ESOP Advisory
ESOP Buyback and Secondary Liquidity in India: Legal, Tax and Structuring Guide (2026)
Table of contents
- Key Takeaways:
- What Is ESOP Buyback and Secondary Liquidity, and Why Has It Become Urgent for Indian Companies?
- How Does Section 68 of the Companies Act Let a Company Buy Back ESOP Shares?
- Is an Independent Valuation Legally Mandatory for an ESOP Buyback Price?
- How Are ESOP Buyback Proceeds Taxed From FY 2026-27 Onward?
- How Does Section 80-IAC Startup Tax Deferral Interact With a Buyback or Secondary Sale?
- What Does SEBI's SBEB Framework Allow for Listed Company ESOP Trust Buybacks?
- What Alternatives Exist to a Formal Company Buyback for ESOP Liquidity?
- What FEMA Compliance Applies to Buyback or Secondary Sale Involving Non-Resident ESOP Holders?
- How Should Companies Price an ESOP Buyback or Secondary Sale Transaction?
- What Does a Compliant ESOP Buyback Process Look Like From Resolution to Extinguishment?
- Common Mistakes in ESOP Buyback and Secondary Liquidity Structuring
- Closing Summary: ESOP Liquidity in India Rewards Structure, Not Speed
- Frequently Asked Questions, ESOP Buyback and Secondary Liquidity
📖 Part of our pillar guide: ESOP Advisory in India, the Complete Guide to Structuring, Compliance and Valuation. This article focuses specifically on the exit side of the ESOP lifecycle, the point at which exercised shares need to become cash.
📌 For Founders, CFOs and ESOP Holders, What You Must Know
Employees in an Indian private company cannot simply sell exercised ESOP shares on an exchange. Liquidity depends entirely on the company arranging a Section 68 buyback, a secondary sale to an investor, an IPO, or an ESOP trust mechanism, and each route carries its own legal process and tax outcome.
The tax rules have changed three times since October 2024. From 1 April 2026, buyback proceeds are taxed as capital gains again, not as dividend income, but promoters now carry an additional tax that ordinary ESOP holding employees do not.
- Section 68 caps any buyback at 25 percent of paid up equity capital in a financial year and requires the post buyback debt-equity ratio to stay within 2:1
- Employees who deferred ESOP tax under Section 80-IAC must pay that deferred tax the moment their shares are sold in a buyback, even if the 48 month window has not run out
- A registered valuer's certificate is not a statutory requirement for a private company buyback the way it is for an ESOP grant, though Rule 17 still forces disclosure of the pricing basis
India's ESOP pools have quietly become one of the largest sources of employee wealth creation in the country, and also one of the most legally awkward. In the year to March 2025, buybacks and IPOs together moved close to Rs 2,100 crore of cash into employees' hands across the startup ecosystem. Flipkart ran a roughly $50 million ESOP buyback in July 2025. Swiggy has facilitated close to Rs 1,000 crore in cumulative ESOP liquidity across five separate events. Sixteen startups listed on the mainboard in 2025 alone, unlocking an estimated $1 billion of ESOP wealth across names such as Swiggy, Urban Company, Meesho, Groww and PhysicsWallah. None of that wealth existed as cash until someone structured a transaction to convert it.
That transaction is harder to get right than most founders expect. A private company's shares are not freely transferable, so a buyback is a formal corporate action governed by the Companies Act 2013, not a resale you can arrange over email. The tax treatment of the proceeds has moved three times in eighteen months, from a company level tax, to a shareholder level dividend tax, to a shareholder level capital gains tax with a separate rate for promoters. Employees in Section 80-IAC certified startups who thought they had deferred their tax bill often discover the deferral ends the moment the company buys their shares back. And every one of these questions gets harder again if any of the shareholders involved are non-resident.
At Elite Valuation, we advise founders, CFOs and boards on structuring ESOP buyback and secondary liquidity events, alongside the underlying share and securities valuation and broader company valuation work that supports pricing and tax defensibility. This guide sets out the legal mechanics, the current tax position, and the structuring choices that determine whether an ESOP liquidity event goes smoothly or creates a compliance problem that surfaces months later.
