A listed company proposing to undertake a buy-back is required to primarily comply with the provisions of the Companies Act, 2013 (the “Companies Act”) and the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018 (the “SEBI Regulations”). However, a listed company is also required to ensure compliance with the requirements of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “SEBI Takeover Regulations”), the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Foreign Exchange Management Act, 1999, the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and other applicable securities laws including in other jurisdictions.
As explained in our earlier blog, as prescribed in the SEBI Regulations, a listed company may undertake a buy-back of its shares and other specified securities through any of the following methods: (a) from the existing holders of securities on a proportionate basis through a tender offer; (b) from the open market either through the book building process or through the stock exchange mechanism; or (c) from odd-lot holders.
Following are the key considerations in undertaking a buy-back through any of the prescribed mechanisms and also deciding the method through which the buy-back may be undertaken:
Promoter participation in the buy-back
The term ‘promoter’ has been defined under the SEBI Regulations to mean a promoter as defined under the SEBI Takeover Regulations which includes members of the promoter group (the “Promoter”). The SEBI Regulations restrict Promoter participation in a buy-back undertaken by a listed company from the open market through the stock exchange mechanism. However, the Promoters of a company are permitted to participate in a buy-back undertaken through the tender offer route.
Implication of the SEBI Takeover Regulations
In terms of the SEBI Takeover Regulations, an acquirer is required to make an open offer if such an acquirer, along with the persons acting in concert, acquire shares or voting rights in a target company above the thresholds prescribed under the SEBI Takeover Regulations.
However, any holder of shares or specified securities who has acquired shares or voting rights, as a result of the buy-back, such that an open offer is required to be made under the SEBI Takeover Regulations, shall be exempt from making an open offer, if such holder of shares or specified securities reduces his shareholding or the holding of specified securities, such that his voting rights fall within the prescribed time period in accordance with the SEBI Takeover Regulations.
Applicability of laws of other jurisdictions specifically, the United States
A company listed on recognised stock exchanges in India which has its shareholders in multiple jurisdictions or depository receipts listed overseas may be required to comply with the legal provisions applicable in such jurisdictions, in addition to compliance with the SEBI Regulations and the Companies Act, to the extent applicable.
For example, a company listed in India proposing to undertake a buy-back through the tender offer route, having its shareholders in the United States, may be required to ensure compliance with the United States Securities Exchange Act of 1934 (the “Exchange Act”), which may be in conflict with the SEBI Regulations. Accordingly, such a company will have to assess the implications of the applicable legal provisions in other jurisdictions while undertaking a buy-back.
Tax implications of a listed company undertaking a buy-back
Until July, 2019, listed companies were kept outside the purview of buy-back tax (“BBT”). However, a change in law pursuant to the enactment of the Finance (No. 2) Act, 2019 meant that such income distributed pursuant to buy-back of shares undertaken whether by listed or unlisted companies, shall be subject to BBT under the Income-tax Act, 1961 (“IT Act”). Section 115QA of the IT Act provides for companies to pay the additional tax i.e. BBT, which is over and above the tax paid by the company on its income, on the element of income included in the amount paid by companies upon buy back of shares from a shareholder. Such BBT is charged at the rate of 20% (plus applicable surcharge and cess) and is treated the final tax regarding this income. No further tax is payable by the shareholders on such buy back of shares. BBT is required to be deposited with the central government within 14 days from the date of payment of any consideration to the shareholder on buy-back of shares.
As stated above, BBT is levied on the income comprised in the amount paid for buy-back. This income is required to be computed as the difference between the consideration paid by the company for buy-back of shares and the amount received by the company on the issuance of the shares or specified securities being bought back. The manner in which such tax will be computed will depend on factors such as (i) the issue price of the shares or specified securities; (ii) whether any sum of money was returned to the holders of such shares or specified securities in the form of dividend; (iii) whether the shares or specified securities were issued pursuant to a stock option scheme or as sweat equity shares; (iv) whether the shares or specified securities were issued pursuant to a scheme; (v) whether the shares or specified securities were issued for consideration other than cash, etc. Thus, considering that a buy back by a listed company may include shares which have been issued under varying circumstances, such as pursuant to a merger, demerger, employee stock option etc., the process of computing BBT payable by a listed company will need to be carefully analysed.
Based on our experience, a company may undertake a buy-back through any of the mechanisms prescribed under the SEBI Regulations based on considerations such as quantum of shares or other specified securities proposed to be bought back, the proposed participation by promoters, the timelines for completing the buy-back and the applicable regulatory requirements across jurisdictions.
Additionally, companies proposing to undertake a buy-back must consider other factors, such as the debt-equity ratio after the buy-back, the cash surplus available with the company, the maximum price that may be offered for the buy-back, the record date for determining entitlement and the compliance related aspects during and after the closure of the buy-back.