Buy-Back Procedure (Private & Unlisted Public Companies)
BUYBACK PROCEDURE FOR PRIVATE AND UNLISTED PUBLIC COMPANIES
The buy-back of shares by private companies & unlisted public companies is governed by Rule 17 of the Companies (Share Capital & Debentures) Rules, 2014.
It prescribes the disclosures, approvals, timelines, and filings required at each stage of the buy-back process.
The rules also impose strict financial and operational safeguards to prevent misuse of buy-back as a capital manipulation tool.
Rule 17. BUY BACK OF SHARES AND OTHER SECURITIES (SHARE CAPITAL AND DEBENTURE RULES , 2014)
Unless a different rule is specifically provided, private companies and unlisted public companies must follow these norms.
These norms apply to how such companies can buy back their securities.
17(1).
(a).
The date on which the Board of Directors approved the buy-back proposal.
(b).
The purpose or reason for carrying out the buy-back.
(c).
The category or type of shares or securities the company plans to buy back.
(d).
The total number of securities the company intends to buy back.
(e).
The method the company will use for the buy-back.
(f).
The price at which the buy-back will be carried out.
(g).
How the company determined or calculated the buy-back price.
(h).
The maximum amount the company will spend on the buy-back and the source of funds that will be used.
(i).
The deadline or time period within which the buy-back must be completed.
(j).
(i).
The total shareholding of the promoters must be disclosed.
If the promoter is a company, the shareholding of its directors must also be included.
The shareholding of the company’s own directors and key managerial personnel must also be disclosed.
All these details must be stated as on the date of the notice calling the general meeting.
(ii).
The total number of equity shares bought or sold by the persons mentioned in sub-clause (i) must be disclosed.
This includes transactions made in the 12 months before the board meeting where the buy-back was approved.
It also includes transactions made from the date of that board meeting up to the date of the notice calling the general meeting.
(iii).
The maximum and minimum price at which purchases and sales referred to in sub-clause (ii) were made along with the relevant date;
(k).
If the persons listed in sub-clause (i) of clause (j) plan to offer their shares in the buy-back:
(i).
They must disclose how many shares they intend to tender.
(ii).
They must provide details of all their share transactions and holdings for the last 12 months before the board meeting where the buy-back was approved, including:
The number of shares acquired.
The price at which they were acquired.
The date of each acquisition.
(l).
A confirmation must be given that the company has no outstanding defaults.
This includes no default in repaying deposits or paying interest on them.
No default in redeeming debentures or paying interest on debentures.
No default in redeeming preference shares or paying any dividend that is due.
No default in repaying term loans or paying interest to any financial institution or bank.
(m).
A confirmation must be given that the Board of Directors has thoroughly examined the company’s affairs and future prospects.
The Board must also confirm that, after this enquiry, that they have formed the required opinion:
(i).
The Board must confirm that the company’s financial position has been assessed.
Based on this assessment, the Board believes that immediately after the date the general meeting is convened:
The company will have no grounds to be considered unable to pay its debts.
They will considered capable of meeting the debt requirements.
(ii).
The Board must assess the company’s prospects for the year following that date.
They must consider how they plan to manage the company’s business during that year.
They must also consider what financial resources will be available to the company.
Based on this, they must confirm that the company will be able to pay its liabilities as they become due.
They must also confirm that the company will not become insolvent within one year from that date.
(iii).
The directors have considered all the company’s liabilities.
This includes current liabilities, future (prospective) liabilities, and contingent liabilities.
They have evaluated these liabilities as if the company were being wound up under the Companies Act, 2013.
(n).
A report addressed to the Board of directors by the company’s auditors stating that:
(i).
They have inquired into the company’s state of affairs.
(ii).
The amount of the permissible capital payment for the securities in question is in their view properly determined.
(iii).
The audited financial statements used to calculate the buy-back must be no older than six months from the date of the offer document.
If the audited accounts are older than six months:
The buy-back calculations must be based on unaudited accounts that are not older than six months from the date of the offer document.
These unaudited accounts must undergo a limited review by the company’s auditors.
(iv).
