BUYBACK OF SECURITIES

Student
Notes
Buy-back of shares means purchase of its own shares by a company. When shares
are bought back by a company, they have to be cancelled by the company. Thus,
shares buy-back results in decrease in share capital of the company. A company
cannot buy its own shares for the purpose of investment. A company having sufficient
cash may decide to buy-back its own shares.

The following may be the objectives/advantages of Buy-back of shares:

(a) to increase earnings per share if there is no dilution in company’s earnings as

the buy-back of shares reduces the outstanding number of shares.
(b) to increase promoters holding as the shares which are bought back are
cancelled.
(c) to discourage others to make hostile bid to take over the company as the
buy-back will increase the promoters holding.
(d) to support the share price on the stock exchanges when the share price, in
the opinion of company management, is less than its worth, especially in the
depressed market.
(e) to pay surplus cash to shareholders when the company does not need it for
business

The Companies Act, 2013 under Section 68 (1) permits companies to buy-back their
own shares and other specified securities out of:
i. its free reserves; or
ii. the securities premium account; or
iii. the proceeds of the issue of any shares.

Note: No buy-back of any kind of shares or other specified securities shall be made
out of the proceeds of an earlier issue of the same kind of shares or same kind of
other specified securities. For example, if equity shares are to be bought-back, then,
preference shares may be used for the purpose.

The other important provisions relating to the buy-back are:

(1) Section 68 (2) further states that no company shall purchase its own shares or
other specified securities unless—

(a) the buy-back is authorized by its articles;

(b) a special resolution has been passed in general meeting of the company
. authorizing the buy-back;

Note:- (1) in case, the buy-back is up to 10% of paid up equity + free reserves, the
same may be done with the authorization of the Board Resolution without the
necessity of its being authorized by the Articles and special resolution as mentioned
above.

(2) Every buy-back shall be completed within twelve months from the date of
passing the special resolution, or the resolution passed by the board of directors.
 BUYBACK OF SECURITIES

Student
Equity Shares With Differential Rights
Notes

• Differentiation can be done by giving a superior dividend / Superior voting

right / diluted voting right to a class of equity shareholders.
• Preference shares are not issued with differential rights. It is only the equity
shares, which are issued.

(Share capital And Debenture) Rules, 2014 prescribe following conditions to be

compulsorily compiled with : (Dec 21)
a) It should be authorised by articles of association.
b) The shares with differential rights shall not exceed twenty-six percent of the total
post-issue paid up equity share capital including equity shares with differential
rights issued at any point of time.
c) The company having consistent track record of distributable profits for the last
three years.
d) The company has not defaulted in filing financial statements and annual returns
for three financial years immediately preceding the financial year .
e) The company has no subsisting default in the payment of a declared dividend to
its shareholders or repayment of its matured deposits or redemption of its
preference shares or debentures.
f) The company has not been penalized by Court or Tribunal during the last three
years of any offence under any Act.
g) The company has not defaulted in payment of the dividend on preference shares
or repayment of any term loan, dues with respect to statutory payments relating
to its employees to any authority or default in crediting the amount in Investor
Education and Protection Fund to the Central Government.
Example (PYQ dec 2021)
Equity capital is held by X, Y and Z in the proportion of 40:40:20. A, B and C hold
preference share capital in the proportion of 50:30:20. If the paid up equity share
capital of the company is ₹ 1 Crore and Preference share capital is ₹ 50 Lakh. Find their
voting Rights in case of resolution of winding up of the company.
Solution:- The relative weight in the voting right of equity shareholders and preference
shareholders will be 2/3 and 1/3 based on the respective capital of Equity & Preference
share Holders. The respective voting right of various shareholders will be:
Equity Shareholders:-
X = 2/3 * 40/100 = 80/300
Y = 2/3* 40/100 = 80/300
Z = 2/3* 20/100 = 40/300
Preference shareholders:-
A = 1/3* 50/100 = 50/300
B = 1/3* 30/100 = 30/300
C = 1/3* 20/100 = 20/300
Hence their relative weights are 80/300 : 80/300 : 40/300 : 50/300 : 30/300 : 20/300
or 8:8:4:5:3:2.
Their voting power is X (26.67%), Y (26.67%), Z (13.33%), A (16.67%), B (10%) and C
(6.67%)
 BUYBACK OF SECURITIES

