Monday, January 8, 2024

Share Buybacks: Law, Taxation, and Validation

In the dynamic world of corporate finance, share buybacks are a crucial aspect regulated by the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014. Understanding the legal framework, taxation provisions, and ensuring proper validation are essential for companies considering a share buyback.

Concept of Buy-Back:

  • Definition: Repurchasing a company's own shares from shareholders.
  • Objectives: Consolidate stake holdings, increase earnings per share, optimize capital structure, prevent takeovers, return surplus cash.
  • Regulatory Compliance: Companies Act, 2013; Companies (Share Capital and Debentures) Rules, 2014; SEBI regulations for listed companies.

Modes of Buy-Back:

  • Proportionate Basis
  • Open Market
  • Employee Schemes

Financing Buy-Back:

  • Free Reserves
  • Security Premium Account
  • Proceeds of the Issue

Regulatory Restrictions on Buy-Back:

  • Prohibition on Buy-Back through Subsidiary or Investment Companies
  • Default on Repayment or Financial Obligations

Conditions for Buy-Back:

  • Authorization by Articles of the Company
  • Shareholder Approval through Special Resolution
  • Maximum Limit of Buy-Back
  • Debt-Equity Ratio Post Buy-Back
  • Fully Paid-Up Shares or Securities
  • Completion Period
  • Minimum Gap Between Buy-Back Offers
  • Extinguishment of Shares
  • Waiting Period for New Buy-Back Offers
  • Post Buy-Back Restrictions on Issuance

Step-Wise Procedure for Buy-Back by Private Companies

Authorization and Board Resolution:

  1. Ensure articles authorize buy-back.
  2. For buy-back up to 10%, a board resolution suffices.

General Meeting Approval: 3. For buy-back exceeding 10%, obtain shareholder approval through a special resolution.

Regulatory Filings: 4. File Form MGT-14 with Registrar: File board and special resolution copies with ROC within 30 days of passing the resolutions.

  1. File Letter of Offer: File a letter of offer with ROC if authorized by a special resolution.
  2. File Declaration of Solvency: File a solvency declaration with ROC.

Communication and Offer Period: 7. Dispatch Letter of Offer: Send a letter of offer to shareholders within 20 days of filing.

  1. Offer Period: Keep the offer open for 15-30 days from the dispatch date.

Verification and Closure: 9. Verification of Offers: Complete verification within 15 days from offer closure.

  1. Open a Separate Bank Account: Deposit funds for accepted shares.

Finalization and Compliance: 11. Extinguishment of Shares: Extinguish or destroy bought-back shares within seven days.

  1. Closure of Offer: Make cash payment within seven days of verification.
  2. File Form SH-11 with Registrar: File a return with ROC within 30 days of buy-back completion.
  3. Maintain Statutory Register: Keep a register of bought-back shares at the registered office.

Legal and Taxation Provisions

  • Tax on Distributed Income (Section 115QA):

    • Applicable to domestic companies on buy-back of shares.
    • Additional income tax at 20% on distributed income.
  • Exceptions (Proviso to Section 115QA):

    • Not applicable to buy-back of listed shares with a public announcement before July 5, 2019.

Frequently Asked Questions (FAQs)

  1. Can a private company buy back shares if not listed on the stock exchange?

    • Yes, both listed and unlisted private companies can undertake share buybacks.
  2. Are there restrictions on using company reserves for buy-back?

    • Companies can use free reserves, security premium, or issuance proceeds, but not from the same kind of prior issuance.
  3. Is shareholder approval necessary for every buy-back?

    • Shareholder approval via special resolution is required for buy-backs exceeding 10% of equity capital and reserves.
  4. What is the timeline for completing a buy-back?

    • Buy-back must conclude within one year from resolution date for regulatory compliance.
  5. Can a company make multiple buy-back offers in a short span?

    • A minimum one-year gap is mandatory between successive buy-back offers.
  6. What happens to bought-back shares?

    • Bought-back shares must be extinguished or physically destroyed within seven days.

Checklist for Validation

Before initiating a share buyback, companies should validate the following:

  1. Legal Authorization:

    • Articles of the company authorize buy-back.
    • Board resolution or special resolution (as required) is duly passed.
  2. Regulatory Compliance:

    • All filings with the Registrar of Companies (ROC) are completed within specified timelines.
    • Letter of offer and solvency declaration are accurately filed.
  3. Communication Process:

    • Letter of offer is dispatched to shareholders within the stipulated time.
    • Offer period is adhered to as per regulations.
  4. Verification and Closure:

    • Verification of offers is completed within 15 days of offer closure.
    • Shares bought back are extinguished or destroyed within seven days.
  5. Financial Compliance:

    • Separate bank account is opened, and funds are deposited for payment.
    • Cash payment to shareholders is made within seven days of verification.
  6. Post-Buyback Compliance:

    • Form SH-11 is filed with the ROC within 30 days of buy-back completion.
    • Statutory register of bought-back shares is accurately maintained.

By following this comprehensive guide, companies can navigate the legal and taxation landscape of share buybacks, ensuring compliance and maximizing stakeholder value. It is advisable to seek professional advice for specific legal and taxation aspects related to share buybacks.

