A buy-back is a distribution of cash to shareholders through the purchase of the company's own shares. It is governed by Section 68, and it is subject to a dense set of conditions: the approval route, the funding source, the debt-equity ratio, the completion timeline, and the extinguishment requirement. A buy-back that fails any one condition is invalid.
The Approval Route
The board route is available for a buy-back of up to ten per cent of the paid-up equity capital and free reserves. The special resolution route is available for a buy-back of up to twenty-five per cent. The board resolution must be passed at a duly convened meeting, and the special resolution must be accompanied by the disclosures prescribed by the rules.
The Funding and Ratio
The buy-back can be funded out of free reserves, the securities premium account, or the proceeds of a fresh issue. The post-buy-back debt-equity ratio must not exceed 2:1. The company must transfer to the Capital Redemption Reserve a sum equal to the nominal value of the shares bought back. A buy-back that breaches the ratio is invalid, and the company and its officers are liable to penalty.
The Extinguishment
Section 68(7) requires the company to extinguish and physically destroy the shares within seven days of the completion of the buy-back. The company cannot retain the shares as treasury stock. The Delhi High Court has emphasised that the extinguishment requirement is mandatory, and the retention or reissue of the bought-back shares is prohibited.
The Consultant's Role
A buy-back consultant coordinates the approval, the funding analysis, the ratio computation, the extinguishment, the SH-11 filing, and the tax compliance. The consultant also advises on the choice between the board route and the special resolution route, and on the timing of the buy-back relative to the company's financial position.
Call to Action
Anuj Desai & Associates advises companies on the Section 68 buy-back compliance—from the approval route and the funding analysis to the debt-equity ratio, the extinguishment, and the SH-11 filing. If you are planning a buy-back, we can help you structure a compliant transaction.
📧 office@anujdesaiassociates.com
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