CHAPTER 16

BUY-BACK OF SECURITIES
Buy-Back of Securities – Introduction
What is Buy-Back?
Buy-back of securities refers to a corporate action where a company repurchases its own
shares or other specified securities from existing shareholders.
After buy-back, the number of outstanding shares reduces, which means the ownership of
the remaining shareholders increases proportionately.
The repurchased shares are usually:
• Extinguished (destroyed), or
• Held as treasury stock (if allowed by law)
Why do Companies Buy Back Their Shares?
Purpose Explanation
Enhance Shareholder Value By reducing number of shares → Earnings
per Share (EPS) goes up → Market price
may increase
Utilize Excess Funds Surplus cash can be returned to
shareholders instead of idle use
Prevent Hostile Takeovers Company reduces shares available in market
→ Harder for acquirer to gain control
Support Share Price Demand increases during buy-back → Helps
stabilize or boost share price
Optimize Capital Structure Helps maintain a desired Debt-Equity ratio
by reducing excess equity
Return Cash in Tax-Efficient Manner Buy-back may be more tax-efficient
compared to dividends

Objectives of Buy-Back of Shares — Detailed Explanation

A company undertakes a buy-back not only to return money to shareholders but also to
achieve various strategic, financial, and corporate-governance goals. The following are the
key objectives:
1. To strategically increase promoters' shareholding
(Subject to SEBI (SAST) Regulations, 2011)
During a buy-back, the total number of outstanding shares reduces.
If promoters do not participate, their percentage shareholding automatically
increases.
Example:
If 1 crore shares exist, promoters hold 40 lakh (40%).
Company buys back 10 lakh shares (from public only).
New share base = 90 lakh → promoter holding increases to 44.44%.
SEBI (SAST) ensures this does not violate takeover norms.
2. To improve Earnings Per Share (EPS)
EPS = Profit After Tax / Number of Equity Shares
 When buy-back reduces total shares:
➜ EPS increases even if profits remain the same.
Higher EPS → Better financial valuation → More attractive to investors.
3. To improve Return Ratios and Enhance Long-Term Value
Buy-back can improve:
• Return on Capital Employed (RoCE)
• Return on Net Worth (RoNW)
• Return on Equity (RoE)
Why?
Because reducing share capital or idle reserves increases efficiency of capital usage.
A leaner balance sheet often indicates better financial health → strengthens long-
term shareholder value.
4. To consolidate stake in the company
When buy-back reduces public shareholding:
• Promoters' stake consolidates
• Control becomes more stable
• Decision-making becomes easier
Useful in companies with dispersed shareholder base.
5. To prevent unwelcome takeover bids
Hostile takeovers require acquiring a major stake in the company.
If the company reduces the number of available shares (floating stock), then:
• Acquirers find it harder to buy significant shares
• Share price may increase (making takeover costlier)
Buy-back acts as a defensive strategy against takeover attempts.
6. To return surplus cash to shareholders
If the company has excess cash that cannot be invested profitably:
• Buy-back distributes this surplus to shareholders
• Provides a balanced capital allocation strategy
• Often preferred over dividends due to tax efficiency
7. To achieve optimum capital structure
Companies aim for a balanced mix of debt and equity.
If equity becomes too high:
• ROE reduces
• Capital becomes inefficient
Buy-back reduces excessive equity and helps reach the optimal debt-equity ratio,
improving financial leverage.
8. To support share price during slow market conditions
During bearish markets, share prices may fall below intrinsic value.
Company intervention through buy-back:
• Creates demand for shares
• Boosts investor confidence
• Prevents sharp decline in stock price
Works like a price-stabilization mechanism.
9. To service equity more efficiently
A company with high equity base must pay:
 • More dividends
• Higher return on equity
By reducing the equity base, the company:
• Improves profitability per share
• Uses capital more efficiently
Overall improves shareholder returns.
10. To provide an Exit route to shareholder
(Especially when shares are undervalued or thinly traded)
Buy-back offers:
• A guaranteed exit window
• Usually at a premium over market price
Especially helpful for:
• Small investors
• Investors in companies with low liquidity
Protects shareholder interests during undervaluation.

