Buyback (or buy-back) of shares is a company purchasing its own shares from existing shareholders, thereby reducing its share capital. For private and unlisted companies it is governed by Section 68 of the Companies Act, 2013 read with Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014. Listed companies must additionally comply with the SEBI (Buy-back of Securities) Regulations, 2018. Companies use buybacks to return surplus cash, improve earnings per share, consolidate promoter holding, or give investors an exit.
Permitted sources and core conditions
A buyback may only be funded from the company’s free reserves, its securities premium account, or the proceeds of a fresh issue of shares or other specified securities. It cannot be financed from borrowed funds, nor out of the proceeds of an earlier issue of the same kind of shares. The main conditions are:
- The buyback must be authorised by the company’s Articles of Association.
- All shares being bought back must be fully paid-up.
- The post-buyback ratio of aggregate debt to paid-up capital and free reserves must not exceed 2:1.
- The buyback must be completed within one year of passing the enabling resolution.
Approval thresholds and limits
The approval route depends on the size of the buyback relative to the company’s owned funds:
| Buyback size | Approval required |
|---|---|
| Up to 10% of paid-up equity capital + free reserves | Board resolution only |
| Above 10% and up to 25% of aggregate paid-up capital + free reserves | Special resolution of members |
Separately, the buyback of equity shares in any financial year cannot exceed 25% of the total paid-up equity capital. A fresh buyback offer cannot be made within one year of the closure of the previous one.
Methods of buyback
- Tender offer: shares are bought from all existing shareholders on a proportionate basis, using a letter of offer in Form SH-8.
- Open market: through the stock exchange or book-building — available only to listed companies.
- Odd-lot: from shareholders holding odd lots of shares.
Taxation after October 2024
The taxation of buybacks changed fundamentally from 1 October 2024. Earlier, the company paid a buyback distribution tax under Section 115QA and the receipt was exempt for shareholders. Now the entire buyback consideration is treated as a deemed dividend in the shareholder’s hands under Section 2(22)(f) and taxed as “Income from Other Sources” at the shareholder’s applicable slab rate; the company deducts TDS at 10% under Section 194 for resident shareholders. The shareholder’s original cost of acquisition is treated as a capital loss that can be set off against capital gains and carried forward for up to eight years. The company itself no longer pays any buyback tax.
Post-buyback compliance
- File a declaration of solvency in Form SH-9 before the buyback, and the return of buyback in Form SH-11 with the ROC within 30 days of completion, with a compliance certificate in Form SH-15.
- Extinguish and physically destroy the bought-back shares within seven days of the last date of completion.
- Transfer a sum equal to the nominal value of the bought-back shares to the Capital Redemption Reserve.
- Do not issue the same kind of shares for six months, except by way of a bonus issue or to discharge subsisting obligations such as ESOPs or conversion of preference shares.
- Maintain a register of buyback in Form SH-10.