Student
Notes
Buyback: Method 1: Out of Existing Reserves

Free Reserve Capital Redemption Reserve

Transfer

Nominal Value of Shares Bought Back

BBP= Rs. 100 BBP= Rs.110 *BBP=Rs.70

FV=Rs.100 FV= Rs.100 FV=Rs.100
Transfer :- Transfer:- Transfer :-
Rs.100 Rs.100 Rs.100

BBP :- Buyback Price

Free Reserves are those reserves which are available for distribution
as dividend and includes Securities Premium

1. General Reserve
2. Profit & loss A/c
3. Dividend Equalisation Capital Redemption Reserves
Reserve
4. Securities Premium

Note:- For the purpose of redemption of Preference shares , Securities Premium cannot
be used to create CRR & also not to write off the premium on redemption ( sec. 133)
Whereas, for the purpose of buyback of Equity Shares, Securities Premium can be
used for transfer to CRR as well as to write off Premium on buyback.

Method 2:- Buyback of Equity Share Capital out of proceeds of Fresh Issue

**Proceeds of Fresh Issue of

Share Capital Nominal Value of BB

❖ Fresh issue of debentures can’t be made to buyback existing Equity Share Capital.
❖ Fresh issue of Share Capital Should not be at the same type of Equity Share Capital
to be bought back
 BUYBACK OF SECURITIES

Student
**Meaning of Proceeds = Lower of FV or IP Notes

At Par At Premium At Discount

FV=10 FV=10 FV=10
IP=10 IP=12 IP=8

Proceeds=FV/IP Proceeds=FV Proceeds= IP

Case 1
BB Price= 150/Shares Sol: Proceeds of FI = Nom.Value of Buyback
X= 100000*100
No.= 1,00,000 equity 1. Total Proceeds = 1,00,00,000
shares.(Face Value=100) 2. Proceeds/sh = 10
3. No. of Shares = 10,00,000
New Preference Shares
issued @ 10/sh. (FV=10)

Case 2
BB Price= 150/Shares Sol: Proceeds of FI = Nom.Value of BuyBack
X= 100000*100
No.= 1,00,000 Equity 1. Total Proceeds = 1,00,00,000
shares.(Face Value=100) 2. Proceeds/sh = 10
3. No. of Shares = 10,00,000
New Preference Shares
issued @ 12/sh. (FV=10)

Case 3
BB Price= 150/Shares Sol: Proceeds of FI = Nom.Value of BuyBack
X= 100000*100
No.= 1,00,000 Equity 1. Total Proceeds = 1,00,00,000
shares.(Face Value=100) 2. Proceeds/sh = 9
3. No. of Shares = 11,11,112
New Preference Shares
issued @ 9/sh. (FV=10)
 BUYBACK OF SECURITIES

Student
Method 3: - When existing funds and proceeds of fresh issue both are used for the Notes
purpose of buyback

Existing Funds Fresh issue

Transfer to CRR from FR + Proceeds of fresh issue = Nominal Value of buyback

Example:-
1. Profit & loss A/c = Rs.1,00,000/-
2. General reserve = Rs.1,00,000/-
3. Securities premium = Rs.3,00,000/-
4. Company wants to buyback 3,00,000 shares of Rs.10 each @ Rs.25/Shares.
5. New shares issued at Rs. 120/sh. (FV=Rs.100)
5. Calculate the number of equity Shares that can be issued by the company
whose F.V. is Rs.100/share @ Rs.120/Share

Solution:-
Transfer to CRR from FR + Proceeds of Fresh Issue = Nominal Value of buyback.
5,00,000 + x = 30,00,000/-
x= 25,00,000
Number of Shares to be issued:
1. Total Proceeds= 25,00,000
2. Proceeds/share= 100
3. No. of Shares(1/2)= 25,000 Shares

Also, the amount raised by Fresh issue. = 25,000*120 = 30.00.000/-

 BUYBACK OF SECURITIES

Student
Notes
Journal Entries for Buyback of Shares Amt in Rs.

