CMA Inter - Corporate Accounting & Auditing

Buy-back of Shares
Meaning of Buy-back

Buy-back of shares means a company purchasing its own shares, which must then
be cancelled, leading to a decrease in share capital. A company cannot buy its
own shares for investment purposes. However, if a company has sufficient cash,
it may decide to buy back its shares.

Provisions of Companies Act, 2013

Clause Key Points

A company can buy back shares using:

Sources of Buy-
(i) Free reserves,
Back Funds
(ii) Securities premium account, or
(iii) Proceeds from issuing new shares
a. Must be authorized by company’s articles.
b. Requires a special resolution in a general meeting (unless
Conditions for buy-back is ≤10% of paid-up equity + free reserves,

Buy-Back which only needs Board approval).

c. Only fully paid-up shares/securities can be bought back.
d. 4. If shares are listed, buy-back must comply with SEBI
regulations.
The buy-back amount must not exceed 25% of the total paid-
Resource Test
up capital and free reserves of the company.

Share In any financial year, the total number of shares bought back
Outstanding must not exceed 25% of the total paid-up equity shares of the
Test company.

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Clause Key Points

Post buy-back, the company’s debt (secured + unsecured)

must not exceed twice the total of its paid-up capital and free

Debt-Equity reserves. (Government may allow a higher ratio for specific

Ratio Test companies.)

Note: Here the equity shall be after excluding the CRR transfer
amount. Debt includes both non-current and current liabilities

A company cannot initiate another buy-back within one year

Time Restrictions
of the previous buy-back’s closure.

Must include:

(i) Complete material facts,

Special
(ii) Reason for buy-back,
Resolution Notice
(iii) Type of securities,
(iv) Amount to be spent,
(v) Timeline for completion
Buy-Back Must be completed within 12 months from passing the special
Completion resolution or Board approval.

Methods of Buy- (i) From existing shareholders (proportionate basis),

Back (ii) From open market,

(iii) From employees via stock options or sweat equity
Before buy-back, the company must file a solvency declaration
Solvency with the Registrar and SEBI, confirming it can meet liabilities
Declaration for at least one year post buy-back. (Unlisted companies don’t
file with SEBI).

Destruction of Shares bought back must be extinguished and physically

Shares destroyed within 7 days of completion.

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Clause Key Points

Company cannot issue the same type of shares within 6

Restrictions
months (except for bonus shares, stock options, sweat equity,
After Buy-Back
or conversion of preference shares/debentures).

Maintenance of Company must keep a register with details of shares bought,

Records payment made, cancellation date, and destruction date.

Company must file a return with Registrar and SEBI within 30

Regulatory Filing days of buy-back completion.

(Unlisted companies don’t file with SEBI).

- Company: Fine of ₹1,00,000 to ₹3,00,000.

Penalties for
- Defaulting officers: Imprisonment (up to 3 years) and/or fine
Non-Compliance
(₹1,00,000 to ₹3,00,000).

Capital If buy-back is from free reserves or securities premium account,

Redemption an equal amount must be transferred to CRR and disclosed in
Reserve (CRR) the balance sheet.

CRR Utilization CRR can be used to issue fully paid bonus shares to members.

Premium on Premium (price paid over nominal value) is adjusted against

Buy-Back free reserves and/or securities premium account.

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Accounting

a. For arrangement of Funds

Bank A/c………Dr
To Equity Share Capital / Preference Share Capital A/c
To Securities Premium Reserve A/c
Note: For arrangement of fund, question may also require to issue
debentures, sell investment or sell assets. Normal Entry for that will be
passed.

b. For making the Payment

Equity Share Capital A/c …….Dr
Premium on buy back A/c …...Dr

To Bank A/c

c. For creating required amount of CRR

Securities Premium A/c…..Dr
General Reserve………….Dr
Profit & Loss A/c………….Dr

To CRR A/c

d. For writing off Premium on buy-back

Securities Premium A/c …….Dr
General Reserve A/c ……….Dr
Profit & Loss A/c …………….Dr
To Premium on buy back A/c

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Institute Material Questions

Question 1
X Co. Ltd. buys back its own 2,00,000 equity shares of ` 10 each at par. The company has sufficient
profits otherwise available for dividend besides general reserve. No fresh issue of shares is made for this
purpose. The shares are fully paid up.
Journalize the transactions.

