Buy back of shares as the name suggests is a process of buying by the company of its own shares from its shareholders at market value and thus reducing its share capital. It is a great way of rewarding the shareholders and distributing the profits of the company in a way other than dividend.

Prior to the Budget 2024, companies had to pay tax on the difference between issue price of shares and purchase price but in Budget 2024 amendment was made to align the taxation on buy back with dividend and make the taxability on shareholder for the difference between issue price of shares and purchase price effective 1^st October 2024. The cost of shares bought back can be carried forward as capital loss.

Pre-requisite for buyback

1. Authorization in Articles of Association, or else the Articles need to be amended first by calling shareholders meeting
2. Buy back can be done out of free reserves or securities premium account or proceeds of any other issue of different kind of securities
3. Total debts of the company should not exceed twice the paid up capital and free reserves after buy back
4. All shares to be fully paid up
5. More than 1 year has elapsed since the last buy back
6. Buy back has to be in same proportion as the shareholding
7. Post completion of buy back company cannot issue new shares till 6 months except by way of bonus issue, conversion. Bonus cannot be issued till the closure of the offer.
8. Cannot withdraw the offer once made
9. Valuation report to be obtained to determine the price

Board and shareholders’ approval

–  Board approval is required for buy back upto 10% of the total paid up capital and free reserves

–  Shareholders’ resolution is required for buy back upto 25% of the total paid up capital and free reserves

– explanatory statement to the notice of shareholders meeting should make complete disclosure on the need, amount to be invested, timeline & others as per Rule 17 of Share Capital and     Debenture Rules (maximum 1 year is allowed)

Filing with Ministry of Corporate Affairs/SEBI

–  Prior to buy back declaration of solvency signed by 2 directors verified by an Affidavit in SH9, letter of offer in SH8 needs to be filed. Letter of offer to be dispatched to shareholders immediately after filing with MCA but not later 20 days. Letter of offer to be open for atleast 15 days and not more than 30 days. In case all members agree the offer can be open for less than 15 days. Verification of offers to be completed within 15 days of closure of offer.

–  SH 11 to be filed after completion of buy back along with a declaration from MD/Directors that all provisions of buy back are complied with.

Steps to process the buyback

-Separate bank account to be opened after closure of offer and deposit the buyback consideration amount

-Within 7 days after verification of offer make the payment OR return the share certificates in case not accepted

Compliances post buyback

-physically destroy the share certificates bought back within 7 days

Maintain a register of buy back mentioning the number of shares, consideration, date of cancellation in SH10

Penalty for non-compliance

Company Rs 1 lakhs-3 lakhs

Every officer in default Rs 1 lakhs-3 lakhs

Snapshot of recent buybacks

Akansha Rathi and Associates (ARACS), Company Secretary Firm in Navi Mumbai is engaged into compliance related services. We have a team of experts who not only possess required skills and experience but also have worked in complex business environment and were engaged in providing complex solutions in terms of providing related Compliance services to our clients.