Share Buyback of Less than 10% of a Private Limited Company or Unlisted Public Company & if the shareholder is a Foreign Entity

Buyback of Shares is an elaborate process. The purpose of this article is to provide the steps required for buy back of shares in case of (all conditions cumulative): 

1. The company is a Private Limited or Unlisted Public Company
2. Buyback is of less than 10% of Equity shares
3. The Shareholder is of a foreign national or a foreign company and
4. The shares are not de-materialized

Relevant Legislations :   

1. Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999
2. Companies Act, 1956 – Specifically Section 77A, 77AA & 77B
3. Income tax Act, 1961
4. Foreign Exchange Management Act, 1999 (FEMA), rules and regulations thereunder

Company Law Implications

All provisions listed under Section 77A, 77AA & 77B of Companies Act, 1956 should be followed. Also provisions contained in Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999 should be adhered to.

To list major implications: 

1. Buyback should be authorised by Articles
2. Buyback should be less than 25% of total paidup capital and free reserves of the company
3. Buyback should not exceed 25% of share capital in a year
4. Debt Equity ratio should not be more than 2:1 after buyback

Income Tax Implications

Buy back whether Dividend? - Provisions of Section 2(22) of Income tax Act, 1961 is relevant

“Dividend does not include………any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956”

Transfer Pricing – The buy back transaction would be considered as International Transactions and it would attract Transfer Pricing regulations if the company buys back the shares and its non resident shareholders are part of the same group.

Capital Gains Tax - For the non-resident shareholders, If the shares are held for less than one year provisions of “Short Term Capital Gains” apply, incase shares are held for more than one year then provisions of “Long Term Capital Gains” apply

Applicability of Tax Treaty – To explore the taxable impact of Capital Gains tax a close reading of relevant Tax Treaties between the countries should be made (county in which the company is incorporated & the county in which the shareholder is incorporated), and if an exemption is available from payment of tax in India, then it is prudent to make an application under section 195(2) of the income tax Act for full clarity.

Filing of income tax return – the non resident shareholder should file an income tax return (see CBDT circular 91 of 2008 dated 28th August, 2008) to give an opportunity to the Revenue authority to examine the payment of Capital Gains Tax or the claim for exemption under Double Taxation Avoidance Agreement.

FEMA Implications

Transfer of Shares under Buy back from non residents is covered under Automatic route (No.A.P (Dir Series) Circular No.10 dated 30th August 2005). Hence prior approval of RBI is not required.

Share Valuation

If shares are not listed then valuation should be done using “Discounted Cash flow” method by either a SEBI registered Category I Merchant Banker or a Chartered Accountant

Secretarial Matters

1. Hold Board Meeting (as buyback is less than 10%), and approve the proposal for buyback in the meeting
2. The approval in the board should include the following
1. Full & complete disclosure of all material facts
2. The necessity of buyback
3. Method of buyback
4. Amount to be paid for this buyback along with valuation certificate
3. Prepare and File “Offer Letter” with the Registrar of Companies in eform 62. The disclosures to be included in Offer Letter are clearly illustrated in Schedule II to “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
4. The offer letter should contain “Declaration of Directors” as contained in clause xii of Schedule 1 of the “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
5. The offer letter should contain “Report by Company’s Auditors” as contained in clause xiii of Schedule 1 of the “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
6. Prepare “Declaration of Solvency” in Form 4A and file the same with Registrar of Companies in eform 62 along with letter of offer
7. Despatch the Letter of Offer to Shareholders within 21 days of filing with the ROC (this preferably should be done through registered post or Speed Post or Certificate of Posting)
8. The offer shall be kept open for 15 days and not more than 30 days from the date of despatch of offer letter
9. In case the number of shares offered by shareholders exceed the total number of shares proposed to be bought back then the acceptance per shareholder will be on proportionate basis
10. Within 15 days of closure of offer the offers received should be verified. The shares offered will be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of offer
11. The company should open a “Special Bank Account” and deposit therein all the monies payable on this buyback
12. Payment to shareholders should be made within 7 days from the date of 15 days of closure of offer (or 21 days from the date of communication of rejection)
13. File eForm 4c (return in respect of buy back of securities) with ROC within 30 days after completion of buyback

RBI & Remittance Formalities

The following should be submitted to authorised dealers (banks) to remit out the proceeds of share buyback

1. A2 Form in duplicate
2. Board Resolution authorising the buyback
3. Form 15CA & 15CB in duplicate
4. Form FC-TRS in quadruplicate
5. Offer letter to shareholders
6. Consent letters from shareholders (for acceptance of buyback)
7. Share valuation certificate
8. Undertaking from Directors (clause xii of Schedule I as mentioned above)

One copy of FC-TRS counter signed by banker should be received back for company records

Destruction of shares

Once the shares are bought back, these shares should be destroyed and fresh share certificates should be issued (if required). Necessary Board resolutions need to be passed for this.

Maintenance of Registers

Share extinguishment register and Share buyback register should be maintained within 7 days of completion of buyback

Form 4B needs to be prepared and signed as per provisions of section 77A(9) of the

Companies Act, 1956

Stamp Duty implication

Buy back of shares does not come under the definition of “Transfer of Shares” under the Companies Act, 1956 and hence will not attract Stamp Duty.