What are the various conditions of buyback?

How is buyback and reduction of share

capital different?

What is buyback?

The term "buy back of shares" describes the procedure whereby a business pays its current
owners more than market value in order to repurchase its shares and other designated
securities1. It serves as a means of paying investors their money back. A company's buy-back
of its own shares is just a share capital decrease2. The necessity for a repurchase often
emerges when management believes that the shares are cheap or if the number of outstanding
shares is declining.

A business, whether public or private, can buy its own shares or other securities from the
following sources in accordance with section 68 (1) of the Companies Act, 2013:

1. The unclaimed reserves

2. The account for securities premiums
3. the money received once any shares or other designated securities are issued.

After the enactment of the Companies Act of 20133, buyback of shares is governed by
sections 68, section 69, and section 70 as well as rule no. 17 of the Companies (Share Capital
and Debentures) Amendment Rules, 2016. Subject to certain restrictions, the corporations are
permitted to repurchase their own shares as well as other designated securities. Additionally,
SEBI has released rules governing share buybacks for listed businesses. A business may,
under certain circumstances, buy its own shares or other securities under Section 68 of the
Companies Act of 2013. Accounting treatment of the buyback process is provided in section
69 of the Companies Act, 2013. In some situations, buybacks of shares are restricted under
Section 70 of the Companies Act of 2013.

However, you cannot repurchase any kind of shares or other specified securities with the
money you raised from an earlier offering of the same kind of shares or other securities.
Employee stock options and other assets that the Central Government may sometimes notify
are examples of specified securities.

1
CS Pooja Toshniwal, Company Law Article, Buy Back of Shares under Companies Act, 2013 (17 Jun 2022),
https://taxguru.in/companylaw/buyshares-companiesact-2013.html.
2
Amrit Law, Company Law, What is Share Buyback – Meaning, Objectives, Methods (23 Sept 2023),
https://www.taxmann.com/post/blog/what-is-share-buyback.
3
Companies Act, 2013.
What are the conditions for buyback?

1. Share buybacks must be permitted under the articles of association.

2. Buy-back authorization requires a specific resolution approved at the general meeting.
On the other hand, the Board of Directors may authorise the firm to repurchase up to
10% of the total paid-up equity capital and free reserves by approving a resolution at
its meeting. For such a buy-back (which may only be executed once per year).
3. A buyback should not exceed 25% of the company's entire paid-in capital and free
reserves.
4. Any financial year's buyback of equity shares cannot exceed 25% of the equity capital
that has been paid up.
5. After the buyback, the debt-to-equity ratio shouldn't drop below 2:1.
6. The specified securities as well as the shares must be completely paid for.
7. When it comes to listed shares, the company has to go by SEBI criteria; for other
shares, it must follow stipulated guidelines.
8. There can be only one buy-back each year.
9. Following the buy-back, shares must be physically destroyed within seven days.
10. Within six months following the buyback, no new issues are permitted unless they are
in the form of bonus shares, ESOPs, equity, or the conversion of debt and preference
shares into equity4.

What are the major differences between buyback and reduction of the share capital?

Reduction of the share capital is the process of reducing a company's total share capital, in
contrast to buying shares from shareholders or open market, which involves cancelling or
decreasing the face value of the company's shares. Companies may lower their share capital
to pay out excess cash to shareholders & change their capital structure or wipe off accrued
losses.

This decrease in share capital often requires approval from the court and shareholders of the
company. The formal process of buy back involves revising the company's articles of
organisation and a reduction in share capital affects the nominal or face value of each share,

4
Companies Act, Buy Back of Securities under the Companies Act, 2013 (25 April 2023),
https://www.khuranaandkhurana.com/2023/04/25/buy-back-of-securities-under-the-companies-act-2013.
while a repurchase of shares focuses on the amount of shares. It could affect share capital and
reserves, for example, even if it might not always change the ownership structure.

Shares of a corporation are engaged in capital reductions as well as share buybacks. By

purchasing existing shares from the market, a buyback of shares lowers the total number of
shares of a company that are outstanding whereas, a decrease in share capital, on the other
hand, officially lowers the face value or nominal value of the shares without necessarily
changing the quantity of shares in circulation. Thus, every action has a unique set of
objectives, stages, and consequences for the company's shareholders and financial structure.