Procedural Aspects and Tax Implications of Buy Back of Securities

Buy-Back of Securities

Buy-back of securities means the purchase of its own securities by the company.

  • Securities buy-back results in a decrease in the share capital of the company.
  • It is one of the methods of capital restructuring.
  • Management decisions between retaining money for investment or payout to shareholders.

Legal Provisions Governing the purchase of Own Securities

1. Section 68 of the Companies Act,2013 permits companies to buy-back their own shares and other specified securities out of:

  • its free reserves; or
  • the securities premium account; or
  • the proceeds of the issue of any shares or other specified securities.
2. No company shall purchase its own shares or other specified securities unless-
  • Articles must authorise otherwise Amend the Article by passing Special Resolution in General Meeting.
  •  For buy-back  Special Resolution in General Meeting is required. However, if the buy-back is up to 10%of its paid-up capital plus free reserves then  Board resolution shall suffice.
  • Maximum number of Shares that can be brought back in a financial year is twenty-five percent of its paid-up share capital plus free reserves.
  • Maximum amount of Shares that can be brought back in a financial year is twenty-five percent of paid up share capital and free reserves (where paid up share capital includes equity share capital and preference share capital; & free reserves includes securities premium).
  • Post-buy-back debt-equity ratio cannot exceed 2:1.
  • Only fully paid up shares can be brought back in a financial year.
Tax aspects
  • Company to pay tax on buy-back @ 23.30%(inclusive of surcharge and education cess) under section 115QA of the Income Tax Act.
  • Amount received on buy-back exempt in the hands of shareholders under section 10(34A) of  the hands of shareholders under section 10(34A) of the Income Tax Act.

Buy-Back vs Dividend Distribution

In pursuant to amendment vide Finance Act,2020 domestic companies are no longer required to pay a dividend distribution tax(DDT) and dividend income is instead taxable in the hands of shareholders at applicable tax rates.

Tax Impact of Buy-Back vis-a-vis Dividend

Buy Back Scenario                                                Amount in Crores

Cash available for distribution(Incl. of tax)            50.00

Less: Buy-back tax@23.30%                                      (9.45)

A Cash received by shareholders*                  40.55

Dividend Scenario                                             Amount in Crores

Cash available for distribution                                   50.00

Less: Tax in the hands of resident individual

Shareholders@ 42.75%#                                  (21.38)

B Net Cash in the hands of resident

    individual shareholder                                   28.62

C Tax impact- Buy Back vs Dividend

    Distribution(A-B)                                             11.92

*The amount received on the issue of shares has been considered as NIL in the computing of buy-back tax.

# For the purpose of taxability of dividend, we have assumed the highest tax slab and surcharge applicable to resident individual shareholder.

Other Consideration

  • Traditionally dividend option is more efficient.
  • Buy-back can be done subject to the prescribed threshold limits.
  • Buy-back of shares may be tax efficient as compared to dividend distribution in the case of individual shareholders.

Kuldeep Singh

Kuldeep Singh

Chartered Accountant with 5 Years of experience in Financial Analysis and planning, Tax Advisory & Litigation Management.

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