Capital Market and Securities Laws · Buy-Back of Securities

Restrictions, Prohibitions and Penalties in Buy-Back of Securities

Updated 11 October 2026 · Fact-checked

Buy-back restrictions are the limits the Companies Act, 2013 places on a company buying its own securities. Sections 68 and 70 bar buy-back through subsidiaries or investment companies, during uncured defaults, or after non-compliance with sections 92, 123, 127 and 129. They also set a one-year gap, a six-month bar on fresh issues, and fines for default.

Understand Restrictions, Prohibitions and Penalties

A company normally cannot buy its own shares. Section 67(1) says a company cannot buy its own shares unless the resulting reduction of share capital is effected under the Act. Buy-back under section 68 is the permitted route. Because it returns money to shareholders, the law surrounds it with safeguards for creditors and the market.

The restrictions fall into three groups. The first group is conditions and limits in section 68(2): authority in the articles, a special resolution (or Board resolution up to 10%), a 25% ceiling, a debt-equity ratio of 2:1, fully paid-up securities, and compliance with SEBI regulations or prescribed rules. A one-year gap is also required between offers.

The second group is prohibitions in section 70. A company cannot buy back directly or indirectly through a subsidiary, through an investment company or group of investment companies, or while in certain defaults. It also cannot buy back if it has not complied with sections 92 (annual return), 123 (dividend), 127 (unpaid dividend) and 129 (financial statements).

The third group is post-buy-back restrictions and penalties. After a buy-back, section 68(8) bars a further issue of the same kind of securities for six months, with limited exceptions. Section 68(11) sets a fine on the company and on every officer in default.

Think of it this way: the Act wants the company to be solvent, compliant and transparent before it shrinks its capital. It also does not want the company to buy back and then quickly re-issue the same securities.

Key rules to remember

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.

How to solve Restrictions, Prohibitions and Penalties questions

Use this method for any question that asks whether a company can buy back, or what happens if it does not comply.

1Read the facts and list each fact that could matter: dates, defaults, subsidiaries, limits, earlier offers.
2Check the section 68(2) conditions: articles, resolution, 25% limit, 2:1 debt ratio, fully paid-up, SEBI or prescribed rules.
3Check the one-year gap from the closure of the previous offer.
4Check section 70 prohibitions: subsidiary, investment company, defaults, and non-compliance with sections 92, 123, 127, 129.
5If a default exists, test the exception: remedied and three years lapsed after it ceased.
6For a completed buy-back, check the six-month bar on fresh issues and its exceptions.
7State the penalty under section 68(11) if there is a breach.
8Write a clear conclusion: the buy-back is allowed, not allowed, or allowed only after a stated condition.

Quickest way: Four-gate check

When to use it: Use this when you have a short fact-based question and little time.

Gate 1 - Who buys: the company itself, not a subsidiary or investment company.
Gate 2 - Clean record: no uncured default, and sections 92, 123, 127 and 129 complied with.
Gate 3 - Timing: one year since the last offer closed.
Gate 4 - After buy-back: no same-kind issue for six months, except bonus or existing obligations.
Name the section for each gate (70, 70, 68(2), 68(8)) and finish with the fine under 68(11).

Common mistakes in Restrictions, Prohibitions and Penalties

Saying the three-year period runs from the date of default.
The words 'three years' and 'default' appear close together.
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.
Students mix it up with the one-year completion time in section 68(4).
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.
Believing a bonus issue is also barred for six months after buy-back.
Students remember 'no further issue' and miss the exceptions.
Fix: Section 68(8) allows bonus issues and discharge of subsisting obligations like conversion of warrants, stock options, sweat equity, preference shares or debentures.
Quoting imprisonment as a penalty under section 68(11).
Older material mentioned imprisonment up to three years.
Fix: Imprisonment was omitted from 21-12-2020. Now only fines of ₹1,00,000 to ₹3,00,000 apply to the company and each officer in default.
Confusing sections 67 and 68.
Both deal with a company dealing in its own shares.
Fix: Section 67 is the general bar and the financial assistance ban. Section 68 is the permitted buy-back route. Section 70 lists prohibitions.
Forgetting that the bar on buy-back applies to indirect purchases.
Students read only the subsidiary clause.
Fix: Section 70(1) uses 'directly or indirectly', so purchase through subsidiaries or investment companies is also barred.

