UNIT – II Buy-back of Shares DEPARTMENT OF MANAGEMENT STUDIES UNIT – II Buy-back of Shares 6/25/2018 Dr. G. MAHESWARAN/AP 1/46

Meaning of Buy-back of Shares • Buy-back of shares means purchase of its shares/securities by a company. own • 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. • • 6/25/2018 Dr. G. MAHESWARAN/AP 2

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. A special resolution should be passed in the general meeting of the company authorising the buy-back of shares. All the shares to be bought-back must be fully paid. 2. 3. 6/25/2018 Dr. G. MAHESWARAN/AP 3

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 sanctioned by the board. two buy-back offers 6/25/2018 Dr. G. MAHESWARAN/AP 4

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. 6/25/2018 Dr. G. MAHESWARAN/AP 5

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 calculated as cannot exceed of the lowest per point no. 7, 8 and 9. of three figures 6/25/2018 Dr. G. MAHESWARAN/AP 6

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. 6/25/2018 Dr. G. MAHESWARAN/AP 7

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. • • 6/25/2018 Dr. G. MAHESWARAN/AP 8

company can buy back its own shares? 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 basis through the tender offer; •From open market through: on a proportionate – Book building process Stock exchange, •From odd lot holders. 6/25/2018 Dr. G. MAHESWARAN/AP 9

(CRR) and Net Proceeds from Fresh Issue 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 amount should be considered. Fresh Shares to be issued = Nominal Value of Shares to be bought-back – Profits CRR. up nominal • available for 6/25/2018 Dr. G. MAHESWARAN/AP 10

Illustration: Calculate net proceeds from fresh issue: 1. 2. Issued 1,50,000 Rs. 2 per share shares of Rs. 10 each at par a premium of 3. shares of Rs. 10 each at par, only Rs. 8 called and paid. Issued 1,50,000 shares 4. of Rs. 10 each at a premium of Rs. 2 per share. Only Rs. 9 including premium is and paid. Answer: (1) 15,00,000; (2) 15,00,000; (3) 12,00,000; 10,50,000. called (4) 6/25/2018 Dr. G. MAHESWARAN/AP 11

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 6/25/2018 Dr. G. MAHESWARAN/AP 12

Journal Entries If shares to be bought- back are not fully 1. paid, should then to make be made and them fully received: paid. A final call (a) Share Final Call A/c Dr. To Share Capital A/c (b) Bank A/c Dr. To Share Final Call A/c 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. 6/25/2018 Dr. G. MAHESWARAN/AP 13

Journal Entries (Contd.) 3. For sale of assets/investments to arrange cash for redemption Bank A/c Dr. To Assets or Investment A/c * 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 Dr. To Debentures Application A/c Debentures Application A/c Dr. To Debentures A/c 6/25/2018 Dr. G. MAHESWARAN/AP 14

To Shareholders/Equity Share Buy-back A/c Journal Entries (Contd.) 5. For issue of new shares, if any Bank A/c Dr. To Share Application & Allotment A/c Share Application & Allotment A/c Dr. To Share Capital A/c To Securities Premium A/c (if any) 6. For making due buy-back Share Capital A/c Dr. *Premium on Buy-back of Shares A/c Dr. To Shareholders/Equity Share Buy-back A/c * If shares are to be bought-back at premium. 6/25/2018 Dr. G. MAHESWARAN/AP 15

Journal Entries (Contd.) 7. For writing off Premium on buy-back, if any Securities Premium A/c Dr. Capital Reserve A/c* Dr. General Reserve A/c Dr. Surplus A/c Dr. To Premium on Buy-back of Shares A/c * 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. 6/25/2018 Dr. G. MAHESWARAN/AP 16

Journal Entries (Contd.) 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 Dr. To Bank A/c b. Shareholders/Equity Share Buy-back A/c Dr. To Share Buy-back Bank A/c 6/25/2018 Dr. G. MAHESWARAN/AP 17

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 partly paid shares as fully paid up. existing 6/25/2018 Dr. G. MAHESWARAN/AP 18

To Bonus to Shareholders A/c Journal Entries for Issue of Bonus Shares (Contd.) 3. When Bonus to shareholders is declared Capital Redemption Reserve A/c Dr. Securities Premium A/c Dr. General Reserve A/c Dr. Surplus OR Divisible Profits A/c Dr. To Bonus to Shareholders A/c 2. For issue of fully paid bonus shares Bonus to Shareholders A/c Dr. To Equity Share Capital A/c 6/25/2018 Dr. G. MAHESWARAN/AP 19

Equity Share Final Call A/c Dr. To Equity Share Capital A/c Journal Entries for Issue of Bonus Shares 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 Dr. To Equity Share Capital A/c (b) For adjusting bonus to shareholders against final call due: Bonus to Shareholders A/c Dr. To Equity Share Final Call A/c 6/25/2018 Dr. G. MAHESWARAN/AP 20