Buyback From Foreign Shareholders

20 October 2023

Buyback of shares means a purchase by a company of its own shares/ securities. A company may resort to buyback for a variety of reasons including for the purpose of giving an exit to its foreign shareholders.

The buyback of the shares/ securities can be made only out of:

(a)Free reserves

(b)Securities premium account

(c)Proceeds of any securities

However, buyback cannot be made out of the proceeds of an earlier issue of the same kind of securities.

Buyback by a private company from its foreign shareholders:

Section 68 of the Companies Act, 2013 read with the relevant rules thereunder govern the buyback of shares of the company.

However, when it comes to buyback of securities by a private limited company from its foreign shareholders, apart from the procedures and compliances under the Companies Act, 2013 there are certain additional compliances/ aspects to be taken care of. These are in relation to the following:

(a)Compliance under the FEMA

(b)Tax implications & filings

Compliance under FEMA

In case a private limited company buys back securities from its foreign shareholders, then FEMA regulations would apply. This would be under the automatic route. The key conditions to be fulfilled in order to avail of this automatic route are as follows:

• The company must be eligible for automatic route investment under the FDI policy, i.e., it must not be a restricted sector

• The pricing guidelines specified by RBI are adhered to. Valuation of shares to be done by a CA in this regard

Form FC-TRS shall be filed through the AD bank – to be filed in respect of each foreign shareholder from whom the shares are bought.

• This route is not available for companies under the finance service sector.

Tax implications and filings

Tax implications:

• Companies undertaking a share buyback need to pay buyback tax at an effective rate of 23.296% (as presently applicable) on the difference between the buyback price and the original issue price of the shares.

• However, shareholders aren't taxed on their earnings from the buyback. In essence, while the company takes care of the tax, shareholders get to enjoy their buyback gains tax-free.

Tax filings:

Form 15CA (self declaration) and Form 15CB (certified by a CA) to be filed by the Company. These forms contain information of the tax deducted on the remittance made by the Company to the non-resident

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