Capital Market and Securities Laws · Buy-Back of Securities

Section 68 Companies Act: Sources and Conditions for Buy-Back

Updated 11 October 2026 · Fact-checked

Section 68 lets a company buy back securities from free reserves, securities premium or a fresh issue of a different kind. You need authority in the articles, a special resolution (Board resolution if up to 10% of total paid-up equity capital and free reserves), the 25% cap, a 2:1 debt test and fully paid-up securities.

Understand Section 68: Sources and Conditions for Buy-Back

A buy-back is when a company purchases its own shares or other specified securities from its holders. The securities are then extinguished. Section 68 of the Companies Act, 2013 sets out when a company may do this.

The law protects creditors and shareholders. Money paid out to buy back shares must not come from capital that creditors rely on. So the Act limits the sources of funds, caps the size of the buy-back and restricts the company's debt after it.

There are three permitted sources: free reserves, the securities premium account, or the proceeds of an issue of shares or other specified securities. There is one catch. You cannot buy back any kind of security out of the proceeds of an earlier issue of the same kind. For example, equity shares cannot be bought back out of money raised from an earlier equity issue. Money from a preference share issue can be used to buy back equity shares. Explanation II adds that free reserves include the securities premium account.

Then come the conditions in section 68(2). The articles must authorise the buy-back. A special resolution at a general meeting is needed, unless the buy-back is 10% or less of total paid-up equity capital and free reserves and the Board has authorised it by a resolution at its meeting.

The size cap has two versions. In general, the buy-back must be 25% or less of the aggregate of paid-up capital and free reserves. But for a buy-back of equity shares in a financial year, the 25% is measured on the company's total paid-up equity capital in that financial year only. Free reserves are not added in that case.

The post-buy-back debt must not exceed twice the paid-up capital and free reserves. All securities must be fully paid-up. Listed securities follow SEBI regulations. Others follow the prescribed rules. A gap of one year is needed between offers.

Remember the lead-in line: the section starts with 'Notwithstanding anything contained in this Act'. So these conditions override other provisions of the Act that might otherwise restrict a company from buying its own shares.

Key rules to remember

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.

How to solve Section 68: Sources and Conditions for Buy-Back questions

Use this order for any question on sources and conditions. It follows the structure of section 68 and keeps your answer in the provision, facts, conclusion format.

1Identify the securities and the company: equity or other securities, listed or unlisted.
2Check the source of funds against section 68(1): free reserves, securities premium, or proceeds of a fresh issue. Reject the proceeds of an earlier issue of the same kind.
3Check authority: do the articles authorise buy-back? If not, the company cannot proceed.
4Compute free reserves and total of paid-up capital and free reserves. Include securities premium in free reserves. Exclude revaluation reserve unless the facts say it is realised.
5Calculate 10% and 25% of the relevant base. Decide whether a Board resolution suffices or a special resolution is needed, and whether the 25% cap is crossed.
6Calculate post-buy-back debt and compare with twice the paid-up capital and free reserves after the buy-back.
7Check the remaining conditions: fully paid-up, SEBI regulations or prescribed rules, and the one-year gap since the last offer.
8Write a clear conclusion: permitted or not, and what the company must do or change.

Quickest way: Four-gate check

When to use it: Use when the question gives numbers and asks whether a buy-back is allowed, or what the maximum buy-back is.

Gate 1 - source: free reserves, securities premium, or fresh issue of a different kind.
Gate 2 - approval: up to 10% (of total paid-up equity capital and free reserves) means a Board resolution is enough; above 10% needs a special resolution.
Gate 3 - cap: for equity shares, the buy-back must not exceed 25% of total paid-up equity capital in that financial year. For other securities, the cap is 25% of paid-up capital plus free reserves.
Gate 4 - debt: debt after buy-back must be at most twice the paid-up capital plus free reserves after buy-back.
Mention articles, fully paid-up status and the one-year gap in one line each, then conclude.

Common mistakes in Section 68: Sources and Conditions for Buy-Back

Saying the Board can approve any buy-back up to 25%.
Students mix up the 10% and 25% figures.
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.
Students remember proceeds of an issue as a source but miss the proviso.
Fix: Always check the kind. Same kind of earlier issue is barred; a different kind is allowed.
Forgetting that free reserves include securities premium.
Securities premium is listed as a separate source, so students treat it as outside free reserves.
Fix: Explanation II to section 68 says free reserves include the securities premium account. Add it when computing the base.
Testing the debt ratio before the buy-back.
Students use the balance sheet figures as given.
Fix: The section tests debts owed after buy-back against paid-up capital and free reserves. Reduce capital and reserves by the buy-back amount, and include any new borrowing used to fund it.
Ignoring the articles of association.
Students focus on resolutions and limits only.
Fix: Authorisation by the articles is the first condition. If the articles are silent, alter them first.
Confusing the one-year gap with the one-year completion period.
Both use the same duration.
Fix: Completion: within one year of the resolution. Gap: no new offer within one year of closure of the preceding offer.

