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Buyback of shares under Companies Act 2013

Laws applicable on buyback of shares in India

The laws governing the buyback of shares in India are as follows:

  • Companies Act, 2013

Section 68 - Power of company to purchase its own securities

Section 69 - Transfer of certain sums to capital redemption reserve account

Section 70 - Prohibition for buy-back in certain circumstances

  • Rule 17 of Companies (Share Capital & Debentures) Rules 2014
  • SEBI (Buyback of Securities Amendment) Regulations 2013

Section 68(1) - Sources of buyback

Buyback of shares can be made out of -

(a) free reserves;

(b) securities premium account; or

(c) proceeds of the issue of any shares or other specified securities.

However, Buyback cannot be made out of proceeds of an earlier issue of the same kind of securities.

Section 68(2) - Buyback conditions

Enabling provisions

(a) Buy-back must be authorised by Articles of Association (AOA) (b) Buy-back must be approved by Board resolution or special resolution depending on the quantum of buyback

  • Board approval - where the buy-back is 10% or less of the total paid-up equity capital and free reserves of the company
  • Shareholders approval - where the buy-back is not more than 25% of the total paid-up equity capital and free reserves of the company

Debt-Equity ratio

The ratio of the debts (secured and unsecured debts) owed by the company after buy-back is not more than twice the paid-up capital and its free reserves: Provided that the Central Government may notify a higher debt-equity ratio.

Fully paid-up

All the shares or other specified securities for buy-back should be fully paid up.

SEBI compliance

Buyback of shares listed on any recognized stock exchange must be in accordance with regulations made Stock and Exchange Board of India (SEBI). If shares are not listed on any recognized stock exchange, buyback must be in accordance with Companies (Share Capital and Debentures) Rules, 2014.

Section 68(3) - Explanatory statement with notice of meeting

The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement stating-

(a) full and complete disclosure of all material facts;

(b) the necessity for the buy-back;

(c) the class of shares or securities intended to be purchased under the buy-back;

(d) the amount to be invested under the buy-back; and

(e) the time limit for completion of buy-back.

Section 68(4) - Date for completion of buy-back

Every buyback shall be completed within a period of one year from the date of passing of the special resolution or board resolution as the case may be.

Section 68(5) - Manner of buyback

The shares can be bought back through any of the following-

(a) Existing shareholders or security holders on a proportionate basis;

(b) Open market;

(c) Securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Section 68(6) - Declaration of solvency

The company shall, before making buy-back, file with the Registrar and the SEBI, a declaration of solvency.

  • Declaration of insolvency should be signed by at least two directors of the company, one of whom shall be the managing director.
  • Declaration of insolvency should be filed in Form SH-9 along with an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of the declaration adopted by the Board.
  • No declaration of solvency shall be filed with the SEBI if shares are not listed on any recognised stock exchange

Section 68(7)

The shares bought back must be destroyed by the company within seven days from the last date of completion of buy-back.

Section 68(10)

After the completion of the buy-back, a company shall file with the Registrar and the SEBI a return in Form SH-11 within thirty days of completion. No return shall be filed with the SEBI if shares are not listed on any recognised stock exchange. Following documents will be submitted with Form SH-11:

  • A copy of the Special Resolution
  • A copy of the Board Resolution
  • Details concerning the shares brought back
  • A copy of the audited Balance Sheet
  • Details concerning the securities holders, prior to the process of Buyback.

Section 68(11) - Punishment for non-compliance

If a company makes any default in complying with the provisions of section 68 or SEBI regulations, the company shall be punishable with a fine which shall not be less than Rs 1,00,000 but which may extend to 3,00,000 and every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.


TaxGyata Team

TaxGyata Team

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