A finance ceiling is only one gate in a lawful buyback
An unlisted company should prepare a source-of-funds, statutory-limit, capital-reserve, post-buyback debt and cash bridge before approving a buyback. A proposal can meet the Board-route percentage and still fail another requirement. Conversely, crossing the Board-route threshold does not alone prohibit the proposal: the special-resolution route and every other applicable condition must be examined.
This guide is checked on 23 October 2026 and addresses the general Companies Act framework for an unlisted company. The governing provisions are section 68: authority, funding, limits and procedure, section 69: capital redemption reserve and section 70: prohibitions. It is a finance precheck, not a complete unlisted-buyback filing manual. Apply the prescribed unlisted-company rules and the current tax and accounting requirements to the actual transaction. Listed companies have the separate SEBI framework.
Use the correct base and avoid counting securities premium twice
Section 68 permits the stated buyback sources: free reserves, securities premium account, or proceeds of an issue of shares or other specified securities, with the prohibition on using proceeds of an earlier issue of the same kind. Its explanation includes securities premium in free reserves for section 68. A working paper that includes premium within its eligible-reserve figure and then adds the same premium again inflates the percentage base.
Start with a reserve-by-reserve schedule and the actual statutory definition and restrictions. A credit balance called reserve is not necessarily available. Distinguish an eligible source in the accounts from the separate question whether cash exists to settle the consideration. Record how each proposed funding component qualifies, including the class of any earlier securities issue. A bank balance does not itself establish statutory source eligibility.
The Board-route test and overall monetary cap answer different questions
For the section 68(2)(b) exception to special-resolution approval, the buyback must be 10% or less of total paid-up equity capital and free reserves, with authorisation by a resolution at a Board meeting. Check the articles as well. Do not use total paid-up preference capital to enlarge a test expressly referring to paid-up equity capital.
Section 68(2)(c) separately limits buyback to 25% or less of the aggregate paid-up capital and free reserves. Equity buybacks also attract the financial-year restriction in the proviso, with reference to paid-up equity capital in that financial year. Maintain a separate equity-capital and annual-usage working; the cash calculations below do not certify that additional restriction. Special-resolution approval does not waive the statutory limits.
| Finance gate | Working required | Error to avoid |
|---|---|---|
| Eligible source | Trace free reserves, securities premium or permitted issue proceeds | Equating all cash or all reserves with permitted sources |
| Approval route | Apply the 10% paid-up equity plus free-reserve test | Treating it as the sole buyback ceiling |
| Monetary and equity restrictions | Apply section 68(2)(c), including its equity proviso | Approving solely because shareholders vote in favour |
| Post-buyback debt | Use secured plus unsecured debt and the adjusted post-buyback base | Using pre-buyback capital and reserves |
| Capital redemption reserve | Identify nominal value requiring transfer under section 69 | Transferring the full purchase price as CRR |
| Liquidity | Fund consideration, costs and other commitments | Assuming statutory capacity creates spendable cash |
Model the balance sheet after all consequential entries
For the general rule, secured and unsecured debts after buyback must not exceed twice the paid-up capital and free reserves after buyback. A higher ratio can be notified for an eligible class; do not assume an exception without verifying it. Identify all relevant debt and prepare a supported pro forma balance sheet rather than testing only one bank facility.
The denominator must reflect the actual post-buyback accounting, including capital cancellation, use of reserves or premium, the capital redemption reserve transfer where required, and relevant transaction adjustments. It is unsafe to assume that every company’s denominator is merely the old base less cash consideration. CRR is a restricted capital reserve with the statutory use specified in section 69; it should not simply be added back as freely available reserves to improve the ratio.
Section 69 requires a transfer equal to the nominal value of the shares purchased when the buyback is out of free reserves or securities premium, with disclosure in the balance sheet. The consideration paid above nominal value is a different component. Document the journal bridge and source treatment; keep the statutory CRR calculation separate from market price or the negotiated offer price.
