Buying back your own shares (s.68): the 25% ceiling, the board-vs-members route, and the solvency paper trail
How a company buys back its own shares under Section 68 of the Companies Act 2013: sources of funds, the 10% and 25% limits, solvency declaration, destruction and fines.
CA Harun Raaj
makeitlegit.in
A founder wants to consolidate control before a funding round; a departing co-founder wants a clean cash exit without selling to an outsider. Section 68 of the Companies Act 2013 lets the company itself buy the shares back, out of free reserves, the securities premium account, or the proceeds of a fresh issue (never the proceeds of an earlier issue of the same kind). But the section wraps the power in ceilings, authorisation tiers, a solvency declaration and a destroy-the-certificates discipline, and default is punishable with a fine of one to three lakh rupees (s.68(11)).
Legal basis: Companies Act 2013, s.68 (with ss.69 and 70) — Effective: ongoing.
What to do now
- Next step: read your articles. A buyback is allowed only if "the buy-back is authorised by its articles" (s.68(2)(a)). If the articles are silent, that is the first thing to fix.
- Deadline: once the special resolution or board resolution is passed, "every buy-back shall be completed within a period of one year" from that date (s.68(4)). After completion, shares must be cancelled ("extinguished") and physically destroyed "within seven days of the last date of completion" (s.68(7)) and the return filed "within thirty days of such completion" (s.68(10)).
- Consequence of getting it wrong: the company is "punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees", and so is every officer in default (s.68(11)).
Have a CA review your facts before you act or file.
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Where the money may come from, and the one forbidden source
Section 68(1) permits a buyback "out of— (a) its free reserves; (b) the securities premium account; or (c) the proceeds of the issue of any shares or other specified securities". The proviso draws the single red line: "no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities." Fresh equity money can fund an equity buyback, but the proceeds of an earlier equity issue cannot be recycled into repurchasing the same kind of share.
Two Explanations widen the toolkit. Explanation I says "specified securities" "includes employees' stock option or other securities as may be notified by the Central Government from time to time", so stock-option securities fall within the section to the extent notified. Explanation II says "free reserves" "includes securities premium account".
The seven conditions: authorisation, ceilings and the debt ratio
Section 68(2) bars any buyback "unless" the listed conditions hold. First, authorisation: the buyback must be "authorised by its articles" (clause (a)). Second, the resolution tier in clause (b): "a special resolution has been passed at a general meeting of the company authorising the buy-back". The proviso excuses the general-meeting resolution where "the buy-back is, ten per cent. or less of the total paid-up equity capital and free reserves of the company" and "has been authorised by the Board by means of a resolution passed at its meeting". So a buyback up to ten per cent travels on a board resolution; a larger one needs the general meeting's special resolution.
Then the quantitative ceilings. Clause (c): "the buy-back is twenty-five per cent. or less of the aggregate of paid-up capital and free reserves of the company", with a proviso that "in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent. in this clause shall be construed with respect to its total paid-up equity capital in that financial year". Clause (d): "the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves", with a proviso that "the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies". Clause (e): "all the shares or other specified securities for buy-back are fully paid-up". Clause (f) sends buybacks of listed securities to SEBI regulations; clause (g) sends buybacks of other securities to "such rules as may be prescribed". Finally the closing proviso: "no offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any."
For a private company the practical reading is: check the articles, compute the ten per cent and twenty-five per cent figures against your latest balance sheet, test the post-buyback debt ratio, and confirm every share on offer is fully paid. The detailed procedure for an unlisted company sits in the prescribed rules, which this article does not summarise; take the current rules and forms from the Ministry of Corporate Affairs before drafting.
The explanatory statement and the one-year completion clock
Where a general-meeting special resolution is needed, s.68(3) requires the meeting notice to be "accompanied by an explanatory statement stating— (a) a full and complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of shares or securities intended to be purchased under the buy-back; (d) the amount to be invested under the buy-back; and (e) the time-limit for completion of buy-back." Members voting on the resolution are told why the company is spending its reserves on its own shares, and how much.
Section 68(4) then caps execution: "Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board". The text sets no extension; a buyback not completed in the year needs a fresh authorisation.
The three routes, the solvency declaration and the destroy discipline
Section 68(5) says the buyback "may be— (a) from the existing shareholders or security holders on a proportionate basis; (b) from the open market; (c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity." The section lists the routes side by side; it does not name one as the default. Which route fits depends on your articles, the prescribed rules and what the resolution authorises.
Before money moves, s.68(6) applies where the buyback follows a special resolution or the board resolution under the ten per cent proviso. The company "shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board, a declaration of solvency signed by atleast two directors of the company, one of whom shall be the managing director, if any, in such form as may be prescribed and verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board." The proviso adds that "no declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange", so an unlisted company files with the Registrar only.
