Reviewed by Team BuyUnlistedShares Research Desk
A buyback of unlisted shares occurs when a company that is not listed on a recognised stock exchange purchases its own shares from existing shareholders. The transaction is governed primarily by the Companies Act, 2013 and the rules made thereunder, with tax consequences laid out in Section 115QA of the Income‑Tax Act.
How does the buyback process work for unlisted companies?
The process begins with a board meeting where the proposal to buy back shares is approved. Thereafter, a special resolution is passed by shareholders authorising the buyback, specifying the maximum number of shares, the price or price range, and the timeline. Once approved, the company issues a letter of offer to eligible shareholders, who may tender their shares within the offer period. After acceptance, the company makes payment, updates its register of members, and files the necessary forms with the Registrar of Companies (ROC).
What approvals and disclosures are required?
Key approvals include:
- Board approval of the buyback proposal.
- Special resolution passed at a general meeting (or through postal ballot/e‑voting) as per Section 68 of the Companies Act, 2013.
- Filing of Form MGT‑14 with the ROC for the special resolution.
- Filing of Form PAS‑3 (return of buyback) within 30 days of completion.
The company must also disclose the pre‑ and post‑buyback shareholding pattern, the rationale for the buyback, and the source of funds (free reserves, securities premium, or proceeds of a fresh issue).
How is the buyback price determined?
For unlisted shares, there is no market price to reference. The company typically appoints an independent valuer or merchant banker to determine a fair value using methods such as net asset value, discounted cash flow, or earnings‑based valuation. The price offered must not exceed the valuation determined by the independent expert, and a fairness opinion may be attached to the letter of offer to provide transparency to shareholders.
What are the tax implications for shareholders and the company?
Under Section 115QA of the Income‑Tax Act, the company distributing income through a buyback must pay tax on the distributed income at the rate of 20 % plus applicable surcharge and cess. This tax is paid by the company before making any payment to shareholders.
For shareholders, the consideration received from the buyback is treated as a deemed dividend under Section 2(22)(e) but is exempt from tax in their hands because the company has already paid the tax on the distributed income. Consequently, shareholders do not incur capital gains tax on the buyback proceeds. If the shares are held as stock‑in‑trade, the amount may be treated as business income, but for typical investors holding shares as capital assets, the buyback proceeds are tax‑free.
What should investors consider before participating?
Investors should evaluate:
- Liquidity: Buybacks offer an exit route, but the window is limited; missing the offer period means waiting for another opportunity.
- Valuation: Compare the offer price with your own assessment of the shares’ fair value to avoid selling at a discount.
- Tax efficiency: Since the company bears the tax, the proceeds are tax‑free in your hands, which can be advantageous compared to a secondary market sale where capital gains tax may apply.
- Regulatory risk: Ensure the company has complied with all procedural requirements; non‑compliance could lead to penalties or the buyback being challenged.
- Impact on shareholding: Consider how the reduction in total shares might affect your proportional ownership and any rights attached to the shares.
Frequently Asked Questions
Ques : Is a buyback of unlisted shares the same as a buyback of listed shares?
Ans : The procedural framework under the Companies Act, 2013 is similar, but listed companies must also comply with SEBI’s Buyback Regulations. For unlisted companies, SEBI regulations do not apply, and the process relies solely on the Companies Act and related rules.
Ques : Can a company buy back shares from a specific shareholder only?
Ans : No. The buyback must be made on a proportionate basis to all eligible shareholders of the same class, unless the company obtains approval for a preferential buyback through a special resolution and meets the conditions laid out in Section 68(7) of the Companies Act, 2013.
Ques : What happens if the company does not have sufficient free reserves?
Ans : A buyback can be funded from free reserves, securities premium account, or the proceeds of a fresh issue of shares or securities specifically for the buyback. If none of these sources are available, the company cannot proceed with the buyback.
Ques : Do I need to pay any tax on the amount I receive from the buyback?
Ans : No. The company pays tax on the distributed income under Section 115QA. The amount you receive is exempt from tax in your hands, provided the shares are held as a capital asset.
Ques : How long does the entire buyback process usually take?
Ans : Timelines vary, but after board approval, the company must convene a general meeting, issue the letter of offer, keep the offer open for a minimum of 15 days and a maximum of 30 days, make payment within 7 days of closure, and file forms with the ROC within 30 days of completion. The whole exercise can typically be completed within two to three months.
Ques : Can the buyback price be lower than the book value per share?
Ans : Yes, the company may offer a price below book value if justified by an independent valuation and approved by the special resolution. Shareholders are free to accept or reject the offer based on their own assessment of value.
Ques : Is there any restriction on the number of shares a company can buy back in a financial year?
Ans : Under Section 68(2)(d), a company may buy back up to 25 % of its total paid‑up equity capital and free reserves in a financial year, subject to the conditions specified in the Act.
Ques : What records should I keep after participating in a buyback?
Ans : Retain the letter of offer, your acceptance form, proof of payment received from the company, and any correspondence. These documents help verify the transaction for future tax filings or if you need to evidence the sale of your shares.
This article was reviewed by Team BuyUnlistedShares Research Desk, whose reviewers hold NISM Series XV (Research Analyst) certification and NISM Series V-A (Mutual Fund Distributor) certification. The desk is NOT a SEBI-registered Research Analyst or Investment Adviser. Nothing in this article constitutes investment advice or a recommendation to buy, sell, hold, or avoid any security. Investments in unlisted securities carry significant liquidity, regulatory, and listing-timing risks. Consult a SEBI-registered Investment Adviser for personalized financial planning.