Key Takeaways:
- A company buyback under Section 68 of the Companies Act 2013 is the primary route for private companies to give ESOP holders liquidity, capped at 25 percent of paid up equity capital in any financial year
- Section 68 does not mandate an independent registered valuer's report for a private company's buyback price, unlike ESOP grants under Section 62(1)(b) or Section 54
- From 1 April 2026, buyback proceeds are taxed as capital gains under Section 69 of the Income-tax Act, 2025, reversing the deemed dividend treatment that applied from October 2024 to March 2026
- Promoters face an additional buyback tax under the amended Section 69, taking their effective rate to roughly 22 percent for corporate promoters and 30 percent for individual promoters, while ordinary ESOP holding employees are not
- Employees who deferred ESOP perquisite tax under Section 80-IAC trigger that deferred tax immediately when their shares are sold in a buyback, regardless of the 48 month deferral window
- Listed companies can run ESOP liquidity through an SEBI SBEB compliant trust, which can acquire shares on the secondary market up to 2 percent of paid up equity per year and 5 percent in aggregate
- Secondary sale to an incoming or existing investor during a funding round remains the most common liquidity route for private company ESOP holders, outside a formal buyback
- Any transaction touching a non-resident ESOP holder pulls in FEMA pricing rules under the NDI Rules and a separate FC-TRS filing obligation
What Is ESOP Buyback and Secondary Liquidity, and Why Has It Become Urgent for Indian Companies?
An ESOP buyback is the repurchase, by the issuing company itself, of equity shares that employees already hold after exercising vested stock options. Secondary liquidity is the broader category, covering any mechanism, buyback, sale to a third party investor, or trust facilitated transaction, that lets an ESOP holder convert exercised shares into cash without waiting for the company to be acquired or to list. Both concepts exist because of a structural gap in how Indian private company equity works: the option grant and exercise mechanics are well developed under the Companies Act and, for listed companies, under SEBI regulation, but nothing in either framework creates a natural buyer for the shares once they are issued.
Listed companies solve this automatically once shares are on the exchange, since employees can sell into the market subject only to insider trading and trading window restrictions. Unlisted companies have no such outlet. An employee who exercises options in a Series B startup owns real equity, with a real tax liability already paid or deferred at exercise, but that equity is worth nothing in cash terms until the company arranges a transaction. This is the gap that ESOP buyback and secondary liquidity structuring exists to close, and it is why the topic has moved from a niche HR question to a recurring board level and CFO level decision as more Indian companies mature past their first few funding rounds without a near term IPO in sight.
| Company Status | Default Liquidity Path | Who Controls Timing | Typical Trigger |
|---|---|---|---|
| Listed | Open market sale post exercise, subject to insider trading window | Employee, within compliance windows | Any trading day the window is open |
| Unlisted, funded | Secondary sale to investor, company buyback, or trust facilitated sale | Company and board | Funding round, board approved liquidity event |
| Unlisted, pre-IPO | Structured tender offer alongside the raise, or post listing offer for sale | Company, investors and merchant banker | Late stage round or IPO process |
| Unlisted, no near term event | Section 68 buyback funded from free reserves | Board and shareholders | Board discretion, subject to annual cap |
How Does Section 68 of the Companies Act Let a Company Buy Back ESOP Shares?
Section 68 of the Companies Act 2013 gives every company, listed or unlisted, the power to purchase its own shares, subject to a defined set of conditions. Section 68(1)(c) specifically recognises the purchase of securities issued to employees under a stock option or sweat equity scheme as one of the permitted purposes for a buyback, alongside the more general purpose of returning surplus capital to shareholders. This means an ESOP buyback does not need to be dressed up as a general shareholder buyback, the Companies Act treats buying back employee held shares as a distinct, legitimate corporate action in its own right.
The conditions that gate every buyback, ESOP or otherwise, sit in Section 68(2). The buyback must be authorised by the company's articles of association. The aggregate value of shares bought back in a financial year cannot exceed 25 percent of the company's total paid up capital and free reserves, and where the buyback is of equity shares specifically, that 25 percent ceiling is applied against total paid up equity capital for that financial year, not the combined capital and reserves figure. After the buyback, the company's total secured and unsecured debt cannot exceed twice its paid up capital and free reserves, the familiar 2:1 debt-equity ceiling. Only fully paid up shares qualify, and the company must file a declaration of solvency in Form SH-9 before proceeding.
