Buy-back of shares explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
When a company buys back its own shares, paid-up capital shrinks and the cash that leaves must come from permitted sources. The Act sets limits on the size of the buy-back and on the debt the company may carry afterwards, and it requires an equal amount of nominal value to be set aside in a reserve. This guide shows how to test a proposed buy-back against those limits using the balance sheet, and how to book it. The legal procedure for an unlisted company is handled by our buy-back of shares service; this article is about the numbers.
Section 68(1) allows a buy-back out of distributable reserves (the Act's defined term, which Explanation II to the section says includes the securities premium account), the securities premium account, or the proceeds of an issue of shares of a different kind. The buy-back must be 25 per cent or less of paid-up capital plus those reserves, and debts after the buy-back must be not more than twice paid-up capital plus those reserves (section 68(2)(c) and (d)). Where it is made out of reserves or securities premium, the nominal value bought back is transferred to the capital redemption reserve (section 69(1)).
What the sections require
| Source | What it requires | What it means in the books |
|---|---|---|
| Section 68(1) | Buy-back out of distributable reserves, securities premium, or proceeds of an issue of shares or securities; none out of the proceeds of an earlier issue of the same kind | Name the source of each rupee in the entry |
| Section 68(2)(a), (b) | Authorised by articles; special resolution at a general meeting, except where the buy-back is ten per cent or less of paid-up equity capital and those reserves and the Board has authorised it | The size of the buy-back decides who approves it |
| Section 68(2)(c) | Twenty-five per cent or less of the aggregate of paid-up capital and those reserves; for equity shares, the twenty-five per cent is measured against total paid-up equity capital in that financial year | Test 1 and Test 2 below |
| Section 68(2)(d) | Debts (secured and unsecured) after the buy-back not more than twice paid-up capital plus those reserves, unless the Central Government notifies a higher ratio for a class | Test 3 below |
| Section 68(2)(e) | The shares must be fully paid-up | Collect unpaid calls first |
| Section 68(2), last proviso | No fresh offer within one year of the closure of the preceding offer | Plan only one offer a year |
| Section 68(6) | Declaration of solvency signed by at least two directors, filed before the buy-back | The solvency opinion looks one year ahead |
| Section 68(7) | Shares bought back are extinguished and physically destroyed within seven days of completion | Cancel in the books at completion |
| Section 69(1) | Where bought back out of reserves or securities premium, a sum equal to the nominal value goes to the capital redemption reserve | A transfer within equity |
| Section 70 | No buy-back through a subsidiary or investment company, or while certain defaults remain, as printed | Check before approving |
Our posts on section 68, sections 69 and 70 and Rule 17 on the letter of offer and forms give the procedure. Listed companies follow the regulations of the Securities and Exchange Board in addition (section 68(2)(f)). For the tax side of a buy-back, see our income-tax guides.
Method
- List paid-up capital, the securities premium and the distributable reserves; add them.
- Test 1: 25 per cent of that total is the maximum amount.
- Test 2: 25 per cent of paid-up equity capital is the maximum number of equity shares, by value.
- Test 3: after the buy-back, debts must not exceed twice paid-up capital plus those reserves, measured after the buy-back.
- Take the lowest of the three outcomes and divide by the buy-back price.
- Pass the entries: debit share capital for the nominal value, and securities premium and reserves for the premium; credit the buy-back account; pay; then transfer the nominal value to the capital redemption reserve.
Worked example: Ishaan Cables Private Limited
The entity and all figures in this example are invented for illustration.
Ishaan Cables is unlisted. It has 2,00,000 equity shares of 10 each, all fully paid. Reserves: securities premium 4,00,000, general reserve 20,00,000, retained earnings 6,00,000, all distributable. Borrowings are 60,00,000 and trade creditors 10,00,000. Assets: fixed assets 65,00,000, other current assets 25,00,000, bank 30,00,000. It proposes to buy back shares at 50 each.
