Conditions of Buy-Back
Regulation 3. Applicability
The following regulations apply to buy-back of shares or other specified securities.
They apply only when such buy-back is carried out in accordance with the Companies Act, 2013.
So , compliance with the Companies Act is a prerequisite.
Explanation:
For the purposes of this Act:
“Shares” includes equity shares with superior voting rights (SR shares).
Regulation 4. Conditions and requirements for buy-back of shares and specified securities
4(i).
The law places a limit on how much a company can buy back.
This is done to ensure the company’s financial position is not weakened.
The maximum limit is 25% of paid-up capital and free reserves.
Companies prepare two types of financial statements:
Standalone (only the company).
Consolidated (company + subsidiaries).
These two statements may show different financial positions.
Therefore, the company must choose the lower value between the two.
The 25% limit is calculated on this lower amount.
Example:
A company wants to do a buy-back.
As per its standalone financial statements:
Paid-up capital + free reserves = ₹200 crore.
25% of this = ₹50 crore.
As per its consolidated financial statements:
Paid-up capital + free reserves = ₹160 crore.
25% of this = ₹40 crore.
Now, the law says the company must choose the lower amount.
So even though the standalone limit allows ₹50 crore, the company must go with the consolidated limit of ₹40 crore.
Therefore , the company cannot buy back more than ₹40 crore.
Explanation:
There is a limit on the quantity of equity shares being brought back as well.
The limit is 25%.
This 25% is calculated with reference to: The total paid-up equity share capital of the company.
The calculation is made for that particular financial year.
Example:
In a single financial year, a company cannot buy back more than 25% of its total equity shares.
Here, the focus is on the number of shares, not their value.
For example:
If a company has 100 lakh equity shares in total, it can buy back only up to 25 lakh shares in that financial year.
Even if the company has enough money to buy more, it is not allowed to exceed this limit.
4(ii).
(a).
After the company completes a buy-back, it must calculate its debt–equity ratio.
This ratio compares:
The total of secured and unsecured debts, with
The paid-up capital and free reserves of the company.
The ratio must not be more than 2:1.
So , the company’s total debt should be at most twice its paid-up capital and free reserves.
For calculating this ratio, the company must consider:
Its standalone financial statements, and
Its consolidated financial statements.
The company must choose whichever of the above two gives a lower ratio.
The lower of the two ratios becomes the applicable ratio for compliance.
The company must ensure that this final ratio (based on the lower figure) does not exceed 2:1 after the buy-back.
Example:
Suppose , A company decides to buy back its shares.
After the buy-back, the company would need to check whether it is still financially safe as per the law.
First, it looks at its own books (standalone financials).
(All the below values are assumed)
It sees that its total debt is ₹180 crore.
Its paid-up capital and free reserves are ₹100 crore.
So, its ratio comes out to 1.8:1.
Then, it looks at the bigger picture including its subsidiaries (consolidated financials):
Now, total debt appears higher at ₹210 crore.
Capital and reserves remain ₹100 crore.
So, the ratio becomes 2.1:1.
At this point, the company has two different ratios in front of it.
The rule says: choose whichever ratio is lower.
So, the company picks 1.8:1 instead of 2.1:1.
Now the company would checks the legal limit which is 2:1.
The maximum allowed ratio is 2:1.
Since 1.8:1 is within the limit, the company is safe.
Even though one calculation crossed the limit, the law allows the company to rely on the lower figure.
Therefore, the company successfully complies with the requirement after the buy-back.
Exception to the 2:1 Debt–Equity Ratio Limit
The general rule is that after a buy-back, the company’s debt–equity ratio should not exceed 2:1.
However, this rule is not absolute and can be relaxed in certain cases.
If the Companies Act, 2013 or any notification issued under it allows a higher debt–equity ratio for a specific class of companies then:
That higher limit will apply.
In such a case, the company is permitted to exceed the standard 2:1 ratio, but only up to the higher limit prescribed.
This means the company does not violate the law if it follows the higher ratio specifically allowed under the Companies Act.
Therefore, the applicable ratio after buy-back will be:
Either 2:1 (standard rule), or
A higher ratio, if officially permitted under the Companies Act, 2013.
The company must ensure that it strictly complies with whichever limit is applicable to it.
4(ii).
(b).