The Board of Directors confirms that the opinion mentioned in clause (m) has been formed on reasonable grounds.
They believe, based on the company’s current financial position, that the company will not become insolvent within one year from that date.
17(2).
A company approved through a special resolution must file a letter of offer with the Registrar of Companies before proceeding with the buy-back.
The letter of offer must be submitted in Form SH.8, along with the required fee.
The letter of offer must be dated and signed by at least two directors.
One of the signatories must be the managing director, if the company has one.
17(3).
The company must file a declaration of solvency together with the letter of offer.
A listed company must file this declaration with both the Registrar of Companies and SEBI; an unlisted company files only with the Registrar.
The declaration must be in Form SH.9 and submitted with the required fee.
It must be signed by at least two directors.
One of the signatories must be the managing director, if the company has one.
The declaration must also be verified through an affidavit, as required in the form.
17(4).
The company must send the letter of offer to all shareholders or security holders right after it is filed with the Registrar of Companies.
The dispatch must happen within 20 days from the date of filing the letter of offer with the Registrar.17
17(5).
The buy-back offer must stay open for at least 15 days and not more than 30 days from the date the letter of offer is sent.
However, if all members of the company agree, the offer can be kept open for less than 15 days.
17(6).
If shareholders offer more shares than the company has decided to buy back, the company cannot accept all of them.
In such a case, each shareholder’s offer will be accepted proportionately.
So each shareholder will have only a proportion of their offered shares bought back, based on the total shares offered.
17(7).
The company must verify all the buy-back offers within 15 days from the date the offer period closes.
Any shares or securities submitted for buy-back will be considered accepted by default.
They will only be treated as rejected if the company specifically communicates a rejection within 21 days from the date the offer closes.
17(8).
Right after the buy-back offer period closes, the company must open a separate bank account.
The company must deposit into this account the full amount that will be payable to shareholders for the shares they have tendered.
The amount deposited should cover the entire consideration required for the buy-back as per the rules.
17(9).
The company shall within seven days of the time specified in Rule 17(7):
(a). The company must pay cash to those shareholders or security holders whose shares or securities have been accepted in the buy-back.
(b). The company must return the share certificates to those whose securities were not accepted, either entirely or return the remaining certificates in cases where only part of their securities were accepted.
17(10).
The company shall ensure that:
(a).
The letter of offer must include information that is true, factual, and relevant.
It must not contain any false or misleading statements.
The letter must clearly state that the company’s directors take responsibility for all the information provided in the document.
(b).
From the date the special resolution authorizing the buy-back is passed until the buy-back offer closes, the company cannot issue any new shares.
This includes bonus shares or any other type of new share issuance.
The only exception is shares that arise from already existing convertible instruments.
(c).
The company must confirm in the offer document that it has opened a separate bank account specifically for the buy-back.
This account must be adequately funded to cover the entire buy-back amount.
The company must also state that all payments for the buy-back will be made only in cash.
(d).
The company shall not withdraw the offer once it has announced the offer to the shareholders.
(e).
The company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares.
(f).
The company shall not utilize the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities for the buy-back.
17(11).Omitted.
17(12).
(a).
The company, shall maintain a register of shares or other securities which have been bought-back in Form No. SH.10.
(b).
The company must maintain a register of all shares or securities that have been bought back.
This register must be kept at the company’s registered office.
It must be in the custody of the company secretary or any other person whom the Board authorizes for this purpose.
(c).
The entries in the register shall be authenticated by the secretary of the company or by any other person authorized by the Board for the purpose.
17(13).
After completing the buy-back, the company must file a return in Form SH.11.
An unlisted company must file this return with the Registrar of Companies.
A listed company must file it with both the Registrar and SEBI.
The return must be submitted along with the required fee.
17(14).
The company must file a return of buy-back with the Registrar in Form SH.11.
This return must include a declaration confirming that the buy-back has been carried out according to the Act and the applicable rules.
The declaration must be signed by two directors, and one of them must be the managing director, if the company has one.