Provisions of the Companies Act, 2013 – Buy-Back of Securities

(Sections 68, 69, 70 + Rule 17 of Companies (Share Capital & Debentures) Rules, 2014)
The Companies Act provides the legal framework for how companies can repurchase their
own shares.
Listed companies must comply with SEBI Buy-Back Regulations, 2018 in addition.
Section 68(1): Sources of Buy-Back
Under Section 68(1), a company can buy back its own shares or other specified securities
from any of the following three permitted sources:
1. Buy-Back Out of Free Reserves
Meaning of Free Reserves:
These are reserves available for distribution as dividend (e.g., general reserve,
retained earnings).
Why allowed?
Because free reserves represent accumulated profits, and using them to buy back
shares is similar to distributing profits to shareholders.
Effect on company:
When buy-back is done through free reserves:
The paid-up share capital decreases
An equivalent amount must be transferred to Capital Redemption Reserve (CRR) under
Section 69.
2. Buy-Back Out of Securities Premium Account
Securities premium account is treated as capital, not free reserve.
The Act specifically allows using:
• Premium collected on issue of shares,
• Sitting in Securities Premium Account,
to finance buy-back.
Why allowed?
Because premium collected from shareholders is considered an equity contributor’s
fund, which can be used to re-purchase shares.
 Note:
No CRR transfer is required if buy-back is made entirely out of the securities
premium account, because capital is not diminished.
3. Buy-Back Out of Proceeds of Fresh Issue of Shares / Other Specified Securities
A company can use the money raised from issuing:
• New shares, or
• Other specified securities (e.g., debentures that may be converted)
Important Clarification:
The proceeds must be from a different type of security.
A company cannot use the proceeds of a new issue of the same kind of securities for
buy-back.
Important Restriction / Prohibition
Company cannot buy back shares out of the proceeds of an earlier issue of the same kind.
This is to prevent a company from:
• Raising funds from the public
• Raising the same type of capital again
• Immediately using that money to buy back and manipulate the market.
Examples to understand:
Example 1: Forbidden
Company issues equity shares
Uses the proceeds to buy back equity shares
❌ Not allowed
Example 2: Allowed
Company issues preference shares / debentures / bonds
Uses proceeds to buy back equity shares
Allowed
Example 3: Not allowed
Company issues ESOP-linked specified securities
Uses money to buy back ESOP-linked securities
❌ Not allowed.

Conditions for Buy-Back under Section 68(2) of the Companies Act, 2013
Conditions for Buy-Back – Section 68(2)
A company can buy back its securities only when all the following statutory conditions are
satisfied:
a) Authorisation in Articles of Association
The Articles of Association (AOA) must permit buy-back.
If not, company must first alter AOA by passing a special resolution.
Reason: AOAs define internal powers of the company.
b) Approval by Shareholders / Board
A company must obtain approval for buy-back as follows (Limits apply per-f. y)
Buy-back Size Approval Required
≤ 10% of Paid-up Equity Capital + Free Board Resolution (No need for Special
Reserves Resolution)
 > 10% and ≤ 25% of Paid-up Equity Capital Special Resolution in GM
+ Free Reserves
c) Maximum Limit of Buy-Back: 25%
• Buy-back shall not exceed 25% of the aggregate of Paid-up Capital and Free
Reserves.
• Special Note for Equity Shares:
This 25% limit must be tested only on paid-up equity capital, not all capital.
• Free reserves include securities premium as well.
d) Debt-Equity Ratio Limit
After buy-back:
• Total Debts (Secured + Unsecured) ≤ 2 : 1 × (Paid-up Capital + Free Reserves)
• This ensures the company does not become over-leveraged.
Central Government may allow a higher ratio for certain classes of companies
(example: NBFCs).
e) Fully Paid-Up Securities Only
The company can buy back only fully paid-up shares or specified securities.
Partly paid shares cannot be bought back.
f) For Listed Securities
If shares/securities are listed on a recognized stock exchange → Compliance must be
as per SEBI (Buy-Back of Securities) Regulations, 2018.
g) For Unlisted Securities
If securities are unlisted → Compliance must be as per Companies (Share Capital &
Debentures) Rules, 2014.
Prohibition on Frequent Buy-Back
• Cooling-off period of 1 year
• Company cannot make another buy-back within 1 year from closure of last buy-
back offer.
h) Explanatory Statement
If buy-back is approved through a Special Resolution:
The notice must include an Explanatory Statement containing:
• Full details of buy-back
• Sources of funds
• Impact on capital structure
• Board declaration of solvency, etc.
Purpose: To ensure transparent disclosure to shareholders.
i) Completion Timeline
Every buy-back must be completed within 1 year from:
• date of Special Resolution, or
• date of Board Resolution (whichever applies)
This prevents indefinite pending buy-back offers.
Important Definitions – SEBI (Buy-Back) Regulations, 2018
These definitions are essential to understand compliance requirements during a buy-back,
especially for listed companies.
Associate A person is considered an Associate of the company if:
a) Control Relationship
A person who, directly or indirectly, either:
• Controls the company alone, or
• Controls the company along with relatives
Control can be through:
• Shareholding rights
• Management control
• Voting agreements, etc.
b) Common Employees or Directors
A person whose employee / officer / director is also:
• Employee, officer, or director of company
This ensures that persons with significant influence are
treated as connected entities to prevent misuse of buy-back
process.
Buy-back Period The duration between:
Start:
Date of Board resolution OR postal ballot results authorizing buy-
back, and
End:
Date on which consideration is paid to
shareholders who tendered shares
It covers the complete operational life cycle of a buy-back:
Announcement → Tendering → Acceptance → Payment
This period is important for compliance, reporting, and restrictions.
Control Same meaning as under SEBI SAST Regulations, 2011
(Clause (e) of Regulation 2(1))
It includes:
• Right to appoint majority of directors, or
• Control management or policy decisions
➢ through shareholding
➢ through agreements
➢ through voting power
Intent: Prevent manipulation during buy-back by persons holding
power in company.
Small Shareholder A shareholder whose market value of shares held on the record
date is:
• Not more than ₹ 2,00,000
based on:
Closing price at the exchange with highest trading volume
Purpose:
 • To provide special reservation quota for small investors in
buy-back tender offers
• Typically, 15% reservation for small shareholders
Specified Includes:
Securities • Employee Stock Options (ESOPs)
• Other securities notified by the Central Government
Not limited to equity shares – covers employee incentive
instruments too.
Tender Offer A method of buy-back where the company makes a letter of offer
inviting shareholders to tender their shares at a premium price.
Key highlights:
• Offer is open for a specific period
• Valid only for existing shareholders
• Proportionate acceptance rules apply
Purpose: Provide a fair and transparent exit for shareholders.

