Buyback

Buyback is the repurchase by a company of its own shares (or other specified securities) from existing shareholders. Governed primarily by Section 68, 69, and 70 of the Companies Act 2013 and the Companies (Share Capital and Debentures) Rules 2014.

Permitted sources of funds:

• Free reserves
• Securities premium account
• Proceeds of an earlier issue of shares (cannot be the proceeds of the same class being bought back)

Statutory limits:

• 25% test: Maximum buyback in a financial year cannot exceed 25% of paid-up capital and free reserves.
• 25% paid-up test (equity): Buyback of equity shares in any FY cannot exceed 25% of total paid-up equity capital.
• Debt-equity ratio: Post-buyback debt cannot exceed 2:1 (Section 68(2)(d)).
• Cooling period: No further buyback for 12 months after a buyback (Section 68(2)(g)).
• Authorization: AoA must permit; special resolution required (Board resolution sufficient if buyback ≤10% of paid-up equity + free reserves).

Process highlights:

• File Form SH-8 (letter of offer) and Form SH-9 (declaration of solvency) with ROC.
• Buyback offer period: minimum 15 days, maximum 30 days.
• Verify acceptances within 15 days; pay consideration within 7 days of verification.
• Extinguish bought-back securities within 7 days of completion.
• File Form SH-11 (return of buyback) with ROC within 30 days of completion.

Tax treatment — Section 115QA:

For unlisted companies, the company pays buyback distribution tax at an effective rate of approximately 23.296% (20% + surcharge + cess) on the distributed income (amount paid minus the amount received by the company on issue of those shares). The shareholder receives the buyback proceeds tax-free under Section 10(34A). This shifts the tax burden from shareholder (capital gains) to company.

Use cases in Indian startups: ESOP liquidity events (after vesting and exercise), departing co-founder exits, returning surplus cash to investors when an IPO or strategic sale is not imminent.