So up until now:
After the buy-back, the company must calculate its debt–equity ratio.
This ratio compares:
Total secured and unsecured debts, with
Paid-up capital and free reserves.
The ratio must be less than or equal to 2:1.
For this calculation, the company must consider:
Standalone financial statements, and Consolidated financial statements.
The company must choose whichever of these gives a lower ratio.
Exclusion of NBFC and HFC Subsidiaries in Consolidated Calculation
While preparing consolidated financial statements for this purpose, a special exclusion applies.
The company must exclude the financial statements of certain subsidiaries, namely:
Subsidiaries that are Non-Banking Financial Companies (NBFCs), and
Subsidiaries that are Housing Finance Companies (HFCs).
These subsidiaries are excluded only if they are regulated by:
The Reserve Bank of India, or
The National Housing Bank.
After excluding such subsidiaries, the company calculates the consolidated figures.
Only after such exclusion of the consolidated statements:
The company ensures that the lower of the standalone or adjusted consolidated ratio does not exceed 2:1.
Condition for Excluded NBFC and HFC Subsidiaries
There is an additional condition check before a company is allowed to proceed with a buy-back of securities:
Even though certain subsidiaries (NBFCs and HFCs regulated by RBI or NHB) are excluded while calculating the company’s overall 2:1 debt–equity ratio:
They are still subject to a separate restriction.
Each such excluded subsidiary must calculate its own debt–equity ratio individually.
In this calculation, debt includes all borrowings, both secured and unsecured.
Equity for this purpose means the sum of paid-up capital and free reserves of that subsidiary.
The ratio of total debt to equity for each excluded subsidiary must not exceed 6:1.
This calculation must be done on a standalone basis.
So , only that subsidiary’s own financial statements are considered, without including group or consolidated figures.
The purpose of this rule is to allow financial subsidiaries to have higher leverage than normal companies, but still keep their borrowing within a reasonable limit.
The company can proceed with the buy-back only if every excluded subsidiary satisfies this 6:1 condition.
If even one excluded subsidiary exceeds the 6:1 ratio, the buy-back of securities is not allowed.
Example:
ABC Ltd. is planning to carry out a buy-back of its shares.
It has three subsidiaries:
One is a normal company.
One being an NBFC regulated by the Reserve Bank of India.
One being an HFC regulated by the National Housing Bank.
For the purpose of checking the 2:1 debt–equity limit, ABC Ltd. does not consider the financials of the NBFC and HFC subsidiaries.
It only considers its own financials and those of the normal subsidiary.
After excluding those financial subsidiaries:
The company calculates its debt and equity.
The resulting ratio comes to about 1.67:1, which is within the permitted limit of 2:1.
At this stage, it appears that the company is eligible to proceed with the buy-back.
However, the law imposes an additional condition for the subsidiaries that were excluded from this calculation.
Each excluded subsidiary must now be examined on its own, using its individual financial statements.
Assume:
The NBFC subsidiary has a debt–equity ratio of exactly 6:1, which is within the allowed limit.
The HFC subsidiary, however, has a higher level of borrowing, and its ratio comes to 7:1, which exceeds the permitted limit.
Because of this, even though the parent company satisfied the 2:1 requirement, the buy-back cannot go ahead.
The company will only be allowed to proceed if every excluded subsidiary also keeps its debt–equity ratio within 6:1.
4(iii).
The company can buy back only those shares or securities that are fully paid-up.
“Fully paid-up” means that the shareholder has paid the entire amount due on those shares or securities.
Shares or securities that are partly paid (where some amount is still unpaid) are not eligible for buy-back.
This condition applies to all types of specified securities, not just equity shares.
4(iv).
A company is permitted to carry out a buy-back of its shares or other specified securities.
However, it cannot use any arbitrary method; the law allows only specific modes for doing a buy-back.
The company must choose any one of the prescribed methods for the buy-back.
Each method has its own procedure, conditions, and compliance requirements, which the company must follow.
(a). Buy-back through tender offer (proportionate basis)
The company buys back shares or specified securities directly from its existing shareholders or security holders.
The buy-back is done through a tender offer, where the company invites shareholders to offer their shares for sale.
The offer is made to all eligible shareholders, not to selected individuals.
Shares are accepted on a proportionate basis.
