Buyback of Shares Under Section 68: A Founder's Complete Guide

Buyback of Shares Under Section 68: A Founder's Complete Guide

Picture this. Your company has done well. Cash reserves have built up, an early investor or co-founder wants to exit, and you would rather not dilute the cap table further or endure a lengthy NCLT-driven capital reduction. You have heard "buyback of shares" in board meetings, but are not sure how it works or whether your company qualifies.

You are not alone — buyback is often confused with dividends, capital reduction, or a simple share transfer. In reality, it is a well-defined route under Section 68 of the Companies Act, 2013, letting you return surplus cash, improve financial ratios, and consolidate ownership, without NCLT approval within prescribed limits. Here is what you need to know.

What is a Buyback of Shares (Section 68 Overview)

A buyback of shares is when a company repurchases its own shares (or specified securities) from existing shareholders. Once bought back, these shares are extinguished and cancelled — not resold or held in treasury — reducing total outstanding shares.

Section 68 of the Companies Act, 2013 governs this for both listed and unlisted Indian companies, setting out when a company can buy back shares, how much, and how it must be funded. This funding point trips up many founders. Under Section 68, a buyback can be funded only out of:

• The company's free reserves
• The securities premium account
• Proceeds of a fresh issue of any shares or other specified securities

A buyback cannot be funded out of the proceeds of an earlier issue of the same kind of shares now being bought back — if you earlier raised money via equity shares, you generally cannot use that pool to buy back those same shares. This stops companies from using investor money to artificially support share prices, and ensures buybacks are funded from genuine reserves.

A buyback can cover equity shares as well as other specified securities, but equity buybacks are by far the most common among growing private and unlisted companies.

Why Companies Opt for a Buyback

Founders usually consider a buyback for financial and strategic reasons:

• Returning surplus cash efficiently: Idle cash reserves can be returned to shareholders, sometimes more tax-efficiently than a large dividend depending on structuring — but verify this with a tax advisor.
• Improving EPS and other ratios: Fewer outstanding shares usually improves earnings per share and return on equity, since the same profit is spread over fewer shares.
• Providing an exit to shareholders or investors: Lets an early investor, angel, or co-founder exit cleanly.
• Consolidating promoter or founder holding: Fewer outstanding shares automatically raises remaining shareholders' proportional holding, including promoters'.
• Preventing a hostile takeover: Fewer shares in the market makes it harder for an unwanted party to build a controlling stake.
• Signalling confidence: A buyback often signals that management believes the shares are undervalued.
• A faster alternative to capital reduction: Within prescribed limits, a buyback avoids the NCLT-approved capital reduction process under Section 66, which is far more time-consuming and expensive.

For busy founders, this last point is often decisive — nobody wants months at the NCLT if Section 68 achieves a similar outcome faster.

Eligibility and Conditions for a Buyback

Section 68 lays down detailed conditions before a company can buy back shares. These limits are amended from time to time, so treat the figures below as general guidance and verify current numbers with your company secretary or auditor.

• Authorisation in the articles: Articles of association must authorise a buyback; if silent, they may need amendment first.
• Board resolution or special resolution: A buyback up to a certain threshold (commonly around 10% of paid-up equity capital and free reserves) can generally be approved by board resolution, once a financial year, subject to prescribed conditions. Beyond that, a special resolution is typically required. Verify the current threshold before deciding your route.
• Overall buyback limit: Total buyback value in a financial year is capped as a percentage of aggregate paid-up capital and free reserves (commonly cited around 25%), with a similar sub-limit for equity shares alone. These percentages can change, so verify the exact current cap.
• Debt-equity ratio condition: Post-buyback debt-to-equity ratio should not exceed a prescribed limit (commonly cited as 2:1), subject to exceptions the government may prescribe for certain classes of companies. Verify current rules before finalising size.
• Fully paid-up shares only: Partly paid-up shares cannot be bought back.
• No defaults: The company must not be in default of deposit repayment or interest, debenture or preference share redemption, or dividend payment, nor in default of filing its annual return, financial statements, or board's report.
• Cooling-off period: A prescribed cooling-off period applies before another buyback of the same kind of securities. Verify the current duration when planning a subsequent buyback.

Since these conditions interact, get a CS or CA to run the numbers first.

