A profitable unlisted company has surplus cash and a minority investor who wants out. Rather than hunt for an outside buyer, the company buys the shares back itself — returning capital cleanly and lifting the remaining shareholders' percentages. For a private company, where share liquidity is otherwise thin, this is one of the few structured exit routes there is. It also shrinks the capital that protects creditors, which is why Section 68 fences it so carefully.
A buyback cannot exceed 25% of the aggregate paid-up capital and free reserves in a financial year, and after it the company's debt cannot exceed twice its paid-up capital and free reserves.
The bottom line
Ceiling: a maximum of 25% of the aggregate paid-up capital and free reserves in a year, and for equity, 25% of paid-up equity.
Approval: a board resolution up to 10% of paid-up equity and free reserves, and a special resolution above that.
Tests: post-buyback debt-equity no more than 2:1, only fully paid shares, a one-year gap between buybacks, and a solvency declaration filed.
What a buyback is
A company purchasing its own shares or specified securities from existing holders, under Sections 68, 69 and 70 with Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.
Companies do it to return surplus cash, improve per-share metrics, consolidate ownership as the share count falls, give shareholders an exit, or signal that the shares are undervalued. Because it reduces the capital base, the Act treats it almost as a capital reduction, which explains the guardrails.
Where the money can come from
Section 68(1) allows a buyback to be funded only from free reserves, the securities premium account, or the proceeds of an earlier issue of shares or securities — but not the proceeds of an earlier issue of the same kind of shares.
In practice that last clause means you cannot fund an equity buyback with money raised from a prior equity issue. Raising equity to buy equity back is precisely the circularity the section forecloses.
The ceilings and the ratio
Section 68(2)(c) and (d) set the quantitative gates.
- The 25% ceiling. A buyback cannot exceed 25% of the aggregate of paid-up capital and free reserves in a financial year. For equity specifically it is 25% of total paid-up equity capital in that year.
- Debt-equity of 2:1. After the buyback, total secured and unsecured debt cannot exceed twice the paid-up capital and free reserves. A higher ratio applies to certain government NBFCs and housing finance companies.
- Fully paid only. Partly paid shares cannot be bought back.
- One-year gap. No fresh buyback offer within one year of the closure of the previous one.
The debt-equity test is the one to model before committing, because it is measured on the balance sheet after the buyback, when both reserves and cash have fallen.
Board resolution or special resolution
Section 68(2)(a) requires the Articles to authorise the buyback. If they are silent, amend them by special resolution before anything else. Section 68(2)(b) then sets the approval threshold by 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 |
Either resolution is filed in MGT-14 within 30 days.
The forms, and the seven-day rule
Section 68(6), (7), (9) and (10), with Rule 17, drive the paperwork.
- MGT-14 for the board or special resolution, within 30 days.
- SH-8, the letter of offer, filed with the Registrar before the buyback, signed by at least two directors, one being the managing director where there is one.
- 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, and keep the buyback proceeds in a separate bank account.
- SH-10, the register of bought-back shares, maintained internally.
- 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, Section 69 requires an amount equal to their nominal value to be transferred to the Capital Redemption Reserve.
When you cannot buy back at all
Section 70 bars a buyback where the company has defaulted on repayment of deposits or interest, redemption of debentures or preference shares, payment of dividend, or repayment of a term loan to a bank or financial institution — unless the default has been remedied and three years have passed since.
It is also barred while the company is in default of Sections 92, 123, 127 or 129, covering the annual return, dividend and financial statement provisions.
A worked example
An unlisted company has ₹4 crore of paid-up equity and ₹6 crore of free reserves, so ₹10 crore in aggregate. A minority holder wants to exit ₹1.5 crore worth of shares.
That sits within the 25% aggregate ceiling of ₹2.5 crore, and within 25% of paid-up equity. But ₹1.5 crore exceeds 10% of ₹10 crore, which is ₹1 crore, so the company needs a special resolution rather than a board resolution.
It confirms the post-buyback debt-equity stays within 2:1, files MGT-14, then SH-8 with SH-9, runs the offer through a separate account, extinguishes the shares within 7 days, transfers the nominal value to the Capital Redemption Reserve, and files SH-11 within 30 days.
Common mistakes
- Using board approval above 10%. Anything over that, up to 25%, needs a special resolution.
- Breaching the 2:1 debt-equity test, which has to be modelled on the post-buyback balance sheet.
- Funding from a same-kind issue, which Section 68(1) forecloses.
- Missing the 7-day extinguishment. Bought-back shares must be destroyed within a week of completion.
- Ignoring the Section 70 prohibitions. An existing default on deposits, dividend or a term loan blocks the buyback entirely.
A working routine
- Confirm the Articles authorise a buyback, and amend by special resolution if not.
- Compute the 10% and 25% limits, and model the post-buyback 2:1 ratio.
- Check the sources of funds and the Section 70 prohibitions, and confirm the shares are fully paid.
- Pass the board or special resolution and file MGT-14 within 30 days.
- File SH-8 with SH-9, and run the offer through a separate bank account.
- Extinguish the shares within 7 days, transfer the nominal value to the CRR, and file SH-11 within 30 days.
Frequently asked questions
What is the maximum a company can buy back? 25% of the aggregate paid-up capital and free reserves in a financial year, and for equity, 25% of paid-up equity capital.
When is a special resolution needed? Where the buyback exceeds 10% of paid-up equity and free reserves. At or below 10%, a board resolution suffices.
What is the debt-equity condition? After the buyback, total debt cannot exceed twice the paid-up capital and free reserves.
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 offer.
Are there tax consequences? Yes, and the buyback tax position has changed in recent years. Take current advice before committing to the structure.
Primary sources
- Sections 68, 69 and 70, Companies Act, 2013
- Rule 17, Companies (Share Capital and Debentures) Rules, 2014
- Forms SH-8, SH-9, SH-10, SH-11 and SH-15; SEBI (Buy-Back of Securities) Regulations, 2018, for listed companies