Buy Back shares

Buy Back of Shares: Procedure, Limits, Tax Treatment and Compliance in FY 2026-27

Under Section 68 of the Companies Act 2013, a company can buy back its own shares from free reserves, securities premium, or proceeds of a prior issue — subject to a 25% cap on paid-up capital and free reserves in any financial year. From 1 October 2024, the Finance Act 2024 abolished company-level Buyback Distribution Tax and shifted the tax burden to shareholders, treating buyback proceeds as deemed dividend taxable at slab rates. Everything that follows walks you through the legal framework, the step-by-step procedure, the revised tax arithmetic, and the mistakes that derail buy backs in practice.

Sources of Funds and the 25% Limit Explained

The starting point for any buy back analysis is Section 68(1) of the Companies Act 2013, which permits a company to purchase its own shares out of:

• Free reserves (accumulated profits available for distribution as dividend)
• Securities premium account
• Proceeds of an earlier issue of shares or other specified securities — but not from the proceeds of the same kind of shares being bought back

The aggregate consideration for all buy backs in a financial year cannot exceed 25% of the aggregate of paid-up capital and free reserves of the company. Separately, buy back of equity shares specifically cannot exceed 25% of the paid-up equity share capital.

The Debt-to-Equity Guard Rail

After completing the buy back, the ratio of the aggregate of secured and unsecured debt owed by the company cannot exceed 2:1 of the paid-up capital plus free reserves. This is a post-transaction test — run it before the board resolution, not after.

The One-Year Lock-In

A minimum period of 12 calendar months must elapse between the date of closure of a preceding buy back offer and the opening of any fresh buy back. This lock-in applies regardless of whether the two buy backs use different methods or sources of funds.

Methods of Buy Back: Picking the Right Route

The Companies Act and SEBI Buyback Regulations 2018 recognise four routes:

1. Tender offer — A fixed-price proportionate offer made to all existing shareholders simultaneously. The price must be equal to or higher than the market price (for listed companies) or a price determined by a registered valuer (for unlisted companies). This is the most commonly used route.
2. Open market purchase through stock exchange — Available only to listed companies. The company purchases shares through normal trading using a separate "buy back" window on the exchange.
3. From odd-lot holders — Applicable where the size of the lot is less than the marketable lot, allowing the company to clean up fragmented shareholding.
4. From employees under ESOP or sweat equity — A targeted mechanism to repurchase shares held by departing employees or to manage dilution from equity-based compensation.

For most unlisted companies and promoter-heavy listed companies, the tender offer route is the default. It ensures parity of access, a defined timeline, and a cleaner audit trail.

Step-by-Step Buy Back Procedure for Unlisted Companies

The procedural sequence under Companies Act 2013 and the Companies (Share Capital and Debentures) Rules 2014 is as follows:

Step 1 — Verify the Articles of Association

The Articles must explicitly permit buy back. If they do not, pass an ordinary resolution to alter the Articles before anything else. Skipping this step is one of the most common reasons a buy back gets challenged post-facto.

Step 2 — Authorise the Buy Back by Resolution

A special resolution must be passed at a general meeting or through postal ballot (Section 110). The explanatory statement must include disclosures mandated under Rule 17 of the Share Capital Rules — including the basis for the buy back price, sources of funds, and impact on the company's financials.

Step 3 — File Form SH-8 with the RoC

Form SH-8 is the "Letter of Offer" filed with the Registrar of Companies before the offer is opened to shareholders. It must be filed within 30 days of the board or shareholder resolution and must contain:

• Number and class of shares proposed to be bought back
• Buy back price and the basis of determination
• Sources of funds and maximum amount of consideration
• Audited financial statements not older than 6 months

Step 4 — File Form SH-9 (Declaration of Solvency)

At least two directors — one of whom must be the Managing Director, if any — must sign Form SH-9, a declaration that the company will not be rendered insolvent within one year of the buy back. This must be accompanied by an auditor's report.

Step 5 — Open the Offer and Accept Tenders

The buy back offer must remain open for shareholders for a period of not less than 15 days and not more than 30 days. Shareholders tender their shares within this window.