Provisions under Section 68(1) of the Companies Act, 2013 along with the related rules.
(Sections 68, 69, 70 + Rule 17 of Companies (Share Capital & Debentures) Rules, 2014)
The Companies Act provides the legal framework for how companies can repurchase their
own shares.
Listed companies must comply with SEBI Buy-Back Regulations, 2018 in addition.
Section 68(1): Sources of Buy-Back (Detailed Explanation)
Under Section 68(1), a company can buy back its own shares or other specified securities
from any of the following three permitted sources:
Permitted Sources Explanation
Buy-Back Out of Free Reserves Meaning of Free Reserves:
These are reserves available for distribution as
dividend (e.g., general reserve, retained earnings).
Why allowed?
Because free reserves represent accumulated
profits, and using them to buy back shares is similar
to distributing profits to shareholders.
Effect on company:
When buy-back is done through free reserves:
• The paid-up share capital decreases
• An equivalent amount must be transferred to
Capital Redemption Reserve (CRR) under
Section 69
Buy-Back Out of Securities Securities premium account is treated as capital,
Premium Account not free reserve.
The Act specifically allows using:
• Premium collected on issue of shares,
• Sitting in Securities Premium Account,
to finance buy-back.
Why allowed?
 Because premium collected from shareholders is
considered an equity contributor’s fund, which can
be used to re-purchase shares.
Note:
No CRR transfer is required if buy-back is made
entirely out of the securities premium account,
because capital is not diminished.
Buy-Back Out of Proceeds of A company can use the money raised from
Fresh Issue of Shares / Other issuing:
Specified Securities • New shares, or
• Other specified securities (e.g., debentures
that may be converted)
Important Clarification:
• The proceeds must be from a different type
of security.
A company cannot use the proceeds of a new issue
of the same kind of securities for buy-back.
Important Restriction / Prohibition
“Company cannot buy back shares out of the proceeds of an earlier issue of the same kind.”
This is to prevent a company from:
• Raising funds from the public
• Raising the same type of capital again
• Immediately using that money to buy back and manipulate the market.
Examples to understand:
Example 1: Forbidden
Company issues equity shares
Uses the proceeds to buy back equity shares
❌ Not allowed
Example 2: Allowed
Company issues preference shares / debentures / bonds
Uses proceeds to buy back equity shares
Allowed
Example 3: Not allowed
Company issues ESOP-linked specified securities
Uses money to buy back ESOP-linked securities
❌ Not allowed.

Conditions for Buy-Back of Shares or Other Securities under the Companies Act, 2013
and SEBI (Buy-Back of Securities) Regulations, 2018.
(Combined view: Companies Act + SEBI Regulations)
1. Maximum Limit of Buy-Back – 25%
A company can buy back up to 25% or less of:
• Aggregate of Paid-up Share Capital + Free Reserves
This limit must be checked on:
• Standalone Financial Statements, AND
 • Consolidated Financial Statements
For equity shares, the 25% limit is calculated only with reference to paid-up equity
capital.
Only fully paid-up shares or securities can be bought back.
Partly-paid shares cannot be tendered.
2. Post Buy-Back Debt–Equity Ratio
After completing the buy-back, the company must maintain:
“Total Debts (secured + unsecured) ≤ 2 : 1 (Paid-up Capital + Free Reserves)”
must be satisfied on BOTH:
• Standalone, AND
• Consolidated financials
This ensures the company does not excessively leverage itself after reducing equity.
Special Relaxation for Certain Subsidiaries
If the company has subsidiaries that are:
• Non-Banking Financial Companies (NBFCs) regulated by RBI
• Housing Finance Companies (HFCs) regulated by National Housing Bank
Then:
Option (b) Available to the Company:
The company may exclude these subsidiaries from its consolidated debt-equity
calculation provided that:
• All such excluded NBFC/HFC subsidiaries must individually maintain:
➢ Debt : (Paid-up Capital + Free Reserves) ≤ 6 : 1
This is because NBFCs/HFCs naturally operate with higher leverage.
Exception under Companies Act
• If the Central Government has notified a higher permissible ratio for a class of
companies (e.g., some NBFCs), that ratio will apply instead of 2:1.
3. Additional Conditions / Restrictions on Buy-Back
These rules avoid misuse of buy-back and protect market fairness.
a) Buy-Back shall NOT be used to delist securities
A company cannot buy back shares:
• With the intention to delist its securities
• Or as an indirect means of reducing public shareholding below statutory
minimum
Delisting requires separate SEBI procedures.
b) No Negotiated Deals / Private Arrangements
Company cannot buy back shares:
• Through negotiated deals
• Through spot transactions
• Through off-market private arrangements
Buy-back must be conducted only:
• Through Tender Offer, OR
• Through Stock Exchange route (open market)
Purpose: Ensure transparency, fairness, and equal opportunity to all shareholders.
 c) One-Year Cooling-Off Period
A company cannot make another buy-back offer:
• Within 1 year from the expiry of the previous buy-back period.
This prevents frequent buy-backs which may manipulate share price.
d) Capital Reduction Must Be Effected
Buy-back essentially reduces share capital.
The company must ensure the consequent reduction of capital is actually carried
out, i.e.:
• Shares bought back must be extinguished
• The capital structure must be updated
• Transfer to Capital Redemption Reserve (CRR) must be done (if applicable
under Sec. 69)
e) All filings to SEBI must be electronic
Every filing related to buy-back must be:
• Submitted digitally
• Digitally signed by:
➢ The Company Secretary, or
➢ A Board-authorized person
This includes:
• Public announcements
• Letter of offer
• Declarations of solvency
• Post-buyback returns
• Certificate of extinguishment
• Compliance reports
Enhances speed, accuracy, and auditability.

