Buy-back of shares is a mechanism by which a company repurchases its own shares from shareholders, reducing the number of outstanding shares in the market. While buy-back can be a strategic tool for improving financial ratios and shareholder value, the Companies Act, 2013 under Section 70 imposes restrictions and prohibitions on buy-backs under certain conditions to protect creditors, ensure fair governance, and prevent misuse.
What is Buy-back?
Buy-back means a company buys its own shares from shareholders. This is usually done to:
- Reduce the number of shares in the market,
- Increase the value of remaining shares,
- Return surplus cash to shareholders.
But, not all companies can do buy-back anytime they want. There are certain restrictions under Section 70 of the Companies Act, 2013.
Step-by-Step Guide: Ensure Compliance Before Buy-back
Step 1: Check Financial Position
- Ensure the company has sufficient free reserves or securities premium.
- Confirm that the debt-equity ratio post-buyback does not exceed 2:1 (or such other ratio as prescribed for specific sectors).
Step 2: Ensure No Default Exists (Section 70(1)(a))
- Obtain confirmation from accounts and legal team that:
- No default has occurred in repayment of deposits, interest, loan, debentures, or dividends.
- If there was any past default, it has been remedied for at least 3 years.
Step 3: Compliance with Key Sections (Section 70(1)(b))
Ensure company has filed:
- Annual Returns (MGT-7) – Section 92
- Audited Financial Statements (AOC-4) – Section 129
- Declared and paid all dividends – Section 123
- No punishment pending for non-payment of dividends – Section 127
Step 4: Legal Clearance
- Obtain confirmation that no investigation is ongoing or pending under:
- Companies Act,
- SEBI Act,
- or any other statutory law.
Step 5: Board and Shareholder Approvals
- Conduct Board Meeting for buy-back resolution.
- Obtain approval from shareholders via Special Resolution, if required.
When Buy-back is NOT Allowed? (Section 70)
- If the Company Has Defaulted
A company cannot buy back its shares if it has defaulted in paying any of the following:
- Deposits (taken from public or others),
- Interest on deposits,
- Debentures or preference shares (non-payment or non-redemption),
- Dividend to shareholders,
- Loan or interest to a bank or financial institution.
✅Exception:
If the company clears the default and waits for 3 years, then buy-back is allowed.
- If Company Has Not Filed Important Returns
Buy-back is not allowed if the company has not complied with:
- Annual Return (Section 92),
- Financial Statements (Section 129),
- Declared and paid dividends properly (Section 123),
- Punishment for non-payment of dividends (Section 127).
📝All these filings and actions must be done before buy-back.
- If Company is Under Investigation
If the company is being investigated under:
- Companies Act,
- SEBI Act,
- Or any other law,
Then it cannot go for buy-back until the investigation is over.
Step-by-Step: What a Company Should Check Before Buy-back
- No defaults in loan, deposit, debentures, or dividend payments.
- Wait for 3 years after clearing any past default.
- All returns and financials must be filed (MGT-7, AOC-4 etc.).
- No ongoing investigation.
- Board and shareholder approvals must be taken.
- If the company is listed, follow SEBI rules also.
⚠️ Penalty for Violating the Rules
If a company does a buy-back even when not allowed:
- The company and officers may face fines up to ₹3 lakh,
- Officers may also face imprisonment up to 3 years.