Section 68 of the Companies Act, 2013 empowers a company to purchase its own shares or other

securities in certain cases.

Under Section 68 of the Companies Act, 2013, read with Section 77A of the Companies Act, 1956,
signifies that any company limited by shares or company limited by guarantee having a share capital
can buy its own securities, whether it is a public company, private company or an unlisted company.

The buyback of shares is also known as ‘share repurchase’. Buyback of equity shares is a capital
restructuring process. It is a financial strategy that enables a company to buy back its equity share
and securities from the shareholders. Buyback of shares is the method of cancellation of share
capital. It leads to a reduction in the share capital of a company as opposed to the issue of shares
which results in an increase in the share capital.

Provisions of Buyback under Section 68

Section 68 of Companies Act deals with Buyback of Shares by a company. This section corresponds

to section 77A (Power of company to purchase its own securities) of the 1956 Act with no changes

except that the definition of the free reserve has been modified and the penalty provisions have been

enhanced. Unlike the provisions of section 67 which prohibits a company to buy-back its own shares

unless reduction of capital is effected, this section dilutes this general prohibition and allows a

company whether public or private, to purchase its own shares or other specified securities out of

following sources according to Section 68(1) of the Companies Act, 2013:-

a) Its free reserves; or

b) The securities premium account; or

c )The proceeds of any shares or other specified securities.

Objectives of Buyback of Shares

1. Unused cash: If the company has a huge cash reserve with not many future projects to
invest in and if the company thinks the market price of its shares is undervalued, they can
buy back shares as a reward for their shareholders.
2. Tax Gains: The companies prefer buyback to reward their investors instead of distributing
cash dividends because dividends are taxed at higher rate than capital gains. At present,
short-term capital gains are taxed at 10% and long-term capital gains are not taxed.
3. Market Perception: By buying shares back from the shareholders at a higher price than
the prevailing market price indicates the company shares valuation should be higher.
 4. Exit Option: If a company wants to exit the market from a particular country or want to
close the companies it can offer to buy back its shares that are trading in the market.
5. Escape monitoring of accounts and legal controls: If a company wants to avoid the
regulations of the market regulator by delisting. They avoid any public scrutiny of its books
of accounts.

Methods of buyback

A company can buy back its own shares from:

 From the existing shareholders on a proportionate basis

Conditions for Buy-Back of Shares- Section 68(2)

No company shall purchase its own shares or other specified securities unless the following
conditions are fulfilled [sub-section (2)].

a) its articles permit the buy-back ;

b) A Special Resolution has been passed at a general meeting of the company authorizing the buy-
back where the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the
company. Board Resolution would authorize the buyback where the buy-back is10% or less of the
total paid-up equity capital and free reserves of the company, a Board resolution would authorize such
buy-back ;

c) the buyback is 25% or less of the aggregate of paid-up capital and free reserves of the company;
Provided that in respect of the buy-back of equity shares in any financial year, the reference to 25% in
this clause shall be construed with respect to its total paid-up equity capital in that financial year ;

d) DEBT EQUITY RATIO 2:1 :the ratio of the aggregate of secured and unsecured debts owed by the
company after buy-back is not more than twice the paid-up capital and its free reserves.
e) FULLY PAID UP SHARES: all the shares or other specified securities for buy-back are fully paid-
up;

f) the buy-back of the shares or other specified securities listed on any recognized stock exchange is
in accordance with the regulations made by SEBI.

g) The buyback in respect of shares or other specified securities not listed on any recognized stock
exchange is in accordance with Companies (Share Capital and Debentures)Rules, 2014.

Buyback of Shares Procedure  -

 FILING OF LETTER OF OFFER WITH THE REGISTRAR (RULE 17(2)): The company which
has been authorized by a special resolution shall, before the buy-back of shares, file with the
Registrar of Companies a letter of offer in Form No SH 8,Such letter of offer shall be dated
and signed on behalf of the Board of directors of the company by not less than two directors
of the company, one of whom shall be the managing director.

 DISPATCH OF LETTER OF OFFER TO SHAREHOLDERS(RULE 17(4)) : The letter of offer

 OFFER PERIOD RULE 17 (5): As per Rule 17 (5) The offer for buy-back shall remain open
for a period of not less than fifteen days and not exceeding thirty days from the date of
dispatch of the letter of offer. Provided that where all members of a company agree, the offer
for buy-back may remain open for a period less than fifteen days.

 REGISTER OF BUYBACK OF SHARES : The company, shall maintain a register of shares

 CERTIFICATION OF COMPLIANCE: There shall be annexed to the return filed with the
Registrar in Form No. SH.11, a certificate in Form No. SH.15signed by two directors of the
company including the managing director, if any, certifying that the buy-back of securities has
been made incompliance with the provisions of the Act and the rules made thereunder. [rule
17(14)]
 PENALTY
Section 68(11) If a company makes any default in complying with the provisions the company
shall be punishable with fine which shall not be less than one lakh rupees but which may
extend to three lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to three years or with fine which
shall not be less than one lakh rupees but which may extend to three lakh rupees, or with
both.

Advantages of buyback of shares

1. It might increase confidence in the investor’s on the company’s board of directors as they
know directors are ever willing to return surplus cash if it’s not able to earn above the
company’s cost of capital.
2. Buyback helps a company to reduce its excessive share capital that is not required for the
time being and helps the company to utilize its large sum of free reserves.
3. Buyback of shares can increase returns on equity. It has a greater effect when more
undervalued shares are repurchased. This is the most profitable course of action for the
company.
4. Companies may buy back its own shares as protection against unfriendly takeovers from
others companies.
5. The buyback is considered as the quickest method for reduction of share capital. It
involves lower cost transaction.

Disadvantages of buyback of shares

1. The biggest disadvantage of the buyback is that cash which is being used by the company
to repurchase securities can be used for another productive purpose like installing the new
manufacturing unit, hiring new staff, increasing the market expenditure to boost sales
which in return can result in an increase in the profits of the company. But if the company
goes for buyback it overlooks all the profitable alternatives which can be used.
2. The next drawback of the buyback is that sometimes it may give a wrong signal to them
about the company so as to increase the price of the stock so that promoters can sell their
stocks. Hence innocent investors get trapped when the news of buyback comes into the
market domain as the prices of the stock rise.
3. It creates a negative image in the market that company is no more profitable as the
company uses its excess cash for buyback of stocks. It creates a negative image in the
mind of long-term investors who are looking for capital appreciation due to growth I the
company.