Complete Guide to Buyback of Shares in India
Understanding Companies Act & SEBI Regulations
What is Buyback of Shares?
A buyback, also known as share repurchase, is a corporate action where a company purchases its own shares from existing shareholders at a predetermined price. This transaction reduces the number of outstanding shares in the market and represents a strategic decision to return capital to shareholders or restructure the company’s equity base.
In simple terms, instead of paying dividends, the company offers to buy back its shares, allowing shareholders to sell their holdings back to the company at a premium to the prevailing market price. According to the Companies Act, 2013, buyback must comply with specific regulatory requirements to protect stakeholder interests.
Why is Buyback Needed?
Companies opt for buyback of shares for several strategic and financial reasons:
1. Return of Capital to Shareholders
When a company has surplus cash that cannot be deployed efficiently in the business, a buyback provides an effective mechanism to return this capital to shareholders. It’s an alternative to paying dividends and often offers tax advantages to investors.
2. Increase Promoter Shareholding
By reducing the total number of shares outstanding, buyback automatically increases the percentage holding of promoters and non-participating shareholders. This consolidates control without requiring additional investment by the promoters. Learn more about promoter regulations on the SEBI website.
3. Prevention from Hostile Takeovers
Buyback serves as a defensive strategy against hostile takeover attempts. By reducing the number of shares available in the market and increasing promoter stake, it becomes more difficult for external entities to acquire controlling interest.
4. Utilization of Free Reserves, Securities Premium, and General Reserves
Companies accumulate various reserves over time. Buyback provides a legitimate avenue to deploy these reserves productively, ensuring that idle capital is put to use for shareholder benefit. The Ministry of Corporate Affairs (MCA) provides detailed guidelines on reserve utilization.
5. Reduction of Company’s Capital
Buyback reduces the paid-up capital of the company, which can improve financial ratios such as Return on Equity (ROE) and Earnings Per Share (EPS), making the company more attractive to investors.
6. Other Strategic Reasons
Companies may also undertake buyback to support share price during market downturns, signal confidence in the company’s future prospects, or optimize their capital structure for better financial efficiency.
Conditions for Buyback
Before undertaking a buyback, companies must ensure compliance with several mandatory conditions as specified in Section 68 of the Companies Act, 2013:
1. Debt-Equity Ratio
The ideal debt-equity ratio after buyback should not exceed 2:1. This ensures that the company maintains a healthy balance sheet and doesn’t over-leverage itself through the buyback process.
2. Source of Funds
Payment for buyback must be made from:
- Free reserves
- Securities Premium Account
- Proceeds of any shares or other specified securities
The company cannot use borrowed funds for buyback purposes.
3. Special Resolution
A special resolution must be passed by shareholders in a general meeting authorizing the buyback. This requires approval of at least 75% of the members voting on the resolution.
4. Buyback Limit
The buyback cannot exceed 25% of the total paid-up capital and free reserves of the company. For any buyback exceeding 10% of the paid-up capital and free reserves, shareholder approval through special resolution is mandatory.
5. Lock-in Period
After completion of buyback, the company cannot make another buyback offer for a period of one year.
Procedure for Buyback of Shares
A. Under the Companies Act, 2013
- Convene a Board Meeting with proper notice as per Section 173
- Pass a Board Resolution recommending buyback to shareholders
- Authorize filing of necessary documents with regulatory authorities
- Issue notice for General Meeting (or Extraordinary General Meeting)
- Pass Special Resolution under Section 68 if buyback exceeds 10% of paid-up capital and free reserves
- Ensure notice contains complete details of buyback offer including price, quantity, and rationale
- File Form SH-8 (Declaration of Solvency) with the Registrar of Companies within 30 days before the General Meeting
- File MGT-14 within 30 days of passing the special resolution
- Ensure compliance with Section 68 requirements
- Make a public announcement in at least one English national newspaper and one vernacular newspaper
- Publish on company website
- Ensure announcement contains all material terms of the offer
- Prepare Draft Letter of Offer
- Dispatch Letter of Offer to all eligible shareholders
- Provide complete details including buyback price, record date, and tender process
- Open the buyback offer for a period ranging from 15 to 30 days (for tender offer)
- Appoint merchant banker if buyback exceeds Rs. 25 crore (for listed companies)
- Accept shares as per the buyback terms
- Make payment to shareholders within 7 days of closure of offer
- Extinguish and physically destroy share certificates within 7 days of payment
- Reduce capital accordingly in the books
- File Form SH-11 with ROC within 30 days of completion
- Update capital clause in Articles of Association
- File necessary e-forms with MCA
B. Under SEBI (Buyback of Securities) Regulations, 2018
For Listed Companies:
The SEBI Buyback Regulations provide comprehensive guidelines for listed companies.
