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.
- 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.
- 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 email@example.com% (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
*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.
- 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.