Senior lawyer K. Kanag-Isvaran, referring to an article in The Sunday Times FT last week titled 'Share Repurchase Needs to be Thought Through', says the views held by market analysts and others on the 'farsightedness' of the share repurchase provisions in the new Companies Act is misleading. Mr. Kanag-Isvaran, who was a panel member in drafting the Companies Act No.7 of 2007, said the provisions in the Act ensure fairness for all parties involved.

Section 63 of the Act dealing with the repurchase of shares, described by Mr. Kanag-Isvaran as the enabling section, states that a company may purchase or otherwise acquire any of its own shares. Section 64 (1) of the Act states that a company may agree to purchase or otherwise acquire its own shares if the articles of such company provide for it to do so with the approval of the board.

Section 64 (2) further states that before a company offers or agrees to purchase its own shares, the board of such company shall resolve that (a) the acquisition is in the interests of the company, (b) the terms of the offer or agreement and the consideration to be paid for the shares is in the opinion of the company's auditors a fair value and (c) that it is not aware of any information that has not been disclosed to shareholders which is material to an assessment of the value of the shares, and as a result of which the terms of an offer or the consideration offered for the shares are unfair to shareholders accepting the offer. Mr. Kanag-Isvaran said Section 64 has inbuilt safeguards to ensure that the price offered is fair.

He added that under Section 529, repurchase also means distribution. The term distribution according to the section means the direct or indirect transfer of money or property other than the shares of a company to or for the benefit of a shareholder or (b) the incurring of a debt to or for the benefit of a shareholder.
Accordingly, Mr. Kanag-Isvaran said Section 64 is not stand alone but goes in conjunction with Section 56 which deals with distributions to shareholders. Section 65 (1) states that before a distribution is made by a company to any shareholder, such distribution shall (a) be authorized by the board and (b) unless the company's articles provide otherwise, be approved by the shareholders by ordinary resolution.

Section 56 (2) states that the board of a company may authorize a distribution at such time and in such amount as it considers appropriate, where it is satisfied that the company will immediately after the distribution is made satisfy the solvency test, provided that such board obtains a certificate of solvency from the auditors.

Section 56 (3) states that the directors who vote in favour of a distribution shall sign a certificate setting that in their opinion, the company will satisfy the solvency test immediately after the distribution is made.
Section 56 (4) states that in applying the solvency test for the purposes of this sections, 'debts' includes fixed preferential returns on shares ranking ahead of those in respect of which a distribution is made, except where the fixed preferential return is expressed to be subject to the power of the board to authorize distributions. Section 56 (5) states that a director who fails to comply with the requirements of subsection (2) shall be guilty of an offence and be liable on conviction to a fine not exceeding two hundred thousand rupees.