Sample Resolutions for Share Buyback:

1. Resolution – Buyback of Equity Shares



“RESOLVED THAT, pursuant to Article 4A of the Company's Articles of Association and in accordance with the provisions of Section 68 and other applicable provisions of the Companies Act 2013, and Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014, (including any statutory modifications or re-enactments thereof), and subject to the consent of the Shareholders in the General Meeting, the Board hereby approves the buyback of the company's own equity shares (hereinafter referred to as the “Buyback”) comprising ___________ (_________(In Words) number of fully paid equity shares with a face value of Rs. ___/- each, representing ___% of the total number of equity shares in the paid-up equity share capital of the Company). The buyback shall be at a price not exceeding Rs. ____/- (Rupees _________ only) per equity share (the “Buyback Offer Price”) payable in cash. The aggregate amount for the Buyback shall not exceed Rs. ___________ (Rupees _____________ Only), which is ____% (being less than 25% of the total paid-up equity share capital and free reserves of the Company as per the latest audited accounts of the company as on __th _______, 20). The Buyback will be made from the existing shareholders of the Company on a proportionate basis, in accordance with the provisions of the Act.”

“RESOLVED FURTHER THAT, the Buyback is being proposed to enhance overall shareholder value, optimize returns to shareholders, and provide an exit route to the shareholders.”

“RESOLVED FURTHER THAT, the Board confirms that it has conducted a thorough inquiry into the affairs and prospects of the Company and formed the opinion that:

(a) Immediately following the date on which the Extra Ordinary General Meeting will be convened, there will be no grounds on which the Company could be found unable to pay its debts;

(b) As regards the Company’s prospects for the year immediately following the date on which the Extra Ordinary General Meeting is convened and having regard to the Board’s intentions with respect to the management of the Company’s business during that year, and to the amount and character of the financial resources, which in the Board’s view, will be available to the Company during that year, the Company will be able to meet its liabilities as and when they fall due and will not be rendered insolvent within a period of one year from that date; and

(c) In forming its opinion, the Board has taken into account the liabilities (including prospective and contingent liabilities), as if the Company were being wound up under the provisions of the Companies Act.”

RESOLVED FURTHER THAT, with respect to the Buyback process:

  1. The equity shares of the Company are fully paid up.
  2. The Company shall not issue or allot any Equity Shares including by way of bonus or convert any outstanding securities into Equity Shares, from this date till the date of closure of this Buyback.
  3. The Company shall not issue fresh Equity Shares within a period of Six Months after the completion of Buyback except in discharge of subsisting obligations.
  4. There are no defaults subsisting in the repayment of Deposits, redemption of debentures or preference shares, or repayment of term loans to any financial institutions or banks.
  5. The ratio of the aggregate of secured and unsecured debts owned by the Company after the Buyback is not more than twice the paid-up capital and free reserves of the Company.”

“RESOLVED FURTHER THAT, Mr. ___________________-, Director of the company be and is hereby authorized to digitally sign all the necessary forms required to be filed with the Registrar of Companies, State: _____________, ____________, under the Companies Act, 2013.”

” RESOLVED FURTHER THAT, the Board of Directors be and is hereby authorized to do all such acts, deeds, matters and things as it may, in its absolute discretion deem necessary, expedient or proper, to be in the best interest of the shareholders for the implementation of the Buyback, carry out incidental documentation as also to make applications to the appropriate authorities for their approvals and to initiate all necessary actions for preparation and issue of various documents including Letter of Offer, opening of accounts, declaration of solvency, extinguishment of share certificates and ‘Certificates of Extinguishment’ required to be filed in connection with the Buyback on behalf of the Board and such other undertakings, agreements, papers, documents and correspondence as may be necessary for the implementation of the Buyback required to be filed with the Registrar of Companies, and/or other authorities.”

CERTIFIED TRUE COPY FOR _______________________ PVT LTD

Director DIN:____________ Address: _______________, _____________, City : __________ Pin Code: State : _____________

Specimen Auditor's Report:

2. Report of Auditors

The Board of Directors _____________________ PVT LTD _____________________, _______________, City : __________, Pin Code : ______ State : _______________

Dear Sirs,

We, M/s ____________-, Chartered Accountants, (City), Statutory Auditors of the Company, in connection with the proposal of the Company to Buy back its shares and in pursuance of the provisions of Sections 68 of the Companies Act, 2013 and Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014, we have examined the audited financial statements of the Company for the period ended on __th _______, 20 and the relevant records, ratios, analysis, reports, and according to the information and explanations given to us and on the basis of such verification of relevant records as we considered appropriate, report that:

We have inquired into the Company’s state of affairs:

In our opinion the amount of permissible capital payment being Rs. ______________ (Rupees _______________ Only) which is _______________% (being less than 25%)of the total paid up capital and free reserves of the Company for the shares to be bought back as given below, is properly determined in accordance with Section 68 of the Companies Act, 2013.

PARTICULARS AMOUNT (Rs.) Paid up Share Capital as at 00-00-20 0 Add: Free Reserves as at 00-00-20 0 Total 0

______% of the total of share capital and free reserves of Rs. ____________/- is Rs. _____________/-. Maximum shares that can be bought back as per this criteria at Rs. ____/- per share is _________.

The audited accounts on the basis of which calculation with reference to buyback is done is not more than six months old from the date of the offer document.

The Board of Directors in their meeting held on th_______, 20__ have formed their opinion on reasonable grounds and that the Company will not, having regard to its state of affairs, be rendered insolvent within a period of one year from the date of the Extra-Ordinary General Meeting of the Members of the Company proposed to be held on th_______, 20__

We have not performed an audit, the objective of which would be the expression of an opinion on the specified elements, accounts or items thereof for the purposes of this report.

We further state that the Compliance with the provisions of the Companies Act, 2013 and Rules thereof is the responsibility of the Company’s management and accordingly, we do not make any representation regarding the question of legal interpretation or representation regarding compliance with company law requirements.

This report is intended solely for your information and for the purpose of inclusion in the explanatory statement to the notice for a special resolution and the letter of offer for buyback and is not to be used, referred to, or distributed for any other purpose without our prior written consent.


Chartered Accountants Firm Reg. No.: _______ Place: _________________ Date