Worked examples

Example 1

Shine Textiles Ltd has paid-up equity capital of ₹40,00,000 and free reserves of ₹1,60,00,000 (including securities premium). Its articles authorise buy-back. It plans to buy back equity shares. Find the maximum equity buy-back in a financial year (a) that the Board can approve alone by a resolution at its meeting, and (b) with a special resolution of the shareholders. Assume the debt test is met.

Show the solution

Board resolution threshold: 10% of (total paid-up equity capital + free reserves) = 10% × (₹40,00,000 + ₹1,60,00,000) = 10% × ₹2,00,00,000 = ₹20,00,000.
Overall limit for equity shares: the proviso to section 68(2)(c) applies to a buy-back of equity shares in any financial year. The 25% is then taken on total paid-up equity capital in that financial year = 25% × ₹40,00,000 = ₹10,00,000. Free reserves are not added.
Board alone: the Board can act only if the buy-back is within both limits. The maximum is the lower of the 10% threshold (₹20,00,000) and the equity cap (₹10,00,000) = ₹10,00,000.
With a special resolution: shareholder approval removes the 10% threshold as a constraint, but not the equity cap. The maximum is still ₹10,00,000.
So an equity buy-back of ₹10,00,000 is within the 10% threshold of ₹20,00,000. The Board can approve it alone, and a special resolution does not raise the ceiling.

Answer: (a) The Board alone can approve an equity buy-back of up to ₹10,00,000, which is the lower of ₹20,00,000 (10% threshold) and ₹10,00,000 (equity cap). (b) With a special resolution the maximum is also ₹10,00,000, because the equity cap of 25% × ₹40,00,000 = ₹10,00,000 applies for that financial year. The other conditions of section 68(2) must still be met.

Example 2

Kaveri Ltd has paid-up equity capital of ₹50,00,000 and free reserves of ₹70,00,000. Its total secured and unsecured debt is ₹2,00,00,000. It proposes a buy-back of equity shares worth ₹20,00,000 out of free reserves, with no change in debt. Its articles authorise buy-back and a special resolution is passed. Can it proceed under section 68?

Show the solution

Source: free reserves, which is permitted.
Approval at the proposed ₹20,00,000: 10% of (₹50,00,000 + ₹70,00,000) = 10% × ₹1,20,00,000 = ₹12,00,000. The proposed ₹20,00,000 is above this, so a special resolution is needed. One has been passed, so the approval condition is met.
Cap for equity shares: 25% of total paid-up equity capital in the financial year = 25% × ₹50,00,000 = ₹12,50,000. The proposed ₹20,00,000 is more than ₹12,50,000, so the cap is breached.
Debt test for the proposed ₹20,00,000: paid-up capital + free reserves after buy-back = ₹1,20,00,000 - ₹20,00,000 = ₹1,00,00,000. Twice this is ₹2,00,00,000. Debt of ₹2,00,00,000 is not more than that, so this test is met.
Largest permitted equity buy-back in that financial year = ₹12,50,000, because the equity cap applies per financial year. Check the debt test at that size on the reduced base: ₹1,20,00,000 - ₹12,50,000 = ₹1,07,50,000. Twice this is ₹2,15,00,000, and debt of ₹2,00,00,000 is within it.
Approval at ₹12,50,000: this is above the 10% threshold of ₹12,00,000, so a special resolution is still needed, and one has been passed.

Answer: No, not as proposed. The approval and debt tests are met at ₹20,00,000, but a ₹20,00,000 buy-back of equity shares exceeds the equity cap of ₹12,50,000 (25% of ₹50,00,000) for that financial year. The company can proceed only if it reduces the buy-back to ₹12,50,000 or less, with a special resolution, subject to the other conditions such as fully paid-up shares and the SEBI regulations or prescribed rules. If the securities were not equity shares, the general cap of 25% × ₹1,20,00,000 = ₹30,00,000 would apply, and ₹20,00,000 would be within it.

Exam tips

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.
Close with a one-line conclusion that says whether the buy-back is permitted.

Practice questions from Buy-Back of Securities

Section 68: Sources and Conditions for Buy-Back in other exams

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

Section 68: Sources and Conditions for Buy-Back: frequently asked questions

What are the sources of buy-back under section 68?

Free reserves, the securities premium account, or the proceeds of an issue of shares or other specified securities. A company cannot use the proceeds of an earlier issue of the same kind of securities to buy back that kind.

When is a special resolution not required for buy-back?

It is not required when the buy-back is 10% or less of the total paid-up equity capital and free reserves and the Board has authorised it by a resolution passed at its meeting. Above 10%, a special resolution at a general meeting is needed.

What is the 25% limit in buy-back?

In general, the buy-back must be 25% or less of the aggregate of paid-up capital and free reserves. For a buy-back of equity shares in a financial year, the 25% is taken on the total paid-up equity capital in that financial year only, without adding free reserves.

What is the debt-equity ratio condition for buy-back?

Secured and unsecured debts owed by the company after the buy-back must not be more than twice its paid-up capital and free reserves. The Central Government may notify a higher ratio for a class or classes of companies.

Can a company make another buy-back offer soon after one?

No. No offer of buy-back can be made within one year from the date of closure of the preceding offer, if any.