Buyback of “shares” through a scheme of compromise or arrangement

It is well settled Principle in the regime of the Companies Act, 1956 that Section 391 to 394 of CA, 1956 is “Complete Code” or “Single Window Clearance” for compromises or arrangements between company and its shareholders or creditors etc..  We have seen lot of judgments allowing different types of compromises or arrangements between company and its shareholders or creditors etc.

One of the classic examples of compromise or arrangement is buyback of shares from the existing shareholders through sections 391 to 394 read with sections 100 to 104.

There are few landmark judgments allowing such kind of buyback of shares from existing shareholders which is not in compliance with section 77A of the Companies Act, 1956. Among them, SEBI V/s. Sterilite Industries (India) Limited is one of landmark case on buyback of shares through scheme of arrangement under section 391 to 394 read with section 100 to 104 of the Companies Act, 1956. Three 3 questions were raised in the said judgement out of which 2^nd question is relevant for our discussion:-

ii) Whether the Company Court has power to grant reorganization scheme under Section 391 read   with Sections 100 to 104 empowering the company to buy back the shares from the share holders or whether Section 77A is the only mode to buy-back the shares?

Section 77A was introduced vide the Companies Amendment Act, 1999. Till then the Companies used to buy back shares by following procedure laid under section 100 to 104.

What was the objective behind insertion of section 77A in the CA, 1956?

The judgment has analysed the scenario between pre and post introduction of section 77A of the CA, 1956.

In the judgement, section 77 of the Companies Act, 1956 was referred:

"77(1) No Company limited by shares, and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of Section 110 to 104 or Section 402.

2. 3

4.

5) Nothing in this section shall affect the right of a company to redeem any shares issued under Section 80 or under any corresponding provision in any previous companies’ law."

Prior to introduction of Section 77A the only exceptions to the general principle that the company 

cannot buy its own shares were 

1. purchase resulting in reduction of capital with the sanction of the court under 

Sections 100-104: 
2. redemption of redeemable preference shares under Section 80 :

3. purchase under an order of court in a scheme of arrangement or amalgamation under 

Sections 391-394, subject to compliance with Sections 100-104 and

4. purchase under an order of Company Law Board to purchase shares of minority

shareholders  under Section 402(b)

Rationale of inserting section 77A of the Companies Act, 1956 allowing buyback:-

The impact of Section 77A which was introduced by the Companies (Amendment) Act, 1999 will have to be considered in the light of the aforesaid provisions as interpreted by the Courts.

“Section 77A was introduced pursuant to the Report of the Working Group which was set up to suggest reforms to the Companies Act. It would be useful to refer to paras 3.9 and 3.10 of the report which read as under -

"3.9    There is an erroneous belief that the sole reason for buyback is to block 

hostile takeovers. In this connection it is pertinent to list the five reasons why 

the Bank of  England favoured  the making of law to allow companies to 

repurchase their shares, of  which blocking takeovers was only one :    

a.       to return surplus cash to shareholders 

b.      to increase the underlying share value   

c.       to support share price during periods of temporary weakness   

d.      to achieve or maintain a target capital structure.  

e.       To prevent on inhibit unwelcome take over bids.

Whether section 77A prohibits Company from adopting any other mode for buying back 

shares from shareholders?

The Judgement also discussed following:-

The opening words of Section 77A viz. "Notwithstanding anything contained in this Act, 

but subject to the provisions of Sub-section (2) of this section and Section 77B, a 

company  may purchase its own shares or other specified securities...." 

It shows that Section 77A is a facilitating provision which enables the companies to buy back 

their shares without having to approach the court under Section 391 and Sections 100-104 

subject to compliance with the provisions of Sub-sections (2), (3) and (4). 

Prior to the introduction of Section 77A, the only manner in which a company could 

buy back its share., was by following the procedure set out under Section 100-104

and Section 391 which required the calling of separate meetings of each class of 

shareholders and creditors as well as (if required by the Court) the drawing up of a 

list of credits of the company and obtaining of their consent to the scheme for reduction.
 

