Share buy-backs in India carry a numbers of restrictions

Question: Many companies in India offer buy-back opportunities to shareholders. Can this be done by the company using the stock exchange mechanism?

ANSWER: At present, companies can offer buy-back schemes to their shareholders under two options, through tender offer and using stock exchange mechanism. The Securities & Exchange Board of India (Sebi) has imposed restrictions on the placement of bids, price and volume for companies undertaking share buy-backs by using the stock exchange route.

Under these restrictions, a company will not be able to purchase more than 25 per cent of the average daily trading volume (in value) of its shares in the ten trading days preceding the day in which the purchases are made. Another restriction is that the company will not place bids in the pre-open market, first 30 minutes and the last 30 minutes of the regular trading session. Sebi has directed companies as well as appointed brokers to ensure compliance with these regulations. Further, the stock exchange has been directed to monitor the compliance of these regulations. Where there is non-compliance, the stock exchange has been authorised to impose appropriate fines and take such enforcement action as is necessary.

Question: My son is working in a company in India. He was an authorized signatory of cheques to be issued on behalf of the company. A cheque has bounced and my son is facing litigation and claim for compensation. Does he have any remedy to protect himself?

ANSWER: The Bombay High Court has recently held that in case of companies issuing cheques, the authorised signatory cannot be treated as the ‘drawer’ of the cheque and therefore would not be liable for legal action and cannot be prosecuted under the Negotiable Instruments Act.

According to the Court, the word ‘drawer’ in section 138 of this Act cannot be interpreted to include either the signatory of the cheque or even a Director of the company who has signed the cheque. The company alone can be treated as the ‘drawer’ of the cheque. A person who signs the cheque on behalf of a company on whose account the cheque is drawn does not become a ‘drawer’ of the cheque under the law because the signatory is only a person who is duly authorized to sign the cheque on behalf of the ‘drawer’ company. Therefore, the signatory would not be liable to pay compensation or face prosecution when the cheque is dishonoured by the company. The company alone would be liable to pay compensation when its cheque bounces.

H. P. Ranina is a practising lawyer, specialising in tax and exchange management laws of India.