Requirement to be complied before buy-back: A company cannot purchase its own shares or other securities unless they fulfill the following conditions:-

  1. There should be an authorization in the articles for the buy-back.
  2. A special resolution must be passed in the general meeting for authorizing the buy-back.
  3. The buy-back must be or less than 25% of the total paid up capital and free reserves of the company.

In any financial year, the buy-back of equity shares shall not exceed 25% of the total paid up equity share

  1. The ratio of the debt owed by the company must not be more than twice the capital and free reserves after such buy-back.

The central Government has the power to increase the ratio of the debt, than specified in the clause for the class or classes of companies.

All the amounts unsecured and secured debts are included in the term debt.

‘Free reserves’ includes in it the reserves which as per latest audited balance sheet of the company are free for distribution as dividend ad it will also include in it the balance to the credit of the securities premium account.

  1. The shares or other specified securities which are to be buy-back by the company must be listed on any recognized stock exchange in reference with the regulation made by SEBI in its behalf.
  2. Buy-back must be done on the shares and securities which are fully paid up.

The notice of the meeting at which the special resolution is proposed to be passed should include with it the statement stating:-

  1. A full and complete disclosure of all material facts
  2. The reason behind the buy-back must be disclosed
  3. The types of securities which are to be purchased under buy-back.
  4. The amount to be involved under the buy-back.
  5. And lastly the time within which the buy-back will be completed [section 77A(3)]
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