Capital Market and Securities Laws · Buy-Back of Securities

Buy-Back of Securities: Meaning and Concept

Updated 11 October 2026 · Fact-checked

Buy-back is a company purchasing its own shares or other specified securities, under section 68 of the Companies Act, 2013, out of free reserves, securities premium or fresh-issue proceeds. The shares are then extinguished. To answer questions, state the meaning, the purpose, the sources, and contrast it with redemption and reduction of capital.

Understand Buy-Back of Securities: Meaning and Concept

A company normally issues shares to raise money. In a buy-back, it does the opposite. It pays money to its own shareholders and takes its shares or other specified securities back. Section 68 gives a company this power, subject to conditions.

The law allows a buy-back only out of three sources: its free reserves, the securities premium account, or the proceeds of the issue of any shares or other specified securities. Free reserves include the securities premium account. There is one bar: you cannot buy back any kind of shares or securities out of the proceeds of an earlier issue of the same kind.

Why do companies do it? The law does not list objectives, but the usual reasons are these:

To return surplus cash to shareholders when the company has no better use for it.
To reduce the number of shares, which tends to raise earnings per share.
To support the share price or signal that the management thinks the shares are undervalued.
To buy back shares issued to employees under a stock option or sweat equity scheme.
To change the capital structure or increase the promoters' proportionate holding.

Buy-back is different from redemption and reduction of capital. Redemption normally applies to redeemable preference shares or debentures, which are issued on terms that they will be repaid. Buy-back applies to securities that were not issued with a repayment promise, such as equity shares. Reduction of capital under section 66 needs a special resolution and Tribunal confirmation. It can cancel lost capital, pay off excess capital, or reduce liability on unpaid shares. Section 66(6) says that section does not apply to a buy-back under section 68. So buy-back has its own, separate route and no Tribunal order is needed.

A buy-back is a serious step, so the law adds safeguards. These include authorisation by the articles, a special resolution (or a Board resolution within the 10% limit), limits on size and debt, a declaration of solvency, and extinguishing the shares within seven days of completion. Section 70 also prohibits buy-back in certain situations. The details are covered in the next topics. For this topic, you need the meaning, the purpose and the contrasts.

Key rules to remember

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.

How to solve Buy-Back of Securities: Meaning and Concept questions

Use this method for any question that asks you to explain buy-back, state its objectives or compare it with other concepts.

1Define buy-back in one sentence: a company purchasing its own shares or other specified securities under section 68 of the Companies Act, 2013.
2State the three permitted sources and the bar on using the proceeds of an earlier issue of the same kind.
3Give the objectives in short points: return of surplus cash, higher earnings per share, price support, employee scheme securities, capital structure.
4If the question asks for a difference, set out two or three clear points: nature of securities, approval needed, and who confirms or sanctions.
5For reduction of capital, cite section 66 and the Tribunal's confirmation. Add that section 66(6) excludes buy-back from that section.
6Mention the main safeguards briefly: the articles, a resolution, the 25% and 2:1 limits, the solvency declaration and extinguishment of the shares.
7Close with a clear conclusion that answers the exact question asked.

Quickest way: Meaning-Source-Safeguard-Contrast (MSSC)

When to use it: Use it for short-note and 'distinguish' questions where you have about 8 to 10 minutes.

Meaning: one line with section 68.
Source: free reserves, securities premium, fresh-issue proceeds.
Safeguard: articles, resolution, 25%, 2:1, solvency declaration, destroy within 7 days.
Contrast: redemption (promised repayment, usually preference shares or debentures) and reduction (section 66, Tribunal confirmation).
Conclusion: one line stating why the law regulates the buy-back.

Common mistakes in Buy-Back of Securities: Meaning and Concept

Treating buy-back and reduction of capital as the same thing.
In both, share capital goes down, so they look alike.
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.
Students mix it up with redemption.
Fix: Redemption is on terms fixed at issue. Buy-back is a later decision to purchase securities, such as equity shares, from holders.
Listing the sources wrongly, for example including the proceeds of an earlier issue of the same kind.
Students remember the three sources but miss the proviso.
Fix: Write the three sources and then add the proviso as a separate line.
Forgetting that securities must be extinguished and destroyed.
Students think the company can hold them as treasury shares.
Fix: Section 68(7) requires extinguishing and physically destroying the securities within seven days of the last date of completion.
Writing objectives as legal conditions or mixing them up with conditions.
Both are asked in the same chapter.
Fix: Keep objectives (why) separate from conditions (how). Label them under two headings in your answer.

Worked examples

Example 1

What is buy-back of securities? State the sources from which a company may buy back its own shares under the Companies Act, 2013.

Show the solution

Define: buy-back is the purchase by a company of its own shares or other specified securities under section 68.
Sources under section 68(1): free reserves, the securities premium account, or the proceeds of the issue of any shares or other specified securities.
Add the proviso: no buy-back of any kind of shares or securities may be made out of the proceeds of an earlier issue of the same kind.
Add that free reserves include the securities premium account for this section.
Conclude that a company cannot fund a buy-back from any other source.

Answer: Buy-back is a company purchasing its own shares or other specified securities under section 68. It may be funded only from free reserves, the securities premium account, or the proceeds of a fresh issue of shares or other specified securities. It cannot be funded from the proceeds of an earlier issue of the same kind.

Example 2

Distinguish between buy-back of shares and reduction of share capital.

Show the solution

Governing provision: buy-back falls under section 68; reduction falls under section 66.
Purpose: buy-back returns money to shareholders by purchasing their securities. Reduction can cancel lost capital, pay off excess capital or reduce liability on unpaid shares.
Approval: buy-back needs authority in the articles and a special resolution (or a Board resolution if it is 10% or less of paid-up equity capital and free reserves). Reduction needs a special resolution and confirmation by the Tribunal.
Tribunal: not needed for buy-back. Required for reduction. Section 66(6) states that section 66 does not apply to a buy-back under section 68.
Limits: buy-back must be 25% or less of paid-up capital and free reserves and meet the debt-equity test. Reduction has no such fixed percentage.
Conclude that the two are separate routes with different safeguards.

Answer: Buy-back is governed by section 68. It is done through the company's own resolution and statutory limits, without Tribunal confirmation. Reduction of capital is governed by section 66 and needs a special resolution and the Tribunal's confirmation. Section 66(6) keeps buy-back outside section 66.

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.

Practice questions from Buy-Back of Securities

Buy-Back of Securities: Meaning and Concept in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Buy-Back of Securities: Meaning and Concept: frequently asked questions

What is buy-back of shares under the Companies Act, 2013?

It is a company purchasing its own shares or other specified securities under section 68. The company must use free reserves, the securities premium account or proceeds of a fresh issue. It must also meet conditions such as authority in the articles and a resolution.

What is the difference between buy-back and redemption of shares?

Redemption is repayment of securities issued on terms that they will be repaid, such as redeemable preference shares. Buy-back is the company purchasing its own securities, such as equity shares, from holders under section 68. Buy-back follows its own conditions and limits.

Is Tribunal approval needed for a buy-back?

No. Section 68 does not require Tribunal confirmation. Reduction of capital under section 66 does, and section 66(6) says that section does not apply to a buy-back under section 68.

Why do companies buy back their own shares?

Common reasons are returning surplus cash, improving earnings per share, supporting the share price and buying back securities issued under employee schemes. The Act does not list these objectives. Use them as general explanation in your answer.

What happens to shares after a buy-back?

The company must extinguish and physically destroy them within seven days of the last date of completion of the buy-back. It also keeps a register of the securities bought back.