"We'll just buy back the founder's shares next quarter": What Section 68 actually requires

"We'll just buy back the founder's shares next quarter": What Section 68 actually requires

A co-founder exits. The board agrees the company will buy back her 18% stake to clean up the cap table before the next funding round. Someone drafts a board resolution, the company pays her, and the shares are cancelled. Eight months later, when the company tries to do exactly the same thing for a second departing shareholder, the auditor refuses to sign off — and the Registrar of Companies has already flagged the earlier buyback as non-compliant. The mistake was not the price or the intention. It was that buyback in India is one of the most tightly fenced corporate actions in the Companies Act 2013, and almost every informal "we'll just buy back the shares" plan violates at least one hard limit in Section 68.

Buyback is not a private arrangement between a company and a shareholder. It is a capital reduction that the law treats with the same suspicion as a dividend raid on creditors. Get the eligibility, the quantitative limits, or the 1-year gap rule wrong, and the consequences run from a void transaction to a fine on every officer in default.

What the law actually requires

The governing provision is Section 68 of the Companies Act 2013, read with Section 69 (transfer to Capital Redemption Reserve) and Section 70 (prohibitions), and operationalised through Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 for unlisted companies.

Sources of funds. Under Section 68(1), a company may buy back its own shares only out of (a) its free reserves, (b) the securities premium account, or (c) the proceeds of a fresh issue of shares or other specified securities. Critically, a buyback cannot be funded out of the proceeds of an earlier issue of the same kind of shares — you cannot issue equity to buy back equity.

Authorisation. Section 68(2) sets the approval architecture:

• A buyback of up to 10% of paid-up equity capital and free reserves can be authorised by a board resolution alone.
• A buyback of up to 25% requires a special resolution of shareholders passed in general meeting, and the Articles of Association must authorise buyback in the first place. If the Articles are silent, they must be amended first.

The quantitative ceilings. This is where founders most often breach the law without realising it. Section 68(2) imposes two simultaneous caps that both must be satisfied:

• The buyback cannot exceed 25% of the aggregate of paid-up capital and free reserves; and
• For equity specifically, the buyback in any financial year cannot exceed 25% of the total paid-up equity capital in that year.

The debt-equity ratio. After buyback, the ratio of secured and unsecured debt to (paid-up capital + free reserves) cannot exceed 2:1. A leveraged company simply cannot buy back shares until it deleverages.

Fully paid-up only. Section 68(2)(d) requires that all shares bought back must be fully paid-up. Partly paid shares are ineligible.

The declaration of solvency. Before buyback, the company must file Form SH-9, a declaration of solvency signed by at least two directors (one being the managing director, if any), affirming the company can meet its liabilities for one year.

Post-buyback filings. After completion, the company must file a return of buyback in Form SH-11 with the Registrar within 30 days, accompanied by a compliance certificate in Form SH-15 signed by two directors. Shares bought back must be physically destroyed within 7 days of completion (Section 68(7)).

The 1-year gap rule — the trap in the exit scenario

Section 68(2) contains a sentence that quietly kills most "we'll buy back the next departing shareholder soon" plans: no offer of buyback shall be made within a period of one year reckoned from the date of the closure of the preceding buyback, where that preceding buyback was authorised by a board resolution under the 10% route.

In plain terms: if you use the quick board-resolution-only 10% buyback, you are locked out of doing another buyback for a full 365 days from closure. The company in our opening scenario bought back the first founder under the 10% board route in one quarter, then tried to repeat it eight months later — squarely inside the prohibited one-year window. That second buyback was legally incapable of being offered.

The workaround is structural, not cosmetic: a buyback authorised by special resolution (the 25% route) is not subject to the same one-year lock between successive board-route buybacks, but a company still cannot exceed the 25%-per-year ceiling. Companies that anticipate multiple exits should plan a single, larger special-resolution buyback rather than a series of small board-route ones.

