2. Meaning
The term buy-back means the buying back by a company of its shares or other securities
From their holder. A company limited by shares or guarantee can buy back or purchase
From its shareholders at a certain price (Offer price) due to such buy-back it returns part of
The issued share capital to shareholder.
Effects
1. There is a payment from the company to the extent of the price (Offer) of the shares bought back.
2. There is reduction in the share capital to the extent of the face value of shares bough back.
3. The shareholders whose shares are bought back their names are removed form the register of members.
Objectives
1. To increase the intrinsic value of shares.
2. To increase the earning per share.
3. To reduce the excess share capital.
4. To use surplus cash lying idle in the business
5. To increase the shareholding of the promoters .
6. To prevent take-over ,restructuring or amalgamation attempts.
3. Distinguish between Buy-back of shares and Redemption of Preference shares
Buy back of shares Redemption of preference shares
1. Any shares can be bought back. Only preference shares can be redeemed.
2. buy-back date is not known on the date
of issue.
Redemption date is known at the time of
Issue of preference shares.
3. buy-back is subject to rules by SEBI. Redemption is not subject to rules of SEBI.
4. buy-back can be out of free reserves +
Securities premium
Redemption of preference shares can be out
Of only divisible profits.
5. Buy-back is governed by section 68 of
companies act 2013
Redemption of preference shares is governed
By section 55 of the companies act 2013
4. ACCOUNTING JOURNAL ENTRIES ON BUY-BACK
1. Equity shares should be fully paid
Incase partly paid made them fully paid by making following entry
Equity share final call a/c Dr.
To equity share capital a/c
Bank a/c Dr.
To Equity share final call a/c
Partly paid shares means
10000 equity shares of Rs. 100 each and Rs. 80 called up = 8,00,000
10,000 equity shares of Rs.100 each 10,00,000
Less calls in arrears at Rs.50 each 2,00,000
8,00,000
2. Transfer equity shares to equity holder for buy-back at par or premium
Incase at par
Equity share capital a/c Dr.
To equity holder a/c
Incase at premium
1.Equity share capital a/c Dr.
Premium on buy-back a/c Dr.
To equity holder a/c
2.Security premium a/c Dr.
Profit and loss a/c Dr.
To premium on buy-back a/c
5. 3. Raise Fund
a) Issue of fresh shares at par premium or at discount
Bank a/c Dr.
Discount on issue of shares a/c Dr.
To equity/preference /debentures a/c
To securities premium a/c
b) Sale of assets at profit or loss
Bank a/c Dr.
Profit and loss a/c Dr.(Loss)
To assets a/c
To profit and loss a/c (Profit)
4. Buy-back of shares
Equity holder a/c Dr.
To Bank a/c
5. Transfer amount to Capital redemption reserve
Profit and loss a/c Dr.
General Reserves a/c Dr.
To CRR a/c
6. Issue of bonus shares if any
CRR a/c Dr.
To Bonus to equity holder a/c
Bonus to equity holder a/c Dr.
To equity share capital a/c
6. Ascertaining compliance with conditions
Free reserves
1. Profit and loss a/c
2. General reserves
3. Dividend equalization reserves
4. Funds e.g. workmen compensation fund
5. Investment fluctuation reserves
Other reserves
1. Revaluation reserves
2. Capital redemption reserves
3. Debentures redemption reserves
4. Share forfeited a/c
5. Profit before incorporation
6. Capital reserves
7. Statutory reserves
Maximum limit on buy back
25% of total paid up capital
When number of shares are not given but offer price is given
Calculation of number of shares will be least of the following
1. Own fund 25% - own fund
fully paid equity capital + preference share capital+
general reserves + profit and loss a/c + security premium
2. Own fund - (1/2 of Loan Fund)
3. 25% of no. of equity shares * offer price
• No. of shares = least of 1/2/3
offer price
7. When number of shares are given but offer price is not given
Calculation of offer pricewill be least of the following
1. Own fund 25% - own fund
fully paid equity capital + preference share capital
+general reserves + profit and loss a/c +security premium
2. Own fund - (1/2 of Loan Fund)
3. 25% of equity share capital
• Offer price = least of 1/2/3
No. of shares
When number of shares and offer price both are not given in the problem
Number of share = 25% of equity shares
Offer price =
1. Own fund 25% - own fund
fully paid equity capital + preference share capital+
general reserves + profit and loss a/c + security premium
2. Own fund - (1/2 of Loan Fund)
• Offer price = least of 1/2
25% no. equity shares
