CS Executive · Capital Market and Securities Laws

Buy-Back of Securities: formula sheet

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Key formulas

Sources of buy-back (section 68(1)): Free reserves OR securities premium account OR proceeds of issue of any shares or other specified securities; Not out of the proceeds of an earlier issue of the same kind of shares or securities. Free reserves include the securities premium account.
Authorisation (section 68(2)(a), (b)): Articles must authorise + special resolution at a general meeting; Board resolution is enough if the buy-back is 10% or less of total paid-up equity capital and free reserves.
Size limit (section 68(2)(c)): Buy-back ≤ 25% of (paid-up capital + free reserves); For equity shares in a financial year, the 25% is applied to total paid-up equity capital in that year.
Debt-equity limit (section 68(2)(d)): Secured + unsecured debts after buy-back ≤ 2 × (paid-up capital + free reserves); The Central Government may notify a higher ratio for a class of companies.
Time and gap rules: Complete within 1 year of the resolution; no new offer within 1 year of closure of the previous offer; Shares must be fully paid-up. Extinguish and destroy them within 7 days of the last date of completion.
Permitted sources (s. 68(1)): Free reserves | Securities premium account | Proceeds of issue of shares or other specified securities; Not from the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Overall limit - general (s. 68(2)(c)): Buy-back ≤ 25% × (paid-up capital + free reserves); This is the general cap for buy-back of shares or other specified securities.
Overall limit - equity shares (proviso to s. 68(2)(c)): Equity buy-back in a financial year ≤ 25% × total paid-up equity capital in that financial year; Free reserves are not added to the base in this case. Use this base whenever the question is about buying back equity shares.
Board resolution threshold (s. 68(2)(b) proviso): Buy-back ≤ 10% × (total paid-up equity capital + free reserves); If this is met and the Board authorises it by a resolution at its meeting, no special resolution is needed. Above 10%, a special resolution is required.
Debt test (s. 68(2)(d)): (Secured debts + unsecured debts) after buy-back ≤ 2 × (paid-up capital + free reserves); Also written as a 2:1 debt-equity ratio. The Central Government may notify a higher ratio for a class or classes of companies.
Other conditions: Authorised by articles; all securities fully paid-up; SEBI regulations for listed securities, prescribed rules for others; Clauses (a), (e), (f) and (g) of section 68(2).
Gap between offers: No new offer within 1 year from the closure of the preceding offer; Proviso to section 68(2).
Time to complete (s. 68(4)): Complete within 1 year from the date of the special resolution or Board resolution; Period runs from the relevant resolution.
Board-resolution route: Buy-back ≤ 10% of total paid-up equity capital and free reserves, plus Board resolution passed at a meeting; If this limit is crossed, a special resolution at a general meeting is needed.
Explanatory statement contents: Material facts + necessity + class of securities + amount to be invested + time-limit; It must accompany the notice of the general meeting called for the special resolution.
Declaration of solvency: Signed by at least 2 directors (one the MD, if any); filed with Registrar before buy-back; verified by affidavit; Filed with SEBI only if the company is listed. Form SH-9 under the Rules.
Completion period: Within 1 year from the date of the special resolution or Board resolution; Time runs from the resolution, not from the offer date.
Extinguishment: Extinguish and physically destroy within 7 days of the last date of completion; Counted from the last date of completion of the buy-back.
Return of buy-back: File with Registrar (and SEBI if listed) within 30 days of completion; Particulars are as prescribed; the Rules provide Form SH-11.
Gap between offers: No new offer within 1 year from the closure of the preceding offer; Applies under the proviso to Section 68(2).
Bar on fresh issue: No further issue of the same kind of securities for 6 months after completion; Exceptions: bonus issue and discharge of subsisting obligations such as conversion of warrants, ESOPs, sweat equity, or conversion of preference shares or debentures.
Register: Securities bought, consideration paid, date of cancellation, date of destruction, other prescribed particulars; Section 68(9). Form SH-10 under the Rules.
Modes of buy-back (Section 68(5)): (a) existing holders, proportionate basis; (b) open market; (c) securities issued to employees under stock option or sweat equity scheme; Memorise all three. This is the base of most questions.
Listed securities: Section 68(2)(f): buy-back must be per SEBI regulations; Unlisted securities follow prescribed rules under Section 68(2)(g).
Size limit: Buy-back ≤ 25% of aggregate paid-up capital and free reserves (equity: 25% of total paid-up equity capital in that financial year); Section 68(2)(c). Board can authorise alone if buy-back ≤ 10% of paid-up equity capital and free reserves.
Debt-equity after buy-back: Total secured + unsecured debts ≤ 2 × (paid-up capital + free reserves); Section 68(2)(d). The Central Government may notify a higher ratio for a class of companies.
Time limits: Complete within 1 year of resolution; destroy securities within 7 days of completion; return within 30 days of completion; Sections 68(4), 68(7), 68(10).
Gap and re-issue: No new offer within 1 year of closure of the preceding offer; no further issue of the same kind within 6 months; Section 68(2) proviso and 68(8). Exceptions: bonus issue and subsisting obligations such as conversion of warrants, ESOP, sweat equity, conversion of preference shares or debentures.
Gap between buy-back offers: No new offer within 1 year from the closure of the preceding offer (s. 68(2) proviso); Counted from the date of closure of the earlier offer, not from its opening or approval.
Ceiling on buy-back: Buy-back ≤ 25% of (paid-up capital + free reserves); for equity shares, 25% of total paid-up equity capital in that financial year (s. 68(2)(c)); Board resolution route applies only if buy-back is ≤ 10% of total paid-up equity capital and free reserves.
Debt limit after buy-back: (Secured + unsecured debts) after buy-back ≤ 2 × (paid-up capital + free reserves) (s. 68(2)(d)); The Central Government may notify a higher ratio for a class of companies.
Prohibited routes (s. 70(1)): No buy-back (a) through any subsidiary company, (b) through investment company or group of investment companies, (c) while in specified default; Applies directly or indirectly.
Default exception: Allowed if the default is remedied and 3 years have passed after the default ceased (s. 70(1) proviso); Both conditions must be met.
Compliance bar (s. 70(2)): No buy-back if sections 92, 123, 127 and 129 are not complied with; Annual return, dividend, unpaid dividend, financial statements.
Bar on fresh issue: No further issue of the same kind of securities for 6 months after completion (s. 68(8)); Exceptions: bonus issue, or discharge of subsisting obligations such as conversion of warrants, stock options, sweat equity, or conversion of preference shares or debentures.
Same-kind source bar: No buy-back out of proceeds of an earlier issue of the same kind of shares or securities (s. 68(1) proviso); Free reserves and securities premium are still allowed.
Penalty (s. 68(11)): Company: fine ₹1,00,000 to ₹3,00,000; each officer in default: fine ₹1,00,000 to ₹3,00,000; Imprisonment was removed with effect from 21-12-2020.
Register of buy-back: Maintain register: securities bought, consideration paid, date of cancellation, date of extinguishing and destroying, other prescribed particulars; Section 68(9). Applies whenever a company buys back under Section 68.
Return of buy-back: File with Registrar and SEBI within 30 days of completion of buy-back; Section 68(10). No filing with SEBI if the company's shares are not listed on a recognised stock exchange.
Destruction of securities: Extinguish and physically destroy within 7 days of last date of completion; Section 68(7). Entries in the register should match this date.
Penalty for default: Company: fine ₹1,00,000 to ₹3,00,000. Every officer in default: fine ₹1,00,000 to ₹3,00,000; Section 68(11). Imprisonment was removed with effect from 21 December 2020.
Forms (from the Rules): Return: Form SH-11. Compliance certificate: Form SH-15; Form numbers come from the Rules, not the Act text. Use them as taught in your study material.

