Buyback of Shares under Section 68 of the Companies Act, 2013

Buyback of Shares under Section 68 of the Companies Act, 2013

A buyback allows a company to purchase back its own shares from existing shareholders, effectively returning surplus cash while reducing the number of outstanding shares. It's a widely used tool for capital restructuring, boosting earnings-per-share, or providing an exit route to shareholders, and Section 68 lays down strict conditions to protect creditors and remaining shareholders.

A buyback can be funded out of the company's free reserves, the securities premium account, or the proceeds of any shares or specified securities, but not out of the proceeds of an earlier issue of the same kind of shares or specified securities being bought back.

•      The buyback must not exceed 25% of the aggregate of paid-up capital and free reserves of the company in a financial year.

•      The buyback of equity shares in any financial year must not exceed 25% of the paid-up equity capital of the company in that year.

•      After the buyback, the debt-equity ratio should not exceed 2:1, unless a higher ratio is permitted for certain classes of companies.

A buyback up to 10% of paid-up equity capital and free reserves can be approved by a board resolution. A buyback exceeding 10% but within the overall 25% limit requires a special resolution of shareholders, along with an explanatory statement disclosing prescribed particulars.

•      Shares bought back must be extinguished and physically destroyed within 7 days of completion of the buyback.

•      The company cannot make a further issue of the same kind of shares (except through bonus issue, conversion of preference shares/debentures, or ESOPs) within 6 months of completion of the buyback.

•      No further buyback can be made within 1 year from the closure of the preceding buyback offer.

•      A declaration of solvency in Form SH-9 must be filed with the ROC and SEBI (for listed companies) before making the buyback offer.

•      Exceeding the 25% overall buyback ceiling by not accounting for the combined base of paid-up capital and free reserves correctly.

•      Using board resolution approval for a buyback that actually exceeds the 10% threshold requiring special resolution.

•      Attempting a second buyback within 1 year of the previous one's closure.

•      Reissuing the same class of shares within 6 months of buyback completion (other than through permitted routes like bonus/ESOP).

Q1. Can a company do a buyback through a special resolution more than once a year?

No, regardless of the mode of approval, a company cannot undertake more than one buyback within a period of 1 year from the closure of a preceding buyback offer.

Q2. Is buyback of shares taxable?

Yes, buyback proceeds are subject to specific tax provisions under the Income-tax Act; companies and shareholders should consult a tax advisor on the applicable tax treatment, as rules have changed over recent years.

Q3. Can an unlisted company buy back shares from only some shareholders?

A buyback under the Act must generally be made on a proportionate basis from all shareholders of the class of shares proposed to be bought back, ensuring fair treatment, subject to the specific method of buyback adopted (tender offer, open market, or odd-lot).

Q4. What is the declaration of solvency?

It is a solemn declaration (Form SH-9), signed by at least 2 directors (one being the managing director, if any), affirming the Board's opinion that the company will be able to pay its debts and will not be rendered insolvent within a year of the buyback date.

Q5. Can a company fund a buyback through fresh borrowing?

A buyback must be funded from free reserves, securities premium, or proceeds of a different kind of share/security issue — not directly from the proceeds of the same kind of security being bought back; while overall funding sources should be carefully checked against the prescribed conditions.

Q6. Are private companies subject to the same buyback rules as public companies?

Yes, the core buyback framework under Section 68 applies to both private and public companies, though listed public companies face additional SEBI regulatory requirements not applicable to private/unlisted companies.

Q7. What happens to the buyback if the company becomes insolvent shortly after?

This is precisely why the declaration of solvency (Form SH-9) is required beforehand; if directors made the declaration without reasonable grounds, they can face personal liability and penal consequences.

Buyback offers companies a flexible way to manage excess capital and reward shareholders, but the quantitative caps, cooling-off periods, and solvency declaration requirements make it a carefully regulated corporate action. Companies planning a buyback should model the debt-equity and reserve limits well in advance to ensure the transaction stays within permissible bounds.