Share buy-back compliance: SH-7, BBA-1, BBA-2, BBA-3 explained

Share buy-back is one of the more documented events in a private company's life. The Companies Act, 2013 covers it in three sections — 68, 69, and 70 — supported by the Companies (Share Capital and Debentures) Rules, 2014 and a sequence of SH-series filings. For listed companies, the SEBI (Buy-back of Securities) Regulations, 2018 layer additional procedure on top. We focus here on private and unlisted public companies, where the corporate-law framework is the principal source of obligation.

The work falls into three blocks: confirming the company is eligible, executing the buy-back through the prescribed steps, and filing the SH-series returns within the prescribed windows. Each block has a place where the project most often slips. What follows is what we run through in sequence on every engagement.

The eligibility conditions

Before any board resolution is passed, four conditions under Section 68(2) must be satisfied.

The buy-back must not exceed 25% of the aggregate of paid-up capital and free reserves. The 25% calculation is on the post-buy-back basis, against the pre-buy-back capital and reserves. For equity shares specifically, the buy-back is further limited to 25% of the paid-up equity capital in any financial year.

The debt-equity ratio post-buy-back must not exceed 2:1. Debt for this calculation is the aggregate of secured and unsecured debt. Equity is the paid-up capital and free reserves. A company that is leveraged near or above 2:1 cannot buy back equity until the leverage comes down.

All shares to be bought back must be fully paid-up. Partly paid shares are not eligible. This rules out buy-back from holders whose calls remain outstanding.

The articles of association must permit buy-back. If they do not, the AOA must be amended by special resolution before the buy-back is initiated.

A further restriction under Section 68(2)(d): no buy-back can be made within one year of a prior buy-back. The one-year clock runs from the date of completion of the prior buy-back, not from the board approval of the prior buy-back.

The procedural sequence

Board resolution

If the buy-back is up to 10% of the paid-up equity capital and free reserves and is authorised by a board resolution, no shareholder approval is required. Above 10%, a shareholder special resolution under Section 68(2)(b) is needed.

Most private-company buy-backs are above 10% because the founder's intention is usually to buy back a substantial holding from a departing shareholder or to return capital to existing shareholders proportionally. Plan for the special-resolution route as the default.

SH-8 is the board resolution combined with the buy-back declaration. It contains the proposed maximum number of shares, the maximum price, the source of funds (free reserves, securities premium, or proceeds of a fresh issue — note that proceeds of an existing class of shares cannot fund the buy-back of the same class), and the time within which the buy-back will be completed (maximum 12 months from the special resolution).

Declaration of solvency

Before the buy-back is announced to shareholders, the company files SH-9 — declaration of solvency signed by at least two directors, one of whom is the managing director if any. The declaration states that the company is, and will remain after the buy-back, in a position to meet its liabilities and will not become insolvent within one year of the buy-back date.

The declaration is supported by a director's affidavit. We see the affidavit drafted lightly in some buy-backs — a single paragraph that the directors sign in haste. The affidavit should reference the cash-flow analysis underlying the solvency view. If the buy-back is later challenged, the affidavit is the first document a creditor or liquidator will read.

Notice of offer to shareholders

The offer to existing shareholders is sent in the prescribed form. For proportionate buy-back from existing shareholders, the notice gives at least 15 days from despatch and not more than 30 days from despatch for response. Each shareholder either accepts the offer in full, accepts partially, or declines.

The notice is the document where pricing transparency lives. The board's basis for the offer price — typically a valuation by a registered valuer under Rule 11UA-equivalent methodology or an agreed pricing by reference to an independent valuation — should be attached.

Settlement and payment

On receipt of acceptances, the company verifies entitlement, computes the final number of shares to be bought back from each accepting shareholder (pro rata, if oversubscribed), and makes payment within seven days of acceptance closing. The shares bought back must be extinguished within seven days of completion of the buy-back.

SH-10: register of buy-back

Within 30 days of the buy-back completion, the company maintains the register of bought-back securities in SH-10, kept at the registered office, signed by a director and the company secretary.

SH-11: return of buy-back

Within 30 days of completion, SH-11 is filed with the ROC. The form reports the number of shares bought back, the consideration paid, the dates of the offer and acceptance, the manner of buy-back (from existing shareholders, from the open market in the case of listed companies, from odd lots, or under employee stock-option schemes), and confirms compliance with each condition under Section 68(2).

SH-11 is the principal record. A buy-back that is not reflected in SH-11 effectively does not exist in the ROC's record. The cap table will diverge from the MCA filing the moment SH-11 is missed.

SH-7: where it fits and where it doesn't

SH-7 is the form for notice to the Registrar of any alteration of share capital. It is filed when authorised capital is increased, consolidated, sub-divided, cancelled, or otherwise altered. SH-7 is not, despite the title of this article, a buy-back form — it appears in this context because buy-back of equity shares results in capital being extinguished, and a separate intimation of the resulting reduction in paid-up capital may need to be made.

In practice, the buy-back's effect on capital is reported through SH-11. SH-7 is filed for capital alterations that are separate from buy-back — typically the increase of authorised capital that may be needed to permit a fresh issue funding the buy-back.

The BBA series

Listed-company buy-backs require the BBA-series filings under the SEBI Buy-back Regulations, 2018. BBA-1 is the public announcement, BBA-2 is the letter of offer, and BBA-3 is the post-offer disclosure. These are SEBI-portal filings in addition to the SH-series.

For unlisted public companies and private companies, the BBA series does not apply. The SH-series is the complete filing set.

Tax

A buy-back by an unlisted company is subject to buy-back distribution tax under Section 115QA of the Income Tax Act, 1961 at the rate prescribed (currently 20% plus surcharge and cess) on the distributed income, which is the consideration paid less the amount received by the company at issuance. The tax is paid by the company; the buy-back proceeds are exempt in the hands of the shareholder under Section 10(34A).

For listed companies, the tax framework was changed by the Finance Act, 2024 with effect from 1 October 2024 — buy-back consideration is now taxable in the hands of the shareholder as deemed dividend, and Section 115QA no longer applies to listed company buy-backs. This affects the after-tax economics of listed buy-backs materially. The unlisted-company framework continues unchanged.

Where buy-backs slip

We see four recurring slips.

Authorised capital headroom missed. The buy-back reduces paid-up capital, which can take the company below the threshold needed for some compliance obligations or, conversely, can leave authorised capital unused. Plan the authorised-capital position before the buy-back, not after.

Free-reserves calculation done on the wrong period. Free reserves are computed as of the date of the SH-8 board resolution. A company that drafts the SH-8 in April but does not pass the resolution until June must refresh the free-reserves number against the June position.

Solvency declaration signed without the cash-flow analysis. SH-9 is a director's personal undertaking. Sign it against a written cash-flow analysis that supports the one-year solvency view.

SH-11 filed late or not at all. The 30-day window from completion is tight. We schedule SH-11 drafting in parallel with the settlement, not after it.

A clean buy-back file

A clean buy-back leaves a file with the SH-8 resolution, the SH-9 declaration with director affidavits, the valuation report supporting the offer price, the notice of offer to shareholders with proof of despatch, the acceptances received, the settlement records and bank statements showing payment, the SH-10 register, and the SH-11 acknowledgement from the ROC. The file is reviewed once before close, and the cap table is reconciled against SH-11 before any further capital action is taken.

The reason to keep the file tight is that buy-backs are reviewed years later — by tax authorities under Section 115QA, by buyers in diligence, by shareholders in a dispute. The procedural completeness is what supports the corporate decision. The shortcuts that look acceptable in week one of the buy-back become the questions that take three weeks to answer in year three.