Buy Back of Shares in the company means repurchasing its own shares from the existing Shareholder of the Company. The Company usually purchases shares at the price higher than the market price. Companies in general undertake buy-backs when they possess surplus cash reserves and seek to return value to shareholders in an efficient manner.
In the Indian context, buy-backs are governed by a comprehensive regulatory framework to ensure transparency, safeguard the interests of shareholders, and promote prudent financial management.
Legal Framework Governing Buy-Backs
Section 68 of the Companies Act, 2013 deals with the regulation of share buy-back read with Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014. For listed companies, the SEBI (Buy-Back of Securities) Regulations, 2018, set out requirements. These regulations form the basis for buy-back regulation, with significant discretion being conferred on companies for capital management.
Sources of Funds
A Company can purchase its own shares and other specified securities out of –
- its free reserves;
- the securities premium account; or
- the proceeds of the issue of any shares or other specified securities:
Funding the buy-back consideration directly from borrowed funds or fresh indebtedness is not permitted, though the post-buy-back debt-equity ratio must still comply with the statutory limit.
Modes of Buy-Back
Companies in India can achieve the buy-back of their shares through any of the routes stated below:
- Proportionate (Tender Offer): In a proportionate or tender offer, the company issues an offer to existing shareholders to tender their shares in proportion to their present holdings. It is the more common method, particularly for unlisted companies.
- Open Market Purchase: Companies were allowed to purchase shares from the stock exchange within the permitted limits. However, SEBI has introduced a phased-out timetable for open-market buy-backs via stock exchanges, and with effect from April 1, 2025, companies can no longer initiate new open-market buy-backs through the stock exchange, except for offers that commenced on or before March 31, 2025.
- From Employees: They can also repurchase sweat equity shares or ESOP-linked shares issued to employees under the general SEBI-compliant framework, subject to specific pricing and disclosure conditions and within the overall 25% cap.
Each of these methods involves distinct procedural and compliance requirements.
Key Conditions and Limits
The law has laid down several provisions to ensure that the repurchase and reissue of shares is done in a prudent manner. The buy-back must first be authorized by the company’s Articles of Association (AOA). In the case of the buy-back being up to 10% of the total paid-up equity capital and free reserves, the Board of Directors of the company may authorise the buy-back by an ordinary resolution. However, in the case of the buy-back being more than 10% but not exceeding 25% of the aggregate of paid-up capital and free reserves, a special resolution of the shareholders has to be obtained.
The total amount of shares to be repurchased must not exceed 25% of the company’s aggregate of paid-up capital and free reserves. After the share repurchase, the post-buy-back debt-equity ratio must not exceed two to one, subject to any higher permissible limits applicable to specified classes of companies as may be prescribed. Only fully paid-up shares may be repurchased, and the share repurchase must be fully completed within a period of twelve months from the date of approval of the resolutions relating to the share repurchase plan. In addition, the repurchase of shares must be made in compliance with the conditions of a declaration of solvency relating to the company’s ability to settle its debts that still remain due and payable even after the repurchase of the shares.
Step-by-Step Process
Share buy-back is a method which is highly procedural and regulatory. After conducting the requisite checks as to whether the Articles of Association allow share buy-back, they have to be amended in case they do not contain such a provision. Further, a Board Meeting has to be conducted in respect of the share buy-back proposal. In case of excess of the limit as specified in the Regulations, a General Meeting has to be conducted in respect of the share buy-back with the approval of the shareholders through a special resolution, supported with an explanatory statement in relation to the share buy-back proposing reasons for the buy-back, the consideration which is to be paid to the shareholders, the source from which the consideration shall be funded and the implications of the share buy-back.
Following approvals, the company must make regulatory filings including Form MGT-14, SH-8 (letter of offer) and SH-9 (declaration of solvency). The buy-back offer or tender offer will usually remain open for at least 10 working days. In the event of an over-subscription, the shares would be accepted in proportion to the subscriptions received.
Once the acceptance period has closed, the company will verify the shares tendered, pay the tendering shareholders and return the shares that have not been tendered. The buy-back shares must then be
cancelled and extinguished within 7 days of purchase. The company will maintain a register of buy-back shares (Form SH-10) and file a return (Form SH-11) within 30 days of the closure of the buy-back offer.
Compliance Requirements
Compliance is involved throughout the buy-back process. Companies have to maintain a record of shares that have been bought; they must extinguish all buy-back shares within 7 days; there should not be any further issuance of the same class of shares during the buy-back period as well as for 6 months thereafter from the completion of the buy-back; disclosure in respect of promoter and directors’ shareholding is to be made; and all taxation in relation to buy-back must be complied with.
Restrictions and Prohibitions
A whole host of situations have been provided in the law that will be outside the scope of buy-backs. Section 70 of the Companies Act prohibits a company from purchasing its own shares through the route of its subsidiaries or investment companies. The company cannot undertake a buy-back if it has defaulted on repayment of loans, deposits, dividend or interest and such default continues, except after repayment/renewal of such defaulted amount and in compliance with any applicable regulatory or lender-imposed waiting periods.
Also, in the case of companies, updating the statutory records (e.g., annual returns and accounts) is also a condition. Once a buy-back is announced, it cannot be revoked, and between the date of such announcement and the closure of the buy-back, no further allotments or issuances of shares of the same class can take place. A breach of these conditions can result in heavy fines on the company and its directors.
Strategic Importance of Buy-Backs
A properly executed buy-back is a very legitimate capital structure tool. It is a good way for companies with cash to improve their returns on equity, balance sheet metrics and to be a market maker of their shares, provided that they are under-valued. Buy-backs are also a good way for investors to reduce their holding in a stock, whether it is to reduce exposure to a particular name or to take some profit off the table. However, due to the heavy regulatory constraints, any buy-back must be properly thought out and in line with laws and regulations.
Tax Implications
Share buybacks in India follow straightforward tax rules that changed recently. Until October 1, 2024, the company paid a special tax of around 23% on the extra money given to shareholders (buyback price minus the original share cost), and shareholders paid nothing.
Now, companies no longer pay that tax. Instead, shareholders treat the full buyback amount as dividend income and pay tax on it at their regular income tax slab rates, with the company deducting 10% TDS for most resident shareholders.
Starting April 1, 2026, shareholders will pay capital gains tax only on profits, 12.5% if shares were held over a year, or 20% for shorter periods.
How India Law Offices LLP Can Assist You
India Law Offices LLP offers comprehensive legal and regulatory assistance for companies undertaking share buy-backs in India. As a full-service law firm, we guide clients through every stage of the buy-back process from initial structuring to final compliance including tax implications.
Our services include advising on the most suitable buy-back strategy, ensuring alignment with the Companies Act and SEBI regulations, and conducting detailed legal due diligence to assess eligibility and risks. We assist in drafting and reviewing all necessary documentation, including board resolutions, shareholder resolutions, explanatory statements and offer letters.
We also manage end-to-end regulatory filings such as MGT-14, SH-8, SH-9, and SH-11, and provide representation before regulatory authorities like the Registrar of Companies and SEBI. Post buy-back, we support clients in maintaining statutory records and fulfilling reporting requirements.
As experts in corporate and securities law, our team ensures that your share buy-back is executed smoothly, efficiently, and in full compliance with applicable laws, allowing you to focus on your strategic business objectives
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