Buy-back of Shares for Private and Unlisted Companies under Companies Act, 2013

Key takeaways

• Section 68 of the Companies Act, 2013 is the primary provision governing buy-backs of shares. It establishes the permitted funding sources, the conditions a company must satisfy before initiating a buy-back, the disclosure obligations, and the permitted methods of execution.
• Shareholder approval by special resolution is the standard requirement for a buy-back. Where the buy-back does not exceed 10% of total paid-up equity capital and free reserves as per the latest audited financial statements, a board resolution is sufficient.
• Before a buy-back proceeds, the board must file a declaration of solvency in form SH-9 with the Registrar of Companies (RoC), affirming that the company will remain solvent for 12 months after completion.
• Where a buy-back is funded from free reserves or the securities premium account, section 69 of the Companies Act, 2013 requires the company to transfer an amount equal to the nominal value of shares bought back into a capital redemption reserve, which can only be used for issuing fully paid bonus shares.

• Buy-back income received by shareholders is treated as capital gains under Income Tax Act, 2025 and taxed according to the period for which shares were held. The prior treatment under Section 115QA placed the tax liability on the company.

A buy-back of shares is a transaction in which a company repurchases its own issued shares from existing shareholders and extinguishes them upon completion. It is a mechanism for returning surplus capital, adjusting ownership composition, or improving per-share financial metrics. 

In India, the buy-back of shares is governed primarily by sections 68 of the Companies Act, 2013.

How a buy-back can be funded

Section 68(1) states a buy-back can be funded from free reserves (accumulated profits retained by the company), the securities premium account (the excess paid by shareholders over the face value of shares at the time of issue), or proceeds from the issue of shares or other specified securities.

Two restrictions apply regardless of which source is used. 

• Proceeds from the issue of any class of shares or other securities cannot be used for buy-back of shares or securities of the same class. For example, a company cannot issue new equity shares to raise funds and then use those proceeds to buy-back equity shares, but it could use proceeds from a fresh issue of preference shares to do so.
• Money borrowed from banks or financial institutions cannot be used to fund the transaction. 

Both restrictions exist to prevent arrangements that would undermine the financial integrity the mechanism is designed to preserve.

Conditions a company must meet before initiating a buy-back

Before a buy-back can be initiated, a set of conditions under section 68(2) must be satisfied.

1. The company's Articles of Association (AoA) must authorise the buy-back.
2. Shareholder approval through a special resolution is required. The exception is where the buy-back does not exceed 10% of total paid-up equity capital and free reserves, in which case a board resolution passed at a board meeting is sufficient.
3. The aggregate value of shares proposed to be bought back cannot exceed 25% of total paid-up capital and free reserves in any financial year. For equity share buy-backs specifically, this 25% limit is applied against total paid-up equity capital, not total paid-up capital and free reserves.
4. The company's total debt after the buy-back cannot exceed twice its paid-up capital and free reserves.
5. Only fully paid-up shares or other specified securities are eligible for buy-back.
6. Listed companies must comply with the SEBI (Buy-Back of Securities) Regulations, 2018 in addition to the Act.
7. A minimum gap of one year must separate the closure of one buy-back offer from the commencement of the next.

Disclosure requirements in buy-back of shares

Shareholders need sufficient information to evaluate whether the buy-back is in the company's interest before voting on it. Where shareholder approval is required, the notice convening the meeting must be accompanied by an explanatory statement. Under rule 17 of the Companies (Share Capital and Debentures) Rules, 2014, that statement must cover:

• The date of the board meeting at which the buy-back was approved
• The objective of the buy-back
• The class and number of shares proposed to be bought back
• The method to be adopted for the buy-back
• The price for buy-back, the basis for arriving at that price, and the maximum amount to be paid for the buy-back
• The sources of funds from which the buy-back will be financed
• The timeline for completion
• The aggregate shareholding of promoters, directors, and key managerial personnel as on the date of the notice, along with details of any shares purchased or sold by them in the preceding 12 months
• A confirmation that there are no subsisting defaults on deposits, debentures, preference shares, term loans, or declared dividends
• A board declaration that the company has made full enquiry into its affairs and will not be rendered insolvent within one year of the buy-back
• An auditor's report confirming that the permissible capital payment has been properly determined and that the accounts used as the basis for the buy-back are not more than 6 months old

Routes for executing a buy-back

Section 68(5) permits execution of a buy-back through purchase from existing shareholders or security holders on a proportionate basis, acquisition from the open market, or purchase from employees holding shares or options under a stock option or sweat equity scheme.

Buy-back process for private and unlisted public companies

The following procedure applies to private companies and unlisted public companies under rule 17 of the Companies (Share Capital and Debentures) Rules, 2014. Listed companies must follow the SEBI (Buy-Back of Securities) Regulations, 2018, which impose additional procedural and disclosure requirements.