Board Resolution Route
Up to 10% of paid up equity capital and free reserves
No shareholder vote needed
Where the buyback does not exceed 10 percent of the company's total paid up equity capital and free reserves, the board can approve it directly by resolution at a board meeting. This is the route most private companies use for a routine, recurring ESOP buyback that clears out shares held by departing or long tenured employees each year.
- Faster to execute, no general meeting notice period
- Only one such board approved buyback is permitted in a financial year under this route
- Still requires the Form SH-9 solvency declaration and Rule 17 pricing disclosure
Special Resolution Route
Above 10% and up to 25%
Shareholder approval required
Once the buyback exceeds 10 percent of paid up equity capital and free reserves, up to the overall 25 percent ceiling, a special resolution passed by shareholders at a general meeting is required, specifying the maximum buyback price. This route is typically used for a larger, one time liquidity event tied to a funding round or an internal decision to meaningfully reduce the size of an oversized ESOP pool.
⚠️ Section 70 Can Block a Buyback Outright. A company cannot undertake any buyback, ESOP or otherwise, while in default under Sections 92 (annual return), 123 (dividend declaration), 127 (dividend distribution within 30 days) or 129 (financial statements) of the Companies Act. A buyback also cannot be routed indirectly through a subsidiary or an investment company. Boards planning an ESOP buyback should clear any outstanding compliance defaults first, since discovering one mid process forces the transaction to restart.
⚠️ Penalty for Non-Compliance, Section 68(11). If a company defaults in complying with Section 68 or applicable SEBI regulations, the company is punishable with a fine of not less than Rs 1 lakh, extendable to Rs 3 lakh, and every officer in default faces imprisonment for up to three years, a fine of Rs 1 lakh to Rs 3 lakh, or both. This is a criminal exposure for directors, not just a corporate penalty, which is why the board resolution or special resolution and the solvency declaration are not treated as formalities in practice.
Planning an ESOP Buyback and Not Sure Which Route Applies?
We help boards work out whether a board resolution or special resolution buyback fits their ESOP pool size, check the 25 percent and debt-equity headroom, and build the pricing basis Rule 17 requires you to disclose.
Is an Independent Valuation Legally Mandatory for an ESOP Buyback Price?
This is one of the most consistently misunderstood points in ESOP buyback structuring. Section 68 itself is silent on pricing methodology and does not require a registered valuer's certificate for an unlisted private company's buyback, in sharp contrast to Section 62(1)(b) for ESOP grants and Section 54 for sweat equity, both of which explicitly require an IBBI-registered valuer to certify fair value. The Companies Act does have a dedicated valuation provision, Section 247, but Section 68 does not cross-refer to it the way the grant provisions do.
What Section 68 does require, through Rule 17 of the Companies (Share Capital and Debentures) Rules 2014, is disclosure. The explanatory statement annexed to the notice of the general meeting, or the board resolution documentation where the 10 percent route applies, must set out the basis on which the buyback price was arrived at. In practice this creates strong commercial pressure to commission a proper valuation even though the statute does not name a valuer category or mandate a certificate, because a board that cannot defend its pricing basis is exposed on three fronts at once: minority shareholder objection, tax authority scrutiny of whether the price reflects genuine fair value, and personal liability for directors under the solvency declaration.
📋 What Rule 17 Actually Requires You to Disclose
- The date of the board meeting at which the buyback proposal was approved
- The basis for arriving at the buyback price, whether derived from the last funding round, a net asset value calculation, or a discounted cash flow exercise
- Confirmation that the audited or limited review accounts used for the calculation are not more than six months old as of the date of the offer document
- The board's opinion, formed on reasonable grounds, that the buyback will not render the company insolvent within one year
Most companies still commission an independent valuation, both because the last priced round or a formal Rule 11UA style exercise usually already exists and can be extended to support the buyback price, and because the fee involved is small relative to the defensibility it buys. For a listed company, the picture is different again: buyback under the SEBI (Buy-back of Securities) Regulations 2018 runs through a merchant banker managed tender offer or open market process with its own pricing mechanics, which sits alongside, not instead of, the Section 68 framework. For deeper treatment of how fair value is established for these purposes, see our guide on share and securities valuation in India, and on the broader question of when a formal valuation becomes mandatory across corporate transactions, see when company valuation is mandatory in India.
