What is a buy-back of shares?
A buy-back is a purchase by a company of its own shares under section 68 of the Companies Act. The company pays out of free reserves, the securities premium account, or the proceeds of an issue of shares or other specified securities of a different kind. It cannot pay out of the proceeds of an earlier issue of the same kind of shares.
No. A buy-back of up to 10 percent of the paid-up equity capital and free reserves can be authorised by the board. Above that, the members pass a special resolution.
Where does the money come from?
Those three sources only. The shares are bought from existing shareholders in proportion, from the open market, or from employees who hold them under a scheme of stock option or sweat equity. A listed company’s buy-back also follows the securities regulator’s regulations. The articles have to authorise it. Altering the articles is on the articles page.
What limits apply?
- Up to 10 percent of the paid-up equity capital and free reserves: the board may authorise it. Above that, a special resolution of the members.
- The buy-back is not more than 25 percent of the aggregate of paid-up capital and free reserves. For equity shares in a financial year, that 25 percent is read against the paid-up equity capital.
- After the buy-back, the debt owed should not be more than twice the paid-up capital and free reserves. The Central Government may set a higher ratio for a class of companies.
- Only fully paid shares. The buy-back is completed within one year of the resolution.
The company extinguishes and physically destroys the certificates within seven days of completion, and files the return of buy-back in SH-11 within 30 days. It does not issue the same kind of shares for six months, except by way of a bonus issue or in discharge of an obligation the section already allows, such as conversion of warrants, preference shares, or debentures, sweat equity, or an employee stock option.
When is a buy-back barred?
Section 70 bars a buy-back through a subsidiary or through an investment company. It is also barred while a default is continuing in repayment of deposits or interest, redemption of debentures or preference shares, payment of a dividend, or repayment of a term loan or interest to a bank or financial institution. After that default is remedied, three years have to pass. A company that has not complied with sections 92, 123, 127, and 129 cannot buy back.
Who pays the tax?
On a buy-back before 1 October 2024, the company paid additional tax under section 115QA and the shareholder’s receipt was exempt. On a buy-back on or after 1 October 2024, that company-level tax does not apply. The sum the shareholder receives is dividend under section 2(22)(f), taxed in the shareholder’s hands, and the company deducts tax at source as it does on a dividend. The cost of the shares is a capital loss. It is not deducted from that dividend.
Frequently asked questions
Four questions cover the 10 percent board route, the same kind of shares, the old tax, and partly paid shares.
Is a special resolution always required?
No. A buy-back of up to 10 percent of the paid-up equity capital and free reserves can be authorised by the board. Above that, the members pass a special resolution. The articles must allow the buy-back in either case.
Can the company buy equity shares out of a fresh issue of equity shares?
No. A buy-back cannot be made out of the proceeds of an earlier issue of the same kind of shares.
Does the company still pay the 20 percent buy-back tax?
Not on a buy-back on or after 1 October 2024. Section 115QA does not apply to that buy-back. The shareholder is taxed on the sum received as dividend.
Can partly paid shares be bought back?
No. Only fully paid shares qualify.
Sources
The company law is section 68. The tax change is the proviso to section 115QA from 1 October 2024.