Pre-Buy-Back Compliance Requirements under Rule 17(2) of the Companies (Share Capital and Debentures) Rules, 2014
In accordance with Rule 17 (2), the following requirements must be complied with before undertaking a buy-back of shares:
The company must have been authorised to undertake the buy-back by a special resolution passed by the shareholders.
Before making the buy-back, the company is required to file a letter of offer with the Registrar of Companies.
The letter of offer must be filed in Form No. SH-8.
The filing of Form SH-8 must be accompanied by the prescribed filing fee.
The letter of offer must be duly dated.
It must be signed on behalf of the Board of Directors of the company.
The letter of offer must be signed by not less than two directors of the company.
Out of the two directors signing the letter of offer, one must be the Managing Director, where the company has a Managing Director.
The buy-back process cannot be initiated unless Form SH-8 is properly filed and signed in compliance with Rule 17(2).
This requirement ensures regulatory oversight, authenticity of the offer, and accountability of the Board before the buy-back is carried out.
Declaration of Solvency Requirements under Rule 17(3) of the Companies (Share Capital and Debentures) Rules, 2014
In accordance with Rule 17(3) the following requirements must be complied with while filing the Declaration of Solvency:
When a company proposes to buy back its own shares or other specified securities, it must comply with this requirement.
This applies whether the buy-back is authorised by:
A special resolution of shareholders.
A Board resolution, as the case may be.
Before making the buy-back, the company must file a Declaration of Solvency.
The declaration must be filed in Form No. SH-9.
The declaration must be filed with:
The Registrar of Companies (ROC).
The Securities and Exchange Board of India (SEBI), in case of listed companies.
The Declaration of Solvency must be signed by at least two directors of the company.
Out of the two directors signing the declaration, one must be the Managing Director, if the company has a Managing Director.
The declaration must be verified by an affidavit in the manner specified in Form SH-9.
By filing this declaration, the directors affirm that:
They have made a full inquiry into the affairs of the company.
The company is capable of meeting its liabilities and will not be rendered insolvent due to the buy-back.
The buy-back cannot be carried out unless the Declaration of Solvency is duly filed and verified, making this a mandatory pre-condition.
Dispatch and Content Requirements of the Letter of Offer under Rule 17(4) and Rule 17(10)(a)
In accordance with Rule 17(4) and Rule 17(10)(a) the following points apply to the dispatch and contents of the Letter of Offer:
After filing the letter of offer with the Registrar of Companies, the company must dispatch the letter of offer to shareholders or security holders.
The dispatch must be made immediately after filing the letter of offer with the Registrar.
In any case, the letter of offer must not be dispatched later than 21 days from the date of filing with the Registrar of Companies.
The time limit of 21 days is mandatory, and delay beyond this period is not permitted.
The letter of offer must contain true, correct, factual, and complete information.
All material facts relevant to the buy-back must be disclosed in the letter of offer.
The letter of offer must not contain any false, misleading, or deceptive statement.
It must clearly state that the directors of the company accept responsibility for the accuracy and completeness of the information.
This declaration of responsibility fixes personal accountability on the directors for any misstatement or omission.
Offer Period and Validity of Buy-Back Offer under Rule 17(5) of the Companies (Share Capital and Debentures) Rules, 2014
In accordance with Rule 17(5) the following provisions govern the validity period of a buy-back offer:
The offer for buy-back must remain open for acceptance by shareholders or security holders.
The offer period shall be calculated from the date of dispatch of the letter of offer.
The offer must remain open for a minimum period of 15 days.
The offer must not exceed a maximum period of 30 days.
This ensures shareholders are given adequate time to consider and respond to the buy-back offer.
Exception:
Where all members of the company agree, the offer period may be kept open for less than 15 days.
This exception applies only when unanimous consent of all members is obtained.
Even in such cases, the offer period must be clearly specified and communicated in the letter of offer.
Any buy-back offer kept open beyond 30 days or without required consent for a shorter period would be non-compliant with Rule 17(5).
Proportionate Acceptance of Shares in Case of Oversubscription under Rule 17(6)
In accordance with Rule 17(6) the following principles apply to acceptance of shares on a proportionate basis:
This rule applies when the buy-back offer is oversubscribed.