Step 6 — Pay and Extinguish

• Payment of consideration: within 7 days of the closure of the offer
• Extinguishment of shares: within 7 days of payment (the shares must be physically cancelled in the register and the dematerialised records updated)

Step 7 — File Form SH-11 with the RoC

Form SH-11 (Return of Buy Back) must be filed with the RoC within 30 days of the completion of the buy back. It must be accompanied by a compliance certificate signed by two directors.

SEBI Buy Back Regulations 2018: What Listed Companies Must Layer In

For listed companies, the Companies Act procedure runs concurrently with the SEBI (Buy-back of Securities) Regulations, 2018. The additional requirements include:

• Public Announcement (PA): must be made by the company's merchant banker immediately upon board approval
• Draft Letter of Offer: filed with SEBI within 5 working days of the PA; SEBI has 15 working days to issue comments
• Escrow account: a cash escrow equivalent to 25% of the total consideration (for tender offers) or the entire amount (for open market) must be created before the offer opens
• Minimum subscription: for a tender offer, if less than 50% of the announced buy back size is tendered, the offer lapses, and the funds are released from escrow
• Post-buy back report: to be filed with SEBI within 15 days of completion

Insider trading rules under SEBI (Prohibition of Insider Trading) Regulations 2015 apply from the day the buy back decision is under active consideration. Trading windows must be closed for designated persons from that date.

Tax Treatment in FY 2026-27: The Post-Finance Act 2024 Reality

This is where the buy back calculus changed dramatically. Prior to 1 October 2024, a company paid Buyback Distribution Tax (BBT) at an effective rate of approximately 23.3% on the distributed income (consideration minus issue price), and the shareholder received proceeds tax-free. That regime has been dismantled.

The New Regime (Applicable from 1 October 2024 — FY 2026-27)

Under the Finance Act 2024 amendments to the Income-tax Act 1961:

1. The entire buyback consideration received by a shareholder is treated as deemed dividend under Section 2(22)(f) and taxed as income from other sources at the shareholder's applicable slab rate.
2. The cost of acquisition of the shares tendered in the buy back is treated as a capital loss in the hands of the shareholder, available for set-off against capital gains in that year or carry-forward for 8 subsequent assessment years.
3. The company pays no tax at the time of the buy back (BBT is no longer levied).

The practical consequence: a promoter in the 30% slab (plus surcharge and cess, effective ~35.88%) now pays more tax on a buyback than a dividend — since under both instruments, the same slab rate applies, but the shareholder at least gets back their cost base as a capital loss only with a buyback.

Worked Example: Unlisted Company Buy Back in FY 2026-27

Company profile:

• Paid-up equity share capital: Rs. 1,00,00,000 (10,00,000 shares × Rs. 10 face value)
• Free reserves: Rs. 5,00,00,000
• No outstanding secured or unsecured debt

Step 1 — Check the 25% ceiling:

• Paid-up capital + free reserves = Rs. 6,00,00,000
• 25% of Rs. 6,00,00,000 = Rs. 1,50,00,000 (maximum buy back consideration in FY 2026-27)
• 25% of paid-up equity capital = 2,50,000 shares

Step 2 — Fix the buy back price:

• Registered valuer determines fair value at Rs. 150 per share
• At Rs. 150, maximum shares buyable = Rs. 1,50,00,000 ÷ Rs. 150 = 1,00,000 shares ✓ (within the 2,50,000 cap)

Step 3 — Check post-buy back debt-equity ratio:

• No debt, so ratio = 0 ÷ (Rs. 6,00,00,000 − Rs. 1,50,00,000) = 0. Compliant.

Step 4 — Tax in shareholder hands (FY 2026-27, AY 2027-28):

Assume a promoter tenders 30,000 shares. Original cost of acquisition: Rs. 20 per share.

Comparison — if same Rs. 45,00,000 were paid as dividend:

• Tax at ~35.88% = Rs. 16,14,600
• No capital loss is available
• Net tax outgo = Rs. 16,14,600

Conclusion for this promoter: the buy back is marginally more tax-efficient than a dividend purely because the cost of acquisition re-emerges as a capital loss to offset. The older narrative — that buybacks were dramatically more tax-efficient — no longer holds.

For a small shareholder in the 5% slab:

• Tax on buyback proceeds: 5% of Rs. 45,00,000 = Rs. 2,25,000
• Capital loss of Rs. 6,00,000 available (likely no gains to offset immediately; carry-forward available)
• Net outgo: Rs. 2,25,000

This shareholder benefits meaningfully from the buy back since the capital loss can be carried forward and used later. Tax planning around the timing of the buyback and the availability of capital gains is therefore important for this cohort.