Prohibitions for Buy-Back under the Companies Act, 2013:

Under Section 70 of the Companies Act, 2013, a company cannot buy back its own shares or
other specified securities in certain situations. These prohibitions protect shareholders,
creditors, and ensure financial discipline.
Let’s explain each prohibition in detail:
1) Buy-Back through Subsidiary Companies – Prohibited
A company cannot buy back its own shares through any subsidiary company, whether:
• Wholly-owned subsidiary
• Partly-owned subsidiary
Why this prohibition exists?
If subsidiaries were allowed, a company could indirectly manipulate its capital by
routing funds through subsidiaries. This would:
• Hide the real financial position
• Allow circumvention of statutory limits
• Create artificial control over share prices
Hence, to ensure transparency and accountability, buy-back through a subsidiary is
completely prohibited.
 2) Buy-Back through Investment Companies – Prohibited
The company also cannot buy back shares through:
• Any investment company, or
• Any group of investment companies
Why this prohibition exists?
Investment companies hold securities of other companies. If allowed:
• Buy-back funds could be indirectly routed
• Share price manipulation could occur
• It would defeat the purpose of capital regulation
Therefore, to stop layered financing and indirect purchases, this route is prohibited.
3) Prohibition in case of Defaults
A company is not permitted to buy back its shares if it has made any default in the
following:
a) Repayment of Deposits
Default in:
• Repayment of deposits (public or private)
• Repayment of interest on deposits
b) Redemption of Debentures or Preference Shares
If the company fails to redeem:
• Debentures (secured or unsecured)
• Preference shares
or fails to pay interest/dividend on them.
c) Payment of Dividend to Shareholders
If the company declares a dividend but does not pay it → buy-back is prohibited.
d) Repayment of Term Loans or Interest Thereon
If the company defaults in repaying:
• Term loan (from banks or financial institutions)
• Interest on the term loan
e) Reason for this restriction
A buy-back reduces the company’s capital. If the company is not even able to meet
existing liabilities such as deposits or loan repayments, allowing a buy-back would:
• Harm creditors
• Reduce financial stability
• Possibly be used to manipulate share prices at the cost of stakeholders
So, no buy-back until the company is financially disciplined and stable.
The Exception — When Buy-Back is Allowed Even After Default
The buy-back is allowed even if the company had committed a default BUT ONLY IF BOTH
CONDITIONS ARE MET:
Condition 1 — The Default Is Fully Remedied
The company must:
• Repay the overdue amount
• Pay interest/penalty
• Fully cure the default
Condition 2 — 3 Years Have Passed After the Default Ceased
A cool-off period of three years must pass from the date the default is corrected.
Purpose of the 3-year rule
This waiting period ensures:
• The company develops stable financial health
• Creditors regain confidence
• No manipulation is done immediately after curing the default
This protects the interests of depositors, lenders, and investors.

