Buyback of shares along with tax implications :

1. Sources for Buyback u/s 68 of the Act

The company may utilize the following to purchase its own shares:

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  • Free Reserves (or)
  
  
  • Securities Premium Account (or).
  
  
  • The Proceeds of an Earlier Issue of Shares or Other Specified Securities:
    
    
    
    • Proceeds from share warrants do not qualify as a source for buyback if such warrants are convertible into Compulsorily Convertible Preference Shares (“CCPS”) rather than equity shares.
    
    
    
    
  
  
  
  

As per Section 68(2)(c) of the Act, the buyback of equity shares in a financial year shall not exceed 25% of the total paid-up equity capital.

• Section 68(2)(b) prescribes that a special resolution has been passed by members at general meeting. However, if the buy back is less than or equal to 10% of total paid up equity and free reserves, special resolution at general meeting is not required.


• No fresh issue is allowed within 6 months from buy-back, except by way of issue of bonus shares, ESOPs, sweat equity and conversion of debt/preference shares into equity - Section 68(8) of the Act.


• The buyback shall be completed within one year from the date of passing of special resolution.


• Shares must be physically destroyed within 7 days of completion of buy-back – Section 68(7) of the Act.

• Where Company buyback its shares out of free reserves or securities premium, the nominal value shall be transferred to capital redemption reserve account – Section 69 of the Act.

1. Convene board of directors meeting.


2. File MGT 14 within 30 days of passing resolution


3. File Letter of offer in Form SH 8 (Mandatory attachments – Details of promoters, declaration by auditor, CTC of board resolution, copy of notice and audited financial statements of last three years)


4. Filing of declaration of solvency in Form SH 9 (Mandatory attachments – Statements of Assets and liabilities, Auditor’s report and Affidavit as per Rule 17(3) of Companies (Share Capital & Debentures) Rules, 2015


5. Dispatch of letter of offer (Not later than 20 days from its filing with ROC)


6. The offer of buy back shall remain open for a minimum period of 15 days and not exceed 30 days from the date of dispatch of the letter of offer. Where all the members of a company agree, the offer for buy back may remain open for a period less than 15 days.


7. After the closure of the offer, the Company shall open separate bank account and deposit the entire sum payable.


8. Maintain register of bought back shares or securities in the Form SH 10.


9. File Form SH-11 within 30 days of completion of buyback, along with a compliance certificate signed by two directors (one of whom must be the Managing Director, if any), confirming compliance with the provisions of the Act and Rules.

• As per Section 115QA, where an unlisted company buys back its own shares, it shall be liable to pay additional income tax at the rate of 20% (plus applicable surcharge and cess) on the distributed income, i.e., the difference between the buyback price and the issue price of the shares.


• In such cases, the amount received by the shareholder is exempt under Section 10(34A) and not taxable in their hands.


• However, for buybacks taking place on or after 1st October 2024, where the buyback does not fall under Section 115QA, and the amount distributed is out of accumulated profits, the entire amount received by the shareholder may be treated as deemed dividend under Section 2(22)(f) and taxed accordingly.


• In such cases, as per the proviso to Section 46A, the consideration for capital gains will be deemed to be NIL, and the entire amount will be taxed as dividend income in the hands of the shareholder.