ICAI Notes: Buyback of Securities | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
12 
 
 
 
 BUY-BACK OF  
 SECURITIES  
 
 
 
After studying this chapter, you will be able to: 
? Elucidate the meaning of buy-back of securities;  
? Comprehend the Accounting Treatment buy-back of securities; 
? Learn the provisions of the Companies Act regarding buy-back of 
securities. 
 
 
Buy-Back of Shares 
• As per Section 68 (1) of the Companies Act 2013, buy-back of shares can be 
made out of: its free reserves; or the securities premium account; or the 
proceeds of any shares or other specified securities. 
• The buy-back of equity shares in any financial year shall not exceed twenty-five 
per cent of its total paid-up equity capital in that financial year. 
• There shall be a minimum gap of one year in a buy-back offer from the date of 
closure of the previous buy-back. 
• The ratio of the debt owed by the company is not more than twice the capital 
and its free reserves after such buy-back. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 2


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
12 
 
 
 
 BUY-BACK OF  
 SECURITIES  
 
 
 
After studying this chapter, you will be able to: 
? Elucidate the meaning of buy-back of securities;  
? Comprehend the Accounting Treatment buy-back of securities; 
? Learn the provisions of the Companies Act regarding buy-back of 
securities. 
 
 
Buy-Back of Shares 
• As per Section 68 (1) of the Companies Act 2013, buy-back of shares can be 
made out of: its free reserves; or the securities premium account; or the 
proceeds of any shares or other specified securities. 
• The buy-back of equity shares in any financial year shall not exceed twenty-five 
per cent of its total paid-up equity capital in that financial year. 
• There shall be a minimum gap of one year in a buy-back offer from the date of 
closure of the previous buy-back. 
• The ratio of the debt owed by the company is not more than twice the capital 
and its free reserves after such buy-back. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 12.2 
1. INTRODUCTION 
Buy-back of shares means purchase of its own shares by a company. When shares 
are bought back by a company, they have to be cancelled by the company. Thus, 
shares buy-back results in decrease in share capital of the company. A company 
cannot buy its own shares for the purpose of investment. A company having 
sufficient cash may decide to buy-back its own shares. The following may be the 
objectives/advantages of Buy-back of shares: 
(a) to increase earnings per share if there is no dilution in company’s earnings 
as the buy-back of shares reduces the outstanding number of shares. 
(b) to increase promoters holding as the shares which are bought back are 
cancelled. 
(c) to discourage others to make hostile bid to take over the company as the 
buy-back will increase the promoters holding. 
(d) to support the share price on the stock exchanges when the share price, in 
the opinion of company management, is less than its worth, especially in the 
depressed market. 
(e) to pay surplus cash to shareholders when the company does not need it for 
business. 
The Companies Act, 2013 under Section 68 (1) permits companies to buy-back 
their own shares and other specified securities out of: 
(i) its free reserves; or 
(ii) the securities premium account; or 
(iii) the proceeds of the issue of any shares or other specified securities. 
Note: 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 same 
kind of other specified securities. For example, if equity shares are to be bought-
back, then, preference shares may be used for the purpose. 
The other important provisions relating to the buy-back are: 
(1) Section 68 (2) further states that no company shall purchase its own shares 
or other specified securities unless— 
© The Institute of Chartered Accountants of India
Page 3


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
12 
 
 
 
 BUY-BACK OF  
 SECURITIES  
 
 
 
After studying this chapter, you will be able to: 
? Elucidate the meaning of buy-back of securities;  
? Comprehend the Accounting Treatment buy-back of securities; 
? Learn the provisions of the Companies Act regarding buy-back of 
securities. 
 