How Are ESOP Buyback Proceeds Taxed From FY 2026-27 Onward?
Buyback taxation in India has gone through three distinct regimes in eighteen months, and getting the applicable regime right matters more than almost any other variable in an ESOP buyback, because it changes both the tax rate and who bears the compliance burden.
| Period | Who Is Taxed | Basis | Effective Treatment |
|---|---|---|---|
| Up to 30 September 2024 | Company | Section 115QA, buyback distribution tax | Company paid roughly 23.3 percent on distributed income; shareholders were exempt under Section 10(34A) |
| 1 October 2024 to 31 March 2026 | Shareholder | Section 2(22)(f), deemed dividend | Entire buyback consideration taxed as Income from Other Sources at slab rates, no deduction for cost of acquisition, cost carried forward separately as a capital loss |
| From 1 April 2026 | Shareholder | Section 69, Income-tax Act 2025 | Capital gains treatment restored: gain over cost of acquisition taxed, with an additional tax layered on for promoters |
Under the regime now in force for FY 2026-27, an ESOP holder who sells shares back to the company pays tax only on the actual gain, buyback consideration minus cost of acquisition, rather than on the entire proceeds. For listed shares, the familiar equity capital gains structure applies: long term capital gains, where shares are held more than 12 months, are taxed at 12.5 percent with an annual exemption of Rs 1.25 lakh, while short term gains on shares held 12 months or less are taxed at 20 percent. Unlisted shares follow a longer 24 month threshold for long term treatment, with short term gains taxed at slab rates rather than the flat listed-share short term rate. This is a meaningfully better outcome for most ESOP holders than the 2024 to 2026 dividend regime, where the entire buyback amount, not just the profit, was pushed into taxable income.
The Finance Act 2026 did not simply reverse the 2024 change, however. Clause 34 of the Finance Bill 2026 amended Section 69 of the Income-tax Act, 2025 to impose an additional buyback tax specifically on promoters, so that their effective rate on buyback proceeds works out to approximately 22 percent for corporate promoters and 30 percent for individual or other non-corporate promoters. This matters directly for ESOP structuring because SEBI's September 2025 amendment introducing Regulation 9A allows founders classified as promoters in a draft red herring prospectus to retain ESOPs granted at least one year before the DRHP filing. A founder or senior executive who holds this kind of promoter classified ESOP grant and later participates in a buyback falls into the higher promoter tax bracket, while an ordinary employee holding an equivalent grant, with no promoter classification, is taxed at the standard capital gains rates described above.
⚠️ Two Items Still Need Verification Before You Rely on Them. First, whether TDS under Section 194 continues to apply to resident shareholders now that buyback proceeds are no longer characterised as dividend income is genuinely unsettled in current commentary, some sources argue ordinary capital gains payments to residents are not subject to domestic TDS at all, others continue to reference a 10 percent withholding. Second, the exact section number for ESOP perquisite taxation under the Income-tax Act, 2025 is cited inconsistently across professional commentary, with Section 16(2) and Section 17(1)(d) read with 17(5)(h) both in circulation pending clearer CBDT guidance. Confirm both points against the current Finance Act text and any CBDT notification before finalising a buyback structure.
How Does Section 80-IAC Startup Tax Deferral Interact With a Buyback or Secondary Sale?
The Finance Act 2020 introduced a genuinely useful relief for startup employees: where the employer is a DPIIT-recognised startup that also holds the additional Section 80-IAC certification from the Inter-Ministerial Board, the employee's perquisite tax liability on ESOP exercise, and the employer's corresponding TDS obligation, can be deferred rather than paid immediately. This relief is narrower than most people assume. DPIIT recognition alone does not qualify a company, and as of early 2026 only around 3,700 to 4,000 of India's roughly 1.97 lakh DPIIT-recognised startups, close to 2 percent, hold the additional 80-IAC certification that unlocks the deferral.