Authorisation for Buy-Back under the Companies Act, 2013 and SEBI (Buy-Back of
Securities) Regulations.
Before a company can buy back its own shares, it must satisfy several legal authorisation
requirements. These requirements ensure transparency, shareholder approval, and
regulatory compliance.
Let’s explain each point in detail:
1) Buy-Back Must Be Authorised by Articles of Association (AOA)
A company cannot undertake a buy-back unless its AOA expressly permits it.
Why?
AOA is the internal constitution of the company.
If the AOA is silent, the company must first alter the AOA by passing a special
resolution before proceeding.
2) Special Resolution Required for Buy-Back (General Rule)
A special resolution must be passed by shareholders at a general meeting (ordinary or
extraordinary) for authorising the buy-back.
A special resolution means:
• At least 75% votes in favour
• Passed in a duly convened general meeting
This ensures shareholder control over major capital reduction decisions.
3) Exception — No Special Resolution Needed for Small Buy-Backs (Up to 10%)
If the buy-back is 10% or less of:
• the total paid-up equity capital, and
• free reserves
then the Board of Directors alone may authorise it through a Board Resolution passed
at a Board Meeting.
Why this exception exists?
Small buy-backs do not significantly affect the company’s capital structure.
Thus, shareholder approval is not mandatory.
4) Filing Requirement with SEBI and Stock Exchanges
Once the resolution is passed, the company must immediately inform regulators.
a) If Special Resolution is passed (SR):
• File a copy with SEBI + Stock Exchanges
• Within 7 days of passing the SR
b) If only Board Resolution is passed (BR):
• File with SEBI + Stock Exchanges
• Within 2 working days from passing the BR
This ensures market transparency and protects investors.
5) Completion Period — Buy-Back Must Be Finished Within 1 Year
Every buy-back must be completed:
• within 1 year from
➢ the date of Special Resolution, or
➢ the date of Board Resolution (whichever applies)
Purpose
This prevents companies from keeping buy-back authorisation open indefinitely and
manipulating the market.
6) Filing of Return After Completion of Buy-Back
After the buy-back period expires, the company must file a Buy-Back Return
containing:
• Number of securities bought back
• Price paid
• Amount utilised
• Method of buy-back
• Other statutory particulars
Where to file?
• Registrar of Companies (ROC)
• SEBI
Time limit:
• Within 30 days of expiry of the buy-back period
The format is prescribed under Companies (Share Capital and Debentures) Rules,
2014.
This helps regulators verify compliance.
7) Maximum Buy-Back Price Must Be Specified (Mandatory for Open Market Buy-
Back)
For a buy-back from the open market, the resolution (Board or Special) must specify:
• the maximum price at which shares will be bought back
If a Special Resolution is required, it must also specify this maximum price.
Reason
• Open market prices fluctuate daily.
To avoid manipulation and protect investors, the maximum price must be pre-
declared.
8) Insider Trading Prohibition
No insider (director, employee, connected person) shall trade in the company’s
securities based on:
• Unpublished Price Sensitive Information (UPSI) relating to the buy-back.
Examples of UPSI (Buy-Back Context):
• Proposed buy-back price
• Proposed buy-back size
• Proposed buy-back method
• Dates of buy-back announcement
Trading on UPSI would harm market integrity and is punishable under SEBI (PIT)
Regulations.
EXAM-READY SUMMARY (For Authorization for Buy-Back)
A company can authorise a buy-back only when:
1. AOA authorises buy-back.
2. Special Resolution is passed at general meeting unless buy-back ≤ 10% of paid-up
equity capital + free reserves → Board Resolution is enough.
3. SR copy must be filed with SEBI & stock exchanges → within 7 days.
4. BR copy must be filed with SEBI & stock exchanges → within 2 working days.
5. Buy-back must be completed within 1 year of SR/BR.
6. After expiry, return of buy-back must be filed with ROC & SEBI → within 30 days.
7. For open-market buy-back → resolution must specify maximum buy-back price.
8. Insider trading on UPSI relating to buy-back is strictly prohibited.

