The concept of purchase by a company of its securities is of recent origin. It was first introduced in the English Companies Act in 1981. Clause 69 of the Companies Bill allows companies to purchase its shares from (1) out of free reserves, (2) out of the securities premium account or, (3) out of proceeds of any issue made specifically for buyback of shares. Such buyback of shares must be authorised by a special resolution passed in a general meeting, and the debt/equity ratio after such a buyback must not exceed 2:1.

The company is allowed to buy back shares issued under the employees stock Option or securities with differential voting rights. The sub clause states that the explanatory statementaccompanying the notice must inter alia give a) Full and complete disclosure of material facts (b) the necessity for the buyback c) the class of the security intended to be purchased under the buyback scheme d) the amount to be invested under buyback e) time limit for completion of buyback. The buyback of shares has to be completed within 15 months of the passing of the resolution.

Buyback may be a) from existing shareholder on proportionate basis, b) from the open market, c) from odd lots, that is to say where the lot of securities in a listed public company is smaller than such market lot as may be specified by the stock exchange, d) through negotiation or other arrangement, subject to the condition that no votes are cast in favour of the special resolution to be passed at the meeting, e) by purchase of securities from employees to whom these were issued under the employee stock option scheme. The securities bought back by the company shall stand cancelled, that is, the issued and subscribed capital ofthe company to that extent shall stand reduced.

The company is required to file with the centre a declaration of solvency in the prescribed format by an affidavit to the effect that the board has made full inquires into the affairs of the firm, as a result of which, it is capable of meeting its liabilities and will not render insolvent within a period of one year of the date of declaration adopted by board and signed by two directors of the company, one of whom shall be the managing director.

The company is prohibited from making further issue of securities within a period of 12 months from the completion of buyback of shares, except by way of a bonus issue or in discharge of its obligation like conversion of warrants or stock options or conversion of preference shares or debentures into equity shares.

Sub clause 8 requires that the company maintain a register giving securities bought, consideration paid for the securities, date of cancellation of securities and such other particulars as may beprescribed. Under sub clause 9, the company is required to file returns with the registrar of companies within 60 days of completion of buyback of shares giving full particulars of the buyback.

Following suggestions are made to prevent abuse or misuse of the provisions of share buyback and to lend transparency.

1) The Articles of Association of the company must authorise directors to buy back shares 2) As in the English Companies Act, the explanatory statement convening the meeting to consider buyback of shares must also give the price band, that is, the maximum and minimum price within which the company wishes to buy shares. The Securities & Exchange Board of India (Sebi) authorities may issue guidelines determining the minimum price at which shares can be bought. 3) If the company proposes to buy back shares by private negotiation, then an explanatory statement must give full details of such an arrangement and, in particular, names of parties, number of shares proposed to be purchased, price at whichthe shares are to be purchased, time frame within which the purchase by private negotiation will be completed, and the copy of the contract giving terms on which the deal is concluded may be kept for inspection at the registered office of the company till the conclusion of the meeting. 4) The register maintained by the company under sub clause 8 of clause 69 should be open for inspection for shareholders. 5) The consent of secured creditors in writing for buyback of shares be obtained before the resolution is considered at the meeting. It will be realised that secured creditors will be adversely affected as their security is depleted to the extent of cash resources used by the company for buyback of shares. 6) Share buyback should not exceed 25 per cent of the equity capital of the company 7) Since the company is given the option to issue shares with differential voting rights and employees stock option, the ratio of such capital, that is, shares with differential voting rights and employees stock option toequity capital after buyback of shares should remain the same as existed prior to the buyback 8) Clarification is needed that the "proceeds of any issue made specifically for buyback purposes" mentioned in clause 1 (iii) of clause 69 relates to debt securities and not issue of any shares.

While it is a useful to have such provisions in the companies act, it is a moot point how many firms will be able to take advantage of it in the foreseeable future.