Testing compliance with the section 68 buyback conditions means independently recomputing each statutory gate the company had to clear before the buyback, not just reviewing the accounting after the fact: the quantum limit on the amount that can be bought back without special resolution approval, the post-buyback debt-equity ratio limit, the requirement that the buyback be funded only from free reserves, the securities premium account, or the proceeds of a fresh issue of a different kind of security, the solvency declaration filed by the directors, and the cooling-off period before the company can make a further buyback or a fresh issue of the same kind of security.
Why this test looks backward from the completed buyback, not forward from the resolution
The resolution authorising the buyback states an intended quantum and source of funds. The test is whether the buyback as actually executed — the amount actually spent, the ratio as it actually stood immediately after completion — stayed within the limits, which can differ from what was originally authorised if the company bought back less, or if its financial position moved between authorisation and completion.
The testing sequence
- 01Recompute the quantum limit independently of the resolutionThe buyback amount, as a percentage of paid-up capital and free reserves, should be checked against the threshold that requires only board approval versus the threshold that requires a special resolution — recompute the percentage from the actual amount spent, not the amount originally authorised.
- 02Recompute the post-buyback debt-equity ratioTotal borrowings (secured and unsecured) over paid-up capital and free reserves, computed as it would stand immediately after the buyback, compared against the prescribed ratio limit. Use the actual post-buyback balance sheet position, not a pre-buyback estimate carried over from the offer document.
- 03Confirm the funding source used was a permitted oneFree reserves, the securities premium account, or the proceeds of a fresh issue of a kind of security different from the one being bought back — a buyback funded from the proceeds of an earlier issue of the same kind of security is specifically prohibited and needs to be ruled out by tracing the actual source of funds.
- 04Obtain and test the solvency declaration filed by the directorsThe declaration affirms the company's ability to meet its liabilities and remain solvent for a specified period after the buyback — test the underlying cash flow and liquidity position actually supports that affirmation, rather than treating the filed declaration as self-evidencing.
- 05Confirm the number of equity shares bought back did not exceed the prescribed proportion of paid-up equity capital for the yearThere is a cap on the proportion of a class of shares that can be bought back in a financial year — recompute this against the actual shares outstanding before the buyback, not a stale capital figure.
- 06Confirm no further buyback was authorised within the prescribed cooling-off periodA company cannot make another buyback within one year of the completion of a previous buyback — check the dates of any subsequent buyback resolution or authorisation against the completion date of this one.
- 07Confirm no fresh issue of the same kind of security was made within the restricted period, except as specifically permittedThe restriction on a fresh issue of the same kind of securities, including by way of bonus issue or conversion of existing securities, within the specified period after the buyback, with limited statutory exceptions — trace any issue made in that window against the exception list rather than assuming it applies.
| Condition | Recomputed from |
|---|---|
| Quantum limit (board vs. special resolution threshold) | Actual amount spent, as a percentage of paid-up capital and free reserves |
| Post-buyback debt-equity ratio | Actual post-buyback borrowings over paid-up capital and free reserves |
| Permitted funding source | Traced cash flow of the actual buyback payment to its source |
| Solvency declaration | Underlying liquidity and cash flow position, tested independently of the filed declaration |
| Proportion of capital bought back in the year | Actual shares bought back over paid-up equity capital before the buyback |
| Cooling-off period for next buyback | Dates of this buyback's completion and any subsequent authorisation |
| Restriction on fresh issue of same security | Dates and nature of any issue made after completion, checked against the statutory exceptions |
Regulatory requirement
Section 68 of the Companies Act, along with sections 69 and 70, sets the quantum limit, the debt-equity ratio condition, the permitted funding sources, the solvency declaration requirement, and the cooling-off restrictions. These provisions have been amended and should be read together with the current rules. Verify the current text before concluding.
How we think about this
Every numerical gate in section 68 — the quantum percentage, the debt-equity ratio, the proportion of capital bought back — is a recomputation that should be rebuilt from the company's actual post-buyback position, not accepted from the offer document's projection. Whether the solvency declaration is genuinely supported by the company's cash position is the one gate that calls for judgement rather than arithmetic, and it deserves the same scrutiny given to a going-concern assessment.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- CARO & Companies ActHow to test treasury share / buyback accountingRecompute the premium adjustment on buyback, test the capital redemption reserve transfer, and trace the extinguished shares out of the capital base and the reserves.
- CARO & Companies ActSecretarial compliance checklist for a statutory auditorBoard meeting frequency, statutory registers and ROC filing timeliness, read as evidence of compliance culture rather than a secretarial checklist in its own right.
- CARO & Companies ActCARO 2020 reporting checklist for statutory auditorsThe topic areas CARO reporting covers, what evidence each one needs, and how the clauses fit together across the audit file.
- Bank, cash & treasuryLoans and borrowings audit checklistSanction letter checks, charge verification against ROC filings, covenant compliance, interest testing, and current/non-current classification.
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