The buyback of shares is a corporate financial strategy where a company repurchases its own shares from existing shareholders. This process reduces the number of outstanding shares, thereby increasing the ownership stake of remaining shareholders. Companies may undertake a buyback for various reasons, including returning surplus cash to shareholders, improving financial ratios such as Earnings Per Share (EPS), or consolidating ownership by reducing the number of external shareholders.
The process of buyback of shares involves various methods, sources, and conditions regulated by the Companies Act, 2013.
![Buyback of Shares - Process and Taxation Buyback of Shares - Process and Taxation](/img/preview/articles/section-194j-tds-40714.jpg)
Regulatory provisions
As per Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are as follows:
- The buy-back is authorised by its articles (if no provision in articles, then alteration in articles is required)
- A special resolution has been passed at a general meeting except in the following case:
- Buyback is 10% or less of the total paid-up equity capital and free reserves, then buy-back can be authorised by the Board by means of a resolution passed at its meeting of Board of Directors.
- The Maximum Buyback that the Company can do is 25% or less of the aggregate of paid-up capital and free reserves of the company.
- The Post Buy Back Debt-Equity Ratio will be 2:1
- Only fully paid-up shares can be brought back
- No offer of buy-back shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back
- The buy-back should be completed within a period of one year from the date of passing of Special Resolution or Board Resolution, as the case may be.
- Company cannot issue same kind of shares including right issue of shares within a period of 6month except Bonus issue or discharge of subsisting obligations (i.e. conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares) from the date of completion of Buy-back.
- Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the completion of buy-back.
*specified securities" includes employees' stock option or other securities as may be notified by the Central Government from time to time
*free reserves" includes securities premium account.
Process for Buy-back of shares
- Check provision in the Articles of Association for buyback or else alter the Articles of Association.
- Convene the meeting of the Board of Directors.
- Send Notice of convening general meeting, if applicable at which special resolution to be passed accompanied by Explanatory statement. The notice for the general meeting must include key details such as:
- Date of board approval for the buy-back.
- Objective and method of buy-back.
- Class, number, price and basis of arriving at the buy-back price.
- Funding sources and maximum amount for the buy-back.
- Time limit for completion of buy back.
- The aggregate shareholding of the promoters and of the directors of the promoter
- Equity shares purchased or sold by promoters and of the directors of the promoter during a period of twelve months preceding the date of the board meeting
- Confirmations on solvency and absence of defaults subsisting in repayment of deposits, interest payment thereon, redemption of debentures or payment of interest thereon or redemption of preference shares or payment of dividend due to any shareholder, or repayment of any term loans or interest payable thereon to any financial institution or banking company by Board of directors
- Such other disclosure mentioned in corresponding rule
- File form MGT-14 with ROC within 30 days in case of Special Resolution
- File with the Registrar of Companies a letter of offer signed by 2 Directors in Form No. SH.8.
- Along with the letter of offer company must declare its insolvency in Form SH-9 to Register of Companies, signed by atleast 2 Directors out of which one must be a Managing Director, if any
- The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than twenty days from its filing with the Registrar of Companies.
- The offer for buy-back shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter
*Except where all members of a company agree, the offer for buy-back may remain open for a period less than fifteen days.
- Acceptances to be on a proportionate basis if over-subscribed
- Post-Offer Actions:
- Complete verification of offer within 15 days of offer closure.
- Deposit the buy-back amount in a separate bank account.
- Make payments or return share certificates whose securities have not been accepted at all within seven days.
- Restrictions:
- No new share issuance during the buy-back period.
- No withdrawal of the offer once announced.
- Prohibitions on using borrowed funds or proceeds from earlier issues for the buy-back.
- The company shall maintain a register of shares or other securities which have been bought-back in Form No. SH.10.
- The company, after the completion of the buy-back under these rules, shall file with the Registrar, a return in the Form No. SH.11
Sources of buyback of shares
The sources of funds for a buyback of shares in a company typically include
- Free Reserves
- Securities Premium Account
- Proceeds of the Issue of Shares or Specified Securities:
Modes of Buy-Back
Company may Buy-Back the shares-
- from the existing shareholders or security holders on a proportionate basis;
- from the open market;
- by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Prohibition for Buy-Back in Certain Circumstances
As per Section 70 of the Companies Act 2013, No company shall directly or indirectly purchase its own shares or other specified securities-
(a) through any subsidiary company including its own subsidiary companies;
(b) through any investment company or group of investment companies; or
(c) if a default is made by the Company, in the repayment of deposits accepted, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company
The Buy-Back is not prohibited if the default is rectified and a period of three years has lapsed after such rectification.
(d) if the company has not complied with the provisions of filing of Annual return and audited financial statements within the prescribed time and declaration of dividend.
Taxation of buy-back
Currently, Buybacks are taxed at 20% in the hands of companies, with no additional tax for investors. This system incentivized companies to return excess capital to shareholders via buybacks, often seen as a tax-efficient alternative to dividends.
The 2024 budget introduced a new taxation policy effective 1st October 2024, that shifts the tax burden from companies to shareholders. Finance Minister Nirmala Sitharaman proposed that income received from share buybacks should be taxed as capital gains for the recipients rather than as additional income for the company and the cost of such shares will be treated as capital loss for the shareholders. This change aligns the taxation of buybacks with that of dividends, which are already taxed in the hands of shareholders.
The impact of this change is twofold:
- For Companies: The removal of the 20% tax on companies could encourage more buybacks. Companies, particularly those with substantial cash reserves, might find buybacks more attractive, boosting shareholder value by reducing the number of shares in circulation and potentially increasing earnings per share (EPS).
- For Shareholders: The tax on buyback income, now classified as capital gains, could dampen the enthusiasm for buybacks, especially among high-income investors who would be subject to higher tax rates. The loss of the tax advantage previously enjoyed by buybacks might push companies and investors to prefer dividends as a method of income distribution.
In 2023, 38 companies completed buybacks worth ₹45,130.34 crore. In 2024, 20 companies have already proposed buyback plans totalling ₹8,335.33 crore, highlighting the significance of this practice in corporate India.
Conclusion
Buyback was possibly the only option for Investors looking for an exit without any tax liability and is often seen as a positive signal of the company's confidence in its future prospects. However, the new tax policy on share buybacks could be a pivotal moment for both companies and investors. While the shift in tax burden might lead to fewer buyback announcements in the long term, it could also prompt a re-evaluation of how companies return value to shareholders. The companies may prefer dividend as a preferred route for distributing income to shareholders.
Akansha Rathi and Associates (ARACS), Company Secretary Firm in Navi Mumbai is engaged into compliance related services. We have a team of experts who not only possess required skills and experience but also have worked in complex business environment and were engaged in providing complex solutions in terms of providing related Compliance services to our clients.