The conditions precedent to buy-back, as laid down in Section 77A (2) of the Companies Act are:-

(a) The company’s article should authorise the buy-back. In case the articles are silent on this point, the same has to be amended to include a provision to that effect;

(b) No company shall purchase its own shares or other specified securities unless a special resolution has been passed in the general meeting authorising the buy-back;

(c) The buy-back should be less than 25% of the total paid-up capital and free reserves of the company, and the buy-back of equity shares in any financial year should not exceed 25% of its total paid-up equity capital in that financial year;


The Companies (Amendment) Act, 2001 has authorised the buy-back by means of a resolution at the company’s Board provided the buy-back does not exceed 10% of the total paid-up equity capital and free reserves of the company. But, there cannot be more than one such buy-back in a period of 365 days.

(d) The ratio of the debt owed by the company (debt-equity ratio) shall not be more than twice the capital and its free reserves after such buy-back. The Central Government may, however, prescribe a higher ratio of the debt than that specified in this clause for a class or classes of companies;

(e) All the shares or other specified securities are fully paid up;

(f) The buy-back of the shares or other securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf;


(g) The buy-back of shares or other securities not listed on any recognised stock exchange is in accordance with the guidelines as may be prescribed.

Notice of the meeting:

The notice of the meeting at which the special resolution on buy- back is proposed to be passed, shall be accompanied by an explanatory statement mentioning:

(i) A full and complete disclosure of all material facts;


(ii) The necessity for the buy-back;

(iii) The class of security intended to be purchased under the buy-back;

(iv) The amount to be invested under the buy-back;

(v) The time limit for completion of buy-back;


(vi) The price at which buy-back of shares is to be made.

(vii) If the promoters intend to offer their shares:

(a) The quantum of shares proposed to be tendered,

(b) And the details of their transaction and their holdings for the last six months prior to the passing of the special resolution including information on the number of shares acquired, the price and the date of acquisition.


It is also one of the conditions that every buy-back should be completed within 12 months from the date of passing the special resolution. Where a company has passed a special resolution or the Board has passed a resolution to buy-back its own shares or other securities, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India, a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any.

No such declaration of solvency need be filed with the Securities and Exchange Board of India by a company the shares of which are not listed on any recognised stock exchange.

Another condition to be complied with by a company buying back its own shares is that the company shall, after buy-back, extinguish and physically destroy the securities so bought within seven days of the last date of completion of buy-back.

The SEBI guidelines in this regard stipulate that the securities bought back should be destroyed in the presence of a Registrar/Merchant Banker, and the statutory auditor. A certificate to this effect shall be furnished to the SEBI duly signed by two whole-time directors including the managing director and verified by the Registrar/ Merchant Banker and statutory auditor.


No further issue within six months. Where a company completes a buy-back of its shares or other securities, it shall not make further issue of the same kind of shares including by way of rights or other specified securities within a period of six months, except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock opinion schemes, sweat equity or conversion of preference shares or debentures into equity shares.

Maintenance of register:

Where a company buys back its shares under this section, it shall maintain a register of the securities so bought, the consideration paid for the securities bought back, the date of cancellation of securities, the date of extinguishing and physically destroying the securities and such other particulars as may be prescribed.

A company shall, after buy-back is completed under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed. No such return need be filed with the SEBI if the company buying back is an unlisted company.


In case a company makes default in complying with the provisions of this section or any rules and regulations made there-under, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to Rs. 50,000, or with both.