Worked examples

Example 1

Alpha Ltd closed a buy-back offer on 1 August 2026. It plans to open another buy-back offer on 15 March 2027. Alpha has complied with sections 92, 123, 127 and 129 and has no defaults. Can it proceed?

Show the solution

Rule: the proviso to section 68(2) says no offer of buy-back within one year reckoned from the date of closure of the preceding offer.
The one year from 1 August 2026 ends on 1 August 2027.
The proposed offer on 15 March 2027 falls inside that year.
Other conditions being met does not cure the breach of the gap.

Answer: Alpha Ltd cannot make the new offer on 15 March 2027. It can make an offer only after one year from the closure of the preceding offer, that is after 1 August 2027. A contravention would attract the fine under section 68(11).

Example 2

Beta Ltd defaulted in repaying a term loan instalment to a bank. The default was remedied on 1 April 2025. Beta now wants to buy back shares on 1 October 2026. Advise Beta. Also state whether, after completing the buy-back, Beta can allot shares on conversion of its outstanding warrants within six months.

Show the solution

Rule: section 70(1)(c) bars buy-back if the company has defaulted in repayment of any term loan or interest payable to a bank.
Proviso: the buy-back is allowed if the default is remedied and three years have lapsed after the default ceased.
The default ceased on 1 April 2025. Three years lapse on 1 April 2028.
1 October 2026 is only about one and a half years after, so the proviso is not satisfied.
On the second part: section 68(8) bars a fresh issue of the same kind of securities for six months after completion.
The exceptions include discharge of subsisting obligations such as conversion of warrants.

Answer: Beta Ltd cannot buy back shares on 1 October 2026 because three years have not lapsed after the default ceased. It may do so only after 1 April 2028, subject to the other conditions of section 68. Separately, once a buy-back is completed, allotment on conversion of existing warrants is permitted within six months, because it is the discharge of a subsisting obligation under section 68(8).

Exam tips

Write the section number with every rule: 68(2) for conditions, 70 for prohibitions, 68(8) for the six-month bar, 68(11) for penalty.
In fact-based questions, compute the dates on paper. Show the one-year, three-year or six-month end date, then conclude.
Always list the exceptions: the three-year default proviso and the bonus and subsisting-obligation exceptions to the six-month bar.
Mention that the penalty applies to both the company and every officer in default, and that it is a fine only.
Use the ICSI answer shape: provision, facts, conclusion. Keep it short and finish with a clear yes or no.

Practice questions from Buy-Back of Securities

Restrictions, Prohibitions and Penalties: frequently asked questions

What is the cooling period between two buy-backs?

Section 68(2) says no offer of buy-back can be made within one year from the date of closure of the preceding offer. The year is counted from closure of the earlier offer.

Can a company in default buy back its shares?

Not if it is in default of the kinds listed in section 70(1)(c), such as deposits, interest, debenture or preference share redemption, dividend, or term loans. It may buy back if the default is remedied and three years have lapsed after it ceased.

Can a company issue shares after a buy-back?

Not of the same kind within six months of completion, except by bonus issue or in discharge of subsisting obligations like conversion of warrants, stock options, sweat equity, or preference shares or debentures into equity.

What is the penalty for default under section 68?

The company is punishable with a fine of not less than ₹1,00,000 and up to ₹3,00,000. Every officer in default faces the same range of fine. Imprisonment was omitted with effect from 21-12-2020.

Can a company buy back through its subsidiary?

No. Section 70(1) bars a company from purchasing its own securities directly or indirectly through any subsidiary company, or through an investment company or group of investment companies.