General Obligations

Chapter V. General Obligations

Regulation 24. Obligations of the company for all buy-back procedure.

24(i).

(a).

• When a company decides to carry out a buy-back, it has to communicate with shareholders through various documents like:

  1. The letter of offer.

  2. Public announcement.

  3. Advertisements, circulars.

  4. Brochures, and other publicity material.

• While preparing these documents, the company must be very careful about what it discloses.

  1. All the information included must be true, factual, and complete, covering every material (important) aspect of the buy-back.

  2. The company cannot include any misleading, false, or half-truth information, even indirectly.

  3. It must ensure that investors reading these documents are able to fully understand the buy-back without being misled.

  4. Along with this, the company must clearly state in these documents that the directors accept responsibility for the information provided.

  5. So , the directors are personally accountable for the accuracy and completeness of the disclosures.

(b).

• Once a company announces a buy-back, it must maintain stability in its capital structure during the buy-back period.

• So, from the time of announcement until the expiry of the buy-back period, the company is generally not allowed to issue any new shares or other specified securities.

• This restriction includes issuing shares:

  1. Through fresh issue, or

  2. By way of bonus shares, or

  3. Any other method that increases share capital.

• The idea is to ensure that the company does not dilute or alter its capital structure while buying back shares.

• However, there are certain exceptions where issuance is still allowed.

• The company can issue shares if it is required to fulfil existing (subsisting) obligations, such as:

  1. Conversion of warrants into shares,

  2. Exercise of employee stock option schemes (ESOPs),

  3. Issue of sweat equity shares,

  4. Conversion of preference shares or debentures into equity shares.

• These are allowed because they arise from pre-existing commitments, not new decisions.

Prior Disclosure of Subsisting Obligations

• While the company is allowed to issue shares for subsisting obligations (like ESOPs, warrants, conversions, etc.), it must be fully transparent about it.

  1. The company must disclose complete details of such obligations.

  2. These details must be included in the public announcement of the buy-back.

  3. The disclosure must also explain the potential impact of these obligations.

• This means the company should clarify:

  1. How many shares may be issued, and

  2. How it may affect the share capital or shareholders.

• The company cannot keep such information hidden or unclear.

(c).

• In a buy-back, the company must pay shareholders only in cash.

(d).

• When the buy-back process has formally begun &:

  1. Once the company files the draft letter of offer with the Board (i.e., Securities and Exchange Board of India), it becomes committed to the buy-back.

  2. Similarly, if the company has made a public announcement of the buy-back, the commitment is binding.

  3. After either of these events, the company cannot withdraw the buy-back offer.

• The company is required to continue and complete the buy-back process.

• This prevents companies from making announcements and then backing out later.

(e).

• Promoters and their associates are restricted from dealing in the company’s shares during the buy-back period.

• The restriction starts from the date when:

  1. The Board resolution is passed, or

  2. The special resolution is passed, as applicable.

• The restriction continues until the closing of the buy-back offer.

• During this entire period, promoters and their associates cannot buy or sell shares:

  1. On the stock exchange, or

  2. Through off-market transactions.

• The restriction also specifically includes inter-se transfer of shares among promoters.

• This means promoters cannot even transfer shares between themselves during this period.

(f).

• Once the buy-back period ends, the company must maintain stability in its capital structure for a certain time.

• For one year from the date of expiry of the buy-back, the company is not allowed to raise further capital.

• This means the company cannot issue:

  1. New shares, or

  2. Other specified securities.

• The restriction ensures that the company does not immediately dilute the effect of the buy-back by issuing fresh capital.

• However, there is an exception.

• The company is allowed to raise capital if it is required to fulfil subsisting (existing) obligations, such as:

  1. Conversion of warrants,

  2. Exercise of stock options (ESOPs),

  3. Conversion of preference shares or debentures into equity shares,

  4. Issue of sweat equity, etc.

• These are permitted because they arise from pre-existing commitments, not new capital-raising decisions.

24(ii).

• If company is involved in any scheme of amalgamation, compromise, or arrangement pending, or any other corporate restructuring process then:

• The company cannot proceed with buy-back.

• “Pending” means the scheme is:

  1. Under consideration,

  2. Awaiting approval, or

  3. Not yet fully completed.

• During this period, the company is not allowed to make a public announcement of buy-back.

• The restriction applies to schemes under the Companies Act.

24(iii).

• When a company undertakes a buy-back, it must put in place a proper system for compliance and investor support.

• The company must nominate a compliance officer.

• The compliance officer is responsible for:

  1. Ensuring compliance with all buy-back regulations, and

  2. Monitoring the entire buy-back process.

• The company must also set up an investor service centre.

• This centre is responsible for handling queries, complaints, and issues of investors.

• It helps in redressal of grievances of shareholders participating in the buy-back.

24(iv).

• After the company completes the extinguishment and physical destruction of share certificates, it must report this action.

