category gets 150 shares, and the general category gets the remaining 850 shares.
Suppose small shareholders together tender only 100 shares.
Even though 150 shares were reserved for them, only 100 are actually offered for buy-back.
So the company can accept only those 100 shares.
This leaves 50 shares unused in the small shareholders category.
At the same time, general shareholders tender 1,200 shares.
Out of this, they are entitled to 850 shares based on their category allocation.
So initially, the company accepts 850 shares, and there are 350 additional shares tendered over and above entitlement.
Now the adjustment process begins.
The law says that leftover shares must first be adjusted within the same category.
However, in the small shareholders category, there are no extra shares tendered beyond entitlement.
So the 50 unused shares cannot be distributed within that category.
Because of this, the company then moves to the second step.
The remaining 50 shares are offered to the general category shareholders who had tendered more than their entitlement.
These 50 shares are then distributed among them on a proportionate basis, so , each such shareholder gets a fair share relative to the number of extra shares they offered.
9(xi).
Escrow Account
(a).
The company has an obligation to provide security for fulfilling its buy-back obligations..
This obligation has to be fulfilled within two working days from the public announcement.
The company must deposit money into an escrow account.
This deposit acts as a security mechanism.
(b).
The escrow amount depends on the total consideration payable in the buy-back.
(i).
If the total consideration does not exceed ₹100 crores: The company must deposit 25% of the total consideration.
(ii).
If the total consideration exceeds ₹100 crores:
25% on the first ₹100 crores, and
10% on the amount exceeding ₹100 crores.
This creates a tiered (slab-based) escrow requirement.
So , smaller buy-backs require 25% deposit, while larger ones have a reduced rate (10%) for the excess portion.
(c).
The escrow account must be created subject to margin requirements specified by the Securities and Exchange Board of India
The escrow account can consist of the following forms:
(i). Cash, including bank deposits with any scheduled commercial bank.
(ii). Bank guarantee issued by a scheduled commercial bank in favour of the merchant banker.
(iii). Deposit of securities that are frequently traded and freely transferable equity shares or other securities.
(iiia). Government securities.
(iiib). Units of mutual funds invested in gilt funds and overnight schemes.
(iv). A combination of the above options.
This provides flexibility while ensuring adequate security for the buy-back obligations.
Explanation:
The cash portion of the escrow account can be kept in an interest-bearing account.
This allows the funds to earn interest while being held.
However, there is a condition attached.
The merchant banker must ensure that the funds are readily available when required.
Specifically, funds must be available at the time of payment to shareholders.
(d).
When the escrow account is in the form of a bank deposit then:
The deposit must be with a scheduled commercial bank.
At the time of opening the escrow account, the company must give authority to the merchant banker.
This authority allows the merchant banker to instruct the bank.
The instruction is for making payment out of the escrow account.
Such payment must be made as per the regulations.
(e).
When the escrow is in the form of a bank guarantee then:
The bank guarantee must be in favour of the merchant banker.
It must remain valid for a specific period.
The validity period is:
30 working days after the expiry of the buy-back period, or
Until all obligations under the regulations are completed,
Whichever is later will apply.
Explanation:
When escrow is in the form of a bank guarantee then:
The merchant banker must retain the bank guarantee.
It cannot be returned early.
It can be returned only after all obligations under the regulations are fully completed.
(f).
When the escrow account consists of securities then:
The company must authorize the merchant banker
The authorization allows the merchant banker to realise the value of such securities
Realisation can be done by Sale, or any other permissible method
If the realised value of securities is less than required (deficit arises)
The merchant banker is responsible to make good such deficit
(g).
When the escrow account consists of approved securities then:
Such securities must be retained by the merchant banker.
They cannot be returned to the company early.
They can be returned only after completion of all obligations under the regulations.
(h).
When the escrow account is partly in non-cash form then:
Such Non-cash forms may include bank guarantee, securities, etc.
In such cases, the company must also deposit a minimum cash component.
The cash must be deposited with a scheduled commercial bank.
The Minimum amount required to be deposited is at least 2.5% of the total buy-back amount.
The total buy-back amount is as specified in:
The Board of Directors’ resolution, or
The special resolution, as applicable.
This cash deposit acts as an additional security for fulfilling obligations.
(i).
After completion of the buy-back process:
The company must have:
Paid consideration to all security holders who accepted the offer.
Completed all buy-back formalities.
Once these conditions are fulfilled:
The amount in escrow is released.
Any bank guarantee is released.
Any securities kept in escrow are released.
The release is made back to the company.
(j).