- Obtain Board approval for the buyback proposal
- Determine the buyback method: Tender Offer, Open Market, or Book Building process
- Appoint merchant banker registered with SEBI if buyback exceeds Rs. 25 crore
- Obtain special resolution if buyback exceeds 10% of paid-up capital and free reserves
- Ensure voting is conducted through postal ballot or e-voting
- Non-promoter shareholders’ approval separately recorded
- Prepare DLO as per Schedule I of SEBI Buyback Regulations
- Submit DLO to Stock Exchanges and SEBI
- Obtain observation letter from SEBI (typically within 15 days)
- Make public announcement in newspapers (one English national daily and one vernacular newspaper)
- Upload on company website and stock exchange websites
- Announcement should be made at least 7 days before dispatch of Letter of Offer
- Dispatch Public Announcement and Letter of Offer to all eligible shareholders
- Ensure dispatch within 21 working days from Board approval (for tender offer)
- File copies with Stock Exchanges and SEBI
- Fix Record Date in consultation with Stock Exchanges
- Record Date should be at least 7 working days after public announcement
- Shareholders as on Record Date are eligible to participate
- Keep offer open for minimum 15 days and maximum 30 days for tender offer
- For open market buyback, period can extend up to 12 months
- Maintain daily disclosures to Stock Exchanges
- Accept shares as per entitlement ratio (if oversubscribed)
- Make payment within 7 days of closure of offer or receipt of shares
- Ensure proportionate acceptance basis is followed
- Extinguish shares within 7 days of payment
- Physically destroy certificates or have them defaced
- Ensure dematerialized shares are cancelled
- File completion report with SEBI and Stock Exchanges within 30 days
- Submit final public announcement in newspapers
- File Form SH-11 with ROC
- Update shareholding pattern with Stock Exchanges
Important SEBI Provisions:
- Pricing: For listed companies, buyback price cannot exceed 25% above the average of weekly high and low of closing prices during 2 weeks preceding the date of Board Meeting
- Escrow Account: Minimum 25% of buyback consideration must be deposited in escrow account at the time of opening of offer
- Merchant Banker: Mandatory for buybacks exceeding Rs. 25 crore; responsible for due diligence and compliance
- Book Building Process: Alternative method where buyback price is discovered through bidding process with a price band
- Disclosure Requirements: Continuous disclosure obligations including daily reports during buyback period
- Cooling-off Period: One year gap required between successive buybacks
- Prohibition on Trading: Company, promoters, and directors cannot trade in securities during buyback period
Key Differences: Tender Offer vs. Open Market Buyback
| Aspect | Tender Offer Method | Open Market Method |
|---|---|---|
| Price | Fixed price offer to all shareholders | Purchase through stock exchange at market price |
| Timeline | Completed within 30 days | Can extend up to 12 months |
| Acceptance | Pro-rata acceptance if oversubscribed | First-come-first-served basis |
| Suitability | Suitable for large buybacks | Suitable for smaller, gradual buybacks |
| Availability | Available for all companies | Available only for listed companies |
Tax Implications
Understanding the tax treatment of buyback is crucial for both companies and shareholders:
- For shareholders, difference between buyback price and issue price is treated as dividend income (as per Section 46A of Income Tax Act)
- Company pays additional tax on distributed income under Section 115QA at approximately 23.296%
- Specific tax treatment may vary based on holding period and investor category
For detailed guidance, consult with a qualified Company Secretary or tax professional.
Common Pitfalls to Avoid
- Insufficient free reserves to fund the buyback
- Failure to maintain debt-equity ratio of 2:1
- Non-compliance with timelines for regulatory filings with MCA
- Inadequate disclosure in Letter of Offer
- Delay in payment to accepting shareholders
- Non-extinguishment of shares within stipulated time
Conclusion
Buyback of shares is a powerful corporate tool that benefits both companies and shareholders when executed properly. However, it involves complex regulatory requirements under both the Companies Act, 2013 and SEBI regulations for listed companies. Companies must ensure meticulous compliance with all statutory provisions, maintain proper documentation, and adhere to timelines to avoid legal complications.
Proper planning, engaging experienced professionals like Company Secretaries and compliance consultants, and maintaining transparency throughout the process are essential for a successful buyback program.
For personalized guidance on buyback procedures and compliance requirements, visit ComplianceGyan.in or consult with qualified professionals.
⚠️ Disclaimer
This blog is intended for informational purposes only and does not constitute legal, financial, or professional advice. The regulatory framework surrounding buyback of shares is subject to change, and readers should consult with qualified professionals before undertaking any buyback transaction. For the latest updates, refer to official sources like MCA and SEBI. The author and ComplianceGyan.in do not assume any liability for actions taken based on the information provided herein.
Last Updated: October 2025