Solution
In the Books of X Co. Ltd.
Journal
Date Particulars Dr. Cr.
Equity Share Capital A/c Dr. 20,00,000
To Bank A/c 20,00,000
(Buying-back 2,00,000 equity shares of 10 each, at par)
20,00,000
General Reserve A/c Dr.
20,00,000
To Capital Redemption Reserve A/c
(Transfer of nominal value of shares bought back )

Question 2
The BCG Co. Ltd. resolved by a special resolution to buy-back 2,00,000 of its equity shares of the face
value of ` 10 each on which ` 8 has been paid up. The general reserve balance of the company stood at
` 50,00,000 and no fresh issue of shares was made.
Journalize the transactions.

Solution
In the Books of BCG Co. Ltd.
Journals
Date Particulars Dr. Cr.
Equity Share Final Call A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Final call of 2 per share due on 2,00,000 equity shares as per Board
resolution)
Bank A/c Dr. 4,00,000
To Equity Share Final Call A/c 4,00,000
(Final call money on 2,00,000 shares received)
Equity Share Capital A/c Dr. 20,00,000
To Equity Shareholders A/c
20,00,000
(Amount due to equity shareholders transferred to their account for
Buy Back)
Equity Shareholders A/c Dr. 20,00,000
To Bank A/c
(Payment to shareholders towards buy-back) 20,00,000

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General Reserve A/c Dr. 20,00,000

To Capital Redemption Reserve A/c 20,00,000
(Transfer of nominal value of shares Bought-back.)

Question 3
The share capital of Beta Co. Ltd consists of 1,00,000 equity shares of ` 10 each, and 25,000 preference
shares of ` 100 each, fully called up. Its securities premium account shows a balance of ` 40,000 and
general reserve of ` 7,00,000. The company decides to buy-back 20,000 equity shares @ ` 12 each.
Pass the necessary journal entries.

Solution
In the Books of Beta Co. Ltd.
Journal

Date Particulars Dr. Cr.

Equity Share Capital A/c Dr. 2,00,000
Premium on Buyback A/c Dr. 40,000
To Equity Shareholders A/c 2,40,000
(Amount due to equity shareholders for buying-back of
20,000 equity shares)
Equity Shareholders A/c Dr. 2,40,000
To Bank A/c 2,40,000
(Payment to shareholders on account of buy-back)
General Reserve A/c Dr. 2,00,000
To Capital Redemption Reserve A/c 2,00,000
(Transfer of nominal amount of equity shares Bought back.)
Securities Premium A/c Dr. 40,000
To Premium on Buyback A/c 40,000
(Premium on Buy-back written off)

Question 4
The PTC Co. Ltd. has a share capital of ` 15,00,000, comprising 1,00,000 equity shares of 10 each and
50,000 8% preference shares of 10 each, both of which fully called up and paid up. The company has
sufficient general reserve to its credit to enable it to comply with the legal formalities connected with
buy-back of shares. It decides to buy-back 20% of its equity share capital at ` 9 per share. Record the
transactions in the books of the company.

Solution
In the Books PTC Co. Ltd.
Journal
Date Particulars Dr. Cr.
Equity Share Capital A/c Dr. 2,00,000

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To Equity Shareholders A/c 1,80,000

To Capital Reserve A/c 20,000
(Amount due to equity shareholders for buy-back of 20,000 shares @
9)
Equity Shareholders A/c Dr. 1,80,000
To Bank A/c 1,80,000
(Payment to equity shareholders the amount due to them)
General Reserve A/c Dr. 2,00,000
To Capital Redemption Reserve A/c 2,00,000
(Transfer of nominal amount of shares bought-back)

Question 5
Alpha Co. Ltd. has a paid up equity share capital of ` 20,00,000 in 2,00,000 shares of ` 10 each. It
resolved to buy-back 50,000 equity shares at 15 per share. For this purpose. it issued 20,000 12%
preference shares of 10 each, at par, payable along with application. The company has to its credit ` 2,50,000
in securities premium account and ` 10,00,000 in the general reserve account. The company utilized the
general reserve. Pass the necessary journal entries.

