Know about Buyback.

Buy-Back is a corporate action in which a company buys backs its shares from the existing shareholders usually at a price higher than market price. When it buys back, the number of shares outstanding in the market reduces. Section 68 of Companies Act 2013, states about the provision related to Power of Company to Purchase its Own Securities. Buy Back is nothing but reduction of capital.

Points to Remember:

  • Number of shares bought back in a year- 25% of paid up capital.
  • After Buyback Debt Equity Ration < or = 2:1
  • The Central Government may, by order, notify a higher ratio of the debt to capital.
  • Before making buy-back, a company shall file with the Registrar and the SEBI, a declaration of solvency signed by at least two Directors of the company, one of whom shall be the managing director in form SH-9 with an affidavit attached to it to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company.
  • Return of Buyback- File form SH-11 and SH-15 with ROC and SEBI (if company is listed) along with certificate of compliance of provisions of the act within 30 days of such completion.
  • Extinguish and physically destroy the shares- within 7 days of the last date of completion of buyback.
  • Check points:
  • Shares should be fully paid-up
  • Gap between two Buyback shall be 1 year from the date of the closure of the preceding offer of buy-back.
  • Explanatory statement should be attached to the notice of buyback.

Tax Perspective in Buy Back:

The provisions of Income Tax with regard to buyback of shares are covered under Sec 115 QA of the Finance Act, 2013 which applied to only unlisted companies which warranted a tax of 20% on the distributed income.

As the buyback was charged as capital gains in the hands of the shareholder and dividend distribution tax was charged to the company. Therefore the amendment was introduced as an anti-tax avoidance measure.

The Union Budget 2019 announced the said section to be applicable to the listed companies as well. The amendment is effective for all buybacks post-July 5, 2019, vide Finance Act (No.2) 2019.

TermsCompanies that are listedUnlisted Companies
Buyback TaxApplicable to all Listed Companies resorting to buyback of shares post-July 5, 2019, as per Finance (No 2) Act 2019Applicable since the Finance Act 2013
Capital Gains TaxNo longer applicable to the investorNot applicable to the investor since the Finance Act 2013

Note:

  • No Deduction and no credit on the buyback tax liability
  • Tax must be paid to government within 14 days from the date of payment related to buyback.