Date Particular Debit Credit

(a) Bank A/c Dr.

To Preference Share Capital A/c
To Security Premium Reserve A/c
(being __ preference shares issued, for the purpose of
buyback of Equity share )
(b) Free Reserves A/c Dr.
To Capital Redemption Reserve A/c
(Being transfer of free reserves to capital redemption
reserve)
(c) Equity Share Capital A/c Dr.
Premium on buyback A/c Dr.
To Equity Shareholders A/c
(Being, equity shares bought back)
(d) Equity Shareholders A/c Dr.
To bank A/c
(Being payment for buy-back of equity shares of Rs.__
each @ Rs.__ per share)
(e) Free Reserves A/c Dr.
To Premium on buyback A/c
(Being Premium Payable on buy-back account written off
against Free Reserves A/c.)
 BUYBACK OF SECURITIES

Student
Maximum Permissible Buyback Notes

1. Resources Test :- Maximum 25% (*Total paid up Capital + Free Reserves)

2. Share Outstanding test :- Maximum 25% (Number of Shares Outstanding)
3. Debt Equity Ratio Test :- After buyback; Total Debt / Total Equity  2 : 1

Lowest of these three tests is permissible

Equity :- Equity paid up capital +

*Total Paid up Capital :- Equity Share Capital Free Reserves
Note:- No. of Shares outstanding =
Preference Shares are not included.
Free Reserve :-
1. Profit & loss Balance Total debt :- Both Short Term and
2. General reserve Long Term Debt will be included.
3. Dividend Equalisation Reserve (Secured as well as unsecured debt
4. Securities premium is included.)

Example:-
Free reserves :- Rs.42,80,000/-
Equity Share Capital :- Rs.30,00,000/-
Total Debt :- Rs.42,00,000/-
You are required to compute maximum no. of shares bought back by Debt – Equity
Ratio Test if buyback @ Rs.30

Sol:- Total debt / Total Equity  2:1

1. Total Debt after buyback = Rs.42,00,000/- (because after buyback, no change

occur in Debt)
2. Total Equity after buyback = Rs.21,00,000/-
3. Total Equity before Buyback= Rs.72,80,000/- (Given )
4. Max. Equity that can be Buyback = Rs.51,80,000/-
5. No. of Shares that can be buyback :- 1,29,500 (51,80,000 / 40)

If one Equity Share is bought back then,

1. Our Paid-up Capital is decreased by Rs.10 (assume face value of Equity Share is
Rs.10).
2. Our free Reserve is decreased by Rs. 10 , because we need to transfer nominal
value of share bought back to CRR.
3. Our free Reserve is decreased by Rs.20 , because we need to pay premium on
buyback.
Total of shareholders funds utilised is Rs.40
 BUYBACK OF SECURITIES

Student
Question 1 Category:- Notes
KG Limited furnishes the following summarized Balance Sheet as at 31st March,
2013:
(₹ in (₹ in
Liabilities Assets
lakhs) lakhs)
Equity share capital (fully paid
1,200 Machinery 1,800
up shares of ₹ 10 each)
Securities premium 175 Furniture 226
General reserve 265 Investment 74
Capital redemption reserve 200 Inventory 600
Profit & loss A/c 170 Trade receivables 260
12% Debentures 750 Cash at bank 740
Trade payables 745
Other current liabilities 195

Total 3,700 Total 3,700

➢ On 1st April, 2013, the company announced the buyback of 25% of its equity
shares @ ₹ 15 per share. For this purpose, it sold all of its investments for ₹ 75
lakhs.
➢ On 5th April, 2013, the company achieved the target of buy back.
➢ On 30th April, 2013 the company issued one fully paid up equity share of ₹ 10 by
way of bonus for every four equity shares held by the equity shareholders.
You are required to:
• Pass necessary journal entries for the above transactions.
• Prepare Balance Sheet of KG Limited after bonus issue of the shares
(Notebook page No. )

Question 2 Category:-
Following is the summarized Balance Sheet of Competent Limited as on 31st March,
2013:

Assets ₹ Assets ₹
Equity Shares of ₹ 10 Fixed Assets 46,50,000
each fully paid up 12,50,000 Current Assets 30,00,000
Revenue reserve 15,00,000
Securities Premium 2,50,000
 BUYBACK OF SECURITIES

Student
Profit & Loss Account 1,25,000 Notes
Secured Loans:
12% Debentures 18,75,000
Unsecured Loans 10,00,000
Current maturities of long
term borrowings 16,50,000
Total 76,50,000 Total 76,50,000

The company wants to buy back 25,000 equity shares of ₹ 10 each, on 1st April,
2013 at ₹ 20 per share. Buy back of shares is duly authorized by its articles and
necessary resolution has been passed by the company towards this.

The payment for buy back of shares will be made by the company out of
sufficient bank balance available shown as part of Current Assets.

Comment with your calculations, whether buy back of shares by company is

within the provisions of the Companies Act, 2013. If yes, pass necessary journal
entries towards buy back of shares and prepare the Balance Sheet after buy back.
(Notebook Page No. )
Question 3 Category:-
M Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2013 :
₹ in ‘000 ₹ in ‘000
Equity & Liabilities
Share Capital:
Authorized Capital: 5,000
Issued and Subscribed Capital :
3,00,000 Equity shares of ₹ 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000 5,000
(issued two months back for the purpose of buy
back)
Reserve and Surplus:
Capital reserve 10
Revenue reserve 4,000
Securities premium 500
Profit and Loss account 1,800 6,310
Non-current liabilities - 10% Debentures 400
Current liabilities and provisions 40
Total 11,570
 BUYBACK OF SECURITIES

Student
Notes
Assets

Fixed Assets: Cost 3,000

Less: Provision for depreciation (250) 2,750
Non-current investments at cost 5,000
Current assets, loans and advances (including cash
4,000
and bank balances)
Total 11,750
❑ The company passed a resolution to buy back 20% of its equity capital @ ₹ 15
per share. For this purpose, it sold its investments of ₹ 30 lakhs for ₹ 25 lakhs.
❑ The company redeemed the preference shares at a premium of 10% on 1st April,
2013.

❑ Included in its investments were 'Investments in own debentures' costing ₹ 3

lakhs (face value ₹ 3.30 lakhs). These debentures were cancelled on 1st April,
2013.
You are required to pass necessary Journal entries and prepare the Balance Sheet
on 01.04.2013. ( Notebook Page no. )
Question 4 Category:-
Following is the summarized Balance Sheet of Complicated Ltd as on 31st March:
Liabilities ₹ Assets ₹
Equity Shares of ₹ 10 each fully
12,50,000 Fixed Assets 46,50,000
Paid Up
Bonus Shares 1,00,000 Current Assets 40,00,000
Share Option Outstanding Account 4,00,000
Revenue Reserve 15,00,000
Securities Premium 2,50,000
Profit & Loss Account 1,25,000
Capital Reserve 1,00,000
Revaluation Reserve 1,00,000
Unpaid Dividends 1,00,000
12% Debentures (Secured) 18,75,000
Advance from Related Parties
10,00,000
(Unsecured)
Current Maturities of Long Term
16,50,000
Borrowings
Application Money Received for
Allotment Due for Refund 2,00,000
Total 86,50,000 Total 86,50,000
 BUYBACK OF SECURITIES

Student
❑ The Company wants to buy back 25,000 Equity Shares of ₹ 10 each, on 1st April, Notes
at ₹ 20 per Share. Buy Back of Shares is duly authorized by its Articles and
necessary resolution has been passed by the Company towards this.
❑ The payment for buy back of Shares will be made by the Company out of
sufficient bank balance available shown as part of Current Assets.
❑ Comment with your calculations, whether Buy Back of Shares by the Company is
within the provisions of the Companies Act, 2013. If yes, pass necessary Journal
Entries towards buy back of Shares and prepare the Balance Sheet after buy
back of Shares
Question 5 Category:-
The following is the Summarized Balance Sheet of M/s. Vriddhi Infra Ltd as on
31st March –
Equity & Liabilities ₹ Assets ₹

