1. Introduction
The buyback of shares by private companies has evolved as a strategic financial management tool under the Companies Act, 2013. Buybacks allow companies to repurchase their own shares from shareholders for cancellation, resulting in a reduction of share capital. This strategy is not only an indicator of robust financial health but also serves multiple objectives, such as enhancing earnings per share (EPS), better management of surplus funds, consolidation of promoter holdings, and protection against hostile takeovers. When executed in compliance with the law, buybacks can provide significant benefits to both the company and its shareholders.
2. Legal Framework: Companies Act, 2013
Buybacks are primarily governed by Sections 68, 69, and 70 of the Companies Act, 2013, read with Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014. The law prescribes stringent procedures and conditions to ensure fairness, transparency, and protection of stakeholders’ interests.
3. Objectives of Share Buyback
- Optimize capital structure and bolster key financial ratios.
- Return surplus cash to existing shareholders.
- Increase the proportionate holding of promoters or key investors.
- Boost market confidence by demonstrating robust financial flexibility.
- Mitigate threats of hostile takeovers through increased promoter holdings.
4. Methods of Buy‑Back (Permitted Modes)
As per Section 68(5), a private company may buy back shares:
- Proportionately from existing shareholders/security‑holders.
- Through the open market (where applicable).
- From shares issued under employee stock options or sweat equity schemes
5. Conditions for Buyback under the Companies Act, 2013
A private company considering a buyback must adhere to the following major conditions:
√ Authorization in Articles: Buyback must be authorized by the Articles of Association. If absent, articles should be amended accordingly.
√ Shareholder/Board Approval:
> For buybacks ≤10% of paid-up equity capital & free reserves: Board resolution suffices.
> For buybacks >10% (up to 25%): Special resolution by shareholders at a general meeting is mandatory.
√ Maximum Buyback: Cannot exceed 25% of paid-up share capital and free reserves in one financial year.
√ Debt-Equity Ratio: Post-buyback, the ratio cannot exceed 2:1 (debt to paid-up capital & free reserves).
√ Sources of Buyback: Buyback can be executed using free reserves, securities premium account, or proceeds of an earlier share issue (excluding same-kind securities).
√ Only Fully Paid-Up Shares: Only fully paid-up shares can be bought back.
√ Completion Timeline: Buyback must be concluded within one year from the resolution approving it.
6. Step-by-Step Procedure for Share Buyback
a) Check Articles of Association: Confirm authorization; amend if necessary.
b) Convene Board Meeting: Approve buyback proposal; authorize process if within 10% threshold.
c) Hold General Meeting: If above 10%, obtain special resolution approval.
d) File Required Forms: File MGT-14 (resolution) and SH-8/SH-9 (declaration of solvency) with the Registrar of Companies (RoC) within 30 days.
e) Dispatch Letter of Offer: The Company issues an offer to shareholders.
f) Acceptance of Offer: Shareholders tender shares as per the offer.
g) Completion & Payment: The Company accepts shares and pays shareholders. Shares must be extinguished and destroyed within seven days post-completion.
h) Filing Return of Buyback: File SH-11 with RoC and maintain a register of bought-back shares.
7. Restrictions and Prohibitions
√ Section 70 of the Act prohibits buyback if the company has defaulted in:
-
- Repayment of deposits or interest.
- Redemption of debentures or preference shares.
- Payment of dividends.
- Repayment of term loans or interest.
√ Buyback is also prohibited through:
-
- Subsidiary companies.
- Investment companies or a group of investment companies.
Note: If a default is remedied, a ‘cooling-off’ period of three years is required before buyback eligibility is restored.
8. Time Gap between Two Consecutive Buybacks
Section 68(2)(g) of the Companies Act, 2013 prescribes:
A company cannot make a new buyback offer within one year (‘twelve months’) from the date of closure of the preceding buyback offer.
Clarification on the 1-Year Gap:
> The gap is a simple 365 days (i.e., one calendar year) from the date of closure of the previous buyback offer, NOT restricted to financial or calendar year boundaries.
> For example, if the last buyback was completed on 06.08.2025, the next buyback can only be initiated on or after 06.08.2026—exactly one year later.
9. Additional Regulatory Norms
♦ No issue of the same kind of shares (except bonus or subsisting obligations) for six months following a buyback.
♦ Disclosure and Reporting: Full compliance with necessary forms and statutory registers.
♦ Destruction of Shares: Must be done within 7 days of completion.
♦ Auditors’ solvency certificate: Accounts used to support solvency must be audited and not more than six months old on the date of the Letter of Offer.
♦ Dematerialization requirement: Due to the MCA 2023 Amendment, private companies (excluding small ones) must issue and handle buy-backs in dematerialized form.
10. Summary Table: Conditions & Limits for Buyback by a Private Company
| Aspect | Technical Limit / Timeline |
| Authorization | AOA required or amended |
| ≤ 10% buy‑back | Board resolution |
| > 10% and ≤ 25% annual limit | Special resolution |
| Annual financial‑year cap | Max 25% of paid-up equity capital + free reserves |
| Debt-equity ratio post buy‑back | ≤ 2:1 |
| Cooling‑off between offers | ≥365 days (calendar‑year from prior closure date) |
| Completion of a buy‑back | ≤12 months from the relevant resolution |
| Audited accounts for solvency | ≤6 months old at offer issuance |
| Filing MGT‑14 | Within 30 days of resolution |
| Dispatch Letter of Offer | Within 20 days of filing SH‑8 |
| Offer period | 15–30 days (or shorter if unanimous) |
| Verification period | Within 15 days, deemed acceptance unless rejected within 21 days |
| Payment & return | Within 7 days post-verification |
| Share extinguishment | Within 7 days of completion |
| Filing SH‑11 | Within 30 days of completion |
| Buy‑Back Register (Form SH‑10) | Maintained at the registered office |
| Transfer to CRR | Nominal value transfer if funded from reserves/premium |
11. Conclusion
The buyback of shares by private companies, when conducted under the purview of the Companies Act, 2013, is a well-regulated mechanism designed to balance corporate flexibility with stakeholder protection. It empowers private companies to manage excess liquidity, optimize capital structure, and enhance shareholder value. However, the process demands strict compliance with statutory requirements, right from authorization, approvals, and documentation to the destruction of shares and maintaining requisite time gaps between successive buybacks. The explicit requirement of a one-year (365-day) gap between consecutive buybacks eliminates ambiguity and ensures that companies cannot repeatedly access the buyback route for short-term gains. Adherence to these rules not only upholds the legal sanctity of the process but also strengthens the integrity and reputation of the company among investors and regulators.
A detailed understanding and careful execution of every step ensure that a buyback serves its intended purpose—bolstering both the company’s financial strength and stakeholder trust.
Disclaimer:–
The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.
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