Buyback of Shares Under explained: this guide covers what Buyback of Shares Under 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.
What Is Buyback of Shares?
Buyback is the process by which a company purchases its own shares from existing shareholders, effectively reducing the total number of shares outstanding. The bought-back shares are extinguished (cancelled) — they cannot be reissued. Buyback serves multiple purposes: returning excess cash to shareholders, improving earnings per share (EPS), supporting share price, providing an exit to shareholders without the company paying dividend (which is taxed in shareholders' hands), and restructuring the capital base.
Section 68 of the Companies Act, 2013 allows companies to buy back their own shares subject to strict conditions and limits. The provision balances shareholder returns with creditor protection — ensuring companies do not deplete their capital to the detriment of creditors.
Conditions for Buyback — Section 68(2)
A company can buy back its shares only if:
(a) Authorization in AOA: The articles of association must authorize buyback. Table F (model AOA) includes this power. If your AOA does not authorize: first alter AOA by special resolution.
(b) Resolution: Board resolution (for buyback up to 10% of paid-up + free reserves) OR Special resolution (for buyback between 10% and 25%).
(c) Maximum limit — 25%: The buyback in any financial year must not exceed 25% of the aggregate of paid-up share capital and free reserves. Additionally, the buyback of equity shares in any financial year must not exceed 25% of total paid-up equity capital.
(d) Post-buyback debt-equity ratio: After buyback, the ratio of secured and unsecured debts owed by the company must not be more than 2:1 (debt cannot exceed twice the remaining capital and reserves). Companies can specify a higher ratio in their AOA.
(e) Shares must be fully paid up — cannot buy back partly paid shares.
(f) No default: The company must not have defaulted in repayment of deposits, redemption of debentures/preference shares, payment of dividend, repayment of term loans, or payment of statutory dues.
(g) Cooling period: Cannot make another buyback within 1 year from the date of closure of the preceding buyback (1-year gap between two buybacks).
Two Routes for Authorization
Route 1: Board Resolution — Up to 10%
If the buyback amount does not exceed 10% of total paid-up capital and free reserves: Board resolution is sufficient. No shareholders' meeting needed. This is the simpler route — used by many private companies for small buybacks. Board passes resolution specifying: maximum number of shares, maximum price, source of funds, and timeline.
Route 2: Special Resolution — 10% to 25%
If the buyback exceeds 10% but is within 25%: special resolution at general meeting is required. The notice must specify: maximum number of shares, maximum price, source of funds, timeline, and necessity for buyback. 21 clear days notice. 75% majority required.
Sources of Funds for Buyback
Buyback can be funded ONLY from:
(a) Free reserves — accumulated profits available for distribution
(b) Securities premium — amounts received above face value on share issuance
(c) Proceeds of any securities issue — only for buyback of a different class of shares (e.g., proceeds from debenture issue to buy back equity)
Buyback CANNOT be funded from: share capital account, capital reserve, revaluation reserve, or borrowed funds. The company must have sufficient free reserves/securities premium to fund the entire buyback price.
Buyback Methods
For Listed Companies
(a) Tender offer: Company makes an offer to all shareholders to tender (sell) their shares at a specified price. Pro-rata acceptance if oversubscribed. Most common method — used by TCS, Infosys, Wipro, HCL for their buybacks.
(b) Open market: Company purchases shares through the stock exchange at prevailing market price (through a broker). Now PROHIBITED by SEBI since 2024 (for listed companies).
For Private/Unlisted Companies
(a) Proportionate basis from all shareholders: Offer to all shareholders proportionally (similar to listed company tender).
(b) From specific shareholders: Buy back from identified shareholders (commonly used when a shareholder wants to exit). Must comply with Section 68 conditions.
(c) Odd lot shares: Buyback of small fractional holdings to clean up the shareholder register.
Procedure for Buyback (Private Company)
Step 1: Board/Shareholder Approval
Board resolution (up to 10%) or special resolution (10-25%). Resolution must specify: maximum shares, maximum price per share, aggregate consideration, source of funds, timeline, and class of shares.
Step 2: Declaration of Solvency (SH-9)
Before making the buyback, Board must make a declaration of solvency in Form SH-9 — verified by an affidavit — that the company is able to pay its debts and will not become insolvent after the buyback. File SH-9 with ROC within 7 days of the declaration.
Step 3: File Letter of Offer (SH-10)
Issue Letter of Offer to shareholders in Form SH-10 — specifying: buyback price, number of shares, record date, last date for acceptance, payment timeline, and conditions.
Step 4: Accept Tenders and Make Payment
Shareholders who accept the offer tender their shares. Company accepts and makes payment within specified timeline. For oversubscription: accept proportionally from all tendering shareholders.
Step 5: Extinguish Shares
Bought-back shares are EXTINGUISHED (permanently cancelled) within 7 days of the last date of completion of buyback. The shares cease to exist — they cannot be reissued, re-allotted, or resold. Paid-up capital is reduced by the face value of extinguished shares.
Step 6: File SH-11 with ROC (Within 30 Days)
File Form SH-11 (Return of buyback of securities) with ROC within 30 days of completion of buyback. Attachments: declaration of solvency, Board/shareholder resolution, details of shares bought back, source of funds, and post-buyback capital structure.
Step 7: Transfer to Capital Redemption Reserve
Under Section 69: create a Capital Redemption Reserve (CRR) equal to the nominal (face) value of shares bought back. Transfer from free reserves to CRR. CRR can be used only for issuing fully paid bonus shares — it cannot be distributed as dividend or used for any other purpose. This protects creditors by ensuring capital is not permanently depleted.
Tax Treatment of Buyback
For the Company
Section 115QA: the company must pay buyback tax at 20% (plus 12% surcharge + 4% cess = effective 23.296%) on the distributed income — which is: (buyback consideration - amount received by the company for issue of those shares). This tax is paid by the company BEFORE distributing buyback proceeds to shareholders.
Example: Company issued shares at Rs. 10 each. Buys back at Rs. 100 each. Distributed income = Rs. 90 per share. Buyback tax = 23.296% of Rs. 90 = Rs. 20.97 per share. Company pays Rs. 100 to shareholder + Rs. 20.97 to government = total cost Rs. 120.97 per share.
For the Shareholder
Section 10(34A): Income received by the shareholder from buyback is EXEMPT from tax in the shareholder's hands. No capital gains tax on the buyback proceeds. This is the key advantage of buyback over dividend — dividend is taxable at the shareholder's slab rate, while buyback proceeds are tax-free for the shareholder (the company bears the buyback tax instead).