A buyback lets a company repurchase its own shares — returning surplus cash, giving shareholders an exit, and lifting remaining holders' stakes. It's effectively a capital reduction, so the law fences it with ceilings, ratios and solvency tests.
Two numbers to know: max 25% of paid-up capital and free reserves; post-buyback debt-equity ratio not above 2:1.
A profitable unlisted company has surplus cash and a minority investor who wants to exit. Rather than hunt for an outside buyer, the company buys the shares back itself — returning capital cleanly and bumping up the remaining shareholders' percentages in the process. For private companies, where share liquidity is otherwise thin, a buyback is one of the few structured exit routes available. But because a buyback shrinks the capital that protects creditors, Section 68 wraps it in conditions: quantum ceilings, a debt-equity test, a solvency declaration, and a tight set of forms.
BOTTOM LINE
- Ceiling: Max 25% of the aggregate paid-up capital and free reserves in a year (for equity, 25% of paid-up equity).
- Approval: Board resolution if ≤10% of paid-up equity + free reserves; special resolution if above 10% (up to 25%).
- Tests: Post-buyback debt-equity ≤ 2:1; only fully paid shares; one-year gap between buybacks; solvency declaration filed.
What is a buyback, and why do it?
Governs this section: Sections 68, 69 & 70, Companies Act, 2013; Rule 17, Companies (Share Capital and Debentures) Rules, 2014
A buyback is a company purchasing its own shares or specified securities from existing holders. Companies do it to return surplus cash, improve per-share metrics, consolidate ownership (promoters' percentage rises as the share count falls), give shareholders an exit, or signal that the shares are undervalued. Because it reduces the company's capital base, it's treated almost like a capital reduction — hence the guardrails.
Sources of funds
Governs this section: Section 68(1)
A buyback can be funded only from:
- free reserves;
- the securities premium account; or
- the proceeds of an earlier issue of shares/securities — but not the proceeds of an earlier issue of the same kind of shares.
In other words, you can't fund an equity buyback with money raised from a prior equity issue.
The ceilings and the 2:1 test
Governs this section: Section 68(2)(c) & (d)
THE LIMITS
- 25% ceiling: A buyback can't exceed 25% of the aggregate of paid-up capital and free reserves in a financial year. For equity specifically, it's 25% of total paid-up equity capital in that year.
- Debt-equity 2:1: After the buyback, total secured + unsecured debt can't exceed twice the paid-up capital and free reserves (a higher ratio applies to certain government NBFC/housing-finance companies).
- Fully paid only: Only fully paid-up shares can be bought back.
- One-year gap: No fresh buyback offer within one year of the closure of the previous one.
Board resolution or special resolution?
Governs this section: Section 68(2)(a) & (b)
First, the Articles must authorise the buyback (if silent, amend by special resolution). Then the approval threshold depends on size:
| Buyback size | Approval needed |
|---|---|
| ≤ 10% of paid-up equity + free reserves | Board resolution |
| > 10% and up to 25% | Special resolution at a general meeting |
The special resolution (and the board resolution) are filed in MGT-14 within 30 days.
The forms and the 7-day extinguishment rule
Governs this section: Section 68(6), (7), (9) & (10); Rule 17
- MGT-14 — the board/special resolution, within 30 days.
- SH-8 — the letter of offer, filed with the ROC before buyback (signed by ≥2 directors, one being the MD where applicable).
- SH-9 — the declaration of solvency, filed with SH-8, affirming the company can meet its liabilities for a year.
- Dispatch the letter of offer; keep buyback proceeds in a separate bank account.
- SH-10 — the register of bought-back shares (maintained).
- Extinguish and physically destroy the bought-back shares within 7 days of completion.
- SH-11 — the return of buyback, filed within 30 days of completion (with the SH-15 compliance certificate).
Where shares are bought out of free reserves, an amount equal to their nominal value is transferred to the Capital Redemption Reserve (Section 69).
When you can't buy back
Governs this section: Section 70
A company is barred from buying back if it has defaulted on repayment of deposits, interest, redemption of debentures or preference shares, dividend payment, or repayment of a term loan to a bank/FI — unless the default has been remedied and a three-year cooling-off has passed. It's also barred while in default of Sections 92, 123, 127 or 129 (annual return, dividend, and financial-statement provisions).
Worked example
Mini-case — buying out a minority investor
An unlisted company has ₹4 crore paid-up equity and ₹6 crore free reserves (₹10 crore aggregate). A minority holder wants to exit ₹1.5 crore worth of shares. That's within the 25% aggregate ceiling (₹2.5 crore) and within 25% of paid-up equity. Since ₹1.5 crore exceeds 10% of (₹4 crore + ₹6 crore = ₹10 crore → 10% = ₹1 crore), the company needs a special resolution, not just a board resolution. It confirms the post-buyback debt-equity stays within 2:1, files MGT-14, then SH-8 + SH-9, runs the offer through a separate account, extinguishes the shares within 7 days, transfers ₹nominal value to the CRR, and files SH-11 within 30 days. Clean exit, capital returned.
Common mistakes
- Using board approval above 10%. Anything over 10% (up to 25%) needs a special resolution.
- Breaching the 2:1 debt-equity test. Model the post-buyback balance sheet before committing.
- Funding from a same-kind issue. You can't buy back equity using proceeds of a prior equity issue.
- Missing the 7-day extinguishment. Bought-back shares must be destroyed within 7 days of completion.
- Ignoring Section 70 prohibitions. Existing defaults (deposits, dividend, term loans) block a buyback.
Checklist
- Confirm the AOA authorises buyback (amend by special resolution if not).
- Compute the 10% and 25% limits and confirm the post-buyback 2:1 ratio.
- Check sources of funds and Section 70 prohibitions; confirm shares are fully paid.
- Pass the board/special resolution; file MGT-14 within 30 days.
- File SH-8 (letter of offer) + SH-9 (solvency); run the offer through a separate account.
- Extinguish shares within 7 days; transfer nominal value to CRR; file SH-11 within 30 days.
FAQ
What's the maximum a company can buy back? 25% of the aggregate paid-up capital and free reserves in a financial year (for equity, 25% of paid-up equity capital).
When is a special resolution needed? When the buyback exceeds 10% of paid-up equity and free reserves (up to the 25% limit). At or below 10%, a board resolution suffices.
What's the debt-equity condition? Post-buyback, total debt can't exceed twice the paid-up capital and free reserves (2:1).
How soon must bought-back shares be cancelled? Within 7 days of completing the buyback — they must be extinguished and physically destroyed.
Can a company do back-to-back buybacks? No. There must be a one-year gap from the closure of the previous buyback offer.
Primary sources
- Sections 68, 69 & 70, Companies Act, 2013
- Rule 17, Companies (Share Capital and Debentures) Rules, 2014
- Forms SH-8, SH-9, SH-10, SH-11, SH-15; SEBI (Buy-Back of Securities) Regulations, 2018 — for listed companies
Disclaimer: This article is general information on a fast-changing area of company law, current at the time of writing. It is not legal or tax advice for any specific company. Buyback also carries tax consequences that have changed recently — verify the current tax position and consult your company secretary or advisor before proceeding.