Quick revision

Section 68(1): buy-back out of free reserves, securities premium account or proceeds of a fresh issue.
No buy-back out of the proceeds of an earlier issue of the same kind of shares or other specified securities.
Buy-back must be authorised by the articles.
Special resolution at a general meeting is needed, unless the Board route applies.
Board route: buy-back is 10% or less of total paid-up equity capital and free reserves, authorised by a Board resolution at a meeting.
Buy-back must be 25% or less of paid-up capital and free reserves; for equity shares, 25% of total paid-up equity capital in that financial year.
Debts after buy-back must not be more than twice the paid-up capital and free reserves.
All securities to be bought back must be fully paid-up.
No fresh offer within one year from the closure of the preceding offer.
Complete the buy-back within one year of the resolution; destroy securities within seven days of completion.
Declaration of solvency is signed by at least two directors, one being the managing director if any; filed with the Registrar and SEBI, but not with SEBI by an unlisted company.
Return is filed within thirty days of completion; default fine is ₹1,00,000 to ₹3,00,000 on the company and on each officer in default.

Common mistakes

Treating buy-back and reduction of capital as the same thing. Fix: Remember that section 66 needs Tribunal confirmation, and section 66(6) says it does not apply to a buy-back under section 68.
Saying buy-back is only for redeemable shares. Fix: Redemption is on terms fixed at issue. Buy-back is a later decision to purchase securities, such as equity shares, from holders.
Saying the Board can approve any buy-back up to 25%. Fix: Board resolution works only at 10% or less of total paid-up equity capital and free reserves. Between 10% and 25%, a special resolution is needed.
Allowing equity buy-back out of an earlier equity issue's proceeds. Fix: Always check the kind. Same kind of earlier issue is barred; a different kind is allowed.
Saying a special resolution is always needed. Fix: A Board resolution passed at a meeting is enough if the buy-back is 10% or less of total paid-up equity capital and free reserves.
Saying the declaration of solvency is filed after the buy-back, or always with SEBI. Fix: File it before the buy-back with the Registrar. File with SEBI only if the company is listed. It needs at least two directors, one being the MD if any.
Listing only two modes and forgetting employee securities. Fix: Recall the three clauses of Section 68(5) in order: holders, open market, employees.
Saying a special resolution is always needed. Fix: Board resolution is enough if the buy-back is 10% or less of paid-up equity capital and free reserves.
Saying the three-year period runs from the date of default. Fix: The three years run from the date the default ceased to subsist, and the default must also be remedied.
Counting the one-year gap from the date of the special resolution or the opening of the offer. Fix: The gap in the proviso to section 68(2) runs from the closure of the preceding offer. The one-year completion period runs from the resolution date.

Exam tips

Always cite section 68 for buy-back and section 66 for reduction. Examiners give credit for the correct section.
In 'distinguish' questions, use three or four clear points and a short conclusion. Do not just write definitions.
Write the sources in a list and do not forget the proviso on proceeds of an earlier issue.
Keep objectives separate from conditions. A short answer should include both only if the question asks.
Write the section number, 68, and then list the conditions in order. Marks follow the structure.
Always state both thresholds: 10% for Board resolution and 25% for the overall limit.
When numbers are given, show the base, each percentage and the comparison before the conclusion.
Mention the proviso on earlier issue of the same kind whenever sources are asked.