Buy-Back Through Tender Offer exactly as required under the Companies Act, 2013
and SEBI (Buy-Back of Securities) Regulations.
The tender offer is one of the main methods of buy-back.
In this method, the company invites existing shareholders to tender (offer) their shares at
a fixed buy-back price, and shares are accepted on a proportionate basis.
1. Buy-Back from Existing Security Holders on a Proportionate Basis
A company must make the tender offer to:
• All existing shareholders or security holders holding the specific class of
securities
• In proportion to their existing shareholding
• Ensuring fairness and equal treatment
Meaning of “Proportionate Basis”
If the company wants to buy back, say, 10% of its equity, every shareholder gets the
right to tender ~10% of their holdings.
his prevents discrimination and ensures transparency.
2. Reservation for Small Shareholders (15% Rule)
As per SEBI regulations:
• 15% of the buy-back size,
OR
• 15% of the entitlement of shareholders,
whichever is higher,
shall be reserved specifically for small shareholders.
Who is a small shareholder?
A shareholder holding securities worth not more than ₹2 lakhs as per the record date.
Purpose:
• To protect retail investors
• To ensure they get a fair exit opportunity even when bigger shareholders
dominate tendering
PUBLIC ANNOUNCEMENT The company must make a Public Announcement (PA)
(PA) within 2 working days from:
• The date of declaration of postal ballot result for the
Special Resolution, OR
• The date of Board Resolution (if buy-back ≤ 10%)
 Where must the PA be published?
At least in:
1. One English national daily
2. One Hindi national daily
3. One regional language daily (of the city where the
Registered Office is located)
Why is PA necessary?
• Creates public transparency
• Provides official confirmation to markets and
shareholders
• Helps investors track buy-back timelines and process
Additional Requirement
A copy (including soft copy) of the PA must be submitted to:
• SEBI
• All stock exchanges where the company’s securities
are listed
FILING WITH SEBI — Once the record date is finalized, the company must file the
Within 2-Working Days following electronically with SEBI through a registered
from Record Date merchant banker:
Letter of Offer (LoF)
The company must file a Letter of Offer containing all
disclosures prescribed under SEBI regulations.
Key Contents:
• Buy-back price
• Buy-back size
• Entitlement ratio
• Timelines and procedures
• Details of promoters’ participation
• Financial position of company
Note:
For tender offer buy-back, NO draft Letter of Offer
(DLoF) is required.
This speeds up the process.
Certificate from Merchant Banker
A merchant banker (not associated with the company) must
certify that:
1. The buy-back complies with SEBI Regulations
2. The Letter of Offer contains all required disclosures
3. The company is financially capable of completing the
buy-back
This ensures independence and investor protection.
Declaration of Solvency (Form SH-9)
As required under Section 68(6) of the Companies Act:
• The company must file a Declaration of Solvency
 • Signed by at least two directors, one of whom must be
the Managing Director
• Certifies that:
➢ The company is solvent
➢ It can meet all liabilities
➢ It will not be rendered insolvent in the next 1
year after buy-back
Payment of Prescribed Fees
The company must pay the fees as specified by SEBI for
processing the buy-back filings.
This completes SEBI-level compliance.
OFFER PROCEDURE The offer procedure is the operational stage of a tender
offer buy-back. It deals with record date, dispatch of offer
documents, opening & closing of offer, and acceptance of
shares.
Let’s break every point in detail:
Announcement of Record Date in the Public Announcement
• While making the Public Announcement (PA), the
company must specify a Record Date.
• Purpose of Record Date:
➢ To determine who is eligible to participate
➢ To determine the entitlement ratio (i.e., the
number of shares each shareholder can tender
proportionately)
Meaning:
Only shareholders whose names appear in the Register of
Members or depository records as on the record date can
participate in the buy-back.
Dispatch of Letter of Offer (LoF) and Tender Form
After the record date:
• The company must dispatch the Letter of Offer (LoF)
+ Tender Form
to ALL eligible security holders.
Purpose of Letter of Offer:
• Provides complete details about:
➢ Buy-back price
➢ Buy-back size
➢ Entitlement
➢ Timelines
➢ Tendering procedure
➢ Submission methods
This ensures transparency and gives shareholders the
chance to make an informed decision.
Mode of Dispatch of Letter of Offer
The Public Announcement (PA) must clearly disclose that:
 • Dispatch of LoF will be through electronic mode
(email)
in accordance with the Companies Act, 2013.
Exception:
• If any shareholder requests for a physical copy, the
company must send a physical copy.
This balances efficiency with investor convenience.
If Shareholder Does Not Receive LoF / Tender Form
Even if an eligible public shareholder:
• Does not receive the Letter of Offer, or
• Does not receive the tender form,
They can STILL participate in the buy-back.
How?
• By downloading tender forms from stock exchange
websites
• By using the bid-cum-tender form available through
brokers
• By contacting the registrar or merchant banker
SEBI ensures that no shareholder is deprived of
participation due to non-receipt of documents.
Opening and Closing of the Buy-Back Offer
Opening of Offer
• Must be not later than 4 working days from the
record date.
This ensures quick execution after eligibility is determined.
Offer Period
• The offer must remain open for exactly 5 working
days.
This is a fixed timeline under SEBI regulations.
Purpose:
• Prevents long uncertainty in the market
• Ensures fast shareholder exit where needed
Tendering & Settlement Through Stock Exchange
Mechanism
The company must ensure that:
• Share tendering
• Order placement
• Clearing
• Settlement
are conducted through the stock exchange mechanism.
Why Stock Exchange Mechanism?
• Transparent process
• Immediate confirmation
• Eliminates counterparty risk
• Ensures timely settlement
 • Supported by brokers and clearing corporations
• Reduces fraud risk
This system is similar to how shares are sold on the
secondary market.
Acceptance of Shares Based on Entitlement
(Proportionate Acceptance)
The company must accept shares strictly on the basis of
entitlement determined as on the record date.
How It Works:
1. Every shareholder gets a certain minimum entitlement
based on proportional holdings.
2. If more shareholders tender than the buy-back size:
• Shares are accepted proportionately.
3. Priority is given to small shareholders because of the
15% reservation rule.
Important:
• If any shareholder tenders LESS than entitlement ⇒
The remaining unfilled quota is redistributed among
those who tender MORE.
Escrow Account
When a company undertakes a buy-back through tender offer, SEBI requires the company to
create an Escrow Account as a security mechanism.
This ensures that the company has sufficient funds to pay shareholders who tender their
shares.
The escrow account acts as a financial safeguard, protecting shareholder interests and
ensuring that the company completes the buy-back obligation.
1. Purpose of Escrow Account
• To ensure performance of obligations by the company.
• To prevent default in payment to shareholders.
• To provide comfort to SEBI and investors that the company has committed
funds.
The account must be opened on or before the opening of the offer.
2. Amount to Be Deposited in Escrow Account
The deposit depends on the total consideration payable during buy-back.
Deposit Requirement Under SEBI Regulations
Total Buy-Back Consideration Amount to be Deposited in Escrow
Up to ₹100 crores 25% of total consideration
Above ₹100 crores 25% of first ₹100 crores + 10% of the
remaining amount
Example:
If buy-back consideration = ₹250 crores
Deposit =
25% of ₹100 crore = ₹25 crore
10% of remaining ₹150 crore = ₹15 crore