Oversubscription occurs when:
The number of shares or other securities tendered by share or security holders exceeds the total number the company has decided to buy back.
In such a situation, the company cannot accept all the shares offered.
The acceptance of shares or securities must then be done on a proportionate basis.
Proportionate basis means that each shareholder’s acceptance is reduced in the same ratio.
No shareholder can have preferential or selective acceptance of their tendered shares.
The proportion is calculated out of the total shares or securities offered for buy-back.
The rule prevents discrimination and arbitrary selection in acceptance of buy-back offers.
Verification of Buy-Back Offers and Timelines for Payment or Return of Securities under Rule 17(7)
In accordance with Rule 17(7) the following rules apply regarding verification of offers and payment or return of securities:
Time Limit for Verification
After the buy-back offer closes, the company must complete verification of all offers received.
Such verification must be completed within 15 days from the date of closure of the offer.
Verification includes checking:
Eligibility of shareholders or security holders.
Validity and completeness of shares or securities tendered.
Shares or securities lodged by shareholders are deemed to be accepted.
Deemed acceptance applies unless the company communicates a rejection.
Any rejection of shares or securities must be communicated within 21 days from the date of closure of the offer.
Failure to communicate rejection within this period results in automatic acceptance.
Payment of Consideration / Return of Share Certificates
After completion of the verification process, the company must act within seven days.
The seven-day period is counted from the expiry of the verification time limit.
(a). Payment of Consideration
The company must pay the consideration in cash to shareholders or security holders: Whose shares or securities have been accepted for buy-back.
Payment must be made within seven days after completion of verification.
(b). Return of Share Certificates
The company must return the share certificates to shareholders or security holders:
Whose shares or securities have not been accepted at all.
In case of part acceptance, return the balance securities not accepted.
The return must also be completed within seven days after verification.
Separate Bank Account and Statutory Restrictions Applicable to Buy-Back under Rule 17(8) and Rule 17(10)
In accordance with Rule 17(8) & Rule 17(10) the following conditions shall be complied w.r.t separate bank account and other statutory restrictions for buy-back:
Immediately after the closure of the buy-back offer, the company shall open a separate bank account.
The separate bank account shall be opened exclusively for the purpose of the buy-back.
The company shall deposit into this account the entire amount which is due and payable as consideration for the shares or other specified securities tendered for buy-back.
The amount deposited must be adequate to meet the full buy-back obligation.
The company shall confirm in the letter of offer that:
A separate bank account has been opened.
The account is adequately funded for the buy-back.
The company shall make payment of the buy-back consideration only in cash.
From the date of passing the special resolution authorising the buy-back till the date of closure of the buy-back offer:
The company shall not issue any new shares, including bonus shares.
Exception: The restriction does not apply to shares issued pursuant to outstanding convertible instruments.
Once the company has announced the buy-back offer, it shall not withdraw the offer under any circumstances.
The company shall not utilise any money borrowed from banks or financial institutions for the purpose of buy-back.
The company shall also not utilise the proceeds of an earlier issue of the same kind of shares or the same kind of other specified securities for the same.
Buy-back must therefore be financed only from permitted internal sources, in compliance with the Companies Act, 2013.
Time Limit for Completion of Buy-Back under Section 68(4) of the Companies Act, 2013
In accordance with Section 68(4) of the Companies Act, 2013, the following requirement applies to the time limit for completion of buy-back:
Every buy-back undertaken by a company must be completed within a prescribed time frame.
The maximum time limit for completion is one year.
The one-year period is reckoned from the date of passing of the special resolution by the shareholders, where shareholder approval is required.
Where the buy-back is authorised only by a Board resolution, the one-year period is reckoned from the date of passing of the Board resolution.
Completion of buy-back means:
Acceptance of shares or securities.
Payment of consideration.
Extinguishment and cancellation of the bought-back shares or securities.
The buy-back cannot be carried on beyond one year under any circumstances.
Failure to complete the buy-back within this period would amount to non-compliance with Section 68(4).
METHODS OF BUY BACK
(a). From Existing Shareholders or Security Holders on a Proportionate Basis
The company may buy back shares directly from its existing shareholders or security holders.
