Buyback Limits, Board Approval and Tender Offer at Crestline Engineering
Crestline Engineering Ltd has paid-up equity capital of ₹40 crore and free reserves of ₹260 crore. It has secured debt of ₹450 crore. The board approves a buyback of ₹180 crore at ₹300 per share through a tender offer. The market price is ₹270, so the buyback price is at an 11% premium. The promoter group holds 65% and the public holds 35%. The promoter has indicated that it may tender up to 20% of its holding. The company secretary says a board resolution is sufficient because the buyback is “only” 60% of net worth and the company will remain solvent. The CFO wants to know the maximum permissible buyback, whether a special resolution is required, and what will happen to the public shareholding if the promoter tenders. The board wants to announce the buyback before the quarter-end.
1. Calculate the maximum permissible buyback under the Companies Act, 2013, and identify the binding constraint.
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Two tests apply under section 68 of the Companies Act, 2013:
- 25% of paid-up capital plus free reserves: 25% × (₹40 crore + ₹260 crore) = 25% × ₹300 crore = ₹75 crore.
- Post-buyback debt-equity ratio not exceeding 2:1: debt is ₹450 crore. For a 2:1 ratio, post-buyback equity must be at least ₹225 crore. Current paid-up plus free reserves is ₹300 crore, so the buyback cannot exceed ₹300 crore − ₹225 crore = ₹75 crore.
Both tests produce the same ceiling: ₹75 crore. The proposed ₹180 crore buyback breaches both the 25% limit and the debt-equity condition. The company secretary’s “solvency” point is not the statutory test; a company can be solvent and still exceed the buyback limits. The board cannot approve ₹180 crore, and the merchant banker should not file the offer documents on that basis. If the company wants a larger return of capital, it should consider a combination of buyback and dividend, or a capital reduction, subject to the applicable approvals and creditor protections.
2. Is a board resolution sufficient for a ₹75 crore buyback, and what SEBI tender-offer requirements apply?
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A board resolution is not sufficient. Under section 68(2)(b), a buyback of up to 10% of the aggregate of paid-up capital and free reserves may be approved by board resolution. Ten percent of ₹300 crore is ₹30 crore. A ₹75 crore buyback - even though it is within the 25% ceiling - exceeds the 10% board-resolution limit and therefore requires a special resolution of shareholders. The explanatory statement must disclose the rationale, the maximum price, the method, the number of shares, the pre- and post-buyback shareholding, and the solvency statement.
Because the buyback is through a tender offer, the SEBI (Buyback of Securities) Regulations, 2018 also apply. The company must make a public announcement, file the draft letter of offer, provide escrow arrangements, appoint a registrar, complete the tendering and verification process, and make payment within the prescribed timeline. The offer price of ₹300 must be justified; the premium to market price is not itself objectionable, but the board should record how it was determined. The company must also ensure that the buyback does not breach the minimum public shareholding requirement and that the promoter’s intended tendering is disclosed.
3. What happens to public shareholding if the promoter tenders 20% of its holding, and what should the board check before announcing?
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The buyback at ₹75 crore and ₹300 per share would repurchase 25 lakh shares, or 6.25% of the 40 crore shares outstanding. If the promoter tenders 20% of its holding, that is 20% × 26 crore = 5.2 crore shares - far more than the entire buyback size. The promoter cannot tender 5.2 crore shares in a 25 lakh-share buyback; acceptance will be scaled down pro rata if the offer is oversubscribed. The board should therefore not treat the promoter’s “20%” as an actual exit.
If the entire 25 lakh shares are bought from the public, public shareholding falls from 35% to 13.75 crore / 39.75 crore = 34.6%, still above 25%. If the promoter tenders the full 25 lakh shares, the promoter falls to 25.75 crore / 39.75 crore = 64.8%, and public shareholding rises to 35.2%. Either way, the 25% minimum public shareholding is maintained on these figures. Before announcing, the board should confirm the buyback ceiling, obtain the special resolution, check the tender-offer escrow and acceptance mechanics, verify that the promoter’s tendering is permitted under the buyback regulations, and disclose the pro-rata acceptance risk. The company should also check whether the buyback falls within a restricted period under the PIT Regulations.