Total Escrow = ₹40 crore
3. Forms of Escrow Account (Permitted Instruments)
The escrow can be maintained through any one or a combination of the following:
Cash or Bank Deposits • Cash deposit with a scheduled commercial
bank
• Most secure and preferred method
• Provides immediate liquidity for pay-out
Bank Guarantee • Guarantee issued by a scheduled commercial
bank
• Must be in favour of the merchant banker
• Provides payment assurance without locking
large cash amounts
Deposit of Frequently Traded, • Company may deposit:
Freely Transferable Equity ➢ its own shares, or
Shares or Securities • other freely transferable securities
• But only those that are liquid and frequently
traded
• Must maintain appropriate margin, since
share value fluctuates
Government Securities • Highly secure
• Provide predictable value
• Suitable for long timelines
Units of Mutual Funds • Specifically:
➢ Gilt Funds (investing in government
securities)
➢ Overnight Funds
• These are low-risk and highly liquid
Combination of the Above The escrow account can be:
• Fully in cash, OR
• Fully in securities, OR
• A mix of cash + bank guarantee + securities,
etc.
This gives companies flexibility while ensuring
investor protection.
4. Role of Merchant Banker in ESCROW Account
Escrow must be in favour of the merchant banker.
Merchant banker ensures:
• Proper deposit of funds
• Monitoring of escrow balance
• Release of funds to Clearing Corporation for payment to shareholders
Merchant banker acts as a regulatory safeguard.
5. Release of ESCROW Amount
Escrow is released only after:
• Buy-back is completed
• All shareholders who tendered shares have been paid
• Merchant banker certifies compliance
 If any part of the buy-back fails due to company’s fault, SEBI can forfeit escrow in
favour of shareholders.
CLOSURE AND PAYMENT TO SECURITIES HOLDERS
This is the final operational stage of the buy-back process.
It deals with:
• opening a special account,
• transferring funds,
• verifying tenders,
• making payments, and
• returning unaccepted shares.
Let’s break down every point clearly.
1. Opening of a Special Account After Closure of Offer
Once the offer period ends (i.e., the last date for tendering shares is over):
The company MUST:
• Open a Special Account with a
“Banker to an Issue” registered with SEBI
(i.e., a bank authorized to handle public issue payments).
• This must be done immediately after the date of closure of the offer.
Purpose of the Special Account
This account is used exclusively for:
• Paying shareholders whose shares are accepted
• Transferring funds from escrow
• Ensuring transparent movement of buyback consideration
2. Deposit of Funds in the Special Account
The company must deposit into the special account an amount that ensures:
“Special Account Deposit + 90% of Escrow Amount = 100% of Buy-Back Consideration
Payable”
Meaning:
The company must place enough money in the special account such that:
• When combined with 90% of the escrow account,
• It equals the full amount payable to shareholders for the buy-back.
Why only 90% of escrow?
Because:
• 10% of escrow remains locked temporarily
• This portion is released only after the merchant banker verifies full compliance
• It protects shareholders against fraud or non-payment
How are the funds moved?
• Company transfers from its own bank account
• And may also transfer required funds from the escrow account (except 10%
portion)
3. Verification of Offers Received
After the offer closes:
The company, along with:
• Registrar to the Buy-Back, and
• Merchant Banker,
must verify all bids/tenders submitted by shareholders.
 Verification includes:
• Checking shareholder eligibility (based on record date)
• Checking dematerialized shares in tender pool
• Matching client IDs and DP IDs
• Verifying physical share certificates (if applicable)
• Ensuring shares are not encumbered, locked, or pledged
Purpose:
To confirm whether the shares tendered are valid and eligible for acceptance.
4. Payment of Buy-Back Consideration
Once verification is complete, the company must:
Make payment to all shareholders whose shares have been accepted.
Payment may be made through:
• Direct credit (NEFT/RTGS/IMPS)
• Direct bank transfer through clearing corporations
• Demand draft (rare cases)
The payment is fully regulated through:
• The Special Account, and
• The Clearing Corporation of the stock exchange
Timeline:
Payment must be completed within 5 working days from closure of the offer.
This is a strict SEBI requirement ensuring shareholders receive money quickly.
5. Return of Unaccepted Shares
Not all shares tendered are always accepted, because acceptance depends on:
• Shareholder entitlement
• Oversubscription ratio
• Proportionate acceptance rules
• 15% reservation for small shareholders
Therefore:
The company must return unaccepted shares to shareholders within the same 5
working days.
For demat shares:
• Shares are released back to the shareholder’s demat account electronically.
For physical shares (rare now):
• Physical certificates are dispatched back (but only for old unresolved cases).
EXTINGUISHMENT OF CERTIFICATES & OTHER CLOSURE COMPLIANCES
Once the buy-back is completed and payments are made, the law requires the company to
formally cancel (extinguish) the bought-back securities and complete several post-buy-back
compliances.
This ensures that the bought-back shares cannot re-enter the market and that the capital
reduction is legally effective.
1. Extinguishment and Physical Destruction of Securities
What must be done?
• The company must extinguish and physically destroy all share certificates or
other specified securities that have been bought back.
In whose presence?
This must be done in the presence of:
 • Registrar to the issue or Merchant Banker, and
• Secretarial Auditor of the company.
Time limit:
• Within 15 days from the date of acceptance of shares/securities.
Stricter SEBI requirement:
The company must ensure that all securities bought back are extinguished within 7
working days from the expiry of the buy-back period, even if acceptance happened
earlier.
Purpose:
• Prevents reuse or resale of bought-back shares
• Ensures genuine reduction of share capital
• Protects investors and market integrity
2. Intimation to Stk Exchange
After extinguishment and destruction:
• The company must furnish full particulars of the securities extinguished and
destroyed
• To all stock exchanges where the company’s shares are listed
• Within 7 days of such extinguishment and destruction
Details generally include:
• Number of shares extinguished
• Distinctive numbers (where applicable)
• Date of extinguishment
3. Compliance Certificate to SEBI & Stk Exchange
Within 7 days from the date of extinguishment and destruction, the company must
submit a certificate of compliance to:
• SEBI, and
• Stock Exchanges
The certificate must confirm that:
• Securities have been properly extinguished
• Physical destruction has been completed
• All timelines and procedures under SEBI Regulations have been followed
Who must certify the compliance?
The certificate must be duly certified and verified by all of the following:
a) Registrar
• If there is no registrar, then by the Merchant Banker
b) Two Directors of the Company
• One of them must be the Managing Director, if the company has one
c) Secretarial Auditor
• Ensures compliance with Companies Act and SEBI Regulations
This triple-level certification ensures accuracy, accountability, and regulatory
confidence.
4. Maintenance of Register of Bought-Back Securities
Statutory Requirement:
• Where a company buys back shares or other specified securities, it must
maintain a Register of Buy-Back.
Format:
 • Form SH-10
(as prescribed under Section 68(9) of the Companies Act, 2013)
Contents of Form SH-10 include:
• Date of buy-back
• Number and description of securities bought back
• Buy-back price
• Mode of buy-back
• Amount paid
• Date of extinguishment
Purpose:
• Acts as official legal record
• Useful for inspections, audits, and future reference
• Ensures transparency in capital reduction

