Conditions and Legal Provisions under Section 68 for Buyback of Securities

Understand Conditions and Legal Provisions under Section 68

Key rules to remember

Resources for the limits

Equity base (E) for the 25%, 10% and 2:1 tests = Total paid-up capital + Free reserves (including securities premium)

Use this base for the 25% test and the 2:1 test. For the 10% approval test, use paid-up equity capital + free reserves. Free reserves under Section 2(43) include the securities premium account, so add it to the base. Do not add debt, revaluation reserve or capital reserve unless free for distribution.

25% limit

Maximum buyback = 25% × (Total paid-up capital + Free reserves)

For equity shares, the shares bought back in a year also cannot exceed 25% of the total paid-up equity capital.

2:1 debt-equity test

Debt after buyback ≤ 2 × (Paid-up capital + Free reserves, after buyback)

Debt means secured and unsecured debts of the company. A different ratio applies only if the Government notifies it for a class of companies.

Maximum buyback under 2:1 test

Maximum buyback = Equity base − (Debt ÷ 2)

Derived from: Equity after buyback ≥ Debt ÷ 2. Assumes buyback is paid from equity and debt stays unchanged.

Final maximum buyback

Lower of (25% limit) and (2:1 test limit)

Both conditions must be satisfied, so the smaller figure is the cap.

Approval rule

Buyback ≤ 10% of (Paid-up equity capital + Free reserves): board resolution. More than 10% and up to 25%: special resolution.

Articles must authorise buyback in both cases. The 10% test uses paid-up equity capital, while the 25% test uses total paid-up capital. The bases differ if preference capital exists.

Timing rules

Complete within 12 months of resolution; gap of 1 year between buyback offers; destroy securities within 7 days of completion; 6-month bar on fresh issue of same kind (Section 70)

Exceptions to the 6-month bar: bonus issue and discharge of a subsisting obligation.

How to solve Conditions and Legal Provisions under Section 68 questions

1. 1List the sources of funds given: share capital, securities premium, general reserve, profit and loss balance and other reserves. Mark which are free reserves available for distribution. Securities premium is a free reserve under Section 2(43), so include it.
2. 2Compute the equity base: paid-up capital plus free reserves, including securities premium. Leave out any amount not free, such as capital redemption reserve already created or revaluation reserve.
3. 3Calculate 25% of the equity base. This is the first limit.
4. 4Identify total debt (secured and unsecured). Compute the second limit: equity base − (debt ÷ 2).
5. 5Take the lower of the two limits as the maximum buyback. Check the equity-share condition (25% of paid-up equity capital in a year) if the question gives number of shares and price.
6. 6State the approval needed: board resolution if the buyback is 10% or less of paid-up equity capital plus free reserves, otherwise special resolution. If there is preference capital, remember the 10% test uses equity capital only, while the 25% test uses total paid-up capital. Mention the authority in the articles.
7. 7Add the procedural conditions that apply: fully paid shares, declaration of solvency, 12-month completion, one-year gap, six-month bar on fresh issue, and destruction within seven days.
8. 8Write a one-line conclusion giving the maximum amount or whether the proposed buyback is permitted.

Quickest way: Two limits, take the lower

Common mistakes in Conditions and Legal Provisions under Section 68

• Applying only the 25% limit and ignoring the 2:1 debt-equity test.

  The 25% rule is remembered first and the question looks complete.

  Fix: Always compute both limits and pick the lower. Check the debt figure in the question.

• Using debt ÷ equity before the buyback instead of after it.

  Students read the ratio from the given balance sheet.

  Fix: Test the ratio on post-buyback equity. Use the formula: maximum buyback = equity base − debt ÷ 2.

• Saying a special resolution is always needed, or that a board resolution is enough up to 25%.

  Mixing up the 10% approval threshold with the 25% overall limit.

  Fix: Up to 10% of paid-up equity capital and free reserves: board resolution. Above 10%, up to 25%: special resolution.

• Mixing up the time rules: 12 months, one-year gap, six months and seven days.

  Several time periods appear in the same section and nearby ones.

  Fix: Link each to its event: 12 months to complete after the resolution; one year between buyback offers; six months before issuing the same kind of shares again; seven days to destroy securities.

• Forgetting that only fully paid shares can be bought back and that the buyback must be authorised by the articles.

  Students focus on the numerical limits.

  Fix: Keep a short checklist: articles, approval, fully paid, solvency declaration, limits, timing. Write all of them in theory answers.

Worked examples