1. Non-Current Assets
1. Shareholders Funds: (a) Fixed (Tangible)
(a) Share Capital: Assets:
1,00,000 Equity Shares of ₹
10,00,000
10 each fully paid up Land & Building 21,50,000

Plant and Machinery 15,00,000

(b) Reserve & Surplus:
3,00,000
Securities Premium
2,50,000 (b) Non-Current
General Reserve
1,50,000 Investments 2,00,000
Profit & Loss Account Surplus
2. Current Assets
(a) Trade Receivables 5,50,000
2. Non-Current Liabilities (b) Inventories 1,80,000
(c) Cash & Cash 40,000
(a) Long Term Borrowings:
Equivalents
(b) 10% Debentures (Secured 20,00,000
by floating charge on all
assets)
(c) Unsecured Loans 8,00,000
3. Current Liabilities & 1,20,000
Provisions: Trade Payables
Total 46,20,000 Total 46,20,000

On 21st April, the Company announced the Buy Back of 25,000 of its Equity Shares at ₹
15 per Share.
For this purpose, it sold all of its Investments for ₹ 2.50 Lakhs. On 25th April, the
Company achieved the target of Buy Back.
 BUYBACK OF SECURITIES

Student
❑ On 1st May, the Company issued one fully paid up Equity Share of ₹ 10 by way Notes
of Bonus, for every Five Equity Shares held by the Equity Shareholders.
Pass necessary Journal Entries for the above transactions
Question 6 Category:-
Perrotte Ltd. (a non-listed company) has the following Capital Structure as on
31.03.2011:

Particulars (₹ in crores)

(1) Equity Share Capital (Shares of ₹ 10 each fully paid) - 330

(2) Reserves and Surplus

General Reserve 240 -
Securities Premium Account 90 -
Profit & Loss Account 90 -
Infrastructure Development Reserve 180 600
(3) Loan Funds 1,800

❖ The Shareholders of Perrotte Ltd., on the recommendation of their Board of

Directors, have approved on 12.09.2011 a proposal to buy back the maximum
permissible number of Equity shares considering the large surplus funds
available at the disposal of the company.

❖ The prevailing market value of the company’s shares is ₹ 25 per share and in
order to induce the existing shareholders to offer their shares for buy back, it
was decided to offer a price of 20% over market.

❖ You are also informed that the Infrastructure Development Reserve is created to
satisfy Income-tax Act requirements.

❖ You are required to compute the maximum number of shares that can be
bought back in the light of the above information and also under a situation
where the loan funds of the company were either ₹ 1,200 crores or ₹ 1,500
crores.

Assuming that the entire buy back is completed by 09.12.2011, show the
accounting entries in the company’s books in each situation.
 BUYBACK OF SECURITIES

Student
Question 7 Category:- Notes
Extra Ltd. (a non-listed company) furnishes you with the following summarized
Balance Sheet as on 31st March, 2012: (₹ in lakhs)
Liabilities Amount Assets Amount
Equity shares of ₹ 10 each fully Fixed assets less
100 50
paid depreciation
9% Redeemable preference Investments at cost 120
shares of ₹ 100 each fully paid 20 Current assets 142
Capital reserves 8
Revenue reserves 50
Securities premium 60
10% Debentures 4
Current liabilities 70
Total 312 Total 312

➢ The company redeemed the preference shares at a premium of 10% on 1st April,
2012.
➢ It also bought back 3 lakhs equity shares of ₹ 10 each at ₹ 30 per share.
➢ The payment for the above was made out of huge bank balances, which
appeared as a part of the current assets.
➢ Included in its investment were “investments in own debentures” costing ₹ 2
lakhs (face value ₹ 2.20 lakhs). These debentures were cancelled on 1st April,
2012.
➢ The company had 1,00,000 equity stock options outstanding on the above
mentioned date, to the employees at ₹ 20 when the market price was ₹30 (This
was included under current liabilities). On 1.04.2012 employees exercised their
options for 50,000 shares.

Pass the journal entries to record the above. Prepare Balance Sheet as at
01.04.2012.
Special points :-