Solution
In the Books of Alpha Co. Ltd.
Journal
Date Particulars Dr. Cr.
Bank A/c Dr. 2,00,000
To Preference Share Application A/c 2,00,000
(Application money on 20,000 preference shares at 10 each)
Preference Share Application A/c Dr. 2,00,000
To Preference Share Capital A/c 2,00,000
(Transfer of application money to preference share capital account on
shares being allotted)
Equity Share Capital A/c Dr. 5,00,000
Securities Premium A/c Dr. 2,50,000 7,50,000
To Equity Shareholders A/c
(Amount due to equity shareholders consequent upon buy- back of
50,000 Shares at 15)
Equity Shareholders A/c Dr. 7,50,000 7,50,000
To Bank A/c
(Payment to equity shareholders for amount due to them)
General Reserve A/c Dr. 3,00,000 3,00,000
To Capital Redemption Reserve A/c
(Transfer of the nominal value of shares bought Back out of profit)

Question 6
The following was the balance sheet of Diamond Ltd. as at 31st March, 2021.
Liabilities in lakhs
10% Redeemable Preference Shares of `10 each, fully paid up 2,500
Equity Shares of 10 each fully paid up 8,000

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Capital Redemption Reserve 1,000

Securities Premium 800
General Reserve 6,000
Profit and Loss Account 300
9% Debentures 5,000
Sundry creditors 2,300
Sundry Provisions 1,000
26,900
Assets
Fixed assets 14,000
Investments 3,000
Cash at Bank 1,650
Other Current assets 8,250
26,900
On 1st April, 2021 the company redeemed all of its preference shares at a premium of 10% and bought
back 25% of its equity shares @ ` 15 per share. In order to make cash available, the company sold all the
investments for ` 3,150 lakh and raised a bank loan amounting to ` 2,000 lakhs on the security of the
company’s plant.
Pass journal entries for all the above mentioned transactions including cash transactions and prepare the
company’s balance sheet immediately thereafter.

Solution
Journal
Particulars Dr. Cr.
1. Bank A/c Dr. 3,150
To Investment A/c 3,000
To Profit and Loss A/c 150
(Being sale of investments and profit thereon)
2. Bank A/c Dr. 2,000
To Bank Loan A/c 2,000
(Being loan taken from bank)
3. 10% Redeemable Preference Share Capital A/c Dr. 2,500
Premium on Redemption of Preference Share A/c Dr. 250
To Preference Shareholder A/c 2,750
(Being redemption of preference shares)
4. Preference Shareholders A/c Dr. 2,750
To Bank A/c 2,750
(Being payment of amount due to preference shareholders)

5. Securities Premium A/c Dr. 250

To Premium on Redemption of Preference Share A/c 250
(Being use of securities premium to provide premium on redemption of
preference shares)

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6. Equity Share Capital A/c Dr. 2,000

Premium on Buy-back A/c Dr. 1,000
To Equity Shareholders A/c 3,000
(being buy back of equity shares)
7. Securities Premium A/c Dr. 550
General Reserve A/c Dr. 450
To Premium on Buy-back A/c 1,000
(being use of securities premium and general reserve to provide
premium on buy-back)
8. General Reserves A/c Dr. 4,500
To Capital Redemption Reserve A/c (2000 + 2500) 4,500
(Being creation of capital redemption reserve to the extent of the face value of
preference share redeemed and equity shares bought back).
Note: Balance in General reserve as on 01.04.2012 (6,000 – 450 - 4,500)
9. Equity Shareholders A/c Dr. 3,000
To Bank A/c 3,000
(Being payment of amount due to equity shareholders).
Note : Cash at Bank [1650+3150+2000-2750-3000] = ` 1,050

Balance Sheet of Diamond Ltd., as on 01.04.2021

Balance Sheet as at: 01.04.2021
( in lakhs)
Ref Particulars Note Current Year Previous Year
No. No. Reporting Period Reporting Period
I EQUITY AND LIABILITIES
1 Shareholders’ Funds
(a) Share capital 1 6,000
(b) Reserves and surplus 2 7,000
2 Share application money pending allotment Nil
3 Non-current liabilities Nil
(a) Long-term borrowings 3 7,000
4 Current Liabilities
(a) Trade payables 2,300
(b) Short-term provisions 4 1,000
Total (1+2+3+4) 23,300
II ASSETS
1. Non-current assets
(a) Fixed assets
(i) Tangible assets 5 14,000
2 Current assets
(a) Cash and cash equivalents 1,050
(b) Other current assets 8,250
Total (1+2) 23,300

