Can Buy Back of shares be made by a Scheme of Arrangement? G. P. Sahi Published on 2005-06-24 Introduction Section 77A was introduced by the Companies (Amendment) Act, 1999, pursuant to the report of the working group which was set up to suggest reforms to the Companies Act. The underlying reasons in support of a buy back, interalia, include (a) return surplus cash to shareholders; (b) increase the underlying share value; (c) support share price during periods of temporary weakness; (d) achieve or maintain a target capital structure; (e) prevent or thwart take over bids. (f) increase promoter shareholding Prohibition of buy back - Erstwhile law Hitherto the amendment, section 77 placed restrictions on purchase of its own shares by a company. According to it, a company limited by shares, and a company limited by guarantee and having a share capital, shall not have the power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402. The section also prohibited giving of financial assistance to a person for purchasing shares in companies except in certain situations i.e. lending by a banking company, purchase of fully paid shares of its own or holding company if the purchase is by the trustees for the benefit of the employees of the company or the grant of loans to employees to enable them purchase shares in the company or its holding company. The main reason for this prohibition on trafficking in its own shares was to prevent the company from influencing the market price of its shares by reducing the floating stock to the prejudice of its creditors. Prior to introduction of section 77A the only exceptions to the general principle that the company cannot buy its own shares were purchase resulting in reduction of capital with the sanction of the court under sections 100 to 104; redemption of redeemable preference shares under section 80; purchase under an order of court in a scheme of arrangement or amalgamation under sections 391 to 394, subject to compliance with sections 100 to 104 and purchase under an order of Company Law Board to purchase shares of minority shareholders under section 402(b). Thus the company could purchase its shares prior to introduction of section 77A provided the scheme or arrangement therefore had been sanctioned under sections 100 to 104. Section 100 does not prescribe the manner in which the reduction of capital is to be effected. Nor is there any limitation on the power of court to confirm the reduction except that it must be first satisfied that all the creditors entitled to object to the reduction have consented or have been paid or secured. { Punjab Distilling Industries Ltd. v. CIT [1965] 35 Comp Cas 541 (SC); Hindustan Commercial Bank Ltd. v. Hindustan General Electrical Corporation [1960] 30 Comp Cas 367 (Cal). Section 77A, 77AA and 77B were inserted by the Companies (Amendment) Act, 1999 w.e.f. 31.10.1998. to provide for buy-back of its own securities by a company. SEBI notified the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998 to govern the procedure of buyback relating to Listed companies. The Department of Company Affairs promulgated the Private Limited Company and Unlisted Public Limited Company (Buyback of Securities) Rules, 1999. The provisions of section 77A of the Companies Act, 1956 reads as follows (1) 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 (hereinafter referred to as 'buy-back') out of - (i) its free reserve; or (ii) the securities premium account; or (iii) the proceeds of any shares or other specified securities : Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. (2) No company shall purchase its own shares or other specified securities under sub-section (1) unless - (a) the buy-back is authorised by its articles; (b) a special resolution has been passed in general meeting of the company authorising the buy-back : Provided that nothing contained in this clause shall apply in any case where(a) the buy-back is or less than ten per cent. of the total paid up equity capital and free reserves of the company; and (b) such buy-back has been authorised by the board by means of aresolution passed at its meeting : Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back, if any; Explanation. - For the purposes of this clause, the expression 'offer of buy-back’ means the offer of such buy-back made in pursuance of the resolution of the board referred to in the first proviso; (c) the buy-back is or less than twenty-five per cent. of the total paid up capital and free reserves of the company : Provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent. of its total paid up equity capital in that financial year. (d) The ratio of the debt owed by the company is not more than twice the Capital and its free reserves after such buy-back: Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies; Explanation. - For the purposes of this clause, the expression 'debt' includes all amounts of unsecured and secured debts; (e)all the shares or other specified securities for buy-back are fully paid up; (f)the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; (g)the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with the guidelines as may be prescribed. (3)The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating - a full and