Buy-Back of Shares under the Companies Act, 2013 – Explained Simply

Buy-back of shares is basically when a company decides to purchase its own shares from existing shareholders and then cancel those shares. Once cancelled, they’re gone for good. The overall number of shares comes down, which often changes the capital structure of the company.

Under Indian company law, buy-back is mainly governed by Sections 68, 69, and 70 of the Companies Act, 2013, along with Rule 17 of the Companies (Share Capital and Debentures) Rules. These provisions lay down who can do a buy-back, how much can be bought, where the money can come from, and what compliances need to be followed.
For listed companies, SEBI also steps in with its own guidelines. So yes, it’s a regulated process. Not something you do casually.
This article focuses more on the compliance side of buy-back, especially for unlisted companies.

What exactly is a buy-back?

In simple terms, buy-back means the company buys its own shares or other specified securities from shareholders and cancels them. After cancellation, those shares don’t exist anymore.

So the paid-up capital reduces. Promoters’ holding may go up. EPS may improve. A lot depends on the company’s situation.

Legal framework at a glance

The buy-back provisions are mainly spread across:

• Section 68 – this allows buy-back, but only if conditions are met
• Section 69 – this talks about accounting treatment
• Section 70 – this puts restrictions and outright prohibitions
• Rule 17 – this deals with procedure, disclosures, forms, timelines, all that practical stuff

Where can the money for buy-back come from?

A company can fund buy-back from:

1. Free reserves
2. Securities premium account
3. Proceeds of a fresh issue of shares or other specified securities

One important restriction here. The company cannot use money from an earlier issue of the same kind of shares for buy-back. That’s clearly not allowed.

Conditions you can’t ignore

Before starting a buy-back, the company needs to tick several boxes. Some of the key ones are:

• The Articles of Association must allow buy-back.
  If they don’t, the AOA has to be altered first.
• Approval depends on the size of buy-back:
• Up to 10% of paid-up capital plus free reserves and securities premium -Board Resolution
• Up to 25% - Special Resolution by shareholders
• Overall buy-back limit cannot exceed 25% of paid-up capital and free reserves.
• For equity shares, buy-back in a financial year cannot be more than 25% of paid-up equity capital.
• After buy-back, the debt-equity ratio should generally not go beyond 2:1.
• Only fully paid-up shares can be bought back. Partly paid ones are out.
• Buy-back must be completed within one year from the date of approval.
• Shares bought back must be extinguished and destroyed within 7 days of completion.
• No fresh issue of shares for six months after buy-back, except for bonus shares, ESOPs, sweat equity, or conversions.
• Borrowed money from banks or financial institutions cannot be used. Period.

When buy-back is not allowed

Section 70 places clear restrictions. A company cannot do buy-back if:

• It tries to do it through a subsidiary or an investment company
• There is a default in repayment of deposits, debentures, preference shares, or interest
• Dividend payment has defaulted
• Annual return or financial statements have not been filed

In short, compliance defaults block buy-back. No way around that.

Why do companies go for buy-back?

There are several practical reasons, such as:

• Increasing promoter holding since the shares bought back get cancelled

• Improving EPS due to reduced number of outstanding shares

• Supporting the share price when management feels it’s undervalued

• Returning surplus cash when the business doesn’t immediately need it

• Rewarding shareholders by offering a premium price

• Acting as a defensive move against hostile takeovers

It’s a strategic decision, not just a legal one.

Financial statements – audited or not?

The accounts used for buy-back calculations should not be older than six months from the date of the offer document.
If the audited accounts are older than six months, then un-audited accounts (not more than six months old) can be used, but they must undergo a limited review by the auditors. This part is often overlooked, but it’s important.

Buy-back procedure for unlisted companies (step-by-step)

1. Hold a Board Meeting to approve the proposal
2. Send notice of General Meeting with an explanatory statement
3. Pass Special Resolution, if required
4. File MGT-14 with ROC within 30 days
5. File Letter of Offer in Form SH-8
6. Dispatch the offer to shareholders
7. Keep the offer open for 15 to 30 days
   (It can be shorter if all shareholders agree)
8. File Declaration of Solvency in Form SH-9
9. Accept shares proportionately if the offer is oversubscribed
10. Open a separate bank account and deposit the buy-back amount
11. Verify offers within prescribed timelines
12. Make payment within 7 days of verification
13. Extinguish and destroy shares within 7 days
14. Maintain Register of Buy-Back in Form SH-10
15. File Return of Buy-Back in Form SH-11 along with Form SH-15

Yes, it’s detailed. And yes, timelines matter.

Forms involved in buy-back

Common MCA forms you’ll deal with:

• MGT-14
• SH-8
• SH-9
• SH-11

Key documents usually required

Some of the main documents include:

• Certified copy of Board Resolution
• Notice of EGM with explanatory statement
• Special Resolution
• Affidavit for declaration of solvency
• Audited financials of last three years
• Auditor’s certificate
• Promoter shareholding details
• SH-10 register
• SH-15 compliance certificate
• Statement of assets and liabilities (not older than six months)

FAQs on Buy-Back of Shares

1. Is buy-back allowed without AOA authorization?
No. If the AOA doesn’t allow it, you must amend it first.
2. Can buy-back be funded through bank loans?
No, borrowed funds from banks or financial institutions are not allowed.
3. Is shareholder approval always mandatory?
Not always. Buy-back up to 10% can be approved by the Board alone.
4. What happens if shareholders offer more shares than proposed?
The acceptance is done on a proportionate basis.
5. Is there a time limit to complete buy-back?
Yes. It must be completed within one year from the approval date.
6. Can the company issue shares immediately after buy-back?
No. There is a six-month restriction.
7. Is filing SH-11 compulsory?
Yes. Filing SH-11 with ROC after completion of buy-back is mandatory.

Final thoughts

Buy-back sounds simple on paper, but in reality it involves a fair amount of compliance work. If filings are delayed or disclosures are missed, problems can crop up very quickly. Keeping things planned and documented properly really helps. The idea behind this write-up is to explain the buy-back provisions under the Companies Act, 2013 in a clear and practical way, without making it unnecessarily complicated.