After completion comes the destroy discipline:
- Destruction. Section 68(7): the company "shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back".
- No quick re-issue. Section 68(8): the company "shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub-section (1) of section 62 or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares".
- Register. Section 68(9): "a register of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed".
- Return. Section 68(10): a "return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed", filed with the Registrar; the SEBI filing does not apply to an unlisted company.
Two related sections: capital redemption reserve and the prohibitions
Section 69(1) says where a company purchases its own shares out of free reserves or the securities premium account, "a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet." Section 69(2) allows that reserve to be applied "in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares".
Section 70(1) bars a company from purchasing its own shares or other specified securities "directly or indirectly" "(a) through any subsidiary company including its own subsidiary companies; (b) through any investment company or group of investment companies; or (c) if a default, is made by the company, in the repayment of deposits ... interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or re payment of any term loan or interest payable thereon to any financial institution or banking company". The proviso says the buyback "is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist". Section 70(2) adds that no company may buy back "in case such company has not complied with the provisions of sections 92, 123, 127 and section 129". Before a board proposes a buyback, check that these filings and payments are up to date.
Penalties and a worked scenario
Section 68(11) prices default: the company faces a "fine which shall not be less than one lakh rupees but which may extend to three lakh rupees", and "every officer of the company who is in default shall be punishable ... with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees". The words about imprisonment were omitted by Act 29 of 2020, so the officer's liability in the current text is a fine.
Take a private company with paid-up capital plus free reserves of ten crore rupees, no borrowings, and articles that permit buybacks. It offers to repurchase twelve per cent of its paid-up equity capital and free reserves. That is above the ten per cent board-resolution proviso, so a special resolution at a general meeting is needed, with the s.68(3) explanatory statement giving the necessity (exit of a departing co-founder). The twenty-five per cent ceiling and the 2:1 debt ratio are both met (s.68(2)(c) and (d)). Before paying, at least two directors, one being the managing director if there is one, sign the declaration of solvency, verify it by affidavit and file it with the Registrar. The offer closes; the shares are extinguished and physically destroyed within seven days of the last date of completion (s.68(7)); the register records consideration and dates (s.68(9)); the return goes to the Registrar within thirty days of completion (s.68(10)); a nominal-value sum moves to the capital redemption reserve, a locked reserve that backs the cancelled shares (s.69(1)). The company then makes no fresh issue of the same kind of shares for six months other than a bonus issue or conversion-type obligations (s.68(8)), and makes no new buyback offer for one year from the closure of this one (s.68(2), last proviso).
How the buyback file should read
A defensible s.68 file has these layers: the articles' authorisation; the ceiling arithmetic (10% board route versus special resolution, 25% cap, 2:1 debt ratio: s.68(2)(b) to (d)); the s.68(3) explanatory statement with the necessity; the affidavit-backed solvency declaration and proof of filing; the offer record for the route chosen; the evidence of extinguishment within seven days (s.68(7)) plus the s.68(9) register; the capital redemption reserve entry; and the proof of the return filed within thirty days (s.68(10)).
Frequently asked questions
Can the board alone approve a buyback?
Only if it is "ten per cent. or less of the total paid-up equity capital and free reserves" and authorised by a board resolution passed at its meeting (s.68(2)(b) proviso). Anything larger needs a special resolution at a general meeting. The s.68(6) declaration of solvency still applies to the board route.
What is the maximum buyback size?
"Twenty-five per cent. or less of the aggregate of paid-up capital and free reserves" (s.68(2)(c)). For equity shares in a financial year, the percentage is read against total paid-up equity capital in that year.
Can a company with borrowings buy back?
Only within the ratio: post-buyback secured plus unsecured debt must be "not more than twice the paid-up capital and its free reserves" (s.68(2)(d)), unless the Central Government has notified a higher ratio for the company's class.
Can the company buy back partly-paid shares?
Clause (e) requires "all the shares or other specified securities for buy-back" to be "fully paid-up" (s.68(2)(e)).
How soon must bought-back shares be destroyed?
"Within seven days of the last date of completion of buy-back": extinguish and physically destroy (s.68(7)).
When can the company issue the same kind of shares again?
Not "within a period of six months" except by bonus issue or in discharge of the listed conversion and option obligations (s.68(8)). A fresh buyback offer cannot be made within one year of the closure of the previous offer (s.68(2) last proviso).
What must directors declare before buying back?
A declaration of solvency signed by at least two directors (one the managing director, if any), verified by affidavit after a full inquiry, forming the opinion that the company can meet its liabilities and will not be rendered insolvent within one year, filed with the Registrar before the buyback (s.68(6)).
Does a buyback affect reserves?
Yes. Where shares are bought out of free reserves or the securities premium account, a sum equal to their nominal value goes to the capital redemption reserve account (s.69(1)).
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See Also
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