Section 68(1) of the Companies Act, 2013 ("the Act") permits a company to buy back its shares out of its free reserves, the securities premium account, or the proceeds of the issue of any shares or other specified securities. The choice of the source of funds has accounting and tax consequences.
The Sources
The free reserves include the general reserve, the retained earnings, and the securities premium. The securities premium account can be used for the buy-back, but the company must comply with the conditions in Section 52. The proceeds of a fresh issue can also be used, but the company cannot use the proceeds of the issue of the same class of shares.
The Accounting Treatment
Section 69 requires the company to transfer to the Capital Redemption Reserve a sum equal to the nominal value of the shares bought back, out of the free reserves or the securities premium. The Capital Redemption Reserve can be used for the issue of bonus shares, but it cannot be distributed as dividend.
The Tax Consequences
The buy-back is subject to the tax provisions, and the company must deduct the tax at source where applicable. The Finance Act, 2024 changed the tax treatment of buy-backs, and the company must consider the tax implications before deciding on the source of funds.
The Limits
The buy-back cannot be funded out of the proceeds of the issue of the same class of shares, and it cannot be funded out of borrowed funds. The company must ensure that the post-buy-back debt-equity ratio is within the 2:1 limit.
Call to Action
Anuj Desai & Associates advises companies on the funding of a buy-back—from the choice between free reserves and securities premium to the Capital Redemption Reserve and the tax consequences. If you are planning a buy-back, we can help you structure the funding.
📧 office@anujdesaiassociates.com
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