Where the deferral does apply, tax becomes payable, and the employer must deduct TDS, within 14 days of the earliest of three trigger events: 48 months from the end of the assessment year in which the shares were allotted, the date the employee sells the shares, or the date the employee ceases to be employed by the company. The point that catches employees and finance teams off guard is the second trigger. A company buyback or a secondary sale is, for this purpose, a sale of the shares. It does not matter that the 48 month clock has not run out, and it does not matter that the employee still holds other unsold shares from the same grant tranche, the specific shares tendered into the buyback trigger their proportionate share of the deferred perquisite tax immediately, payable within 14 days.
📋 Before Running a Buyback in a Section 80-IAC Company, Check
- Which employees exercised options with deferred TDS still outstanding, and the exact perquisite amount deferred for each
- Whether the buyback proceeds per employee are sufficient to cover both the triggered perquisite TDS and the capital gains tax on the sale itself
- Whether the employer has a mechanism to withhold and deposit the triggered TDS within the statutory 14 day window, since late deposit attracts interest under Section 201
- Whether any employee's 48 month deferral window would have expired within the next few months regardless, which affects how the cash flow conversation with that employee should be framed
Running an ESOP Buyback With Deferred 80-IAC Tax in the Mix?
We help startup finance teams reconcile deferred perquisite liabilities against buyback proceeds before payout, so employees are not surprised by a tax trigger they did not plan for.
What Does SEBI's SBEB Framework Allow for Listed Company ESOP Trust Buybacks?
Once a company lists, ESOP liquidity mechanics move from the Companies Act framework alone into the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations 2021, commonly called SBEB, which consolidated the earlier 2014 SBEB Regulations and the 2002 Sweat Equity Regulations into a single instrument. Listed companies are permitted to implement their ESOP scheme directly or through an irrevocable employee welfare trust, and the trust route is the more common structure for companies that want to actively manage a pool of shares for ongoing grants and periodic buybacks rather than issuing fresh shares for every tranche.
The trust structure only works because of a specific carve out. Section 67(3)(b) of the Companies Act generally prohibits a company from providing financial assistance for the purchase of its own shares, but this carve out permits the company to fund an employee welfare trust for exactly this purpose. Once funded, the trust can subscribe to primary shares or acquire shares on the secondary market, subject to caps designed to prevent the trust from being used as a backdoor mechanism to support the share price or concentrate voting control: secondary market acquisition is capped at 2 percent of paid up equity per year and 5 percent in aggregate, trustees cannot be promoters or key managerial personnel, trust held shares cannot be voted at the trustees' discretion, and a six month minimum holding period applies before shares can be reallocated or sold on.
SBEB Trust Route at a Glance
Section 67(3)(b) funding carve out
2% per year, 5% aggregate secondary cap
6 month minimum holding
The trust warehouses unallocated options, recycles shares forfeited by departing employees, and can facilitate structured liquidity for employees who have exercised and want to sell, all without the company issuing fresh equity for every transaction. This is distinct from a general SEBI (Buy-back of Securities) Regulations 2018 corporate buyback, which returns capital to all shareholders proportionately rather than targeting ESOP holders specifically.
Two recent amendments are worth tracking. The September 2025 amendment introducing Regulation 9A permits founders classified as promoters in a draft red herring prospectus to retain ESOPs granted at least one year before the DRHP filing, a relief that previously forced founders to either forfeit pre-IPO grants or restructure them awkwardly ahead of listing. The December 2025 amendment replaced merchant bankers with IBBI-registered valuers for sweat equity valuations, effective 2 January 2026, aligning sweat equity pricing more closely with the valuer category already required for ESOP grants generally. On the general corporate buyback side, SEBI phased out the open market buyback route through stock exchanges entirely from 1 April 2025, leaving the tender offer route as the sole mechanism, before its board approved reintroducing open market buybacks with effect from 1 August 2026, alongside new conditions preventing any buyback that would breach minimum public shareholding requirements.
What Alternatives Exist to a Formal Company Buyback for ESOP Liquidity?