Screen the prohibitions and remaining procedural conditions
Section 70 prohibits the specified purchases through subsidiaries or investment companies and addresses defaults in deposits, specified redemptions, dividends and institutional or bank term loans. Its default-relief proviso requires remedy and the stated three-year interval after cessation. A separate section 70(2) compliance screen is also necessary; a clean debt-ratio spreadsheet does not replace it.
The section 68 file must also address fully paid securities, the prior-offer interval, required explanatory information, solvency declaration, completion, extinguishment, register and return requirements. For unlisted securities apply the prescribed rules to the precise offer and filing steps. Do not infer a form name or portal deadline from a listed-company precedent. The examples here establish limited finance results, not completion of those procedures.
Show management the binding constraint and cash shortfall
Present the proposed consideration alongside each independently calculated gate. The Board should see which condition constrains the proposal and what factual or legal action would be needed. Any debt repayment included in the plan consumes cash and may change the pro forma balance sheet; rerun both liquidity and ratio after such a change.
Keep shareholder tax, company tax, payment withholding and transaction costs in a separate current-law analysis for the actual date. This guide does not assume an older buyback-tax regime remains applicable in October 2026. A finance approval is not evidence that the payment and tax obligations have been discharged.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: Exactly at the numerical Board-route threshold
Assume paid-up equity capital ₹40 lakh and eligible free reserves ₹60 lakh, with securities premium already included once in that ₹60 lakh. The section 68(2)(b) base is ₹100 lakh and 10% is ₹10 lakh. A ₹10 lakh proposal meets this numerical exception threshold. Articles, a Board-meeting resolution and every other statutory and procedural condition still require verification.
Illustrative example 2: Above the Board exception is not the same as above every cap
Using the same ₹100 lakh base, a ₹12 lakh proposal equals 12% and exceeds the ₹10 lakh Board-route threshold by ₹2 lakh. It cannot rely on that exception. Examine the special-resolution route and other conditions; the ₹2 lakh excess alone does not establish an absolute prohibition.
Illustrative example 3: Shareholder approval cannot cure an excessive amount
Assume the separately verified section 68(2)(c) paid-up-capital-plus-free-reserve base is ₹100 lakh. The 25% monetary amount is ₹25 lakh. A proposed ₹30 lakh buyback exceeds it by ₹5 lakh. A favourable special resolution does not remove that defect, and an equity buyback also needs its separate financial-year restriction check.
Illustrative example 4: Cash provenance does not equal the account balance
Assume a source working identifies ₹30 lakh available cash: ₹20 lakh represents an earlier equity issue of the same kind as the shares proposed for buyback and ₹10 lakh is supported by an eligible free-reserve source. On these deliberately segregated facts only ₹10 lakh has an established permitted source for this proposal; treating all ₹30 lakh as eligible ignores the ₹20 lakh exclusion. This does not impose a universal requirement for physically separate bank accounts.
Illustrative example 5: Use the adjusted post-buyback denominator
Assume the completed pro forma working, after cancellation, reserve use, CRR and other relevant entries, shows paid-up capital ₹30 lakh and eligible free reserves ₹30 lakh. Debt is ₹130 lakh. The ratio is 130/60 = 2.1667:1, above the general 2:1 condition; the maximum at that unchanged base is ₹120 lakh. Reducing debt by ₹10 lakh would reach 2:1 only if the stated denominator remains valid and the repayment is otherwise feasible.
Illustrative example 6: CRR follows nominal value, not offer price
Assume 1,00,000 fully paid shares with ₹10 face value are bought for ₹15 each out of free reserves or securities premium. Nominal value is ₹10 lakh, consideration ₹15 lakh and the excess over nominal value ₹5 lakh. The section 69 transfer is ₹10 lakh, not ₹15 lakh. These numbers do not themselves certify the annual equity restriction or correct accounting of all other entries.