Notes to the Accounts ( in Lakhs)

Note 1. Share Capital Current Year Previous Year

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Issued Capital , Subscribed and Paid Up capital

Equity Shares of 10 each 6,000
Total 6,000

Note 2. Reserve and Surplus Current Year Previous Year

Capital Redemption Reserve (1,000+4,500) 5,500
General Reserve 1,050
Profit and Loss(300+150) 450
Total 7,000
Note 3. Long Term borrowings Current Year Previous Year
9% Debenture 5,000
Bank Loan 2,000
Total 7,000

Note 4. Short Term Provisions Current Year Previous Year

Sunday Provision 1,000
Total 1,000
Note 4. Tangible Assets Current Year Previous Year
Fixed Assets 14,000
Total 14,000

Question 7
XYZ Ltd. has the following capital structure on of 31st March 2021.
Particulars ` in Crores
a. Equity Share capital (Shares of 10 each) 300
b. Reserves :
General reserve 270
Security Premium 100
Profit and Loss A/c 50
Export Reserve (Statutory reserve) 80
c. Loan Funds 800

The shareholders have on recommendation of Board of Directors approved vide special resolution at
their meeting on 10th April 2021 a proposal to buy back maximum permissible equity shares
considering the huge cash surplus.
The market price was hovering in the range of ` 25 and in order to induce existing shareholders to offer
their shares for buy back, it was decided to offer a price of 20% above market.
Advise the company on maximum number of shares that can be bought back and record journal entries
for the same assuming the buy back has been completed in full within the next 3 months.
If borrowed funds were ` 1200 crores, and ` 1500 crores respectively would your answer change?

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Solution
Maximum shares that can be bought back
Situation I Situation II Situation
III
a. Shares outstanding test (WN # 1 ) 7.5 7.5 7.5
b. Resources test (WN # 2) 6 6 6
c. Debt Equity ratio test (WN # 3) 8 3 —
d. Maximum number of shares for buy back - LEAST of the 6 3 —
above

Particulars Situation I Situation II

Debit Credit Debit Credit
a. Shares bought back A/c Dr. 180 90
To Bank A/c 180 90
[Being purchase of shares from public]
b. Share capital A/c Dr. 60 30
Security premium A/c Dr. 100 60
General reserve A/c (balancing figure) Dr. 20 —
To Shares bought back A/c 180 90
c. [Being cancellation of shares bought on buy back] 60 30
General reserves A/c Dr.
To Capital redemption reserve A/c 60 30
[Being transfer of reserves to capital redemption reserve to
the
extent capital is redeemed]

Note: Under situation III, the company does not qualify the debt equity ratio test. Therefore the
company
cannot perform the buyback of shares
Working Notes:
WN # 1: Shares outstanding test
Particulars `
a. No. of shares outstanding 30 crores
b. 25% of shares outstanding 7.5 crores

WN # 2: Resources test ( in Crores)

Particulars `
a. Paid up capital 300
b. Free reserves [270+100+50] 420
c. Shareholders fund (a+b) 720
d. 25% of shareholders fund 180
e. Buyback price per share 30
f. Number of shares that can be bought back 6 Crores

WN # 3: Debt Equity ratio test :

( in Crores)
Let no. of shares bought back be x @ 30
Max ratio of Debt/Proprietors Fund = 2

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I II III
800 =2 1,200 =2 1,500 =2
720 - 10x - 30x 720 - 10x - 30x 720 - 10x - 30x
or x = 8 or, x = 3 or, x = - x, so not possible

Question 8
R Ltd. wants to buy back 100000 equity shares of 10 each at a price of 20 each on 01.04.2021. The buy
back is allowed in its articles of association and the company has obtained necessary approval from the
shareholders. The company has sufficient bank balance to make the payment for buy back of shares.
The following information is available as on 31.03.2021:
Particulars `
Equity Share Capital (`10 each fully paid) 50,00,000
General Reserve 60,00,000
Dividend Equalization Reserve 10,00,000
Balance of Profit and Loss (Cr.) 5,00,000
10% Debentures (`100 each) 75,00,000
Bank Loan 40,00,000
Current Liabilities 66,00,000
You have been appointed as a legal expert to supervise the buyback process. Verify whether the buyback
planof the company meets the conditions specified by the Companies Act 2013 as regards to the maximum
amount of buyback.

