Buy Back Legal Provisions of the Companies Act, 1956

 


Legal Provisions of Section 77A, 77AA AND 77B of the Companies Act, 1956

 

Meaning

A Procedure which enables a company to go back to the holder of its shares/specified securities and offer to purchase from them the shares/specified securities that they hold.

Purpose

A Company would opt for buy- Back for the Following reasons:-

{1} To Improve shareholder value- Buy back Generally results in higher earning per share {E.P.S}

2} As a defence mechanism- Buy back Provides a safeguard against hostile take- over by increasing promoters holding.

{3} to provide an additional exit route to shareholder when shares are undervalued or thinly traded.

{“4} To return surplus cash to shareholders.

 



 Comparison with old provisions

 Section 77 {1} of the Companies Act, 1956 prohibits buy- back of shares, except in pursuance of Section 100 to 104 {Reduction of capital with the approval of the Court} and Section 402 {Reduction of capital in pursuance of order of the CLB} Further, Section 77 {2} also prohibits financing for purchase of own shares.

Thus, new provision of buy- back introduced by Companies {Amendment} Act, 1999 by inserting new Section 77A, 77AA AND 77b In the companies act, 1956 override the existing provisions of Section 77{1}. However, provision of finance for purchase of own shares continues to be prohibited by Section 77{2}

 

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