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Unit 4: Buy Back of Securities by Private Limited and Unlisted Public Limited Companies

Conditions to be fulfilled before buy back Notes

Section 77A(2) provides that no Company shall purchase its own shares unless the following
conditions are met:
(a) There must be a specific provision in the Articles of Association authorising the Company
to buy back its own shares, otherwise the Articles must be amended by a special resolution
to incorporate a suitable provision. Special resolution must also be passed in the General
Meeting authorising Board of Directors to buy-back the shares of the Company or other
specified securities. However no special resolution in General Meeting is required in case
the buy-back is of or less than 10% of the total paid up equity capital and free reserves of
the Company and the same is authorised by way of a resolution passed at a duly convened
Board Meeting.
(b) The quantum of buy back could be upto 25% of paid up capital and free reserves provided
the buy back of the equity shares in any financial year shall not exceed 25% of its total paid
up equity capital in that financial year.
(c) The company shall after the buy-back ensure that the debt of the Company viz., the
amount of secured and unsecured debts shall not be more than twice the paid up capital
and free reserves. It is open, however, for the Central Government to prescribe a higher
ratio of debt for any class or classes of Companies.
(d) All the shares or other specified securities involved in buy-back must be fully paid-up.
(e) The explanatory statement sent to members along with the notice for passing the special
resolution referred to in clause (a) above shall, inter-alia, set out the following particulars:
(i) A full and complete disclosure of all material facts ;
(ii) The necessity for the buy-back ;

(iii) The class of security proposed to be bought back ;
(iv) The amount involved in the buy-back ;
(v) An indication of time limit for completion of buy-back. In any case, the buy-back
should be completed within 12 months from the date of passing the special resolution.
(f) The Company shall make no offer of buy-back within a period of 365 days reckoned from
the date of the preceding offer of buy-back, if any. Further the Company cannot come out
with a fresh issue of shares of the same class within a period of 6 months except by way of
bonus issue or in the discharge of subsisting obligations such as conversion of warrants,
Stock options schemes, sweat equity or conversion of preference shares or debentures into
equity shares.

Manner of making buy-back

The buy-back may be made as follows:

(a) From the existing shareholder holders on a proportionate basis through private offers.
(b) By purchasing the securities issued to employees of the Company pursuant to a scheme of
stock option or sweat equity.

The buy-back under sub-section (1) may be:
(a) from the existing security-holders on a proportionate basis;
(b) from the open market

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