Buy back of shares - introduction and accounting

Introduction and Accounting for Buy-back of Shares in India as per the Companies Act 2013 and other rules.
It will be useful for the students of B. Com., B.Com.(H), CA, CS and other professional courses, studying Corporate Accounting.

1. Buy-back of Shares
M. C. Sharma
Associate Professor
Department of Commerce
Shaheed Bhagat Singh Evening College
(University of Delhi), Delhi, INDIA

2. Prof. M. C. Sharma (Email: [email protected]) 2
Meaning of Buy-back of Shares
•Buy-back of shares means purchase of its own
shares/securities by a company.
•After buy-back of its shares, the company has to cancel
them.
•A company cannot buy-back its own shares for the
purpose of investment.
•When a company has sufficient cash, it may like to buy-
back its shares, usually when prevailing market price is
lower.

3. Prof. M. C. Sharma
(Email: [email protected])
3
Conditions for Buy-back [Sec. 68]
•The buy-back of the shares listed on any stock
exchange, must be in accordance with SEBI regulations.
•The buy-back of the shares not listed on any stock
exchange, must be in accordance with Rule 17 of the
Companies (Share capital and debentures) Rules, 2014.
No company shall purchase its shares/other securities,
unless the following conditions are satisfied:
1.The buy-back of shares should be authorised by its
Articles of Association.
2.A special resolution should be passed in the general
meeting of the company authorising the buy-back of
shares.
3.All the shares to be bought-back must be fully paid.

4. Prof. M. C. Sharma
(Email: [email protected])
4
Conditions for Buy-back [Sec. 68]
However, buy-back of shares can be made without a
special resolution if the following conditions are
fulfilled:
4.The buy-back is upto 10% of the total paid-up capital
equity capital and free reserves of the company.
5.Such buy-back is authorised by passing a resolution in
the meeting of Board of Directors.
6.There is a gap of 365 days between two buy-back offers
sanctioned by the board.

5. Conditions for Buy-back (Contd.)
Maximum number of shares that can be bought-back
7.The buy back must not exceed 25% of total paid up
equity capital of the company in a single financial year. This
limit is regarding the maximum number of equity shares
that can be bought-back in a single financial year.
Maximum Amount Available for Buy-back of Shares
8.The buy back cannot exceed 25% of the paid up capital
and free reserves of the company. This limit is in the
context of the maximum amount that can be paid by a
company in a buy-back offer.
Prof. M. C. Sharma (Email:
[email protected])
5

6. Conditions for Buy-back (Contd.)
Post buy-back conditions:
9.The ratio of secured and unsecured debt owed by the
company must not be more than twice the capital and its
free reserves after such buy-back. In other words, the debt-
equity ratio of the company should not be more than 2:1
after the buy-back.
Note: The maximum amount of share buy-back in a
financial year cannot exceed of the lowest of three figures
calculated as per point no. 7, 8 and 9.
Prof. M. C. Sharma (Email:
[email protected])
6

7. Conditions for Buy-back (Contd.)
Post buy-back conditions:
10.After buy-back of the shares, the company cannot issue
further shares of the same kind as bought back for a period
of 6 months.
Prof. M. C. Sharma (Email:
[email protected])
7

8. Sources of Funds for Buy-back
•Free Reserves:
According to Sec. 69 of the Companies Act 2013, where
buy-back is done out of the free reserves, then an
amount equal to nominal value of shares bought back
must be transferred to “Capital Redemption Reserve
(CRR) A/c.”
•Securities Premium Account
•Proceeds from fresh Issue
However, buy-back of shares cannot be made out of the
proceeds of an earlier issue of the same kind of shares
or same kind of other securities.
Prof. M. C. Sharma (Email:
[email protected])
8

9. What is the manner in which the
company can buy back its own shares?
The company can buy back its shares in any of the
following manners :
•From the existing shareholders on a proportionate
basis through the tender offer;
•From open market through:
–Book building process
–Stock exchange,
•From odd lot holders.
Prof. M. C. Sharma (Email:
[email protected])
9

10. Prof. M. C. Sharma (Email:
[email protected])
10
Calculation of Capital Redemption Reserve
(CRR) and Net Proceeds from Fresh Issue
•CRR required
= Nominal Value of Shares to be bought-back – Net Proceeds from
Fresh Issue of Shares
•Net Proceeds from Fresh Issue of Shares
= Nominal Value of Shares issued (Premium on such issue, if any,
is to be ignored)
If new shares issued are partly paid, then only the paid up nominal
amount should be considered.
•Fresh Shares to be issued
= Nominal Value of Shares to be bought-back – Profits available for
CRR.

