Buy Back of Shares: Procedures, Advantages, Disadvantages, Conditions, Accounting Treatment.

What is Buy Back of Shares?

Buy back of shares, or other specified securities means buying back of its own shares or other specified securities by the company from the holder thereof and canceling them.

After the enactment of the companies act, 2013 sections 68, 69, and 70 read with rule 17 of the companies (share capital and debentures) rules, 2014 deal with buy back of shares. The companies are allowed to buy back their own shares and other specified securities subject to certain conditions.

SEBI has also issued certain guidelines regulating the buy-back of shares in the case of listed companies.

In general, sense, to buy back means once something was sold and now that sold item is bought back. The term ‘Buy back of Share’ means earlier shares were sold and now the same are bought back. ‘Buy back of Share’ is also a different type of redemption of share, but the term ‘redemption’ is not used in this case.

This is because equity shares can not be redeemed as per the concern rules. Hence, ‘Buy back of Share’ means buying or purchasing of equity shares of a company by the company itself. Normally, a company is allowed to invest its surplus money by purchasing shares of other companies.

But if the company utilizes its surplus money in purchasing its own equity shares, it is called buy back of shares. It is a method used by a company to cancel a part of its own share capital. Though it is not mentioned in the Companies Act, share buy back means buy back of equity shares.

It leads to a reduction in the paid-up share capital of a company. Buy back of share does not affect the authorized share capital of a company.


Advantages of Buy Back of Shares

  1. Capital restructuring of the company is possible through buy back of share.

  2. The excess capital may be reduced to a suitable level.

  3. Earning per share of the company may be raised through buy-back of shares.

  4. The buy-back can also be used by the company to prevent the hostile take-over of the company by undesirable persons.

  5. It helps to avoid corporate dividend tax as cash resources are used for buy-back instead of declaration of dividend.

  6. To increase the promoters holding as the shares which are bought are cancelled.

  7. To increase EPS, if there is no dilution in companies earnings as the buy-back reduces the outstanding number of shares.

  8. To support the share price when the share price, in the opinion of the management is less than its fair value.

  9. To pay surplus cash to the shareholders when the company does not need it for the business. For e.g. TCS, Infosys, Wipro, HCL and Tech Mahindra are regularly conducting such programmes since 2014 as part of their capital allocation policies.

  10. To reward shareholders by Buy-back of shares at much higher price than ruling market price. 6. It safeguard against a hostile takeover by increasing promoters holding.

Disadvantages of Buy Back of Shares

The following are the principal disadvantages of buy-back of shares:

  1. There may be risk of manipulation of stock prices by management.

  2. There is the possibility of insider trading in case of buy-back of shares.

Conditions of Buy Back Shares

  1. Buy back of shares must be authorized by its articles.

  2. A special resolution passed at general meeting is needed to authorize buy-back. However, if buy-back is upto 10% of the total paid up equity capital and free reserves, the board of directors by passing a resolution at its meeting may authorize the company for such buy-back (only one such buy-back can be done in a year).

  3. Buy-back should not be more than 25% of the total paid up capital and free reserves of the company.

  4. Buy-back of equity shares in any financial year must not exceed 25% of its paid up equity capital.

  5. Debt-equity ratio should not fall below 2:1 after buy-back.

  6. The shares and the specified securities should be fully paid up.

  7. Company must follow the SEBI guidelines in case of listed shares and prescribed guidelines in case of others.

  8. Only one buy-back in a year is allowed.

  9. Shares must be physically destroyed within 7 days of completion of buy-back.

  10. No fresh issue is allowed within 6 months from buy-back, except by way of issue of bonus shares, ESOPs, sweat equity and conversion of debt/preference shares into equity.

Procedures for Buy Back

  1. Notice of the meeting to be accompanied by the explanatory statement- Notice must include the details regarding all the materials facts, the necessity of the buy back, class of the securities intended to be bought back, amount to be invested under the buy back and the time limit for the completion of the buy back.

  2. Declaration of solvency- Before making the buy-back, the company is required to file with the registrar and SEBI a declaration of solvency in prescribed form and an affidavit declaring that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the board.