So , If more shares are offered than required then:
Each shareholder’s offer is accepted in proportion to their holding or the total shares tendered.
Shareholders have the option to participate or not participate in the tender offer.
The company buys back only the number of shares it has specified in the offer, not all shares tendered.
Non-participation by promoter / promoter group in buy-back
If any member of the promoter or promoter group declares that they will not participate in the buy-back, this declaration is taken into account.
The shares held by such non-participating promoter or promoter group member are excluded from the calculation.
Specifically, these shares are not considered while computing the entitlement ratio.
The entitlement ratio is used to determine how many shares each eligible shareholder is entitled to tender.
By excluding these shares, the calculation is made only among those shareholders who are actually participating.
Example:
Suppose a company plans to buy back 100 shares through the tender offer route.
The total shareholding of the company is 1,000 shares.
Out of this, the promoter group holds 400 shares, and public shareholders hold 600 shares.
One promoter (holding 200 shares) clearly declares that he will not participate in the buy-back.
Because of this declaration, those 200 shares are excluded while calculating the entitlement ratio.
Understanding Entitlement Ratio:
It is the ratio that tells each shareholder how many shares they are entitled to tender in the buy-back.
It is calculated based on:
Number of shares the company wants to buy back.
Divided by total eligible shares (after exclusions).
Now, for entitlement calculation, the relevant shares are:
Total shares = 1,000
Less non-participating promoter shares = 200
Remaining = 800 shares
The company still wants to buy back 100 shares, but now this is out of 800 shares, not 1,000.
So in this case , the Entitlement ratio = 100 / 800 = 12.5%
This essentially means that each eligible shareholder can tender 12.5% of their holding as an assured entitlement.
(b).
A company can buy back its shares or specified securities directly from the open market instead of approaching shareholders specifically.
This method involves purchasing shares through market mechanisms, just like a normal investor buys shares.
The company does not deal with shareholders individually , instead, it buys from whoever is willing to sell in the market.
The law allows two ways to do buy-back from the open market:
Through the book-building process.
Through the stock exchange mechanism, such as recognized exchanges like National Stock Exchange of India or BSE Limited.
In the book-building process:
The company announces a price range.
Shareholders submit bids indicating the price at which they are willing to sell.
The company determines the final price based on these bids.
In the stock exchange method:
The company buys shares directly from the market at prevailing prices.
Transactions happen through the stock exchange system like regular trading.
Shareholders who sell on the exchange may end up selling to the company without direct interaction.
In both methods, the buy-back happens gradually over a period of time, unlike a tender offer which is done in a fixed window.
Limit on buy-back through stock exchange
When the company is doing buy-back through the stock exchange route (open market method):
The law places a limit on how much the company can buy back using this method.
The limit is calculated based on paid-up capital and free reserves of the company.
The company must consider either standalone or consolidated financial statements, and use whichever gives a lower amount.
The maximum buy-back allowed is restricted as follows:
(i) Up to 15% of paid-up capital and free reserves is allowed till March 31, 2023.
(ii) Up to 10% of paid-up capital and free reserves is allowed till March 31, 2024.
(iii) Up to 5% of paid-up capital and free reserves is allowed till March 31, 2025.
(c). Omitted.
4(v).
A company is not allowed to carry out a buy-back in a way that results in its shares or securities being removed from the stock exchange.
A buy-back should not lead to delisting of the company’s securities.
“Delisting” means the shares are no longer traded on a recognized stock exchange such as National Stock Exchange of India or BSE Limited.
The company must ensure that after the buy-back, there are still enough shares held by the public to maintain listing requirements.
Buy-back is meant to reduce capital, not to remove the company from the stock market.
If a company intends to delist, it must follow a separate legal process for delisting, and not use buy-back as a shortcut.
4(vi).
A company is not allowed to buy back its shares through private or selective deals with specific persons.
It cannot enter into negotiated deals, where the price or terms are privately agreed with a particular shareholder.
This restriction applies both on the stock exchange and outside the stock exchange.
The company is also prohibited from using spot transactions, which are immediate, one-to-one purchase arrangements.
It cannot carry out buy-back through any private arrangement or informal agreement with selected investors.
4(vii).
A company is not allowed to make a new buy-back offer immediately after completing one.
There must be a cooling-off period of 1 year before the next buy-back can be announced.