Limit tests.
| Test | Working | Result |
|---|---|---|
| Base: paid-up capital + reserves | 20,00,000 + (4,00,000 + 20,00,000 + 6,00,000) | 50,00,000 |
| 1. Amount: 25 per cent of the base | 50,00,000 x 25 / 100 | 12,50,000 |
| 2. Equity: 25 per cent of paid-up equity capital | 20,00,000 x 25 / 100 | 5,00,000 nominal, or 50,000 shares |
| 3. Debt: funds must be at least half the debt | 60,00,000 / 2 | funds of at least 30,00,000 after |
Maximum from Test 1: 12,50,000 / 50 = 25,000 shares. From Test 2: 50,000 shares. From Test 3: buying back Y shares takes 10Y off paid-up capital, 40Y of premium off the reserves and a further 10Y out of the reserves into the capital redemption reserve. Taking the cautious view that the new reserve is not counted, the funds after the buy-back are 50,00,000 less 60Y. To keep them at 30,00,000 or more, Y can be at most 33,333 shares. The lowest of the three is Test 1, so the company buys back 25,000 shares: 25,000 x 50 = 12,50,000. The buy-back exceeds ten per cent of paid-up equity capital and reserves (5,00,000), so a special resolution is needed.
Entries. Nominal value 25,000 x 10 = 2,50,000; premium 25,000 x 40 = 10,00,000, met from securities premium 4,00,000 and general reserve 6,00,000.
| Particulars | Debit | Credit |
|---|---|---|
| Equity share capital Dr | 2,50,000 | |
| Securities premium Dr | 4,00,000 | |
| General reserve Dr | 6,00,000 | |
| To Equity shares buy-back account | 12,50,000 | |
| Equity shares buy-back account Dr | 12,50,000 | |
| To Bank | 12,50,000 | |
| General reserve Dr | 2,50,000 | |
| To Capital redemption reserve | 2,50,000 | |
| Total | 27,50,000 | 27,50,000 |
| Capital and liabilities | Before | After | Assets | Before | After |
|---|---|---|---|---|---|
| Equity share capital | 20,00,000 | 17,50,000 | Fixed assets | 65,00,000 | 65,00,000 |
| Securities premium | 4,00,000 | nil | Other current assets | 25,00,000 | 25,00,000 |
| General reserve | 20,00,000 | 11,50,000 | Bank | 30,00,000 | 17,50,000 |
| Capital redemption reserve | nil | 2,50,000 | |||
| Retained earnings | 6,00,000 | 6,00,000 | |||
| Borrowings | 60,00,000 | 60,00,000 | |||
| Trade creditors | 10,00,000 | 10,00,000 | |||
| Total | 1,20,00,000 | 1,07,50,000 | Total | 1,20,00,000 | 1,07,50,000 |
Check. Debt test after the buy-back: paid-up capital 17,50,000 + distributable reserves (11,50,000 + 6,00,000 = 17,50,000) = 35,00,000; twice that is 70,00,000, and borrowings of 60,00,000 do not exceed it (a ratio of about 1.71 to 1). Counting the new reserve as well would only raise the base. Bank: 30,00,000 - 12,50,000 = 17,50,000. Debits and credits agree at 27,50,000; the balance sheet totals 1,20,00,000 before and 1,07,50,000 after, a fall equal to the cash paid.
How it shows in the financial statements
Under Schedule III, Division I, the share capital note shows the reconciliation of shares at the start and end of the year and, for five years, the number of shares bought back. Section 69(1) asks that details of the transfer to the capital redemption reserve be disclosed in the balance sheet. The reserve may later fund a bonus issue under section 69(2).
Common mistakes
- Measuring the debt ratio on the balance sheet before the buy-back instead of after.
- Using the proceeds of an earlier issue of the same kind of shares to fund the buy-back.
- Forgetting the transfer to the capital redemption reserve.
- Treating the premium as an expense in the statement of profit and loss; it is charged to securities premium or reserves.
- Making a second offer within a year of closing the first.
Need help with a buy-back?
If your company is considering a buy-back, our team can run the limit tests on your latest accounts, prepare the resolutions, declaration and returns, and book the entries. See our buy-back of shares service and send us the audited balance sheet.
Key takeaways
- Fund the buy-back from distributable reserves, securities premium or a different kind of issue.
- Run three tests: amount at 25 per cent, equity at 25 per cent of paid-up equity capital, and debt not above twice the funds after the buy-back.
- Credit the buy-back account first, then pay.
- Transfer the nominal value to the capital redemption reserve.
- Extinguish the shares within seven days of completion.
Read next
- Redemption of preference shares: section 55, reserve and entries
- Internal reconstruction: capital reduction account and balance sheet
- Section 68: buy-back of securities
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.