Buyback of Shares – Legal Provisions & Accounting

Introduction

Buyback is the reverse of Issue. The company purchases its own shares from the market and cancels them.

• Section 68 of Companies Act, 2013 governs buyback.
• Objective: Return surplus cash to shareholders, increase EPS, prevent hostile takeovers.

1. Important Provisions (Section 68)

1. Sources: Buyback can be done out of:
   • Free Reserves (General Reserve, P&L).
   • Securities Premium Account.
   • Proceeds of a fresh issue of any other kind of securities (Not same kind).
2. Maximum Limit:
   • Number of Shares: Max 25% of Paid-up Capital.
   • Amount Spent: Max 25% of (Paid-up Capital + Free Reserves).
3. Debt-Equity Ratio: After buyback, the ratio should not exceed 2:1.
4. Fully Paid: Shares must be fully paid.
5. CRR Creation: If bought back out of Free Reserves, a sum equal to Nominal Value of shares bought back must be transferred to Capital Redemption Reserve (CRR).

2. Journal Entries

Step 1: Realisation of Assets (If needed for cash)

Bank A/c ...Dr                 (Amount)
    To Investment A/c              (Amount)

Step 2: Buyback Due

Equity Share Capital A/c ...Dr     (Face Value)
Premium on Buyback A/c ...Dr       (Extra paid)
    To Equity Shareholders A/c         (Total Payable)

Step 3: Payment

Equity Shareholders A/c ...Dr      (Total Paid)
    To Bank A/c                        (Total Paid)

Step 4: Writing off Premium on Buyback

Use Securities Premium first.

Securities Premium A/c ...Dr       (Amount)
General Reserve A/c ...Dr          (Balance)
    To Premium on Buyback A/c          (Total Premium)

Step 5: Transfer to CRR (Crucial)

Nominal Value of shares bought back from Free Reserves.

General Reserve A/c ...Dr          (Face Value)
P&L Account ...Dr                  (Face Value)
    To Capital Redemption Reserve      (Face Value)

Illustration

Data:

• Buyback 10,000 Equity Shares of ₹10 each at ₹12.
• Pass entries. (Assume sufficient reserves).

Solution:

1. Due:

   Eq Share Capital A/c ...Dr (10k x 10)  1,00,000
   Premium on Buyback ...Dr (10k x 2)       20,000
       To Eq Shareholders                     1,20,000
   

2. Payment:

   Eq Shareholders ...Dr                  1,20,000
       To Bank                                1,20,000
   

3. Write off Premium:

   Securities Premium ...Dr                 20,000
       To Premium on Buyback                    20,000
   

4. CRR Creation:

   General Reserve ...Dr                  1,00,000
       To CRR                                 1,00,000
   

Exam Notes: Writing the Answer

Question: "Why is CRR created on buyback?" (2 Marks)

Answer: To maintain the Capital Intact. Since Share Capital is reduced (Debit), we create a parallel Capital Reserve (Credit) from Free Reserves to ensure creditors' security is not compromised.

Summary

• Section: 68.
• Limit: 25%.
• CRR: Mandatory if Free Reserves used.
• Premium: Written off against Sec Prem.

Quiz Time! 🎯

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