Share Buyback Procedure

Procedures under the Companies Act are periodically revised. This article is for general information and does not constitute legal advice.

Board-Approved vs Shareholder-Approved Buybacks

Under Section 68 of the Companies Act, a buyback of up to 10% of the total paid-up equity capital and free reserves can be approved by the board alone. Anything larger, up to the overall statutory ceiling, needs a special resolution passed by shareholders. Both routes are still subject to the same overall cap and post-buyback tests described below; the board/shareholder distinction only changes who has to approve it, not whether the underlying conditions apply.

The 25% Cap and the Debt-Equity Test

Total buybacks in a financial year, board-approved and shareholder-approved combined, can’t exceed 25% of the company’s paid-up capital and free reserves. After the buyback, the company’s debt (secured and unsecured) can’t exceed twice its paid-up capital and free reserves, a solvency safeguard meant to stop a buyback from being financed in a way that leaves the company dangerously leveraged.

The Cooling-Off Period

A gap of one year generally has to pass before a company can undertake another buyback, or issue the same kind of securities it just bought back, counted from the closure of the previous buyback. This is meant to stop buybacks being used as a repeated, routine tool to manage share price rather than the exceptional capital-return event it’s intended to be. The company’s tax obligations and the shareholder’s own tax treatment on the proceeds are covered separately in the Dividend and Buyback Taxation article on this site.