  3. Completion of Buy-back- Every buy-back must be completed within 12 months from the date of passing the special resolution or the resolution passed by the board.

  4. Extinguishment of securities- The Company must extinguish and physically destroy the securities bought back within 7 days of the last date of completion of buy-back.

  5. Register of bought back of securities is to be maintained by the company.

  6. Filling of return to be made with the registrar and SEBI (in case of listed company) within 30 days of such completion.

Purposes of Buy Back of Own Shares

Buying back of Equity Shares may be carried out, with the following purposes:

  • Higher Earnings per Shares for the remaining shareholders
  • Reduction of excess Share Capital
  • Increase in Intrinsic value of Shares
  • Utilization of Surplus idle funds lying in the company
  • Increase share holding of promoters
  • Financial restructuring of the business
  • Maintaining market value of Shares in the situation of slow down in economy.

The Buy-Back of Shares leads to the following benefits to the concerned company:

  • Share Capital Structure can be re-organised suitably.
  • It reduces capital base and thus return on Equity Capital and Earning Per Share can be increases.
  • By sub-division of shares and Buy-Back of Shares, company can avoid Corporate Divided Tax as cash resources are used for Buy-Back of Share.
  • Holding of promoters can be increased.
  • Promoters can keep their control on the company due to buy back as less shares available for sale in the market.
  • Buy-Back helps family rearrangements, as claims dissatisfied members can be settled.

Legal Provisions and Sources of Funds for Buy Back of Shares

Section 68(1) of the Companies Act, 2013 empowers a company to buy back its own shares subject to fulfillment of certain conditions:

1. 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 the same kind of other specified securities.

2. No company shall purchase its own shares or other specified securities, unless:

  • The buy-back is authorised by its articles.

  • A special resolution has been passed at a general meeting of the company authorising the buy-back.

  • Provided that nothing contained in this clause shall apply to a case where: (i) The buy-back is, ten per cent or less of the total paid-up equity capital and free reserves of the company; and (ii) Such buy-back has been authorised by the Board by means of a resolution passed at its meeting.

  • The buy-back is twenty-five per cent or less of the aggregate of paidup capital and free reserves of the company.

    Provided that in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent in this clause shall be construed with respect to its total paid-up equity capital in that financial year.

  • The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves.

    Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies.

  • All the shares or other specified securities for buy-back are fully paidup.

  • The buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board in this behalf.

  • The buy-back in respect of shares or other specified securities shall be in accordance with such rules as may be prescribed.

    Provided that no offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

3. The notice of the meeting at which the special resolution is proposed to be passed for buy back of shares shall be accompanied by an explanatory statement stating:

  • A full and complete disclosure of all material facts.

  • The necessity for the buy-back.

  • The class of shares or securities intended to be purchased under the buy-back.

  • The amount to be invested under the buy-back.

  • The time-limit for completion of buy-back.

4. Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be.

5. The buy-back of shares maybe:

  • From the existing shareholders or security holders on a proportionate basis.

  • From the open market.

  • By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

6. Where a company proposes to buy-back its own shares or other specified securities, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board, a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director.

If any, in such form as may be prescribed and verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of the declaration adopted by the Board.

Provided that no declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognized stock exchange.

7. Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.

8. Where a company completes a buy-back of its shares or other specified securities, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares or other specified securities within a period of six months except by way of a bonus issue

In the discharge of subsisting obligations such as the conversion of warrants, stock option schemes, sweat equity, or conversion of preference shares or debentures into equity shares.

9. Where a company buys back its shares or other specified securities under this section, it shall maintain a register of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities.

The date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed.

10. A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed.

Provided that no return shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognized stock exchange.

11. If a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, the company shall be punishable with a fine which shall not be less than one lakh rupees.

But which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

Explanation I: For the purposes of this section and section 70, ”specified securities” includes employees’ stock options or other securities as may be notified by the Central Government from time to time.

Explanation II: For the purposes of this section, “free reserves” includes securities premium account.