 
Buy-Back of Shares 
• As per Section 68 (1) of the Companies Act 2013, buy-back of shares can be 
made out of: its free reserves; or the securities premium account; or the 
proceeds of any shares or other specified securities. 
• The buy-back of equity shares in any financial year shall not exceed twenty-five 
per cent of its total paid-up equity capital in that financial year. 
• There shall be a minimum gap of one year in a buy-back offer from the date of 
closure of the previous buy-back. 
• The ratio of the debt owed by the company is not more than twice the capital 
and its free reserves after such buy-back. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 12.2 
1. INTRODUCTION 
Buy-back of shares means purchase of its own shares by a company. When shares 
are bought back by a company, they have to be cancelled by the company. Thus, 
shares buy-back results in decrease in share capital of the company. A company 
cannot buy its own shares for the purpose of investment. A company having 
sufficient cash may decide to buy-back its own shares. The following may be the 
objectives/advantages of Buy-back of shares: 
(a) to increase earnings per share if there is no dilution in company’s earnings 
as the buy-back of shares reduces the outstanding number of shares. 
(b) to increase promoters holding as the shares which are bought back are 
cancelled. 
(c) to discourage others to make hostile bid to take over the company as the 
buy-back will increase the promoters holding. 
(d) to support the share price on the stock exchanges when the share price, in 
the opinion of company management, is less than its worth, especially in the 
depressed market. 
(e) to pay surplus cash to shareholders when the company does not need it for 
business. 
The Companies Act, 2013 under Section 68 (1) permits companies to buy-back 
their own shares and other specified securities out of: 
(i) its free reserves; or 
(ii) the securities premium account; or 
(iii) the proceeds of the issue of any shares or other specified securities. 
Note: 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 same 
kind of other specified securities. For example, if equity shares are to be bought-
back, then, preference shares may be used for the purpose. 
The other important provisions relating to the buy-back are: 
(1) Section 68 (2) further states that no company shall purchase its own shares 
or other specified securities unless— 
© The Institute of Chartered Accountants of India
 
 
v
v 
v
v 
    
v 
 12.3 
 
BUY-BACK OF SECURITIES  
 
(a) the buy-back is authorised by its articles; 
(b) a special resolution has been passed in general meeting of the 
company authorising the buy-back; 
 However, the above provisions do not apply where the buy-back is ten 
percent or less of the paid-up equity capital + free reserves and is 
authorized by a board resolution passed at a duly convened meeting 
of the directors. Hence, in case the buy-back is up to 10% of paid up 
equity + free reserves, the same may be done with the authorization 
of the Board Resolution without the necessity of its being authorized 
by the articles of association of the company and by a special 
resolution of its members passed at a general meeting of the 
company. 
(c) the buy-back must be equal or less than twenty-five per cent of the 
total paid-up capital and free reserves of the company: (Resource Test) 
(d) Further, the buy-back of shares in any financial year must not exceed 
25% of its total paid-up capital and free reserves: (Share Outstanding 
Test) 
(e) the ratio of the debt owed by the company (both secured and 
unsecured) after such buy-back is not more than twice the total of its 
paid-up capital and its free reserves: (Debt-Equity Ratio Test) 
Note: Central Government may prescribe a higher ratio of the debt 
than that specified under this clause for a class or classes of 
companies. Debt here should include both long-term debt as well as 
short term debt. 
(f) all the shares or other specified securities for buy-back are fully paid-
up; 
(g) 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 of India in this behalf; 
(h) the buy-back in respect of shares or other specified securities other 
than those specified in clause (f) is in accordance with the guidelines 
as may be prescribed. 
© The Institute of Chartered Accountants of India
Page 4


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
12 
 
 
 
 BUY-BACK OF  
 SECURITIES  
 
 
 
After studying this chapter, you will be able to: 
? Elucidate the meaning of buy-back of securities;  
? Comprehend the Accounting Treatment buy-back of securities; 
? Learn the provisions of the Companies Act regarding buy-back of 
securities. 
 