complete disclosure of all material facts; (b) necessity for the buy-back; (c) class of security intended to be purchased under the buy-back; (d) amount to be invested under the buy-back; and (e) time-limit for completion of buy-back. (4) Every buy-back shall be completed within twelve months from the date of passing the special resolution (or a resolution passed by the board) under clause (b) of sub-sections (2). ..." The following issues emerge for discussion Is it that the non-obstante clause in section 77A gives overriding effect to the said provision and is a complete code for buy-back of shares? Is it that a listed company desiring to buy back its equity shares should follow the procedure under section 77A and SEBI (Buy-back of Securities) Regulations, 1998? Whether the company court has the power to grant reorganisation scheme under section 391 read with sections 100 to 104 empowering the company to buy back the shares from the shareholders or is section 77A the only mode to buy back the shares? A clause beginning with ‘notwithstanding anything contained in this Act or in some particular provision in the Act or in some particular Act or in any law for the time being in force’, is sometimes appended to a section in the beginning, with a view to give the enacting part of the section in case of conflict an overriding effect over the provision or Act mentioned in the non obstante clause. (Orient Paper and Industries Ltd. v. State of Orissa, AIR 1991 SC 672, p. 678:1991 Supp (1) SCC 81). It is equivalent to saying that in spite of the provision or Act mentioned in the non obstante clause, the enactment following it will have its full operation or that the provisions embraced in the non obstante clause will not be an impediment for the operation of the enactment. (P.E.K. Kalliani Amma (Smt.) v. K. Devi, 1996 (4) Scale 131, p. 149:AIR 1996 SC 1963, pp. 1975, 1976). Thus a non obstante clause may be used as a legislative device to modify the ambit of the provision or law mentioned in the non obstante clause (Pannalal Bansi lal Patil v. State of Andhra Pradesh, 1996 (1) Scale 405, p. 415: AIR 1996 SC 1023, p. 1032).or to override it in specified circumstances. Section 20 of the Urban Land (Ceiling & Regulation) Act, 1976 has two sub-sections. Sub-section (1) begins with the non-obstante clause "Notwithstanding anything contained in any of the foregoing provisions of this Chapter", after which occur clauses (a) and (b) therein which provide for exemption, "subject to such conditions, if any, as may be specified in the order", of "such vacant land from the provisions of this Chapter". The non obstante clause clearly indicates that Section 20 of the Urban Land (Ceiling & Regulation) Act, 1976 overrides the foregoing provisions of Chapter III that is, Sections 3 to 19 of the Act. This is reaffirmed in clauses (a) and (b) wherein the concluding part in each is "Government may, by order, exempt, subject to such conditions, if any, as may be specified in the order, such vacant land from the provisions of this Chapter". (T.R. Thandur v. Union of India, AIR 1966 SC 1643, p. 1651 (para 8): 1966 (3) SCC 690). BHAGWATI, J. observed: The non obstante clause need not necessarily and always be co-extensive with the operative part so as to have the effect of cutting down the clear terms of an enactment. If the words of the enactment are clear and are capable of only one interpretation on a plain and grammatical construction of the words thereof a non obstante clause cannot cut down the construction and restrict the scope of its operation. In such cases the non obstante clause has to be read as clarifying the whole position and must be understood to have been incorporated in the enactment by the Legislature by way of abundant caution and not by way of limiting the ambit and scope of the operative part of the enactment. {Dominion of India v. Shrinbai A. Irani, AIR 1954 SC 596, PP. 599, 600:1955(1) SCR 206}. It is well settled that while dealing with a non obstante clause under which the Legislature wants to give overriding effect to a section, the court must try to find out the extent to which the Legislature had intended to give one provision overriding effect over another provision. Such intention of the Legislature in this behalf is to be gathered from the enacting part of the section. In Aswini Kumar Ghose v. Arabinda Bose AIR 1952 SC 369, Patanjali Sastri, J. observed - "The enacting part of a statute must, where it is clear, be taken to control the non obstante clause where both cannot be read harmoniously." In Madhav Rao Scindia v. Union of India (1971) 1 SCC 85 at page 139, Hidaytullah, C.J. observed that the non obstante clause is no doubt a very potent clause intended to exclude every consideration arising from other provisions of the same statute or other statute but "for that reason alone we must determine the scope" of that provision strictly. When the section containing the said clause does not refer to any particular provisions which it intends to override but refers to the provisions of the statute generally, it is not permissible to hold that it excludes the whole Act and stands all alone by itself. "A search has, therefore, to be made with a view to determining which provision answers the descripttion and which does not." There is no doubt that by the non obstante clause the legislature devises means which are usually applied to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other statute. In other words, such a clause is used to avoid the operation and effect of all contrary provisions. The phrase is equivalent to showing that the Act shall be no impediment to the measure intended. To attract the applicability of the phrase, the whole of the section, the scheme of the Act and the objects and reasons for which such an enactment is made have to be kept in mind. Vishin N. Khanchandani And Another, Appellants V. Vidya Lachmandas Khanchandani And Another, Respondents. 