Solution
Determination of maximum buyback permissible as per Companies Act 2013:
1. Shares Outstanding Test: Max. Permissible Limit = 25% of Outstanding Shares
Particulars `
Total number of shares outstanding 5,00,000
25% of the shares outstanding 1,25,000

1. Resource Test: Max. Permissible Limit = 25% of Paid up Capital plus Free Reserves
Particulars `
Equity share capital 50,00,000
Free Reserve (General Reserve + DER +P/L) 75,00,000
Paid up Capital plus Free Reserves 1,25,00,000
25% of Paid up Capital plus Free Reserves 31,25,000
Buy back price per share 20
No. of shares that can be bought back (3125000/20) 1,56,250

1. Debt Equity Ratio Test: Debt after buyback cannot exceed twice the paid up capital plus free
reserves.
Particulars `
Total Debt (75,00,000+40,00,000+66,00,000) 1,81,00,000
Minimum Equity to be maintained after buyback in the ratio 2:1 90,50,000
Paid up capital plus free reserves before buyback 1,25,00,000

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Future Paid up capital plus free reserves (`) (1,25,00,000 – 11,50,000) 1,13,50,000
Maximum permissible buyback (`) (1,13,50,000 - 90,50,000) 23,00,000
Buy back price per share (`) 20
No. of shares that can be bought back 1,15,000

Summary of three test results:

Particulars No. of Shares
Permissible Buyback as per –
Share Outstanding Test 125000
Resource Test 156250
Debt-Equity Ratio Test 115000
Maximum permissible buyback (least of the three) 115000
Actual buyback plan 100000
Since actual buyback proposed is below the permissible limit, the company can buy back 100000 shares
at `20 each.

Past Year Questions / MQPs

Question 9 (June 23, MQP Set II)
The following is the extract of the Trial Balance of Q Ltd. as on 31.03.2022.
Particulars `
Equity share capital ( 10) 12,00,000
General reserve 18,00,000
Securities premium 6,00,000
14% Debentures 25,00,000
Creditors 11,00,000
Non-current assets 36,00,000
Cash and bank balances 18,00,000
Other current assets 18,00,000
The management of the company is contemplating a buyback plan. Recommend to the company on the
maximum no. of equity shares which can be bought back by offering maximum price after complying
with all the necessary legal provisions as per Companies Act, 2013. Provide needful justifications and
calculations in support of your answer.

Solution
Statement showing computation of maximum number of equity shares Buy Back and maximum price
for Buy-Back
(i) According to Outstanding Equity Shares Test, maximum number buy-back of equity shares
= (25% of paid-up Equity Share Capital) / Face value per equity share
= 25% of 1,20,000/ 10 = 30,000 shares
(ii) According to Buy-back Resource Test, maximum amount that has to be paid for buy-back
= 25% of (Paid up capital + Free Reserves and Securities Premium)
= 25% of (12,00,000 + 18,00,000 + 6,00,000) = 9,00,000

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So, Maximum buy-back price per equity share = 9,00,000/30,000 shares = 30 per share
Now, it has to be verified that after the buy-back of shares, the post buy-back debt- equity ratio test will
not exceed 2:1.
Ascertainment of Post Buyback Debt-Equity Ratio
Here, Debt = 14% Debentures + Creditors = (25,00,000 + 11,00,000) = 36,00,000 Post buy-back
Equity:
• Post buy-back Share Capital = Existing Share Capital - Face value of shares buy- back = [12,00,000
- (30,000 x `10)] = `9,00,000
• Post buy-back Free Reserves & Securities Premium
= Existing Free Reserves & Securities Premium - Amount utilised for buy-back
= [(18,00,000 + 6,00,000) - 9,00,000] = 15,00,000
Post buy-back Equity = 9,00,000 + 15,00,000 = 24,00,000 Post buy-back Debt-equity ratio = Total Debt
/ Equity
= 36,00,000/ 24,00,000 = 1.5, which happens to be less than 2:1
So, the above condition of maintaining Debt-Equity ratio gets satisfied.
Hence, Q Ltd. may be suggested to buy-back 30,000 shares @ `30 each (i.e., at 20 premium per share).

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