Further, Section 70B of the Companies Act, 2013 has imposed certain restrictions on the buy-back of shares. According to this provision buy-back of shares cannot be made:

  • Through any subsidiary company including its own subsidiary company.

  • Through any investment company or group of investment companies.

  • If the company is in default in repayment of deposit or interest payable thereon, the redemption of debentures or preference shares or payment of dividend to any shareholders or repayment of any term loan or interest payable thereon to any financial institution or bank.

  • If the company has not complied with the provisions of section 92 (filing of annual return), Section 123 (payment of dividend with 30 days of declaration), 127 (failure its distribute dividend), and section 129 (preparation of a financial statement of the company).

Prohibition for Buy-Back in Certain Circumstances:

No company shall directly or indirectly purchase its own shares or other specified securities:

  1. Through any subsidiary company including its own subsidiary companies.

  2. Through any investment company or group of investment companies.

  3. If a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

Provided that the buy-back is not prohibited if the default is remedied and a period of three years has elapsed after such default ceased to subsist.

No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of sections 92 (filing of annual return), 123 (payment of dividend with 30 days of declaration), 127(failure to distribute dividend) and section 129 (preparation of a financial statement of the company).


Accounting Treatment on Buy Back of Shares

  1. For Issue of Preference Shares/Debentures/ other Specified Securities
  2. For the Amount Paid to Shareholders Against Buy Back
  3. For Cancellation of Equity Share Capital
  4. If the Buy Back is Made out of Free Reserves
  5. For Expenses Incurred on Buy Back
  6. Treatment of Expenses on Buy Back

For Issue of Preference Shares/Debentures/ other Specified Securities

Journal Entries

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
—– Bank Dr.
To Preferece Share Capital A/c
To Debentures/Specified Securities A/c
To Securities Premium A/c (if any)
——– ——-
For Issue of Preference Shares/Debentures/ other Specified Securities

For the Amount Paid to Shareholders Against Buy Back

Journal Entries

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
——Equity Shareholders Dr.
To Bank
Amount PaidAmount Paid
For the Amount Paid to Shareholders Against Buy Back

For Cancellation of Equity Share Capital

(a) When buy back is at par:

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
——Equity Share Capital A/c Dr.
To Equity Shareholders
Nominal value of the
shares purchased
Nominal value of the
shares purchased
For cancellation of Equity Share Capital

(b) When buy back is at a price higher than their face value i.e at a premium:

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
——Equity Share Capital A/c Dr.


General Reserve or Securities Premium A/c Dr.

To Equity Shareholders
Nominal value
of shares

Amount of
Premium





Amount
Payable
(b) When buy back is at a price higher than their face value i.e at a premium:

(c) When buy back is at a price lower than their face value i.e. at discount:

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
——Equity Share Capital A/c Dr.
To Capital Reserve or Securities Premium A/c
To Equity Shareholders
Nominal value
of shares
Amount of discount
Amount payable
(c) When buy back is at a price lower than their face value i.e. at discount:

If the Buy Back is Made out of Free Reserves

An amount equal to the nominal value of the shares bought back shall be transferred to Capital Redemption Reserve Account:

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
——Security Premium A/c Dr.
General Reserve A/c Dr.
(Any) Free Reserve A/c Dr.
Profit & Loss A/c Dr.

To Capital Redemption Reserve A/c
Amount
Transferred
Amount
Transferred

For Expenses Incurred on Buy Back

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
——Expenses on Buy Back A/c Dr.
To Bank
Amount
Paid
Amount
Paid

Treatment of Expenses on Buy Back

Expenses on buy back may be treated in any one of the following ways:

(a) All expenses are debited to Profit and Loss Account of the year in which buy back takes place.

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
——Profit & Loss A/c Dr.
To Expenses on Buy Back A/c
Amount
Paid
Amount
Paid
Treatment of Expenses on Buy Back

(b) The expenses may be debited to ‘Free Reserves’

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
—— General Reserve A/c Dr.
To Expenses on Buy Back A/c
Amount
Paid
Amount
Paid
Treatment of Expenses on Buy Back

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