What if the period of completion of buyback extends to the next financial year (say if the resolution is passed in September)? Because the shares bought back are not extinguished when the dividend is declared, and the shares are still in the name of person(s)from whom shares are bought back, will that person be entitled to dividend, rights, bonus, if any?

According to the Companies Bill, 1997, the company shall forthwith cancel the securities bought back.

Another point to be considered is that buyback cannot exceed 25 per cent of the paid-up capital and free reserves of the company purchasing its own shares, or other specified security. Take an example of a company whose paid-up capital consists of Rs 50 crore equity, Rs 25 crore preference capital, and free reserves of Rs 150 crore. The company is allowed to buy back shares, or other specified securities up to Rs 56.25 crore. What if the equity capital of Rs 25 crore is bought back. By staying within the limit imposed, the voting capital has been reduced by 50 per cent. Dabke suggests that to avoid this, the ratio of equity to preference capital should be maintained.

Section 77B states that no company shall purchase its own shares, or other specified securities, through any subsidiary company includingits own subsidiary firms, or through any investment companies. It is impossible to understand the logic. Section 42 of the Companies Act provides that a subsidiary can't buy a holding company's shares. Section 77A(1) provides that a company may purchase its own shares, or other specified securities, from out of its free reserves, or out of the securities-premium account, or out of proceeds of an earlier issue other than the fresh issue of shares made specifically for buyback purposes. Plain reading makes it clear that if the free reserves have to be of a company purchasing its own shares, the share-premium account of another company cannot be debited, nor can any other company's issue proceeds be used for buyback. Buyback is different from shares bought by separate entities. Buyback simply means that a company is buying its own shares back, and can't use any other entity for that.

Sections 77B and 77A(1) did not form part of the Companies Bill, 1997. The amended Section 372 is no better. The limit forinter-corporate loan/guarantee/ acquisition of securities is either 60 per cent of its paid-up share capital and free reserves, or 100 per cent of free reserves, whichever is more. Prior to the amendment, Section 372 provided that the ceiling under the section will not be applicable to a rights issue. Dabke hits the final nail in the coffin. He says that the Securities & Exchange Board of India cannot do anything about these inconsistencies as it is beyond its powers. A view being considered is that for tax purpose, buyback can be treated as dividend. This is not possible because dividend cannot be paid for shares to the shareholder who is no longer a shareholder because the security is extinguished. Because of the movement of consideration, buyback is simply a sale-and-purchase transaction.