 
Buy-Back of Shares 
• As per Section 68 (1) of the Companies Act 2013, buy-back of shares can be 
made out of: its free reserves; or the securities premium account; or the 
proceeds of any shares or other specified securities. 
• The buy-back of equity shares in any financial year shall not exceed twenty-five 
per cent of its total paid-up equity capital in that financial year. 
• There shall be a minimum gap of one year in a buy-back offer from the date of 
closure of the previous buy-back. 
• The ratio of the debt owed by the company is not more than twice the capital 
and its free reserves after such buy-back. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 12.2 
1. INTRODUCTION 
Buy-back of shares means purchase of its own shares by a company. When shares 
are bought back by a company, they have to be cancelled by the company. Thus, 
shares buy-back results in decrease in share capital of the company. A company 
cannot buy its own shares for the purpose of investment. A company having 
sufficient cash may decide to buy-back its own shares. The following may be the 
objectives/advantages of Buy-back of shares: 
(a) to increase earnings per share if there is no dilution in company’s earnings 
as the buy-back of shares reduces the outstanding number of shares. 
(b) to increase promoters holding as the shares which are bought back are 
cancelled. 
(c) to discourage others to make hostile bid to take over the company as the 
buy-back will increase the promoters holding. 
(d) to support the share price on the stock exchanges when the share price, in 
the opinion of company management, is less than its worth, especially in the 
depressed market. 
(e) to pay surplus cash to shareholders when the company does not need it for 
business. 
The Companies Act, 2013 under Section 68 (1) permits companies to buy-back 
their own shares and other specified securities out of: 
(i) its free reserves; or 
(ii) the securities premium account; or 
(iii) the proceeds of the issue of any shares or other specified securities. 
Note: 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 same 
kind of other specified securities. For example, if equity shares are to be bought-
back, then, preference shares may be used for the purpose. 
The other important provisions relating to the buy-back are: 
(1) Section 68 (2) further states that no company shall purchase its own shares 
or other specified securities unless— 
© The Institute of Chartered Accountants of India
 
 
v
v 
v
v 
    
v 
 12.3 
 
BUY-BACK OF SECURITIES  
 
(a) the buy-back is authorised by its articles; 
(b) a special resolution has been passed in general meeting of the 
company authorising the buy-back; 
 However, the above provisions do not apply where the buy-back is ten 
percent or less of the paid-up equity capital + free reserves and is 
authorized by a board resolution passed at a duly convened meeting 
of the directors. Hence, in case the buy-back is up to 10% of paid up 
equity + free reserves, the same may be done with the authorization 
of the Board Resolution without the necessity of its being authorized 
by the articles of association of the company and by a special 
resolution of its members passed at a general meeting of the 
company. 
(c) the buy-back must be equal or less than twenty-five per cent of the 
total paid-up capital and free reserves of the company: (Resource Test) 
(d) Further, the buy-back of shares in any financial year must not exceed 
25% of its total paid-up capital and free reserves: (Share Outstanding 
Test) 
(e) the ratio of the debt owed by the company (both secured and 
unsecured) after such buy-back is not more than twice the total of its 
paid-up capital and its free reserves: (Debt-Equity Ratio Test) 
Note: Central Government may prescribe a higher ratio of the debt 
than that specified under this clause for a class or classes of 
companies. Debt here should include both long-term debt as well as 
short term debt. 
(f) all the shares or other specified securities for buy-back are fully paid-
up; 
(g) 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 of India in this behalf; 
(h) the buy-back in respect of shares or other specified securities other 
than those specified in clause (f) is in accordance with the guidelines 
as may be prescribed. 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
v
v 
v
v 
 
