Query on Buy Back of shares

YES — an unlisted company can buy back shares at a price higher or lower than the fair value.
There is no requirement under the Companies Act that buy-back must be done at exactly fair value.

However:

• The buyback price must be justifiable,

• Supported by a valuation report, and

• Must not be prejudicial to shareholders or creditors.

Applicable Law / Notification / Circular

Company Law

• Section 68, Companies Act, 2013 – Buy-back of securities

• Rule 17, Companies (Share Capital and Debentures) Rules, 2014

Income-tax

• Section 115QA, Income-tax Act, 1961 – Buy-back tax on unlisted shares

• Section 56(2)(x) read with Rule 11UA – Taxation of receipt of shares for inadequate/excess consideration (relevance for shareholders)

Short Practical Answer

👉 Yes, the buy-back price can be more than or less than the fair value.
There is no legal requirement under the Companies Act or Income-tax Act that buy-back must be at exactly fair value.

However:

• Commercial justification and

• Tax consequences
  must be carefully evaluated.

Detailed Explanation

1️⃣ Under the Companies Act, 2013

• Section 68 does not prescribe fair value pricing for buy-back.

• Buy-back price is a commercial decision of the company, subject to:

  • Articles of Association permitting buy-back

  • Shareholder approval (special resolution if >10%)

  • Solvency declaration

  • Buy-back limits (25% of paid-up capital + free reserves)

📌 Result:
✅ Buy-back price can be higher or lower than FV from a company law perspective.

2️⃣ Under Income-tax Act – Company Level Tax

🔹 Section 115QA (Unlisted Companies)

• Company pays buy-back tax @ 20% + surcharge + cess

• Tax base =
  Buy-back price – Issue price of shares

📌 Important:

• Fair value is irrelevant for computing buy-back tax.

• Higher buy-back price ⇒ higher 115QA tax for the company.

• Shareholder’s receipt is exempt u/s 10(34A).

✔ Even if buy-back price > FV or < FV, 115QA applies.

3️⃣ Income-tax Impact on Shareholder (Section 56(2)(x))

This is where fair value becomes practically relevant.

⚠ If Buy-back Price is LESS than Fair Value

• Shareholder is transferring shares to the company for inadequate consideration.

• However, 56(2)(x) does NOT tax the seller.

• It taxes the recipient — here, the company.

But:

• Since the company is already taxed u/s 115QA, courts and practice generally treat 56(2)(x) as not applicable in buy-back scenarios.

👉 Still, valuation report is strongly recommended to defend pricing.

⚠ If Buy-back Price is MORE than Fair Value

• No additional tax on shareholder (receipt is exempt).

• No 56(2)(x) exposure.

• Only consequence is higher buy-back tax u/s 115QA.

Practical Summary Table

Caveats & When Human Review Is Needed

• If buy-back is selective, or between related parties

• If pricing appears to be profit distribution / tax avoidance

• If company has recent share issues at different valuations

• During assessment or scrutiny proceedings

Action Plan

1. Obtain a Rule 11UA / merchant banker valuation report (strongly advisable).

2. Document commercial rationale for pricing.

3. Compute 115QA tax impact before finalizing price.

4. Ensure Companies Act compliances (Section 68 + Rules).