A Section 68 buyback is not the only, or even the most common, way Indian private companies give ESOP holders liquidity. Several alternative structures are used depending on the company's stage, its cash position, and whether a funding event is already in motion.
| Route | How It Works | Best Suited For |
|---|---|---|
| Secondary sale to investor | An incoming or existing investor purchases exercised shares directly from ESOP holders alongside a primary funding round, at the round's price | Companies raising a new round where the investor is willing to allocate part of the cheque to secondary purchase |
| Structured tender offer | The company or an investor runs a defined window in which eligible employees can tender a capped percentage of their exercised holding at a set price | Larger, one-time liquidity events tied to a milestone rather than a routine annual process |
| ESOP trust facilitated sale | The SBEB compliant trust acquires shares from employees on the secondary market within its annual cap, for listed companies only | Listed companies managing an ongoing ESOP pool rather than a single event |
| Company buyback under Section 68 | The company itself repurchases and extinguishes the shares out of free reserves or securities premium | Companies with sufficient free reserves and no imminent funding or IPO event |
| IPO or offer for sale | Shares become freely tradeable on listing, or are sold in a structured offer for sale as part of the IPO itself | Companies with a credible near-term listing timeline |
In practice, the secondary sale route is the most frequently used mechanism for private companies, precisely because it does not require the company to hold or deploy cash reserves, the buying investor pays directly. The trade off is that it depends entirely on an investor being willing to allocate part of a round to secondary purchase, which is a negotiation the company does not fully control. A Section 68 buyback gives the board direct control over timing but consumes company cash and free reserves that might otherwise fund growth, which is why many boards treat it as a smaller, recurring mechanism for departing employees rather than a primary liquidity tool for the whole ESOP pool.
Weighing a Secondary Sale Against a Formal Buyback?
We help boards model the cash impact, tax outcome and shareholder approval requirements of each route before committing to a structure.
What FEMA Compliance Applies to Buyback or Secondary Sale Involving Non-Resident ESOP Holders?
Any ESOP liquidity transaction becomes materially more complex the moment a non-resident holder is involved, whether that is an NRI, OCI or foreign national employee, or a foreign entity on the other side of a secondary sale. Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 sets a pricing floor for inbound transactions and a pricing ceiling for outbound ones. A transfer from a resident to a non-resident must be priced at or above fair value, while a transfer from a non-resident to a resident, which is exactly what a buyback of a non-resident ESOP holder's shares represents, must be priced at or below fair value, in each case certified by a Chartered Accountant, a SEBI-registered Category I Merchant Banker, or a practising Cost Accountant.
Where an Indian company issues ESOPs to employees resident outside India, whether foreign nationals, NRIs, OCIs, or overseas group employees under a global scheme, this is governed under what practitioners refer to as Track 1, the NDI Rules read with the FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. Where instead an overseas parent grants its own stock options to Indian resident employees, that falls under Track 2, governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022. The overseas entity is permitted to repurchase shares it issued under such a scheme provided the original issuance complied with FEMA, the repurchase follows the terms of the original offer document, and the transaction is reported through an Authorised Dealer bank, but this repurchase sits entirely outside India's Section 68 framework, since the shares being bought back are those of the foreign parent, not the Indian subsidiary.
📋 Reporting Checklist for a Cross-Border ESOP Liquidity Event
- Confirm the original ESOP issuance to the non-resident employee was reported through Form ESOP on the RBI FIRMS portal within 30 days of grant, and Form FC-GPR within 30 days of the resulting share allotment
- Obtain a fresh FEMA valuation certificate for the buyback or sale price, dated no more than 90 days before the transaction, from a CA, SEBI Category I Merchant Banker, or practising Cost Accountant
- File Form FC-TRS through the FIRMS portal within 60 days of the transfer date or the date consideration is received, whichever is earlier, for any secondary transaction where a non-resident is on either side
- Where the counterparty is an overseas parent repurchasing its own shares under a Track 2 scheme, route reporting through the Authorised Dealer bank rather than treating it as a Section 68 event
How Should Companies Price an ESOP Buyback or Secondary Sale Transaction?
Pricing an ESOP liquidity event is not a single, uniform exercise, because different legal frameworks apply depending on the route chosen. A genuine third party secondary sale between an ESOP holder and a new or existing investor is, for tax purposes, an ordinary transfer of unquoted shares. If priced below fair market value, the recipient of the shortfall benefit is taxed on the difference under the deemed gift provisions that succeeded Section 56(2)(x), and the seller's capital gains are computed as if the full fair market value, not the actual price received, was the consideration, under the provision that succeeded Section 50CA. Fair market value in both cases is determined under the Rule 11UA framework, using the net asset value method or, where the transferee is a company, the discounted cash flow method.