2000-(006)-SCC -0724 -SC The non-obstante clause at the commencement of the section suggests that the provisions of this section shall exist harmoniously with other provisions of this Act but shall have an overriding effect in the event of a conflict between the provisions of this section and any other provision of the Act. The non-obstante clause certainly takes the provision to which it is attached at the highest pedestal than the other provisions prevailing at the relevant time. The effect of a non-obstante clause occurring in a statute is well known. It sets at naught and obliterates such other provisions as may be inconsistent or repugnant to the provisions of that statute. For interpretation and construction of section 77A, we can refer to its heading and language. The heading is “power of a company to purchase its own securities". For interpretation of the words of section the language of the heading cannot be used to control the operation of the section, but at the same time being part of the statute it prima facie furnishes some clue as to the meaning and purpose of the section. (Re : K. P. Varghese v. ITO [1982] 1 SCR 629, 647). In the case of ambiguity or doubt the heading can be referred to as an aid in construing the provision. This heading indicates that the Legislature has envisaged special provision giving power to company to purchase its own securities subject of course to its complying with the conditions mentioned in the section. The section along with the guidelines/rules framed by SEBI/DCA gives a detailed and comprehensive procedure of factors to be considered and complied before the company proceeds with the buy back of shares. A company may for instance have to ensure that the articles do permit such issue, shares are fully paid up, special/board resolution is passed, the debt equity ratio does not exceed 2:1, shares can be purchased either out of the share premium account or free reserves or share capital. Besides, the section prescribes limits up to which the shares can be bought back. The time frame within which buy back should be completed, filing of declaration of solvency with the Registrar of companies/ SEBI depending upon whether the company is unlisted/listed. Maintenance of register of shares bought back. Extinguishing shares bought back and filing of return with SEBI within 30 days of completion of buy back. The section also states that in the event of a failure to comply with the provisions of this section, the company and every officer of the company who is in default shall be punishable with imprisonment for a term, which may extend to two years or with a fine, which may extend to fifty thousand rupees or both. The introductory part of section 77A also mentions that the provisions of this section are subject to section 77B, which prohibits a company from purchasing shares, directly or indirectly, through a subsidiary or investment company. Also, if a default is subsisting in repayment of deposits or interest thereon, redemption of debentures or preference shares or payment of dividend to any share holders or repayment of any term loan. Further, the company shall not purchase if its shares if it has defaulted on account of the provisions of section 159(filing of Annual return), section 207(failure to distribute dividend within specified time) and section 211 (form and contents of Balance sheet and Profit & loss Account). In addition, the SEBI guidelines applicable to listed companies will require buying from members through the tender offer or through the stock exchange, appointment of merchant banker, filing of the letter of offer with regulator, matters to be stated therein, public announcement in the prescribed newspapers etc. It is well settled that under section 391 of the Companies Act, the court is