Restrictions and Situations Where You Cannot Proceed

Before a buy back resolution is passed, the board must confirm none of the following subsist:

• Default in repayment of deposits, debentures, term loans or interest thereon — unless the default has been remedied in full before the board resolution
• Default in payment of statutory dues — provident fund, ESI, tax, etc.
• Defaulted on payment of dividend declared in the preceding year
• The company has not complied with Sections 92 (annual return), 123 (dividend), 127 (unpaid dividend account) or 129 (financial statements)

Additionally, post-buy back:

• No further issue of the same kind of shares within 6 months of the buy back — except for bonus issues, ESOP allotments, conversion of warrants, or conversion of debentures/preference shares
• No buy back from any person holding 10% or more of total voting power through open market purchases by a listed company

Common Mistakes and Pitfalls to Avoid

1. Treating board-level buy back as a 25% matter A board resolution authorises a maximum of 10% of paid-up equity capital and free reserves. Going beyond that without a special resolution is void. Check the resolution type before the quantum, not after.

2. Not getting a registered valuer for unlisted buy backs The offer price for unlisted companies must be supported by a valuation report from a registered valuer (Category — Securities or Financial Assets). An informal net asset value calculation by the CFO does not substitute.

3. Forgetting the SH-9 solvency declaration Many companies file SH-8 (the letter of offer) and then skip SH-9, or file it after the offer opens. SH-9 must be filed before the offer is made to shareholders.

4. Miscalculating the 25% limit mid-year If the company has already declared a dividend or made other capital distributions, the free reserves figure changes. Always use the balance sheet date free reserves, then adjust for any distributions made between the balance sheet date and the buy back resolution date.

5. Missing the 30-day SH-11 deadline The Form SH-11 return must be filed within 30 days of the buy back completion date (not the board resolution date, not the offer closure date — the date the last payment is made and shares extinguished). Late filing attracts penalties under Section 450 of the Companies Act.

6. Ignoring TDS obligations on deemed dividend From FY 2026-27, the company must deduct TDS under Section 194 on the buyback consideration at the applicable rate (10% for resident individual shareholders where total dividend income exceeds Rs. 5,000 in the year). Many companies are unprepared for this withholding obligation. Deduct, deposit, and issue Form 16A.

7. Allowing insider trading windows to remain open In listed companies, the decision to consider a buy back is price-sensitive information (UPSI) from the moment the matter is placed before the board. Trading windows must close immediately. Failure here creates personal liability for designated persons and regulatory exposure for the company.

Strategic Alternatives: Running the Comparison Before You Commit

A buy back is one of five capital return levers available to a board. Before committing, model each:

The right choice depends on three variables: shareholder tax positions, the company's post-transaction capital structure, and the board's signalling intent. A buy back signals confidence in valuation. A dividend signals liquidity. A capital reduction signals a structural change. Do not let tax alone drive the decision — but do model the after-tax cash-in-hand for your top five shareholders before the board commits.

Key Takeaways

• Section 68 imposes two parallel 25% caps: 25% of paid-up capital plus free reserves (by quantum of consideration), and 25% of paid-up equity capital (by number of shares). Both must be respected.
• Board resolution suffices only up to 10% of paid-up equity capital and free reserves; anything beyond requires a special resolution.
• Three forms govern the unlisted buy back: SH-8 (letter of offer), SH-9 (solvency declaration), SH-11 (return of buy back within 30 days of completion).
• From 1 October 2024 (FY 2026-27), the company no longer pays Buyback Distribution Tax. The shareholder pays income tax at slab rates on the entire consideration received as deemed dividend, and the cost of acquisition of tendered shares becomes a capital loss available for set-off.
• TDS under Section 194 now applies on buyback consideration — ensure your company deducts and deposits before payment.
• The one-year lock-in and the 6-month restriction on fresh issue of the same class of shares are hard stops — calendar them before you begin.
• For listed companies, SEBI Buyback Regulations 2018 add a public announcement, an escrow account, SEBI review of the letter of offer, and insider trading window obligations on top of the Companies Act requirements. Budget 75–90 days of total regulatory runway.