A company buyback under Section 68, by contrast, sits somewhat apart from this framework. Appellate tribunals have held in several rulings, including in cases such as Globe Capital Market and Venture Lighting India, that the deemed gift provisions under Section 56(2)(x) do not apply to a genuine buyback of a company's own shares, since the buyback has its own dedicated computation mechanism under Section 69 of the Income-tax Act, 2025, whichever way that mechanism happens to be calibrated at the time. This means the pricing discipline that matters most for a buyback is not a Rule 11UA fair market value floor in the way it is for a secondary transfer, but rather the Rule 17 disclosure obligation discussed earlier, and the commercial need to price consistently with the company's last funding round to avoid an obvious mismatch that invites scrutiny from remaining shareholders or a future acquirer's diligence team.
⚠️ Do Not Assume One Standard Fits Every Route. Using a Rule 11UA fair market value certificate prepared for one purpose, say an earlier share issuance, to also justify a buyback price, or vice versa, is a common structuring shortcut that creates problems later. Each route, secondary transfer, buyback, and FEMA-governed cross-border transaction, has its own pricing standard and its own certifying professional requirement, and treating them as interchangeable is one of the fastest ways to create an inconsistency a tax officer or auditor later flags.
What Does a Compliant ESOP Buyback Process Look Like From Resolution to Extinguishment?
1. Confirm Eligibility and Headroom
Check the company is not in default under Sections 92, 123, 127 or 129, confirm the articles of association authorise a buyback, and calculate available headroom against the 25 percent of paid up equity capital cap and the post buyback 2:1 debt-equity ceiling.
2. Approve the Price and Basis
Agree the buyback price at board level, supported by a valuation or a clear reference to the last funding round, and prepare the Rule 17 disclosure of pricing basis for the explanatory statement or board resolution.
3. Pass the Resolution
Pass a board resolution if the buyback is 10 percent or less of paid up equity capital and free reserves, or convene a general meeting for a special resolution if it exceeds that threshold, specifying the maximum buyback price.
4. File the Solvency Declaration
File Form SH-9, signed by at least two directors including the managing director where one exists, confirming the board's opinion that the company will not become insolvent within one year of the buyback.
5. Issue the Letter of Offer
Send the letter of offer in Form SH-8 to eligible ESOP holders, or to all shareholders on a proportionate basis if the buyback is not routed specifically under the Section 68(1)(c) employee purchase route.
6. Open a Separate Bank Account and Pay
Open a dedicated bank account immediately after the offer closes and deposit the full consideration due, then pay each tendering employee, withholding any triggered tax as applicable.
7. Extinguish the Shares
Physically extinguish and destroy the bought back shares within seven days of completing the buyback, and transfer a sum equal to the nominal value of shares bought back from free reserves or securities premium into the Capital Redemption Reserve.
Timer: complete within 7 days of buyback completion.
8. File the Return
File the return of buyback in Form SH-11, annexed with a certificate in Form SH-15 confirming compliance with the Act and rules, within 30 days of completing the buyback, with the Registrar and, for listed companies, with SEBI.
The entire process, from resolution to completion, must be finished within one year of passing the board or special resolution, and a company that completes a buyback generally cannot issue the same kind of shares again for six months, except to discharge subsisting obligations such as further stock option exercises, which is a useful carve out for companies running an ongoing ESOP program alongside periodic buybacks.
📁 A Recent Engagement
B2B SaaS, Series C
42 Departing and Long-Tenured Employees
Board Approved 10% Route
A Series C SaaS company approached us wanting to run its first ESOP liquidity event, covering shares held by employees who had left over the previous two years plus a handful of long tenured employees the founders wanted to reward. The finance team initially assumed a full Rule 11UA valuation from a recent funding round could be used directly as the buyback price without further work, and had not checked whether any of the affected employees were still inside their Section 80-IAC deferred tax window.
We confirmed the buyback fit comfortably within the 10 percent board resolution route rather than requiring a special resolution, restructured the pricing disclosure to reference the funding round valuation explicitly as required under Rule 17 rather than simply attaching the report, and identified six employees with outstanding deferred perquisite tax whose buyback proceeds needed to be split between the triggered TDS deposit and their net payout. The buyback completed within the statutory one year window from board approval, with the Form SH-9, SH-8 and SH-11 filings sequenced correctly and no employee left unaware of a tax trigger they had not budgeted for.