What the law absolutely prohibits — Section 70

Section 70 lists circumstances where buyback is barred outright. A company cannot buy back its shares if:

• it has defaulted on repayment of deposits, redemption of debentures or preference shares, payment of dividend, or repayment of a term loan to a bank or financial institution (though buyback is allowed if the default has been remedied and three years have elapsed); or
• it has not complied with Sections 92 (annual return), 123 (dividend), 127 (failure to distribute dividend), and 129 (financial statements).

This last point matters enormously for the typical private company: a company with overdue MGT-7A or AOC-4 filings is statutorily disqualified from buyback. Your annual compliance backlog directly blocks your cap-table cleanup.

Practical implications when this is ignored

Buyback breaches are not technicalities the Registrar overlooks. The exposure includes:

• The buyback is void / not legally effective. Shares purportedly cancelled may not actually be extinguished, leaving the cap table legally unresolved — a fatal problem during due diligence for the next funding round.
• Penalty under Section 68(11): if a company makes default in complying with Section 68 or the rules, the company is punishable with a fine of not less than ₹1 lakh extending to ₹3 lakh, and every officer in default is punishable with a fine of not less than ₹1 lakh extending to ₹3 lakh. Note this attaches to each officer personally.
• MCA21 V3 scrutiny. The V3 portal cross-matches SH-11 against the company's capital structure and prior filings. A buyback filed within the prohibited one-year window, or by a company with overdue annual filings, is exactly the kind of anomaly the system auto-flags for the Registrar.
• Auditor qualification. A non-compliant buyback sitting in the books forces a qualified audit report, which itself cascades into lender and investor concerns.

Step-by-step: what to do

• Check Section 70 disqualifiers first. Confirm no default on deposits, debentures, preference shares, dividend, or bank term loans, and that MGT-7A, AOC-4, and financial statements (Sections 92, 123, 129) are all up to date. If anything is overdue, fix the filing backlog before anything else.
• Confirm the Articles authorise buyback. If not, pass a special resolution to amend the AoA.
• Run the three maths checks: buyback ≤ 25% of (paid-up capital + free reserves); equity buyback ≤ 25% of paid-up equity for the year; post-buyback debt-equity ≤ 2:1. Confirm all shares are fully paid-up.
• Pick the right route. For a one-off ≤10% buyback you can use a board resolution — but remember the 1-year lockout before the next one. For larger or repeated buybacks, use the special resolution / 25% route and consolidate exits into a single transaction.
• File the declaration of solvency (Form SH-9) signed by two directors before buyback.
• Complete the buyback, then transfer the nominal value of bought-back shares to the Capital Redemption Reserve under Section 69.
• Physically destroy the bought-back share certificates within 7 days of completion.
• File Form SH-11 (return of buyback) within 30 days with the Registrar, attaching the Form SH-15 compliance certificate.
• Maintain the register of buyback in Form SH-10 at the registered office.

FAQ

Q: Can a private limited company do a buyback without shareholder approval?
Yes, but only up to 10% of paid-up equity capital plus free reserves, and only via a board resolution. Anything above that, up to the 25% ceiling, needs a special resolution and Articles that permit buyback.

Q: How long must we wait between two buybacks?
If the earlier buyback used the 10% board-resolution route, you must wait one full year from the closure of that buyback before offering another. This is the single most common founder mistake during staggered exits.

Q: We have an overdue AOC-4 from last year. Can we still buy back shares?
No. Section 70 bars buyback where the company has not complied with Sections 92, 123, 127, and 129. An overdue annual return or financial statement disqualifies the company until the filings are regularised.

Q: What happens to the shares after buyback?
They must be physically destroyed within seven days of completion, and the nominal value transferred to the Capital Redemption Reserve. The shares are extinguished, not held as treasury stock — India does not permit treasury shares from buyback.

Closing

Buyback looks like a simple cap-table tool, but Section 68 treats it as a creditor-sensitive capital reduction hedged by hard limits, mandatory filings, and a one-year lockout that routinely surprises founders mid-exit. Before you promise a departing shareholder a buyback "next quarter," confirm the maths, the route, and your annual-filing status. For a compliance audit of your company, visit pvtltd.co.

Need help with this?

Our team handles the paperwork. You focus on your business.