invested with very wide powers to approve or sanction any scheme of amalgamation, arrangement, compromise or reconstruction. The court has power to sanction all matters, which for their effectuation require a special procedure to be followed under the Companies Act. The only exception to this is the special procedure to be followed under section 101 for reduction of capital since rule 85 of the Companies (Court) Rules, 1959, specifically enjoins the following of a special procedure prescribed for reduction of share capital. In Maneckchowk and Ahmedabad Manufacturing Co. Ltd., In re [1970] 40 Comp Cas 819 (Guj), D. A. Desai J. held that section 391 of the Companies Act is a complete code. However, in view of rule 85 of the Companies (Court) Rules, 1959, whenever a scheme of arrangement proposed under section 391 involves a reduction in the share capital of the company, the procedure prescribed under sections 100 to 102 of the Companies Act and the Rules relating to the reduction of the capital shall have to be complied with. He went on to hold that reduction of capital can be sanctioned as part of a scheme of compromise and arrangement by a common order under section 391 subject to the requirements of sections 100 to 102 being complied with. The decision in Maneckchowk and Ahmedabad Manufacturing Co. Ltd.'s case [1970] 40 Comp Cas 819 (Guj) was followed by this court in Vasant Investment Corporation Ltd. v. Official Liquidator, Colaba Land and Mill Co. Ltd. [1981] 51 Comp Cas 20 and PMP Auto Industries Ltd., In re [1994] 80 Comp Cas 289. The Bombay high Court in Securities and Exchange Board of India v Sterlite Industries Limited {2003-(113)-Comp Cas- 0273 – Bom} held that 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 ..." shows that section 77A is a facilitating provision which enables companies to buy back their shares without having to approach the court under section 391 and sections 100 to 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 shares was by following the procedure set out under sections 100 to 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 creditors of the company and obtaining of their consent to the scheme for reduction. The legislative intention behind the introduction of section 77A is to provide an alternative method by which a company may buy back up to 25 per cent. of its total paid up equity capital in any financial year subject to compliance with sub-sections (2), (3) and (4). It does not supplant or take away any part of the pre-existing jurisdiction of the company court to sanction a scheme for such reduction under sections 100 to 104 and section 391. The non obstante clause in section 77A namely "notwithstanding anything contained in this Act ..." only means that notwithstanding the provisions of section 77 and sections 100 to 104, the company can buy back its shares subject to compliance with the conditions mentioned in that section without approaching the court under sections 100 to 104 or section 391. There is nothing in the provision of section 77A to indicate that the jurisdiction of the court under section 391 or 394 has been taken away or substituted. It is well settled that the exclusion of the jurisdiction of the court should not readily be inferred; such exclusion should be explicitly or clearly implied. There is nothing in the language of section 77 that gives rise to such an inference. We are, therefore, inclined to hold that section 77A is merely an enabling provision and the court's powers under sections 100 to 104 and section 391 are not in any way affected. The conditions provided in section 77A are applicable only to buy-back of shares under section 77A. The conditions applicable to sections 100 to 104 and section 391 cannot be imported into or made applicable to a buy-back under section 77A. Similarly the conditions for a buy-back under section 77A cannot be applied to a scheme under sections 100 to 104 and section 391. The two operate in independent fields. A similar view was taken by AP High Court in TCI Industries Limited (2004) 60 CLA 382 (AP) The Companies (Amendment) Bill,2003 inserted a new clause In section 391 of the principal Act, after sub-section (6), the following sub-section shall be inserted, namely: (7) Notwithstanding anything contained in this section, the compromise or arrangement under this section shall not include buy back of securities other than under section 77A The Bill was withdrawn and referred back to the department to rectify anomalies but it did reflect the intent of the framers of the bill to rectify this flaw. With utmost humility and due respect I beg to differ with the views expressed by honourable high courts as the examination of the aforesaid relevant provisions of the Act clearly reflect the intention of the legislature. It has to be admitted that the provisions of the Act as are drafted in section 77A, 77AA and 77B read with the guidelines/rules framed by SEBI /DCA give a very comprehensive and elaborate procedure for buying back the shares by a Company. The two modes prescribed under section 391 and 77A will be in direct conflict where for example a listed company although complying with the requirements of a majority vote and approval of the court in terms of section 391(2) of the Act fails to comply with the SEBI guidelines and requirements of section 77A. The non-obstante clause shall lose its shine if a similar act can be performed through a scheme of arrangement. Section 55A of the companies Act empowers SEBI to regulate the provisions of section 77A in case of listed and those public companies, which intend to get their securities listed. The legislature having conferred powers on the regulator to administer provisions relating to buy back. Will it be treated as compliance if a company circumvents the regulations and section 77A by filing a scheme of arrangement to buy back the shares? A company can of course by complying with the regulations and the requirement of section 77A and 77B have the scheme approved under section 391 of the Act.
