A share buyback or repurchase is a move by a company to buy its own shares and either cancels them or holds them as treasury shares. Only repurchased ordinary shares can be held as treasury shares.
TYPES OF BUY-BACKS
The four main types of Buybacks are as follows:
- Off‑market acquisition on equal access scheme u/s 76C
- Selective off‑market acquisition u/s 76D
- Acquisitions pursuant to Contingent purchase contract u/s 76DA
- Market acquisition u/s 76E
The most common reason for companies to buy back their shares is because they have excess capital that they cannot effectively (or profitably) use in their business. Share buybacks can help boost the financial ratios by creating a positive impact on the company’s earnings per share (EPS) and return on equity (ROE). This makes the business look more attractive by taking advantage of the undervaluation of shares and reducing the overall cost of capital.
Companies typically fund a share buyback using capital and profits. If share buybacks are funded by profits, then a lower amount of profits will be available for distribution as dividends in the future.
CRITERIA FOR BUY-BACK OF SHARES
- Provisions in Constitution:
Companies may only buy back their own shares if their Constitution allow for it (section 76B(1)). If not authorized, then Constitution will have to be amended to allow for share buybacks.
- Member’s Approval through a special Resolution:
Member’s approval to be obtained for the buyback of shares by passing a special resolution in a General Meeting.
- Quantum of Buy Back:
The total number of ordinary shares purchased or acquired by a company during the relevant period may not exceed 20% of the issued ordinary capital of the company (section 76B(3)), ascertained as at the date of resolution.
- Solvency requirement:
In case the repurchase/buy back is paid out of existing capital, the company must remain solvent after the acquisition of such shares. In other words a “Declaration of Solvency” will be required. In case the buy back is done out of profits then no need for the declaration.
STEPS/PROCEDURES FOR BUY-BACK OF SHARES
- Board resolution for Buy back and cancellation of the shares bought back (if the shares are to be cancelled)
- Members resolution for Buy back and cancellation of the shares bought back (if the shares are to be cancelled)
- Lodgement with ACRA for buy back, thereafter they can be either cancelled or held in treasury
Treasury shares can be held by the company (u/s 76H) subject to some conditions and time frame.
- Cancellation of shares bought back will have to be lodged u/s 76K.
- The rights and privileges attached to those cancelled shares shall stand expired.
Additionally, you will have to get the shares valued by an approved valuer to fix the purchase price.
Treasury shares are the company’s ordinary shares which have been acquired from shareholders. The company will be listed as the owner of the shares but is not allowed to exercise the right to attend or vote at meetings, and no dividends may be paid to the company.
The treasury shares that a company holds must be less than 10% of the total number of shares in that class. Below is an illustration of this legal requirement.
|Total Number of shares issued
|Maximum number of treasury shares that the company can hold (capped at 10%)
|Redeemable preference shares
Any treasury shares in excess of 10% must be cancelled or disposed of within 6 months. The company may sell, cancel or transfer the treasury shares.
To exercise this move, the company must file a “Notice of Cancellation or Disposal of Treasury Shares under S76K” transaction via BizFile+.