  1. The company must furnish details of all such extinguished and destroyed certificates.

  2. These details must be submitted to the stock exchanges where the company’s securities are listed, such as National Stock Exchange of India or BSE Limited.

  3. The submission must be made within 7 working days from the date of extinguishment and destruction.

24(v).

• The company is not allowed to buy back certain types of shares or securities.

• This restriction applies to:

  1. Locked-in shares, and

  2. Non-transferable shares or securities.

  3. “Locked-in shares” are those that cannot be sold or transferred for a specified period.

  4. “Non-transferable shares” are those that cannot legally be transferred at that time.

• The company must wait until the lock-in period ends.

• It must also wait until such shares become freely transferable.

• Only after they become transferable can they be considered for buy-back.

24(vi).

• After the buy-back period expires, the company must issue a public advertisement.

• This must be done within 2 working days from the expiry of the buy-back period.

• The advertisement must be published in a national daily newspaper.

• It must contain the following disclosures:

• (a). The number of shares or other specified securities bought back.

  1. (b). The price at which the shares or other specified securities were bought back.

  2. (c). The total amount invested by the company in the buy-back.

  3. (d) . The details of security holders from whom shares or securities exceeding 1% of the total shares or securities were bought back.

  4. (e). The changes in the capital structure and shareholding pattern, showing:

     1. Position before the buy-back, and

     2. Position after the buy-back.

Regulation 25. Obligations of the merchant banker

• The merchant banker has the following obligations:

• (i) .

  1. The merchant banker must ensure that the company is actually capable of implementing the buy-back offer

  2. This includes checking financial capacity, compliance readiness, and overall feasibility.

• (ii).

  1. The merchant banker must verify that the escrow account requirements have been properly complied with

  2. This includes correct amount, proper form, and timely creation of escrow.

• (iii).

  1. The merchant banker must ensure that firm financial arrangements are in place.

  2. This means the company has secured funds available to pay shareholders for the buy-back.

• (iv).

  1. The merchant banker must ensure that the public announcement is made strictly in accordance with the regulations.

  2. This includes timing, format, and required disclosures.

• (v).

  1. The merchant banker must ensure that the letter of offer is properly filed as per regulatory requirements.

  2. No procedural lapse should occur in filing.

• (vi).

  1. The merchant banker must submit a due diligence certificate along with the draft letter of offer to the Board, i.e., Securities and Exchange Board of India

  2. This certificate confirms that the merchant banker has verified all relevant aspects of the buy-back.

• (vii).

  1. The merchant banker must ensure that the contents of the public announcement and letter of offer are true, fair, and adequate.

  2. Wherever necessary, the source of information must be properly disclosed.

• (viii).

  1. The merchant banker must ensure that :

  2. The company has complied with Sections 68, 69, and 70 of the Companies Act, along with any other applicable laws or rules.

• (ix).

  1. The merchant banker must ensure that the bank holding the escrow account releases the remaining balance to the company only after all obligations are fulfilled.

  2. This prevents premature release of funds and ensures proper completion of the buy-back process.

• (x).

  1. The merchant banker must submit a final report to the Board in electronic mode within 15 working days from the expiry of the buy-back period.

  2. This report confirms that the buy-back has been completed in compliance with all regulations.

Regulation 25A. Exemption from enforcement of the regulations in special cases

25A(1).

• The Securities and Exchange Board of India (Board) has the power to grant exemptions from these regulations.

• Such exemption can be given to:

  1. A specific person, or

  2. A class of persons.

• The exemption can cover all or some provisions of the regulations.

  1. However, the exemption is temporary.

  2. It can be granted for a specified period, but not exceeding 12 months.

  3. This power is used to promote innovation in the securities market.

• It applies in situations where entities are:

  1. Testing new products,

  2. New processes or services, or

  3. New business models.

• The testing is done in a live market environment under a “regulatory sandbox”.

• A regulatory sandbox allows experimentation under controlled conditions with regulatory relaxation.

25A(2).

• Any exemption granted by the Securities and Exchange Board of India is not unconditional.

• The exemption will always be subject to specific conditions imposed by the Board.

• The applicant (company/person) must satisfy all such conditions.

• These conditions may relate to:

  1. Conduct of business,

  2. Reporting requirements, or

  3. Safeguards for investors.

• Some conditions may require continuous compliance, not just one-time fulfillment.

• This means the applicant must keep complying with the conditions throughout the exemption period.

• If the conditions are not fulfilled or violated, the exemption may be withdrawn, or lead to regulatory action.

Explanation:

• For the purposes of this section:

• A “regulatory sandbox” is a live testing environment in the securities market.

• It allows companies or entities to test new ideas in real market conditions.

• These ideas may include:

  1. New products,

  2. New processes,

  3. New services, or

  4. New business models.

• The testing is done on a limited set of eligible customers, not the entire market.

• The testing is allowed only for a specified period of time.

• The purpose is to encourage innovation in the securities market.

• The entire process is conducted under supervision and conditions specified by the Board, i.e., Securities and Exchange Board of India.