Documents Required

A Section 68 buyback is document-heavy, since regulators want clear evidence the company can afford it. Typical documents include:

• Board resolution approving the buyback and letter of offer
• Special resolution (where applicable) authorising the buyback
• Letter of offer (Form SH-8) sent to eligible shareholders
• Declaration of solvency (Form SH-9), verified by affidavit, typically required for unlisted companies
• Audited financial statements, generally not older than a specified period
• Statutory auditor's certificate confirming the buyback is within permissible limits
• Board's report disclosing buyback details to shareholders
• Escrow arrangement details, since an escrow account typically secures payment to shareholders

Form formats are updated periodically by the MCA, so check the latest prescribed formats before filing.

Step-by-Step Process and Forms

The sequencing can vary by listing status and approval route. Broadly, the process looks like this — verify current timelines and forms with a professional, as these are periodically revised:

1. Board meeting: Approve the buyback proposal, letter of offer, and declaration of solvency.
2. General meeting (if required): Pass a special resolution if the buyback exceeds the board-resolution threshold.
3. File declaration of solvency: Form SH-9, verified by affidavit, filed with the Registrar (and SEBI for listed companies).
4. File and dispatch letter of offer: Form SH-8 filed with the Registrar and sent to shareholders with terms, price, and timeline.
5. Open the offer: Shareholders tender shares within the prescribed offer period.
6. Verify acceptances: The company or its registrar verifies tendered shares, especially if oversubscribed.
7. Open an escrow account: Fund it to secure payment to accepted shareholders.
8. Complete payment and extinguish shares: Pay shareholders within the prescribed timeline and extinguish the shares.
9. File return of buyback: Form SH-11, with a compliance certificate, confirming completion.
10. Physically extinguish share certificates: Destroy certificates or extinguish dematerialised shares within the prescribed timeline.

Since timelines are specified in the rules and can be amended, have your CS chart a compliance calendar once the board approves the proposal.

Cost and Fees for a Buyback in 2026

Costs vary by company size, listing status, and shareholding complexity. As a realistic guide:

• Professional fees (CA/CS fees for resolutions, letter of offer, solvency declaration, and filings) typically range from around Rs. 50,000 to a few lakhs for unlisted companies, and higher for listed companies given added SEBI compliance. Treat this as indicative, not a quote.
• Government/MCA filing fees for SH-8, SH-9, SH-11, and resolutions follow the standard MCA fee schedule based on authorised capital slab. Check the current schedule before filing.
• Auditor's certification fees, sometimes billed separately.
• Escrow banking charges for the account.
• Buyback tax implications: Depending on structuring and Income Tax Act provisions at the time, there may be tax consequences for the company or shareholders. These rules have changed materially in recent years — never rely on an old figure, always verify current provisions with a tax advisor.

Get a specific, itemised quote based on your company's actual structure.

Timeline

A realistic timeline depends on approval route and listing status:

• Under the board resolution route for an unlisted company, the process from approval to filing the return of buyback can often complete within a few weeks to about a month, given clean documentation.
• Under the special resolution route, add time for calling and holding a general meeting — typically a few more weeks.
• Listed companies generally take longer due to SEBI buyback regulations, public announcements, and stock exchange filings layered on the Companies Act process.

Overall, most unlisted companies should budget four to eight weeks for a straightforward buyback, while complex or listed-company buybacks can stretch to a couple of months or more. Treat these as indicative ranges — your CS can confirm a firm timeline after reviewing your specifics.

Buyback vs Capital Reduction vs Dividend — Key Distinctions

Founders frequently mix up these routes. Here is how they differ:

1. Buyback of shares (Section 68)

- Company repurchases and extinguishes its own shares from shareholders.

- No NCLT approval needed, provided the buyback stays within prescribed limits.

- Faster and cheaper than capital reduction since there is no court or tribunal step.

- Reduces outstanding shares, improving EPS and other ratios.

- Bound by quantitative caps and the debt-equity condition.

1. Capital reduction (Section 66)

- Reduces share capital by cancelling shares, reducing face value, or paying back capital, requiring NCLT approval plus a special resolution.

- More flexible in quantum and structure since it is not bound by buyback caps.

- Slower and costlier due to NCLT approval, creditor objections, and compliance.

- Used when the amount to be returned exceeds what a buyback permits.