This one-year period is counted from the date on which the previous buy-back offer period ends, not from the date it started.
The rule applies only if the company has already completed a previous buy-back.
During this one-year period, the company cannot launch or announce another buy-back offer.
4(viii).
A company can carry out a buy-back only if it actually reduces its share capital as a result.
Buy-back is not just a purchase of shares , it must lead to cancellation (extinguishment) of those shares.
The shares bought back must be removed from existence, and cannot remain in circulation.
4(ix).
A company is allowed to undertake a buy-back only from specified sources of funds.
The law clearly permits three sources from which the company can finance the buy-back.
(a). From free reserves
The company can use its accumulated profits that are available for distribution as dividends.
These are reserves that are not restricted and can be freely used.
(b). From the securities premium account
The company can use the amount collected as premium on issue of shares or securities.
This amount is maintained separately and can be utilized for buy-back as permitted by law.
(c). From the proceeds of the issue of shares or other specified securities
The company can use funds raised by issuing shares or other specified securities.
Restriction on use of proceeds for buy-back
A company is not allowed to use funds raised from an earlier issue of the same kind of shares or securities for buy-back.
“Same kind” means:
Equity shares cannot be bought back using proceeds from a fresh issue of equity shares.
Similarly, a specific type of security cannot be bought back using proceeds from the same type of security.
The restriction applies specifically to proceeds from an earlier issue, whether recent or past.
The company must use other permitted sources like free reserves or securities premium for such buy-back.
4(x).
A company is not allowed to purchase its own shares directly or indirectly through certain routes.
The law specifically prohibits the following:
(a). Through subsidiary companies
The company cannot route the buy-back through any of its subsidiaries.
This includes both direct and indirect subsidiary structures.
(b). Through investment companies or group of investment companies
The company cannot use investment companies as intermediaries to buy its own shares.
This prevents indirect buy-back arrangements through layered entities.
(c). In case of default by the company
The company is not allowed to carry out a buy-back if it has defaulted in:
Repayment of deposits (whether accepted before or after the Companies Act),
Payment of interest on such deposits,
Redemption of debentures or preference shares,
Payment of dividend to shareholders,
Repayment of any term loan or interest to a financial institution or banking company.
Exception where default has been corrected
Even if a company had earlier made a default, buy-back is not permanently prohibited.
The company can proceed with buy-back only after correcting the default.
“Default remedied” means:
The company has fully repaid the dues, and
All pending obligations like interest, dividends, or loan repayments are cleared.
After fixing the default, the company must wait for a period of 3 years.
This 3-year period is counted from the date on which the default stopped existing.
Only after this waiting period is completed, the company becomes eligible to undertake buy-back.
Regulation 5. General compliance and filing requirements for buy-back
5(i).
Conditions for authorising buy-back
A company cannot proceed with a buy-back unless certain basic approvals are in place.
These conditions apply regardless of the method used, whether it is a tender offer or open market purchase.
(a). Authorisation in Articles of Association
The company’s Articles of Association (AOA) must permit buy-back of shares or securities.
If the AOA does not allow it, the company must first amend the Articles before proceeding.
(b). Approval by shareholders through special resolution
The company must pass a special resolution in a general meeting.
This means approval by at least 75% of the members voting.
The resolution must specifically authorise the buy-back.
Board approval allowed for small buy-back (up to 10%)
There is an exception to the general rule that a special resolution of shareholders is required for buy-back.
Where the size of the buy-back is 10% or less of the total paid-up equity capital and free reserves, then:
The company can avoid the shareholder approval process.
The 10% limit is calculated on the basis of:
Paid-up equity capital, and
Free reserves of the company.
For this calculation, the company must consider both standalone and consolidated financial statements and adopt whichever gives the lower amount.
If the buy-back falls within this 10% threshold, it can be authorised only by the Board of Directors.
The Board must approve it by passing a formal resolution in a properly convened board meeting.
So ,
The decision cannot be taken informally or by circulation alone (unless otherwise permitted).
Proper quorum and meeting procedures must be followed.
The rationale behind this provision is to simplify and speed up smaller buy-backs, as they have relatively limited impact on the company’s capital structure.
However, once the buy-back exceeds this 10% limit:
The company must compulsorily obtain shareholder approval through a special resolution, as it becomes a more significant transaction.
