Buyback of Securities in Times of Crisis
🔷 Buyback of Securities in Times of Crisis – Detailed Explanation
🔹 1. What is a Buyback of Securities?
A buyback (also called a repurchase) is when a company purchases its own shares from the open market or shareholders. It reduces the number of shares outstanding and is often used as a tool to return surplus cash to shareholders or support the share price.
🔹 2. Legal Framework Governing Buyback in India
Buyback in India is regulated by:
| Statute/Regulation | Relevant Provision |
|---|---|
| Companies Act, 2013 | Sections 68 to 70 |
| SEBI (Buyback of Securities) Regulations, 2018 | Applicable to listed companies |
| Income Tax Act, 1961 | Tax on distributed income under Section 115QA |
🔹 3. Buyback in Times of Crisis – Purpose
In economic or financial crises (like COVID-19, global market crashes, or company-specific downturns), companies may undertake buybacks to:
Boost investor confidence by signalling financial strength.
Support or stabilize stock price amid volatility.
Optimize capital structure by reducing excess equity.
Reward shareholders when dividend payout may not be feasible.
🔹 4. Modes of Buyback
Tender Offer – Company offers to repurchase shares at a fixed price from shareholders.
Open Market Purchase – Company buys shares through stock exchanges.
From Existing Shareholders on Proportional Basis – Offers to buy from all in proportion.
🔹 5. Statutory Conditions under Section 68 of Companies Act, 2013
A company can buy back its shares if:
It is authorized by Articles of Association.
Shareholder approval (special resolution) is obtained, unless ≤10% of paid-up equity capital and reserves (in which case board resolution suffices).
Buyback ≤25% of total paid-up capital and free reserves.
Debt-equity ratio post-buyback ≤ 2:1.
All shares must be fully paid-up.
Complies with SEBI Regulations if listed.
🔹 6. Restrictions During Times of Crisis
During economic distress, regulators may impose temporary restrictions on buybacks to preserve liquidity and prevent misuse.
For example:
SEBI temporarily prohibited buybacks during the COVID-19 crisis for companies availing benefits under the relaxation schemes.
Companies receiving government stimulus or restructuring under RBI guidelines may be barred from buybacks.
🔹 7. Judicial and Regulatory Approach – Key Case Law
✅ Securities and Exchange Board of India v. Sterlite Industries Ltd., SAT Appeal No. 74/2002
Facts: SEBI challenged the open market buyback by Sterlite for alleged non-compliance.
Held: SAT upheld that buyback must be done in strict compliance with SEBI guidelines to ensure transparency and prevent manipulation.
Relevance: Reinforces that even in distress, buybacks must follow due process.
✅ Hindustan Lever Employee Union v. Hindustan Lever Ltd., (1995) Supp (1) SCC 499
Though not directly about buybacks, the Supreme Court emphasized fairness in valuation and protection of minority shareholders in corporate transactions.
Relevance: During crises, companies must ensure buybacks are not coercive or unfair to small shareholders.
✅ Larsen & Toubro Ltd. (L&T) Buyback Case (2019) – SEBI Order
Facts: L&T’s buyback was rejected by SEBI due to non-compliance with post-buyback debt-equity ratio.
Held: SEBI strictly applied statutory criteria, holding that even strong companies can’t bypass Section 68 limits.
Relevance: During crises, companies may attempt buybacks, but compliance with law is non-negotiable.
🔹 8. Buyback as a Strategic Tool in Crisis – Pros and Cons
| Pros | Cons |
|---|---|
| Supports stock price | Depletes cash reserves needed for operations |
| Boosts investor morale | Can signal lack of investment opportunities |
| Improves EPS (Earnings per Share) | May face regulatory restrictions |
| Allows capital restructuring | Risk of favouring promoters |
🔹 9. SEBI Measures During Crisis (COVID-19 Example)
SEBI relaxed certain regulations temporarily but cautioned against imprudent buybacks.
For companies under stress, buybacks were discouraged unless they had strong fundamentals.
SEBI also increased the minimum gap between buyback and fresh equity issue from 6 months to 1 year in some cases to prevent misuse.
🔹 10. Summary of Key Legal Points
| Legal Requirement | Condition |
|---|---|
| Authorization | Articles + Shareholder/Board Resolution |
| Limit | ≤25% of paid-up capital + free reserves |
| Debt-equity ratio | Post-buyback ≤2:1 |
| Prohibition | If default in repayment of deposits, loans, etc. |
| Cooling-off period | No fresh issue for 6 months post-buyback |
| SEBI Compliance | Mandatory for listed companies |
✅ Conclusion
Buyback of securities during times of crisis is a strategic but sensitive corporate decision. It must be strictly compliant with the Companies Act and SEBI Regulations. Courts and regulatory bodies have emphasized that buybacks should not be misused to manipulate share prices or benefit insiders at the cost of minority shareholders, especially during times of economic stress.
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