1. Dividend distribution

- Distributes company profits to all shareholders proportionately.

- Does not reduce share count or return capital — purely a profit distribution.

- No selective payout mechanism; all shareholders paid proportionately.

- Simpler procedurally but does not help exit a specific shareholder or improve EPS.

In short: to reduce share count quickly without NCLT, a buyback wins. For larger requirements beyond buyback limits, capital reduction is necessary despite the cost. To simply share profits with everyone, a dividend is appropriate.

Common Mistakes Companies Make

We consistently see the same mistakes derail an otherwise straightforward buyback:

• Exceeding the permissible limit: Sizing the buyback around commercial goals without checking the caps first, forcing a last-minute rework.
• Breaching the debt-equity ratio condition: Forgetting to model the post-buyback ratio carefully with existing borrowings.
• Attempting to buy back partly-paid shares: Overlooking shareholders who hold partly-paid shares, which are ineligible until called up.
• Ignoring the cooling-off period: Planning a second buyback without checking whether the prescribed gap since the last one has elapsed.
• Missing the SH-11 filing timeline: The return of buyback and compliance certificate must be filed within a prescribed period; missing it attracts penalties.
• Inadequate escrow arrangements: Underestimating the escrow amount, causing payment delays and shareholder complaints.
• Not obtaining the declaration of solvency properly: Treating the SH-9 affidavit as a formality rather than backing it with real analysis, which can expose directors to personal liability.
• Ignoring tax implications until the last minute: Finalising price and structure before checking tax treatment, only to find the economics change afterward.
• Poor documentation: Missing minutes or an incomplete audit trail creating compliance headaches later.

Most of these are avoidable with proper planning and a professional running the checklist alongside your finance team.

Frequently Asked Questions

What is the maximum limit for a buyback of shares?

The Companies Act, 2013 caps the value of shares bought back in a financial year as a percentage of aggregate paid-up capital and free reserves, with a sub-limit for equity shares. These percentages can change under the rules, so verify the current limit with a professional before finalising your buyback size.

Does a private company need SEBI approval for a buyback?

No. Private and unlisted public companies are not regulated by SEBI for buybacks. SEBI's regulations apply specifically to listed companies, which face additional disclosure requirements. Unlisted companies primarily need to comply with Section 68 and the applicable Companies Act rules.

What is the debt-equity ratio condition for a buyback?

Post-buyback, the debt-to-equity ratio should not exceed a prescribed limit, commonly cited as 2:1, subject to exceptions for certain classes of companies. Since this can be updated through rules, verify the current requirement before sizing your buyback.

Is there a cooling-off period between two buybacks?

Yes. The law prescribes a cooling-off period before a company can undertake another buyback of the same kind of securities after completing a prior one. The exact duration is specified under the rules and should be verified when planning your next buyback.

How is a buyback taxed for the company and shareholders?

Buyback taxation in India has changed materially in recent years and depends on listing status and structuring. Because applicable Income Tax Act provisions and rates can change, check the current tax treatment with a qualified tax advisor before finalising your price and structure.

Can a company buy back shares from only some shareholders selectively?

A buyback is typically offered to all eligible shareholders, who choose whether to tender. The offer generally has to be extended fairly and proportionately rather than targeted at named shareholders, subject to the method used. Confirm the permissible structure with your company secretary.

What happens to shares once they are bought back?

Bought-back shares are extinguished — physically destroyed for share certificates, or cancelled in the depository system for dematerialised shares. They cannot be reissued or held as treasury shares; they simply cease to exist, reducing total outstanding share count.

Can a company use borrowed funds to finance a buyback?

Generally, a buyback should be funded out of free reserves, the securities premium account, or proceeds of a fresh share issue — not routine borrowings meant to bypass Section 68 funding restrictions. Using debt requires careful evaluation against the debt-equity condition, so discuss this with your auditor and CS before proceeding.

How Legal Suvidha Makes This Effortless

This is exactly the kind of process where one wrong document, a mismatched detail, or a missed deadline turns into a rejection, a resubmission, or a running penalty. Legal Suvidha handles the whole thing end-to-end so you can focus on your business.

• Fixed, all-inclusive price quoted upfront — professional fee plus government fee, itemised, with no hidden charges appearing later.
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