Buyback of Shares: Understanding Valuation, Regulatory and Tax Aspects

Buyback of shares refers to the shares issued by the company through repurchasing of items. The company pays the shares’ market value to shareholders. Thereafter, the company reclaims the ownership that it distributed previously. Keep reading to learn more about the buyback of shares-tax, regulatory and valuation aspects.

The basic reasons for a company’s buyback of shares are the following:

• Significant shareholding refers to more costs to the company followed by widespread ownership. So, the buyback of shares comes into existence to cater to the two objectives. One of the objectives is to incorporate ownership compactness. However, the other objective is to minimize capital costs.

• The shares’ market price can be immensely undervalued because of different reasons. Therefore a buyback supports the market price correction.

• The buyback of shares can all help the financials of a company look better. With minimum share numbers, the company’s earnings per share look good.

• Buyback is used often if the company’s promoters are planning for an increment in their shareholding.

Companies have excess funds and not having any proper solution for investment. Also, if the company sees unused cash to be expensive, the company can buy back the shares from the market. However, companies can undertake buybacks for multiple reasons to simply appear attractive, to increase equity value or to company consolidation.

Understanding Buyback of Shares:Tax Regulatory and Valuation Aspects

Tax and Regulatory Framework

Companies Act, 2013: Section 68-70 of the Companies Act, 2013 offers the power of purchasing securities subject to specific laid down restrictions and conditions.

The articles mentioned in the act authorize the buy-back;

The company is witness to a special resolution that is passed during its general meeting. The special resolution mentions that the company authorizes buyback if the buyback quantum is beyond 10% of the company’s free reserves. The company also authorizes if the paid-up equity capital is more than 10%.

Buyback’s Valuation Needs

In Listed Companies

For listed companies no prescribed methodology under SEBI regulations.

However, the board has to decide on a fixed price in the case of a tender offer. As for open market operations, the board has to determine a maximum price.

Buy-Back is offered generally at a premium to the book value/market value per share. However, the board determines the premium.

In Unlisted Companies

According to the Income Tax Act

It is important to keep in mind that ITA’s Section 115QA talks about taxation imposed on distributed income under buy-back. This income is evaluated on company-paid consideration on shares buy-back as minimized by the received amount by the company for such shares issuance.

According to the Companies Act, 2013

There isn’t any prescription for a methodology for Buy-Back price fixing. However, as per the Internation Valuation Standards, it will be the Fair Market Value.

The basis for determining the buy-back price can depend on acquiring a Registered Valuer-issued valuation report.

Suggested rule to apply Net Assets Method according to:

NAV workout from

• The audited account isn’t older than 6 months from the offer document date.

• The unaudited account which isn’t more than 6 months old from the offer document is subjected to the Company’Auditor review.

Unlisted companies are required to obtain a valuation report, before the formation of a buy-back. Buying back shares for companies is an efficient rewarding way for the shareholders.

Company Bio

To get unbiased and professional consultation from highly-experienced chartered accountants on how to buy back shares for your company; look no further than Prakash K Prakash Consultancy. Our team of proficient consultants are experts at helping you understand the various aspects of Buy Back and its tax implications.

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