Illustrative example 7: Legal capacity can coexist with a cash shortfall
Assume planned consideration ₹15 lakh, illustrative transaction fees ₹50,000 and separate proposed debt repayment ₹10 lakh, against available cash ₹20 lakh. The stated cash need is ₹25.50 lakh and shortfall ₹5.50 lakh, before any further applicable tax or costs. A percentage calculation cannot eliminate that funding gap. The fee is an assumed commercial input, not a statutory tariff.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Confirm the company and applicable framework | Unlisted status, articles and any special-class provisions |
| 2 | Map permitted funding sources | Reserve schedule, premium treatment and issue-proceeds provenance |
| 3 | Calculate the approval-route base | Paid-up equity and eligible free reserves without double counting |
| 4 | Apply the overall and equity restrictions | Section 68(2)(c) monetary and annual equity workings |
| 5 | Screen prohibitions and prior offers | Section 70, defaults, compliance and prior-offer records |
| 6 | Prepare all post-buyback entries | Cancellation, reserve use, CRR and relevant adjustments |
| 7 | Test secured plus unsecured debt | Supported post-buyback denominator and debt schedule |
| 8 | Build the cash and tax plan | Consideration, costs, debt service and current tax analysis |
| 9 | Complete the prescribed authorisation and offer process | Resolutions, explanatory material, solvency and unlisted-rule evidence |
| 10 | Track completion and statutory follow-through | Extinguishment, register, return and accounting disclosures |
Sixteen practitioner FAQs
1. Is 10% the universal maximum buyback amount?
No. It is the numerical threshold for the specified Board-resolution exception. The overall and equity restrictions are separate.
2. Which capital is used for the Board-route test?
The provision refers to paid-up equity capital plus free reserves. Do not automatically add preference capital to that test.
3. Does a special resolution override the 25% restriction?
No. Approval and the statutory amount restrictions are separate conditions.
4. Can the finance working ignore the equity proviso?
No. Maintain a separate documented financial-year equity-capital restriction check; the monetary examples do not certify it.
5. How should securities premium enter the base?
Section 68 includes it in free reserves for that section. Use a transparent schedule and count the same amount only once.
6. Does a bank balance establish an eligible source?
No. Source eligibility and liquidity are different enquiries. Trace the accounting and issue-proceeds provenance.
7. Can earlier proceeds from the same kind of securities be used?
Section 68 prohibits the specified same-kind earlier-issue proceeds from funding that buyback.
8. Are only secured borrowings included in the ratio?
No. The statutory post-buyback test addresses secured and unsecured debts.
9. Can the pre-buyback capital base be used for the debt test?
No. The test concerns the position after buyback, so model all consequential entries.
10. Is the CRR transfer equal to the cash consideration?
Section 69 uses the nominal value of shares purchased out of free reserves or premium, not the full offer price.
11. Can CRR automatically be counted as free reserves?
No. It has a restricted statutory character and specified use. Do not add it back merely to improve capacity.
12. Does a debt repayment solve the matter automatically?
No. Verify its cash funding, consequences for the pro forma balance sheet and the other buyback conditions.
13. Does curing a specified default immediately remove the prohibition?
The section 70 default proviso also contains the three-year interval after the default ceased. Verify the actual facts and relevant provision.
14. Is this a complete unlisted-company form checklist?
No. Apply the prescribed unlisted rules to the offer, declarations, filings and completion. This guide provides the finance precheck.
15. Does a successful finance test establish the tax result?
No. Analyse current tax and payment obligations separately for the actual date and parties.
16. What should the Board see if all percentages pass but cash is short?
Show consideration, costs, debt-service commitments and the resulting shortfall explicitly. Statutory capacity does not create cash.
Conclusion
Treat the finance file as a set of independent gates. Reconcile source, amount, post-buyback capital and reserves, debt and cash before completing the prescribed approval and offer process.