FE Report (March 16, 2011)
The securities regulator has finalised a guideline on buy-back by imposing two-year restriction on liquidity expansion in a move to help the government bring amendment in Companies Act 1994, officials said.
The Securities and Exchange Commission (SEC) has designed the guidelines following the models of India and United Kingdom.
The SEC and key stakeholders Tuesday discussed the guideline on buy-back and now it will be sent to the ministry of finance.
The SEC excluded the provision of imprisonment from the guideline for violating buy-back law.
In the guideline the regulator has imposed two-year restriction on liquidity expansion. Within the restriction period, the company will be allowed to issue only bonus shares.
Under the proposal, a company will be allowed to buy its shares back with its free reserve or premium earned by securities or profits earned by any specific share or special securities.
But the company will not be allowed to buy the securities back with the profit earned by same securities.
The guideline says, a company is not allowed to buy the shares back unless, the buy-back is approved in accordance with the company's memorandum of articles of association and two-third majority vote for the issue at the company's general meeting.
The agenda of a company's general meeting must include the complete and real information of buy-back, its necessity, the securities which will be bought back, the specific amount of money for buy-back, the specific time frame and the source of fund that will be used for buy-back.
The buy-back procedure must be completed within twelve months from the date of taking decision at the company's general meeting.
But in this case, another condition of not taking same proposal with 365 days from the date of approving buy-back issue is also applicable.
The guideline also says, the volume of buy-back shares can be more than ten per cent compared to company's total paid-up capital and free reserve, but not more than twenty five per cent compared to total shares' paid-up capital in a fiscal.
After the execution of buy-back, the company's liabilities cannot be more than two times of its total capital and free reserve, unless the securities regulator allows the companies to increase their liabilities in specific sectors.
As per guideline, the company can buy the securities back proportionally from its existing shareholders or from regular market or odd lot shares of listed securities.
But a company is not allowed to buy back its shares through its own or other subsidiary firms or through single or joint organisation of investment firms.
After the execution of buy-back, the company must destroy the same volume of electronic or non-electronic shares with seven days.
And the company will preserve the buy-back documents that will include the volume of destroyed shares and the date of buy-back execution.
The company will also submit all documents regarding buy-back to the Registrar of Joint Stock Companies and Firms, the SEC, the stock exchanges and depository participants within thirty days from the date of buy-back execution.
The securities regulator will own the power of formulating the rules regarding buy-back.
Normally, a share buy-back means the purchase by a company of its own shares in the market and these shares will be declared null and void.
The advantage of buy-backs is that, by boosting the share price, they give shareholders capital gains rather than income as the volume of free-floated shares reduces after the execution of buy-back and company's earning per share (EPS) increases.
The Securities and Exchange Commission (SEC) has designed the guidelines following the models of India and United Kingdom.
The SEC and key stakeholders Tuesday discussed the guideline on buy-back and now it will be sent to the ministry of finance.
The SEC excluded the provision of imprisonment from the guideline for violating buy-back law.
In the guideline the regulator has imposed two-year restriction on liquidity expansion. Within the restriction period, the company will be allowed to issue only bonus shares.
Under the proposal, a company will be allowed to buy its shares back with its free reserve or premium earned by securities or profits earned by any specific share or special securities.
But the company will not be allowed to buy the securities back with the profit earned by same securities.
The guideline says, a company is not allowed to buy the shares back unless, the buy-back is approved in accordance with the company's memorandum of articles of association and two-third majority vote for the issue at the company's general meeting.
The agenda of a company's general meeting must include the complete and real information of buy-back, its necessity, the securities which will be bought back, the specific amount of money for buy-back, the specific time frame and the source of fund that will be used for buy-back.
The buy-back procedure must be completed within twelve months from the date of taking decision at the company's general meeting.
But in this case, another condition of not taking same proposal with 365 days from the date of approving buy-back issue is also applicable.
The guideline also says, the volume of buy-back shares can be more than ten per cent compared to company's total paid-up capital and free reserve, but not more than twenty five per cent compared to total shares' paid-up capital in a fiscal.
After the execution of buy-back, the company's liabilities cannot be more than two times of its total capital and free reserve, unless the securities regulator allows the companies to increase their liabilities in specific sectors.
As per guideline, the company can buy the securities back proportionally from its existing shareholders or from regular market or odd lot shares of listed securities.
But a company is not allowed to buy back its shares through its own or other subsidiary firms or through single or joint organisation of investment firms.
After the execution of buy-back, the company must destroy the same volume of electronic or non-electronic shares with seven days.
And the company will preserve the buy-back documents that will include the volume of destroyed shares and the date of buy-back execution.
The company will also submit all documents regarding buy-back to the Registrar of Joint Stock Companies and Firms, the SEC, the stock exchanges and depository participants within thirty days from the date of buy-back execution.
The securities regulator will own the power of formulating the rules regarding buy-back.
Normally, a share buy-back means the purchase by a company of its own shares in the market and these shares will be declared null and void.
The advantage of buy-backs is that, by boosting the share price, they give shareholders capital gains rather than income as the volume of free-floated shares reduces after the execution of buy-back and company's earning per share (EPS) increases.
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