The buy-back is offered on a proportionate basis, meaning each shareholder gets an equal opportunity based on their shareholding.
If the buy-back is for a certain percentage, every shareholder can tender the same percentage of shares held by them.
This method is is commonly implemented through the tender offer route.
(b). From the Open Market
The company may buy back its shares from the open market, usually through a recognised stock exchange.
The company specifies:
The maximum number of shares to be bought back, and a price cap (upper price limit).
Shares are purchased at prevailing market prices, subject to the price cap.
This method provides flexibility in timing and pricing.
It is widely preferred by companies due to its operational convenience.
(c). By Purchasing Securities Issued to Employees
The company may buy back shares issued to employees under:
An Employee Stock Option Scheme (ESOP), or Sweat equity shares.
This allows employees to liquidate their holdings and realise value.
It also helps the company manage dilution caused by employee-based equity compensation.
Such buy-back must comply with the prescribed rules and limits applicable to employee securities.
EXTINGUISHMENT OF SECURITIES BROUGHT BACK
In accordance with Section 68(7) of the Companies Act, 2013, the following requirement applies to the extinguishment of securities bought back:
When a company buys back its own shares or other specified securities, it has a statutory obligation to extinguish them.
The obligation applies to all shares or securities that have been bought back, irrespective of the mode of buy-back.
The shares or securities so bought back must be extinguished and physically destroyed.
Extinguishment means the permanent cancellation of the bought-back shares or securities.
Physical destruction ensures that the securities cannot be reissued, transferred, or traded again.
The extinguishment and physical destruction must be completed within seven days.
The seven-day period is from the last date of completion of the buy-back.
Completion of buy-back includes:
Acceptance of securities.
Payment of consideration.
Closure of the buy-back process.
Failure to extinguish and destroy the securities within the prescribed period constitutes non-compliance with Section 68(7).
PROHIBITION OF FURTHER ISSUE OF SHARES OR SECURITIES
In accordance with Section 68(8) of the Companies Act, 2013, the following restrictions apply after completion of a buy-back:
Once a company completes a buy-back of its shares or other specified securities, it becomes subject to a statutory restriction on further issue.
The company shall not make a further issue of the same kind of shares or other specified securities.
This prohibition applies for a period of six months.
The six-month period is reckoned from the date of completion of the buy-back.
The restriction covers:
Fresh issue of shares or securities.
Allotment of new shares under Section 62(1)(a) (rights issue).
Permitted Exceptions
The prohibition does not apply where shares or securities are issued by way of:
Bonus issue.
Discharge of subsisting obligations.
Subsisting obligations include:
Conversion of warrants.
Issue of shares under stock option schemes (ESOPs).
Issue of sweat equity shares.
Conversion of preference shares or debentures into equity shares.
These exceptions are allowed because they arise from pre-existing commitments and do not amount to fresh capital raising.
REGISTER OF BUY BACK
In accordance with Section 68(9) of the CA, 2013 read with Rule 17(12) the following requirements apply to the register of buy-back:
When a company buys back its shares or other specified securities, it is mandatory to maintain a register of such buy-back.
The register must contain complete particulars of the buy-back transaction.
The particulars to be recorded include:
The shares or securities bought back;
The consideration paid for the shares or securities bought back;
The date of cancellation of the shares or securities;
The date of extinguishment and physical destruction of the shares or securities; and
Any other particulars as may be prescribed under the rules.
As per the Rules, the register of shares or securities bought back shall be maintained in Form SH-10.
The register must be kept at the registered office of the company.
The custody of the register shall be with:
The Company Secretary.
Any other person authorised by the Board of Directors for this purpose.
Every entry made in the register must be authenticated.
Authentication shall be done by:
The Company Secretary.
Any other person authorised by the Board.
Failure to maintain the register in the prescribed manner would amount to non-compliance with Section 68(9) and Rule 17(12).
RETURN OF BUY-BACK
In accordance with Section 68(10) of the Companies Act, 2013, the following requirements apply to the return of buy-back:
After the completion of the buy-back, the company is required to make a statutory filing.
