1. UNIT – II Buy-back of Shares
DEPARTMENT OF MANAGEMENT STUDIES
UNIT – II Buy-back of Shares
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2. 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. • •
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3. 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.
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4. 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
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5. 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.
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6. 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
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7. 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.
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8. 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. • •
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9. 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.
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10. (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
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11. 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)
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12. Illustration 2 Calculate the amount of CRR required in the following
cases:
Shares to Be bought-back Fresh issue of share capital
Rs. 12,00,000 at par Rs. 10,00,000 at par
Rs. 15,00,000 at a premium of 5% Rs. 10,00,000 at par
Rs. 12,00,000 at par Rs. 9,00,000 at premium of
10%
Answer:
Rs. 2,00,000
Rs. 5,00,000
Rs. 3,00,000
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13. 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.
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14. Journal Entries (Contd.)
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.
For issue of debentures, if any
Bank A/c Dr.
To Debentures Application A/c
Debentures Application A/c Dr.
To Debentures A/c
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15. 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.
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16. 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.
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17. 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
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18. 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
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19. 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
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20. 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
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