1. Once the special resolution is passed, the company files a letter of offer in form SH-8 with the RoC. The letter must be signed by at least two directors, one of whom must be the managing director.
2. The letter of offer must be dispatched to shareholders within 20 days of filing with the RoC.
3. The offer remains open for a minimum of 15 days and a maximum of 30 days from the date of dispatch. Where all shareholders agree, the offer period may be shorter than 15 days.
4. If the shares tendered exceed the total number the company proposes for buy-back, acceptance is determined on a proportionate basis.
5. The company must complete verification of all offers received within 15 days of the offer closing. The company must communicate any rejection of tendered shares within 21 days of the offer closing. Shares not rejected within this period are treated as accepted.
6. Immediately after the offer closes, the company must open a separate bank account and deposit the full consideration payable.
7. Within 7 days of completing verification, the company must either pay shareholders in cash for accepted shares or return share certificates for shares not accepted.

Declaration of solvency before a buy-back

Before a buy-back takes place, the company must file a declaration of solvency in form SH-9 with the RoC. Listed companies must file it with both the RoC and SEBI. The declaration must be verified by an affidavit and signed by at least two directors, one of whom must be the managing director.

The declaration affirms that the board has reviewed the company's financial position and is satisfied the company will not become insolvent within 12 months of completing the buy-back.

Obligations after a buy-back is completed

Once the buy-back concludes, the following obligations apply.

1. The buy-back must be completed within 1 year of the approval date.
2. Shares or other securities acquired through the process must be destroyed within 7 days of completion. They cannot be held in treasury or reissued.
3. No fresh issue of the same class of shares is permitted for 6 months after completion. Exceptions apply for bonus issues, ESOPs, sweat equity shares, conversion of warrants, and conversions of debentures or preference shares into equity.
4. The company must maintain a register in form SH-10 recording the shares bought, the price paid, the date of cancellation, and the date of destruction. The register must be kept at the registered office of the company and authenticated by the company secretary or a person authorised by the board.
5. A return in form SH-11 must be filed with the RoC within 30 days of completion. Listed companies must simultaneously file it with SEBI. The return must be accompanied by a declaration signed by two directors, including the managing director, certifying that the buy-back was conducted in compliance with the act and the rules.

Role of capital redemption reserve in a buy-back

Where a buy-back is funded from free reserves or the securities premium account, section 69 of the Companies Act, 2013 requires the company to transfer an amount equal to the nominal value of the shares bought back into a capital redemption reserve. The details of this transfer must be shown in the balance sheet. 

For example, if a company buys back 10,000 shares with a face value of ₹10 each, it must transfer ₹1,00,000 into the capital redemption reserve.

This reserve can only be applied towards issuing fully paid bonus shares to the members of the company.

Tax treatment of a buy-back of shares

The tax treatment of buy-backs in India has changed significantly in recent years.

Before October 1, 2024, buy-back tax was levied at the company level. Under section 115QA of the Income Tax Act, 1961, the company paid a buy-back distribution tax of approximately 20% (plus surcharge and cess) on the distributed income. Proceeds received by shareholders were exempt from tax in their hands.

From October 1, 2024, the Finance (No. 2) Act, 2024 abolished this company-level tax and shifted the liability to shareholders. Buy-back proceeds are treated as a deemed dividend in the hands of the shareholder and taxed at the shareholder's applicable income-tax slab rate. The cost of the shares surrendered in the buy-back is treated as a capital loss, available for set-off against capital gains subject to applicable rules. This regime applies to all buy-backs completed on or after October 1, 2024 and remains operative today.

From April 2026 onwards, buy-back proceeds are treated as capital gains in the hands of the shareholder, calculated on the difference between the buy-back price and the cost of acquisition. Long-term capital gains are taxed at 12.5% and short-term capital gains at 20%. For promoters, an additional income-tax applies on these gains under section 69 of the Income Tax Act, 2025.

When a company cannot conduct a buy-back

Section 70 of the Companies Act, 2013 identifies circumstances under which a company is barred from conducting a buy-back regardless of whether other conditions are met.

A company cannot execute buy-back of its own shares through a subsidiary company or through any investment company or group of investment companies.

A buy-back is also prohibited where the company has defaulted on repayment of deposits or interest on deposits, redemption of debentures or preference shares, payment of declared dividends, or repayment of term loans or interest payable to a financial institution or banking company.

When such a default has occurred, the bar lifts only after the default is fully remedied and three years have elapsed since it ceased to subsist.

FAQs on buy-back of shares

What happens to shares after a buy-back? 

Shares acquired through a buy-back must be extinguished and physically destroyed within 7 days of the buy-back process completing. They cannot be held in treasury or reissued. The company must record the cancellation and destruction in its register maintained in form SH-10.

What are the penalties for not following buy-back rules?

In any case where the requirements of section 68 or SEBI regulations are not met, the company faces a fine between ₹1 lakh and ₹3 lakh. The defaulting officer or director are also fined in the same range.