Procedure for Buy Back of Shares

Buy-back of shares is an important corporate action that allows a company to repurchase its own shares from existing shareholders. This process helps companies optimise their capital structure, utilise surplus funds effectively, enhance shareholder value and improve the financial ratios such as Earnings Per Share (EPS). In India, buy-back of shares is majorly 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. In the case of listed companies, buy-back is also regulated by the SEBI (Buy-Back of Securities) Regulations, 2018.

This blog will explore and address the meaning, objectives, legal framework, sources, modes, statutory conditions and step-by-step procedural compliance for the buy-back of shares, ensuring full alignment with MCA regulations and professional corporate practices.

Meaning of Buy-Back of Shares

Buy-back of shares refers to the process by which a company purchases its own fully paid-up shares or any other specified securities from the existing shareholders. The buy-back may be at a premium or at par and is financed using the company’s free reserves, securities premium account or proceeds from the issue of any securities other than the same kind of shares. Once shares are repurchased, they are extinguished and physically destroyed, leading to a reduction in the company’s paid-up share capital.

Objectives of Buy-Back

Companies may undertake buy-back of shares for several strategic and commercial reasons: -

• Return surplus funds to shareholders: Instead of retaining excess cash, companies can reward shareholders.
• Improve Earnings Per Share (EPS): By reducing the number of outstanding shares, the EPS of the company increases.
• Optimise capital structure: Buy-back helps maintain a balanced debt-to-equity ratio.
• Increase promoter shareholding: Buy-back allows promoters to consolidate control.
• Correct undervaluation of shares: Companies can signal confidence in their financial health.
• Prevent hostile takeover: Reducing the public float makes the company less vulnerable to takeover attempts.

Legal Framework Governing Buy-Back

The buy-back of shares is governed by several statutory provisions: -

• Section 68 – Buy-back of shares
• Section 69 – Transfer to Capital Redemption Reserve Account
• Section 70 – Restrictions and prohibitions on buy-back
• Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014
• SEBI (Buy-Back of Securities) Regulations, 2018 (applicable to listed companies)

Sources of Buy-Back

Under Section 68(1) of the Companies Act, 2013, a company may finance a buy-back through: -

1. Free reserves
2. Securities premium account
3. Proceeds from the issue of any shares or other specified securities, excluding the same kind of shares

Modes of Buy-Back

Companies may buy back shares using any of the following modes: -

• Tender offer: Shareholders are invited to tender shares on a proportionate basis.
• Open market purchase: Through the stock exchange or book-building process.
• Odd-lot buy-back: From holders of shares in small lots.
• Employees’ schemes: Shares issued under stock options or sweat equity can also be bought back.

Statutory Conditions for Buy-Back

Before initiating a buy-back, companies must comply with certain conditions under Section 68(2): -

1. Authorization in Articles of Association: The Articles must explicitly allow buy-back; otherwise, they must be amended through a special resolution and ROC filings.
2. Board or Shareholders’ Approval: -
   • Up to 10% of total paid-up equity capital and free reserves – Board Resolution suffices.
   • Between 10% and 25% – Requires shareholders’ approval via Special Resolution.
3. Maximum Buy-Back Limit: Aggregate buy-back in a financial year must not exceed 25% of paid-up capital and free reserves.
4. Debt-Equity Ratio: Post buy-back, the debt-to-equity ratio should not exceed 2:1, unless a higher ratio is specifically allowed.
5. Fully Paid-Up Shares Only: Only fully paid-up shares or securities can be bought back.
6. Time Gap Between Buy-Backs: No buy-back should occur within one year of the closure of a previous buy-back offer.

Step-by-Step Procedure for Buy-Back of Shares

Step 1: Verification and Alteration of Articles of Association

The company must ensure that its Articles of Association permit buy-back. If not, a special resolution must be passed to amend the Articles, followed by filing with the ROC.

Step 2: Notice of Board Meeting

A notice of the Board Meeting is issued under Section 173 of the Companies Act, 2013, with the agenda including approval of the buy-back proposal.

Step 3: Board Meeting and Resolution

The Board approves: -

• The buy-back proposal
• Quantum, price and mode of buy-back
• Draft Letter of Offer
• Date, time and venue for shareholders’ approval, if required 

Step 4: Shareholders’ Approval (Where Applicable)

For buy-back exceeding 10% of capital and free reserves: -

• Convene an Extra-Ordinary General Meeting (EOGM)
• Pass a Special Resolution
• Include material facts in the explanatory statement, such as necessity, class of shares, price, amount and timeline

Step 5: Filing of Form MGT-14

Form MGT-14 must be filed with the ROC within the period of 30 days of passing the Board or Special Resolution.

Step 6: Declaration of Solvency (Form SH-9)

File Form SH-9, verified by affidavit and signed by at least two directors (one being the MD), confirming that the company can meet its liabilities and will not be insolvent within a year.

Step 7: Letter of Offer (Form SH-8)

Prepare Form SH-8 along with the audited financial statements and the auditor’s certificate and circulate the Letter of Offer to the various shareholders, keeping it opens for a period of 15 to 30 days.

Step 8: Verification and Acceptance of Shares

Post offer closure, the company verifies tendered shares within 15 days, accepts valid shares and returns rejected shares.

Step 9: Payment of Consideration

Payment to shareholders for accepted shares must be made within 7 days from verification.

Step 10: Filing with Authorized Dealer (AD) Bank

If funds are remitted, comply with prescribed FEMA and RBI regulations, submitting necessary forms such as Form A2, 15CA, 15CB, valuation certificate, consent letters and the KYC documents.

Step 11: Extinguishment and Destruction of Shares

Bought-back shares must be extinguished and destroyed within 7 days of buy-back completion.

Step 12: Maintenance of Register of Buy-Back (Form SH-10)

Maintain Form SH-10 to record shares bought back, consideration paid and extinguishment date.

Step 13: Filing of Return of Buy-Back (Form SH-11)

File the Form SH-11 with the ROC within the duration of 30 days, detailing the board resolution date, the offer timeline and the completion of the buy-back and payment. MCA Master Data reflects the reduction in paid-up capital.

Transfer to Capital Redemption Reserve (CRR)

Under Section 69, where buy-back is made from free reserves or securities premium, the nominal value of shares bought back must be transferred to the Capital Redemption Reserve (CRR), which can only be used to issue fully paid bonus shares.

Prohibition on Buy-Back (Section 70)

Buy-back is prohibited if the company: -

• Defaults in repayment of deposits, debentures, loans or preference shares
• Has not complied with Sections 92, 123, 127 or 129
• Has not remedied defaults for three years

Conclusion

Buy-back of shares is a strategic corporate action requiring strict adherence to statutory provisions. The Companies Act, 2013 provides a clear, structured and time-bound procedure to protect the interests of shareholders and creditors. Companies must ensure the proper planning, compliance with statutory limits, timely ROC filings and FEMA regulations (where applicable) for successful buy-back execution.

By following the given procedural roadmaps outlined above, companies can efficiently execute buy-backs, improve financial metrics and enhance shareholder confidence while remaining fully compliant with Indian corporate laws.