(c). Prior consent of lenders in case of covenant breach
A company may have loan agreements with lenders that contain certain conditions (called covenants).
These covenants may restrict actions like buy-back of shares.
If the company’s proposed buy-back violates or breaches any such covenant, it cannot proceed freely.
In such a case, the company must first obtain prior consent from its lenders.
This consent must be taken before initiating the buy-back process.
The requirement applies to all relevant lenders whose covenants are affected.
Without such consent, proceeding with buy-back would be in violation of loan agreements and legal requirements.
Explanation:
Disclosure of lender’s consent in letter of offer
When a company prepares the letter of offer for buy-back, it must follow the prescribed regulations.
If the company has obtained consent from its lenders, this must be clearly disclosed.
The disclosure must be specific and explicit, not vague or general.
It should state that the required consent has been obtained from the relevant lender(s).
This disclosure is made in the letter of offer sent to shareholders.
5(ii).
Every buy-back must be fully completed within 1 year.
The one-year period starts from:
The date of passing the special resolution in the general meeting, or
The date of passing the board resolution, where board approval is sufficient.
The company must complete the entire buy-back process within this time, not just start it.
This includes:
Making the offer.
Accepting shares.
Completing payment and extinguishment of shares.
5(iii).
After the buy-back period ends, the company has a mandatory filing obligation.
The company must file a return containing details of the buy-back.
This return must be filed with:
The Registrar of Companies (ROC), and
The regulatory Board (i.e., Securities and Exchange Board of India).
The filing must be done within 30 days from the date of expiry of the buy-back period.
The return must include prescribed particulars, such as:
Number of shares bought back,
Price at which buy-back was done,
Amount utilized, and other relevant details.
The format of this return is specified under the Companies (Share Capital and Debentures) Rules, 2014.
5(iv).
When a buy-back requires approval by special resolution, the company must issue a notice of general meeting to shareholders.
Along with this notice, the company must attach an explanatory statement under section 102 of the Companies Act.
This explanatory statement must contain:
The mandatory disclosures required under section 102, and
Additional disclosures specifically required for buy-back.
(a).
Disclosures required under Section 68(3) for buy-back
The explanatory statement must contain a full and complete disclosure of all material facts relating to the buy-back.
It must clearly explain the necessity or reason for undertaking the buy-back.
The company must specify the class of shares or securities that it proposes to buy back.
The statement must mention the total amount to be invested in the buy-back.
It must also specify the time-limit within which the buy-back will be completed.
(b).
Additional disclosures under Schedule I
Apart from disclosures required under the Companies Act, the company must also include additional disclosures prescribed under these regulations.
These disclosures are specified in Schedule I of the buy-back regulations.
Schedule I lays down detailed information requirements that must be provided to shareholders.
The company must ensure that all applicable disclosures under Schedule I are included in the explanatory statement or offer document.
These additional disclosures are meant to provide more detailed and comprehensive information about the buy-back.
(c).
Additional disclosures for tender offer buy-back
When the buy-back is through the tender offer method & the buy-back is from existing shareholders or security holders then:
In such cases, the explanatory statement must include extra disclosures in addition to the general requirements.
These disclosures are over and above those required under:
Section 68(3) of the Companies Act, and
Schedule I of the regulations.
(i). Disclosure of maximum buy-back price and board authority
The explanatory statement must clearly mention the maximum price at which the company proposes to buy back its shares or specified securities.
This maximum price acts as a ceiling, beyond which the company cannot buy back shares.
The statement must also disclose whether the Board of Directors is being authorised by shareholders to decide the final buy-back price later.
If such authorisation is given, the Board can determine the exact price at the appropriate time, depending on market conditions.
This objective is to inform the the shareholders of:
The upper limit of price, and
Whether the Board has flexibility to fix the final price later.
(ii). Disclosure of promoter participation and past transactions
The explanatory statement must disclose whether the promoter intends to participate in the buy-back.
If yes, promoter must specify the quantum (number) of shares or securities the promoter proposes to tender.
Promoter must also provide details of the promoter’s shareholding and transactions during the last 6 months prior to passing the special resolution.
These details must include:
Number of shares or securities acquired,
The price at which they were acquired, and
The date of such acquisition.
5(v).
When a company passes a special resolution for buy-back in a general meeting, it has a filing obligation.
