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Buyback of Shares under the Companies Act, 2013


Introduction

A buyback of shares is a corporate financial strategy where a company repurchases its own shares from existing shareholders. This reduces the number of outstanding shares, consolidates ownership, and often improves financial ratios such as Earnings Per Share (EPS). In India, buybacks are regulated under the Companies Act, 2013, providing companies with flexibility in capital management while safeguarding shareholder interests.


Legal Provisions

The buyback of shares is primarily governed by:

  • Section 68 of the Companies Act, 2013 – Power of company to purchase its own securities.

  • Section 69 – Treatment of buyback proceeds.

  • Section 70 – Restrictions on buyback.

  • Companies (Share Capital and Debentures) Rules, 2014 – Procedural requirements.


Sources for Buyback

A company may buy back its shares out of:

  • Free reserves

  • Securities premium account

  • Proceeds of issue of any shares or other specified securities (but not of the same kind being bought back)


Quantum of Buyback

  • A company can buy back up to 25% of its total paid-up equity capital in a financial year.

  • The debt-equity ratio post-buyback must not exceed 2:1.


Methods of Buyback

  1. Tender Offer: Proportionate buyback from existing shareholders.

  2. Open Market Purchase: Through stock exchanges.

  3. Book-building Process: Price determined by bids.

  4. Odd-lot Buyback: For small shareholders holding odd lots.


Process of Buyback

  1. Authorization: Articles of Association must permit buyback.

  2. Resolution:

    • Board resolution for buyback up to 10% of paid-up capital.

    • Special resolution in general meeting for buyback beyond 10%.

  3. Filing: Company must file Form SH-8 (Letter of Offer) with the Registrar.

  4. Offer Period: Minimum 15 days, maximum 30 days.

  5. Completion: Buyback must be completed within 1 year from the date of resolution.

  6. Extinguishment: Shares bought back must be extinguished within 7 days of completion.


Restrictions on Buyback

  • No buyback through subsidiaries or investment companies.

  • No buyback if company has defaulted in repayment of deposits, loans, or redemption of debentures.

  • No buyback within 1 year of a previous buyback.


Objectives of Buyback

  • Return surplus cash to shareholders.

  • Improve EPS and ROE by reducing outstanding shares.

  • Prevent hostile takeovers by consolidating ownership.

  • Support share price in the market.


Challenges and Compliance

  • Strict adherence to procedural rules and filings.

  • Ensuring debt-equity ratio compliance.

  • Avoiding misuse for stock price manipulation.

  • Tax implications for shareholders receiving buyback proceeds.


Conclusion

The buyback of shares under the Companies Act, 2013 is a strategic tool for companies to manage capital efficiently, reward shareholders, and strengthen financial performance. However, it is bound by strict legal provisions to ensure transparency, fairness, and protection of investor interests. For law students and practitioners, mastering the nuances of buyback regulations is essential to advising clients and understanding corporate governance in practice.


 
 
 

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