11. Illustration:
Calculate net proceeds from fresh issue:
1.Issued 1,50,000 shares of Rs. 10 each at par
2.Issued 1,50,000 shares of Rs. 10 each at a premium of
Rs. 2 per share
3.Issued 1,50,000 shares of Rs. 10 each at par, only Rs.
8 called and paid.
4.Issued 1,50,000 shares of Rs. 10 each at a premium of
Rs. 2 per share. Only Rs. 9 including premium is called
and paid.
Answer: (1) 15,00,000; (2) 15,00,000; (3) 12,00,000; (4)
10,50,000.
Prof. M. C. Sharma (Email:
[email protected])
11

12. Illustration 2
Calculate the amount of CRR required in the following cases:
Shares to Be bought-back Fresh issue of share capital
1. Rs. 12,00,000 at par Rs. 10,00,000 at par
2. Rs. 15,00,000 at a premium of 5% Rs. 10,00,000 at par
3. Rs. 12,00,000 at par Rs. 9,00,000 at premium of
10%
Answer:
1. Rs. 2,00,000
2. Rs. 5,00,000
3. Rs. 3,00,000
Prof. M. C. Sharma (Email:
[email protected])
12

13. Journal Entries
1.If shares to be bought-back are not fully paid,
then to make them fully paid. A final call should
be made and received:
1.If there is calls-in-arrear on some shares:
• EITHER such amount shall be received,
• OR such shares shall be forfeited and then re-issued before buy-
back,
• Such shares cannot be bought-back.
Prof. M. C. Sharma (Email:
[email protected])
13
(a)Share Final Call A/c
To Share Capital A/c
Dr.
(b)Bank A/c
To Share Final Call A/c
Dr.

14. Journal Entries (Contd.)
Prof. M. C. Sharma (Email:
[email protected])
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3.For sale of assets/investments to arrange cash for redemption
Bank A/c
To Assets or Investment A/c
Dr.
*Any loss on sale of assets/investments shall be debited to
Surplus (Profit and Loss A/c).
*Any Profit on sale of assets/investments shall be credited
to Capital Reserve.
4.For issue of debentures, if any
Bank A/c
To Debentures Application A/c
Dr.
Debentures Application A/c
To Debentures A/c
Dr.

15. Journal Entries (Contd.)
Prof. M. C. Sharma (Email:
[email protected])
15
5.For issue of new shares, if any
Bank A/c
To Share Application & Allotment A/c
Dr.
Share Application & Allotment A/c
To Share Capital A/c
To Securities Premium A/c (if any)
Dr.
6.For making due buy-back
Share Capital A/c
*Premium on Buy-back of Shares A/c
To Shareholders/Equity Share Buy-back A/c
* If shares are to be bought-back at premium.
Dr.
Dr.

16. Journal Entries (Contd.)
Prof. M. C. Sharma (Email:
[email protected])
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7.For writing off Premium on buy-back, if any
Securities Premium A/c
Capital Reserve A/c*
General Reserve A/c
Surplus A/c
To Premium on Buy-back of Shares A/c
Dr.
Dr.
Dr.
Dr.
*
*
Above order or preference is not legally
required. It is desirable that minimum use of
free reserve or divisible profits is made for this
purpose.
Capital reserve (profit) can be used only if it
was realised in cash.

17. Journal Entries (Contd.)
Prof. M. C. Sharma (Email: [email protected])
17
8.For payment to Shareholders
Shareholders/Equity Share Buy-back A/c
To Bank A/c
Dr.
As per Rule 17 (8) of the Companies (Share Capital and
Debentures) Rules, 2014, private companies and unlisted public
companies are required to open a separate bank account and
deposit therein, such sum, as would make up the entire sum due
and payable as consideration for shares tendered for buy-back.
Then entries will be
a.Share Buy-back Bank A/c
To Bank A/c
Dr.
b.Shareholders/Equity Share Buy-back A/c
To Share Buy-back Bank A/c
Dr.

18. Issue of Bonus Shares
•As per Sec. 55 of the Companies Act
2013, Capital Redemption Reserve (CRR)
and Securities Premium can be used for
issue of fully paid bonus shares.
•Free reserves and surplus can be used to
pay bonus to shareholders either to issue
fully paid bonus shares or to make existing
partly paid shares as fully paid up.
Prof. M. C. Sharma (Email:
[email protected])
18

19. Journal Entries for Issue of Bonus Shares (Contd.)
Prof. M. C. Sharma (Email:
[email protected])
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3.When Bonus to shareholders is declared
Capital Redemption Reserve A/c
Securities Premium A/c
General Reserve A/c
Surplus OR Divisible Profits A/c
To Bonus to Shareholders A/c
Dr.
Dr.
Dr.
Dr.
2.For issue of fully paid bonus shares
Bonus to Shareholders A/c
To Equity Share Capital A/c
Dr.

20. Journal Entries for Issue of Bonus Shares
Prof. M. C. Sharma (Email:
[email protected])
20
3.When Bonus to shareholders is used to make
existing partly paid shares as fully paid up:
(a)For making final call due
Equity Share Final Call A/c
To Equity Share Capital A/c
Dr.
(b)For adjusting bonus to shareholders
against final call due:
Bonus to Shareholders A/c
To Equity Share Final Call A/c
Dr.

21. Thanks.
Pl mail your feedback, comments and
suggestions to me at:
[email protected]
Prof. M. C. Sharma (Email:
[email protected])
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