A copy of this resolution must be submitted to regulatory authorities.
The company must file it with:
The Board (i.e., Securities and Exchange Board of India), and
All stock exchanges where its shares or securities are listed, such as National Stock Exchange of India or BSE Limited.
This filing must be done within 7 working days from the date on which the resolution is passed.
5(vi).
When the company undertakes buy-back through the open market either through
Buy-back through the stock exchange or
Buy-back through the book-building process then:
In such cases, the Board of Directors must pass a resolution approving the buy-back.
The board resolution must clearly specify the maximum price at which the company will buy back its shares or securities.
This maximum price acts as a ceiling, & the company cannot buy shares above this price.
The company may buy shares at any price below the maximum limit, depending on market conditions.
Maximum price to be specified in special resolution
Where the buy-back requires approval by special resolution of shareholders. then:
In such cases, it is not enough to just approve the buy-back in general terms.
The special resolution itself must clearly specify the maximum price at which the buy-back will be carried out.
This maximum price acts as a limit, beyond which the company cannot buy back its shares.
Example:
Case 1: Buy-back through open market (stock exchange / book-building)
The Board of Directors passes a resolution approving the buy-back.
The board fixes a maximum price of ₹150 per share.
This ₹150 acts as a ceiling price.
The company starts buying shares from the market.
Depending on market conditions, it may buy shares at ₹130, ₹140, ₹145,
But it cannot buy even a single share above ₹150.
So, ₹150 is only the upper limit, not the fixed price.
Case 2: Buy-back requiring special resolution (shareholder approval)
The company seeks approval from shareholders through a special resolution.
In the resolution itself, the company specifies the maximum price as ₹150 per share.
Shareholders approve the buy-back along with this price limit.
Now, the company can carry out buy-back at any price up to ₹150, but not beyond.
For example, it may buy at ₹135 or ₹145, but cannot exceed ₹150, because that is what shareholders approved.
5(via).
In case of buy-back through the tender offer method:
The Board of Directors is given limited flexibility to modify the buy-back terms.
The Board can make changes only up to one working day before the record date.
The Board is allowed to:
Increase the maximum buy-back price, and
Decrease the number of securities to be bought back.
However, there is an important condition:
The total size (overall amount) of the buy-back must remain unchanged.
If the buy-back price is increased, the company must reduce the number of shares to be bought back.
The reduction in quantity must be proportionate to the increase in price.
Example:
A company announces a buy-back through tender offer with the following terms:
Maximum price = ₹100 per share
Number of shares = 1,00,000
Total buy-back size = ₹1,00,00,000
Before the record date (within the allowed time), the Board decides to revise the terms.
The Board increases the maximum price to ₹125 per share.
Since the total size must remain the same (₹1,00,00,000), the company must reduce the number of shares.
New number of shares = ₹1,00,00,000 ÷ ₹125 = 80,000 shares.
So, after revision:
Price = ₹125 per share
Number of shares = 80,000
Total size = ₹1,00,00,000 (unchanged)
5(vii).
When the buy-back is approved by the Board of Directors within the 10% limit under Section 68(2)(b) then:
Once the board passes the resolution, the company has a mandatory filing requirement.
A copy of the board resolution must be filed with:
The Board (i.e., Securities and Exchange Board of India), and
The stock exchanges where the company’s securities are listed, such as National Stock Exchange of India or BSE Limited.
This filing must be done within 2 working days from the date of passing the board resolution.
The timeline is shorter than in case of special resolution, ensuring quicker disclosure.
5(viii).
No insider of the company is allowed to buy or sell shares or specified securities of the company in certain situations.
The restriction applies when the insider has access to unpublished price sensitive information (UPSI).
UPSI means important information that is not yet publicly available and can affect the share price.
Information relating to a buy-back of shares or securities is considered such sensitive information.
Therefore, if an insider knows about a proposed or ongoing buy-back before it is publicly disclosed, they cannot trade in the company’s securities.
5(ix).
All filings made to the Board (i.e., Securities and Exchange Board of India) must be done only in electronic mode.
Physical or paper-based submissions are not permitted for these filings.
The documents must be digitally signed to ensure authenticity.
The digital signature must be affixed by:
The Company Secretary, or
Any person authorised by the Board of Directors.