The filing must be made within thirty days from the date of completion of the buy-back.
The company must file a return of buy-back containing prescribed particulars relating to the buy-back.
The return must be filed with:
The Registrar of Companies (ROC).
The Securities and Exchange Board of India (SEBI), in the case of listed companies.
The particulars to be furnished include details such as:
The number of shares or securities bought back.
The price at which they were bought back.
The amount paid.
Compliance with statutory conditions.
This filing is a mandatory post buy-back compliance.
Failure to file the return within the prescribed time constitutes non-compliance with Section 68(10) and attracts penalties under the Companies Act, 2013.
Return of Buy-Back and Compliance Certification under Rule 17(13) and Rule 17(14) of Share Capital
In accordance with Rule 17(13) and Rule 17(14), the following requirements apply to the return of buy-back and related certification:
After completion of the buy-back, the company shall file a return of buy-back in Form No. SH-11.
The return must be filed along with the prescribed filing fee.
The return shall be filed with:
The Registrar of Companies (ROC).
The Securities and Exchange Board of India (SEBI), in case of a listed company.
The return filed with the Registrar in Form SH-11 must have an annexure attached.
The annexure shall be a certificate in Form No. SH-15.
Form SH-15 must certify that the buy-back of securities has been carried out in compliance with:
The provisions of the Companies Act, 2013 and the rules made thereunder.
The certificate in Form SH-15 must be signed by at least two directors of the company.
Out of the two directors signing the certificate, one must be the Managing Director, if the company has a Managing Director.
Filing of Form SH-11 without the annexed Form SH-15 is incomplete and non-compliant.
These requirements ensure director accountability, regulatory confirmation, and legal validity of the buy-back process.
PENAL PROVISIONS
In accordance with Section 68(11) of the Companies Act, 2013, the following penal provisions apply in case of non-compliance with buy-back requirements:
These penalties apply if a company makes any default in complying with:
The provisions of Section 68.
Any regulation made by the Securities and Exchange Board of India (SEBI), in the case of listed companies.
On such default, the company itself becomes liable to penalty.
The company shall be punishable with a fine which: Shall not be less than ₹1,00,000, and may extend up to ₹3,00,000.
In addition to the company, every officer of the company who is in default is also personally liable.
Each such defaulting officer shall be punishable with a fine which:
Shall not be less than ₹1,00,000, and may extend up to ₹3,00,000.
The liability of officers is independent of the company’s liability, meaning both can be penalised simultaneously.
TRANSFER TO AND APPLICATION OF CAPITAL REDEMPTION RESERVE ACCOUNT
In accordance with Section 69 of the CA , 2013 the following provisions apply to the transfer to and application of the Capital Redemption Reserve Account:
When a company purchases its own shares by way of buy-back out of its free reserves or securities premium account, a statutory obligation arises.
The company must transfer a sum equal to the nominal (face) value of the shares so purchased to a separate account.
This separate account is called the Capital Redemption Reserve Account.
This transfer is mandatory and must be made immediately upon buy-back of shares from such sources.
The purpose of creating the Capital Redemption Reserve is to maintain the company’s capital base, despite reduction of paid-up share capital.
The details of the transfer to the Capital Redemption Reserve Account must be disclosed in the balance sheet of the company.
This disclosure ensures transparency and compliance with accounting and statutory requirements.
The Capital Redemption Reserve Account cannot be used for distribution of dividends.
The CRR may be applied only for a specific purpose permitted by law.
The company may utilise the Capital Redemption Reserve Account for issuing fully paid bonus shares to its members.
Such bonus shares must be issued out of unissued shares of the company.
CIRCUMSTANCES PROHIBITING BUY-BACK
The following statutory prohibitions apply to a company while undertaking a buy-back of its own shares or other specified securities.
(i). Through Any Subsidiary Company
A company cannot buy back its own shares directly or indirectly through any subsidiary company.
This prohibition applies to:
Wholly owned subsidiaries, and Partly owned subsidiaries.
The objective is to prevent indirect self-acquisition of shares and artificial control structures.