 12.4 
Provided that no offer of the buy-back under this sub section shall be made 
within a period of one year reckoned from the date of closure of a previous 
offer of buy-back if any. This means that there cannot be more than one 
buy-back in one year. 
(2) The notice of meeting at which special resolution is supposed to be passed 
must be accompanied by an explanatory statement stating- 
(a) a full and complete disclosure of all material facts; 
(b) the necessity of the buy-back; 
(c) the class of security intended to be purchased under the buy-back; 
(d) the amount to be invested under the buy-back; 
(e) the time limit for completion of the buy-back. 
(3) Every buy-back shall be completed within twelve months from the date of 
passing the special resolution, or the resolution passed by the board of 
directors. 
(4) The buy-back may be— 
(a) from the existing security holders on a proportionate basis; or 
(b) from the open market; or 
(c) by purchasing the securities issued to employees of the company 
pursuant to a scheme of stock option or sweat equity. 
(5) Where a company has passed a special resolution under clause (b) of Sub-
section (2) to buy-back its own shares or other securities under this section, it 
shall, before making such buy-back, file with the Registrar and the Securities 
and Exchange Board of India a declaration of solvency in the form as may be 
prescribed and verified by an affidavit to the effect that the Board of Directors 
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 of the date of 
declaration adopted by the Board of Directors. It must be signed by at least 
two directors of the company, one of whom shall be the managing director, if 
any: 
© The Institute of Chartered Accountants of India
Page 5


 
 
 
 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
12 
 
 
 
 BUY-BACK OF  
 SECURITIES  
 
 
 
After studying this chapter, you will be able to: 
? Elucidate the meaning of buy-back of securities;  
? Comprehend the Accounting Treatment buy-back of securities; 
? Learn the provisions of the Companies Act regarding buy-back of 
securities. 
 
 
Buy-Back of Shares 
• As per Section 68 (1) of the Companies Act 2013, buy-back of shares can be 
made out of: its free reserves; or the securities premium account; or the 
proceeds of any shares or other specified securities. 
• The buy-back of equity shares in any financial year shall not exceed twenty-five 
per cent of its total paid-up equity capital in that financial year. 
• There shall be a minimum gap of one year in a buy-back offer from the date of 
closure of the previous buy-back. 
• The ratio of the debt owed by the company is not more than twice the capital 
and its free reserves after such buy-back. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 12.2 
1. INTRODUCTION 
Buy-back of shares means purchase of its own shares by a company. When shares 
are bought back by a company, they have to be cancelled by the company. Thus, 
shares buy-back results in decrease in share capital of the company. A company 
cannot buy its own shares for the purpose of investment. A company having 
sufficient cash may decide to buy-back its own shares. The following may be the 
objectives/advantages of Buy-back of shares: 
(a) to increase earnings per share if there is no dilution in company’s earnings 
as the buy-back of shares reduces the outstanding number of shares. 
(b) to increase promoters holding as the shares which are bought back are 
cancelled. 
(c) to discourage others to make hostile bid to take over the company as the 
buy-back will increase the promoters holding. 
(d) to support the share price on the stock exchanges when the share price, in 
the opinion of company management, is less than its worth, especially in the 
depressed market. 
(e) to pay surplus cash to shareholders when the company does not need it for 
business. 
The Companies Act, 2013 under Section 68 (1) permits companies to buy-back 
their own shares and other specified securities out of: 
(i) its free reserves; or 
(ii) the securities premium account; or 
(iii) the proceeds of the issue of any shares or other specified securities. 
Note: 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 same 
kind of other specified securities. For example, if equity shares are to be bought-
back, then, preference shares may be used for the purpose. 
The other important provisions relating to the buy-back are: 
(1) Section 68 (2) further states that no company shall purchase its own shares 
or other specified securities unless— 
© The Institute of Chartered Accountants of India
 
