INDIA Law and Practice Contributed by: C R Dua, Sanjeev Kaul, Abhinav Rastogi and Ashish Malkotia, Dua Associates
4. Cancellation and Buybacks of Shares 4.1 Cancellation A company may cancel its shares after issuance by way of a reduction of share capital, by passing a spe- cial resolution and through confirmation by the Tribu- nal, either with or without extinguishing the liability on any of its shares, in any manner. In particular, it may: • cancel paid-up share capital lost or unrepresented by available assets; or • pay off any paid-up share that exceeds the com- pany’s wants. 4.2 Buybacks A company may buy back its shares, provided that its articles authorise this and a special resolution has been passed at a general meeting for the buyback. The board can authorise a buyback of 10% or less of the total paid-up equity share capital and free reserves of the company by passing a resolution at its meeting. A company cannot buy back if it has defaulted in the repayment of deposits, interest payment, redemption of debentures, preference shares, payment of divi- dend or repayment of any loan. Key conditions for buyback include the following: • the buyback should be 25% or less of the aggre- gate paid-up capital and free reserves of the company, and the buyback of equity shares cannot exceed 25% of the total equity paid-up share capi- tal of the company in any financial year; • the ratio of aggregate secured and unsecured debt after the buyback to the paid-up capital and its free reserves should not be more than 2:1; • a declaration of solvency is to be made by the directors and filed with the relevant Registrar of Companies in the prescribed manner before mak- ing the buyback; and • a company may purchase its own shares out of its free reserves, the securities premium account or the proceeds of the issuance of any shares or other specified securities, but the buyback should not be made out of the proceeds of an earlier issue of the same kind of shares or the same kind of other securities.
Buyback by a company whose shares are listed on a recognised stock exchange is also governed by the provisions of the relevant SEBI regulations.
5. Dividends 5.1 Payments of Dividends
A company may pay dividends to its shareholders. The board of a company may declare interim dividends, whereas final dividends can be recommended by the board but declared by the shareholders at the AGM. Interim dividends for a financial year can be declared during that financial year or at any time between the closure of the financial year and the holding of the AGM. A company can only declare or pay dividends for any financial year: • out of its profits for that year, arrived at after pro- viding for depreciation as per the Act; • out of the profits of any previous financial year or years, arrived at after providing for depreciation in accordance with the provisions of the Act and remaining undistributed; or • out of both. Where a company proposes to declare dividends out of the accumulated profits earned by it in previous years and transferred by the company to the free reserves, owing to inadequacy or absence of profits in any financial year, such declaration of dividends should not be made, except in accordance with the prescribed rules. A company cannot declare or pay dividends from its reserves other than free reserves. Furthermore, no company can declare dividends unless carried-over previous losses and depreciation not provided in the previous year or years are set off against the com- pany’s profit for the current year.
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