The legislative intention behind introduction of Section 77A is to provide an alternative 

method  by  which a company may buy back upto 25% of its total paid up equity capital

in any financial  year  subject to compliance with Sub-sections (2), (c) and (4). It does not 

supplant or take away any part of the pre-existing jurisdictions of the Company Court to 

sanction a scheme for such  reduction under Sections 100-104 and Section 391.

The word arrangement is of wide import and is not restricted to a compulsory purchase or acquisition of shares. There is no reason as to why a cancellation of shares and the consequent reduction of capital cannot be covered by Section 391 read with section 100 merely because a shareholder is given an option to cancel or to retain his shares. In view of the foregoing discussions, the objection of the appellants based on Section 77A must be rejected.

Capgemini India Private Limited V/s Regional Director (2014) also upheld the view taken in Sterlite Case and allowed Buyback of shares through scheme of arrangement.

Further, it was also noted that that section 230 (10) of the Companies Act, 2013 does not allow any buyback of securities through scheme of compromise or arrangement. But, since the section is not yet effective, it was not discussed further in the said judgement.

Let’s try to analyse what section 230(10) states:-

“No compromise or arrangement in respect of any buy-back of securities under this section shall be sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68”

First of all, the term used in sub-section (10) of section 230 is “Securities” and not “shares”.

Is there any difference between two terms?

There are three judgements which dwell upon this subject. The two judgements are of Supreme Court and one of Bombay High Court. The word “securities” was analysed very well in the said judgements.

In Bhagwati Developers Private Limited V Peerless General Finance & Investment Company Ltd and ANR, (2003) SC it was discussed that..

One of the essential parts of the definition of “Securities” is that it should be marketable. The meaning of marketable is also discussed in the said judgement

“the word ‘Marketable’ has not been defined in the Securities Contracts (Regulation) Act, 1956; and hence to understand it, we have to revert to its dictionary meaning. Black’s Law Dictionary (Sixth Edition) explains the word, ‘marketable’ as follows:-

“Marketable. Saleable, Such things as may be sold in the market, those for which a buyer may be found, merchantable “

The Compact  edition of Oxford English Dictionary, Vol. I. P. 1728 gives the meaning of the expression “Marketable” as follows:-

“1. Capable of being marketed that may or can be bought or sold, suitable for the market, that finds a ready market, that is in demand, saleable.

2. of or pertaining to buying or selling, concerned with trade; of price, value, that may be obtained in buying or selling.”

As is evident from the dictionary meaning set out above, the expression “marketable” has been equated with the word saleable. In other words, whatever is capable of being bought and sold in the market is marketable. The size of the market is of no consequence.

In the said case, it was also discussed that “Free Transferability” is material to fall under “marketable”.

The said view has also been  taken in another case of Supreme Court viz., “Naresh K. Aggarwala and Co. Vs Canbank Financial Services Ltd and Anr. .D.ivision Bench and in Bombay High Court Judgement Dahiben Umedbhai Patel and others Vs. Norman James Hamilton and others.

The decisions of Supreme Court are binding on all Courts including the Supreme Court itself. The decision of High Court is binding on lower courts and subject to certain exceptions on High Court itself.

Bhagwati Developers Private Limited V Peerless General Finance & Investment Company Ltd and ANR, (2003) judgement of Bombay High Court –Dahiben Umedbhai Patel and others Vs. Norman James Hamilton and others was referred to explain the term “securities”

From the Bombay High Court judgement- Dahiben Umedbhai Patel and others Vs. Norman James Hamilton and others ; it is very clear that shares of Private Limited Company will not fall under the definition of securities. Hence, one can take a view that “shares” of a private limited will not fall undert securities for the purposes of the Companies Act, 2013.

Section 230(10) of the Companies Act, 2013 provides that any buyback of “securities” in scheme of arrangement shall be in compliance with section 68 of the Companies Act, 2013. As discussed above, “shares” of Private Limited will not fall under the term “Securities”.

Hence, view can be that even after section 230 of CA, 2013 made effective, Private Limited Companies can buy back its shares through the scheme of arrangement or compromise which may not be in compliance with section 68 of the Companies Act, 2013.