(ii) Through Any Investment Company or Group of Investment Companies
A company is prohibited from buying back its shares through an investment company or a group of investment companies.
This prevents the use of layered or intermediary entities to circumvent buy-back restrictions.
The provision avoids price manipulation, hidden control, and abuse of corporate structures.
Buy-back must be a direct corporate action, not routed through investment vehicles.
(iii) Where the Company Is in Default of Specified Obligations
A company cannot undertake buy-back if it has made a default in:
Repayment of deposits accepted before or after commencement of the Act.
Payment of interest on such deposits.
Redemption of debentures.
Redemption of preference shares.
Payment of dividend to any shareholder.
Repayment of term loans or payment of interest thereon to any financial institution or banking company.
The restriction applies as long as the default continues.
The purpose is to protect creditors and stakeholders by preventing diversion of funds towards buy-back.
A company must first cure all defaults before it can legally proceed with buy-back.
EXCEPTIONS AND ADDITIONAL PROHIBITIONS RELATING TO BUY-BACK
A buy-back is not permanently prohibited merely because the company had earlier committed a default.
If the company remedies the default in full, the restriction on buy-back is lifted after a cooling-off period.
The buy-back becomes permissible only after three years have elapsed from the date on which the default ceased to subsist.
This three-year period acts as a safeguard, ensuring sustained financial discipline before allowing buy-back.
During this three-year period, the company cannot undertake any buy-back, even though the default has been cured.
A company is prohibited from purchasing its own shares or specified securities unless it has complied with all mandatory statutory filings and obligations.
Buy-back is prohibited if the company has failed to comply with Section 92, relating to filing of Annual Return.
Buy-back is also prohibited if the company has not complied with Section 123, which governs declaration of dividend.
Non-compliance with Section 127, dealing with punishment for failure to distribute dividend, also bars buy-back.
Further, failure to comply with Section 129, relating to preparation and filing of financial statements, prohibits buy-back.
These compliances are pre-conditions for undertaking buy-back and must be fully satisfied before initiating the process.
Thus, a company must be:
Free from subsisting defaults (for at least three years).
Fully compliant with statutory filing and dividend obligations before it can legally undertake a buy-back.
INCOME TAX ASPECTS
The tax treatment of buy-back consideration under the Income-tax Act, 1961 is as follows:
Section 46A of the IT Act, 1961 provides that any consideration received by a security holder on buy-back of shares or securities is taxable as capital gains.
The capital gains are computed on the difference between:
The cost of acquisition of the shares or securities.
The value of consideration received by the security holder on buy-back.
The nature of capital gains (short-term or long-term) depends on the period of holding of the shares or securities.
The computation of capital gains is carried out strictly in accordance with Section 48 of the Income-tax Act, 1961.
Section 48 provides the mechanism for computing capital gains after allowing:
Cost of acquisition.
Cost of improvement (where applicable).
TAX TREATMENT FOR FOREIGN INSTITUTIONAL INVESTORS
In the case of Foreign Institutional Investors (FIIs), special provisions apply.
As per Section 196D(2) of the IT Act, 1961, no tax is required to be deducted at source by the company before remitting the buy-back consideration to FIIs.
This exemption applies to FIIs as defined under Section 115AD of the Income-tax Act, 1961.
TAX TREATMENT FOR OTHER NON-RESIDENT SHAREHOLDERS
Non-Resident Indians (NRIs), Overseas Corporate Bodies (OCBs) & other non-resident shareholders are required to comply with additional requirements.
Foreign Institutional Investors are excluded from these additional requirements.
Such non-resident shareholders must submit a No Objection Certificate (NOC) or tax clearance certificate obtained from the Income-tax authorities.
The NOC or tax clearance certificate confirms that appropriate tax liability has been addressed.
If the required NOC or tax clearance certificate is submitted, then:
The company may remit the consideration without or with appropriate tax deduction, as permitted.
If the NOC or tax clearance certificate is not submitted, the company is mandatorily required to deduct tax.
In such cases, tax must be deducted at the maximum marginal rate, as applicable to the relevant category of shareholders.
The tax is deducted on the entire consideration amount payable, not merely on the capital gains portion.