Common Mistakes in ESOP Buyback and Secondary Liquidity Structuring
❌ Assuming Section 68 requires the same registered valuer certificate as an ESOP grant
Section 68 has no explicit valuer mandate for private companies, unlike Section 62(1)(b) and Section 54. Boards sometimes skip any pricing documentation altogether, or conversely assume a costly formal certificate is legally unavoidable when it is not.
Fix: Commission a valuation for commercial defensibility, but document it as support for the Rule 17 disclosure, not as a statutory prerequisite you are racing to obtain before the resolution can be valid.
❌ Ignoring the Section 80-IAC deferral trigger until after the buyback is paid out
Finance teams often calculate buyback proceeds based only on the sale price, without checking that some tendering employees have outstanding deferred perquisite tax that becomes due the moment their shares are sold.
Fix: Cross-check every tendering employee's exercise history against the company's 80-IAC certification status before finalising payout amounts, and build the triggered TDS into the payment calculation.
❌ Applying the same fair value standard to a buyback and a secondary sale
Rule 11UA fair market value governs a secondary transfer between shareholders, while a buyback runs under a separate, dedicated computation mechanism. Using one certificate to justify both transaction types creates an inconsistency that surfaces in diligence or audit.
Fix: Treat each transaction type as needing its own pricing basis and documentation, even where the underlying valuation work draws on the same financial data.
❌ Not checking promoter classification before assuming standard capital gains rates apply
Since the September 2025 SEBI amendment lets founders retain promoter classified ESOPs granted before a DRHP filing, some founder or senior executive shareholders are promoters for tax purposes even while holding what looks like an ordinary ESOP grant.
Fix: Confirm each participating shareholder's promoter status under the applicable SEBI definition before modelling their post-tax proceeds from a buyback.
❌ Treating a non-resident employee's shares as a routine domestic buyback
Companies sometimes run a standard Section 68 process for all employees without separately checking FEMA pricing and reporting obligations for the non-resident holders in the pool.
Fix: Flag every non-resident holder before the offer document goes out, obtain a fresh FEMA valuation certificate for the outbound pricing ceiling, and file Form FC-TRS within 60 days.
❌ Missing the compliance default check under Section 70 before approving the resolution
A board that approves a buyback resolution while the company is in default under Sections 92, 123, 127 or 129 risks the entire buyback being void, along with the personal exposure under Section 68(11).
Fix: Run a clean compliance check against all four sections before the board meeting where the buyback is first proposed, not after the resolution has already been drafted.
Closing Summary: ESOP Liquidity in India Rewards Structure, Not Speed
ESOP buyback and secondary liquidity in India sit at the intersection of three separate legal regimes, the Companies Act mechanics of Section 68, a capital gains tax framework that has changed three times since October 2024, and, wherever a non-resident is involved, a fourth layer under FEMA. None of these regimes was designed with the other two in mind, which is exactly why the gaps between them, an unmandated valuer certificate, a deferred tax trigger, a promoter tax that only some ESOP holders face, cause the most expensive mistakes. Companies that treat an ESOP buyback as a single transaction to close quickly tend to discover the compliance gaps months later, when a departed employee's tax notice, a shareholder objection, or an acquirer's diligence team asks the question the original process never answered. A disciplined approach, checking eligibility, documenting the pricing basis, reconciling every employee's specific tax position, and matching the FEMA framework to any cross-border holder, is what turns an ESOP liquidity event into the retention and morale win it is meant to be, rather than a compliance liability that outlasts the goodwill it was meant to create.
Structuring an ESOP Buyback or Secondary Liquidity Event?
Section 68 compliance review, pricing basis and valuation, FY 2026-27 tax modelling for every employee, and FEMA compliance where non-resident holders are involved. One engagement, built to close cleanly.
Frequently Asked Questions, ESOP Buyback and Secondary Liquidity
CA Sagar Shah, Founder
Mr Sagar Shah is the Founder of Elite Valuation and leads the firm’s Valuation and Advisory practice. With over 15+ years of professional experience.
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