BUY-BACK THROUGH BOOK BUILDING

Buy-back through Book Building is a price discovery mechanism in which shareholders
indicate the price at which they are willing to sell their shares, and the company determines
the final buy-back price based on the bids received.
This method is commonly used when the company wants the market to determine a fair price
for the buy-back.
1) Pre-conditions
Before initiating a buy-back through book building:
• The company must obtain proper authorization, i.e.:
➢ Special Resolution passed by shareholders, OR
➢ Board Resolution, where buy-back is 10% or less of paid-up equity capital
and free reserves
Without such authorization, the company cannot proceed with buy-back.
2) Disclosures, Filing Requirements & Timelines for Public Announcement
Appointment of Merchant Banker
• The company must appoint a SEBI-registered merchant banker
• The merchant banker manages the book-building process and ensures regulatory
compliance
Public Announcement (PA)
• The company must make a public announcement and disclose all required details
as prescribed under SEBI Regulations
Timeline
The public announcement must be made:
• Within 2 working days from the date of:
➢ Board approval or
➢ Shareholders’ approval, as applicable
Commencement of Book Building
• The book building process must commence within 7 working days from the date
of public announcement
These timelines ensure speed, transparency, and certainty for investors.
3) Retail and Promoter Participation
Retail Investors
 • Retail investors are allowed to participate
• They have the option to bid at the buy-back price
This provides retail shareholders a fair exit opportunity.
Promoters & Associates
• Promoters and their associates are NOT permitted to participate in buy-back
through book building
Purpose:
• Prevents price manipulation
• Ensures genuine price discovery
• Protects minority and public shareholders
4) Offer Procedure
Offer Period
• The buy-back offer shall remain open for:
➢ Minimum of 2 trading days
Situation 1: Bids Exceed Buy-Back Size (Oversubscription)
If bids received are more than the buy-back size:
a) Determination of Buy-Back Price
• The price at which 100% of the buy-back size is reached shall be the buy-back
price
b) Acceptance of Shares
• Shares tendered:
➢ At or below the buy-back price
➢ Shall be accepted at the buy-back price
➢ In proportion to the size of bids received
This ensures equitable treatment of shareholders.
Situation 2: Bids Are Less Than Buy-Back Size (Undersubscription)
If bids received are less than the buy-back size:
• All shares tendered shall be accepted
• Acceptance shall be at the highest bid price
This protects shareholders from price disadvantage.
Withdrawal Restrictions
• Once the public announcement is made:
➢ The buy-back cannot be withdrawn or terminated
• Bids once placed cannot be withdrawn
This rule ensures commitment, certainty, and market discipline.
5) Payment of Consideration
• The company must make payment to shareholders
• Within 5 working days from the date of closure of the buy-back offer
Prompt payment protects investor interests and ensures compliance.
6) Extinguishment of Certification
• The provisions relating to extinguishment of securities applicable to tender
offer buy-back shall apply mutatis mutandis (with necessary modifications)
This includes:
• Physical destruction of securities
• Certification by:
➢ Registrar / Merchant Banker
 ➢ Two directors (one MD)
➢ Secretarial auditor
• Filing with SEBI and stock exchanges
• Maintenance of Form SH-10

LIMITS FOR BUY-BACK

1. Maximum Amt.
Board Resolution: 10% of PUSC+FR+SP
Special Resolution: 25% of PUC+FR+SP
2. Max. no. of Eq. Shares
25% of total Eq. Shares
3. Post Buy Back Debt. Equity Shares <2:1
Debt/Eq. = Secured + Unsecured Debt/ESC+PSC+FR+SP