Securities and Exchange Board of India (SEBI) to forfeit the escrow account.
This power is exercised in the interest of security holders
It applies when the company fails to fulfil its obligations under the regulations
In such cases, the Board may forfeit the escrow account
The forfeiture may be Full, or Partial.
SEBI can seize (confiscate) the money, guarantee, or securities kept in escrow.
The company loses its right to get that amount back.
The forfeited amount is typically used to protect or compensate affected shareholders.
9(xii).
The forfeited amount may be distributed among security holders.
Distribution is done on a pro rata basis.
Pro - Rata basis means In proportion to the shares tendered/accepted.
It is distributed only to those security holders who accepted the buy-back offer.
If any amount still remains after such distribution: The balance is used for investor protection purposes.
Regulation 10. Closure and payment to securities holders
10(i).
The company must act immediately after the closure of the buy-back offer.
The company must open a special account.
The account must be with a banker to an issue registered with the Securities and Exchange Board of India.
The company must deposit an amount into this special account.
The amount deposited, together with 90% of the escrow amount, must equal: The total consideration payable to shareholders.
For this purpose, the company may transfer funds from the escrow account.
This ensures that full funds are available and secured for payment to shareholders.
Example:
A company completes its buy-back offer and determines that the total amount payable to shareholders is ₹100 crore.
At this stage, the company already has ₹80 crore lying in the escrow account.
As per the regulation, the company can use 90% of the escrow amount, which comes to ₹72 crore.
However, this is not sufficient on its own to meet the total payment obligation.
Therefore, immediately after closure of the offer:
The company opens a special account with a banker to an issue registered with the Securities and Exchange Board of India.
The company then deposits the remaining ₹28 crore into this special account.
To complete the arrangement:
The company transfers ₹72 crore from the escrow account and combines it with the ₹28 crore deposited in the special account.
Together, this makes up the full ₹100 crore required to pay shareholders.
10(ii).
The company must verify the offers received from security holders.
Verification must be done after closure of the buy-back offer.
The company must then identify which offers are accepted.
It must make payment of consideration to those holders whose offers are accepted.
It must also return shares or other specified securities to holders whose offers are not accepted (or partially accepted).
All of the above must be completed within 5 working days from the closure of the offer
Regulation 11. Extinguishment of certificate and other closure compliances
11(i).
The company must extinguish and physically destroy the securities certificates bought back.
This applies to shares or other specified securities accepted in the buy-back.
The destruction must be done in the presence of:
A registrar to an issue or the merchant banker, and
The secretarial auditor.
The destruction has to be done within 15 days from the date of acceptance of the securities.
There is an additional time requirement on the company.
The company must ensure that all securities bought-back are extinguished.
This must be completed within 7 working days.
The time is counted from the expiry of the buy-back period.
Explanation:
This 15-day period provided in (i) is subject to an outer limit.
The outer limit is 7 working days from the expiry of the buy-back period.
The company must ensure that extinguishment does not go beyond this outer limit.
Even if 15 days are available, the final deadline is capped by the buy-back period expiry rule.
11(ii).
Shares or other specified securities in dematerialised (demat) form must be extinguished and destroyed after buy-back.
The process must be carried out as per prescribed procedure.
The procedure is governed by the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996.
It must also comply with:
Bye-laws,
Circulars, and
Guidelines issued under those regulations.
11(iii).
The company must furnish a certificate to the Board (i.e., Securities and Exchange Board of India).
This certificate confirms that the company has complied with the requirement of extinguishment and destruction of securities.
The certificate must be properly certified and verified by multiple parties.
It must be certified by:
(a). The registrar, and where there is no registrar, the merchant banker.
(b). Two directors of the company, out of which: One must be the Managing Director, if such a position exists.
(c). The secretarial auditor of the company.
11(iv).
After buy-back, the company must extinguish and physically destroy the share certificates or securities.
Once this is done, the company has a reporting obligation.
The company must furnish details of such extinguished and destroyed certificates.
These details must be submitted to the stock exchanges where the company’s shares are listed, such as National Stock Exchange of India or BSE Limited.
The filing must be done within 7 days from the date of extinguishment and destruction.
11(v).
When a company carries out a buy-back, it must maintain a proper register of the shares or securities bought back.
The register must record the details of all shares or securities purchased under the buy-back.
It must include the consideration (amount) paid for the shares or securities bought back.
The company must record the date on which the shares or securities are cancelled.
It must also mention the date of extinguishment and physical destruction of such shares or securities.
In addition, the register must contain any other prescribed particulars under section 68(9) of the Companies Act.