 
v
v 
v
v 
    
v 
 12.3 
 
BUY-BACK OF SECURITIES  
 
(a) the buy-back is authorised by its articles; 
(b) a special resolution has been passed in general meeting of the 
company authorising the buy-back; 
 However, the above provisions do not apply where the buy-back is ten 
percent or less of the paid-up equity capital + free reserves and is 
authorized by a board resolution passed at a duly convened meeting 
of the directors. Hence, in case the buy-back is up to 10% of paid up 
equity + free reserves, the same may be done with the authorization 
of the Board Resolution without the necessity of its being authorized 
by the articles of association of the company and by a special 
resolution of its members passed at a general meeting of the 
company. 
(c) the buy-back must be equal or less than twenty-five per cent of the 
total paid-up capital and free reserves of the company: (Resource Test) 
(d) Further, the buy-back of shares in any financial year must not exceed 
25% of its total paid-up capital and free reserves: (Share Outstanding 
Test) 
(e) the ratio of the debt owed by the company (both secured and 
unsecured) after such buy-back is not more than twice the total of its 
paid-up capital and its free reserves: (Debt-Equity Ratio Test) 
Note: Central Government may prescribe a higher ratio of the debt 
than that specified under this clause for a class or classes of 
companies. Debt here should include both long-term debt as well as 
short term debt. 
(f) all the shares or other specified securities for buy-back are fully paid-
up; 
(g) 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 of India in this behalf; 
(h) the buy-back in respect of shares or other specified securities other 
than those specified in clause (f) is in accordance with the guidelines 
as may be prescribed. 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
v
v 
v
v 
 
 12.4 
Provided that no offer of the buy-back under this sub section shall be made 
within a period of one year reckoned from the date of closure of a previous 
offer of buy-back if any. This means that there cannot be more than one 
buy-back in one year. 
(2) The notice of meeting at which special resolution is supposed to be passed 
must be accompanied by an explanatory statement stating- 
(a) a full and complete disclosure of all material facts; 
(b) the necessity of the buy-back; 
(c) the class of security intended to be purchased under the buy-back; 
(d) the amount to be invested under the buy-back; 
(e) the time limit for completion of the buy-back. 
(3) Every buy-back shall be completed within twelve months from the date of 
passing the special resolution, or the resolution passed by the board of 
directors. 
(4) The buy-back may be— 
(a) from the existing security holders on a proportionate basis; or 
(b) from the open market; or 
(c) by purchasing the securities issued to employees of the company 
pursuant to a scheme of stock option or sweat equity. 
(5) Where a company has passed a special resolution under clause (b) of Sub-
section (2) to buy-back its own shares or other securities under this section, it 
shall, before making such buy-back, file with the Registrar and the Securities 
and Exchange Board of India a declaration of solvency in the form as may be 
prescribed and verified by an affidavit to the effect that the Board of Directors 
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 of the date of 
declaration adopted by the Board of Directors. It must be signed by at least 
two directors of the company, one of whom shall be the managing director, if 
any: 
© The Institute of Chartered Accountants of India
 
 
v
v 
v
v 
    
v 
 12.5 
 
BUY-BACK OF SECURITIES  
 
Note: No declaration of solvency shall be filed with the Securities and 
Exchange Board of India by a company whose shares are not listed on any 
recognised stock exchange. 
(6) Where a company buys-back its own securities, it shall extinguish and 
physically destroy the securities so bought-back within seven days of the 
last date of completion of buy-back. 
(7) Where a company completes a buy-back of its shares or other specified 
securities under this section, it shall not make further issue of same kind of 
shares (including allotment of further shares under clause (a) of Sub-section 
(1) of Section (62) or other specified securities within a period of six months 
except by way of bonus issue or in the discharge of subsisting obligations 
such as conversion of warrants, stock option scheme, sweat equity or 
conversion of preference shares or debentures into equity shares. 
(8) Where a company buy-back its securities under this section, it shall maintain 
a register of the securities so bought, the consideration paid for the 
securities bought-back, the date of cancellation of securities, the date of 
extinguishing and physically destroying of securities and such other 
particulars as may be prescribed.  
(9)  A company shall, after the completion of the buy-back under this section, 
file with the Registrar and the Securities and Exchange Board of India, 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 of India by a company whose 
shares are not listed on any recognised stock exchange. 
(10) If a company makes default in complying with the provisions of this section 
or any regulations made by SEBI in this regard, the company may be 
punishable with a fine which shall not be less than Rs One Lakh but which 
may extend to three lakh rupees and every officer of the company who is in 
default shall be punishable with imprisonment for upto 3 years or with a 
fine of not less than one lakh rupees but which may extend to three lakh 
rupees or with both. 
(11)  Section 69 (1) states that where a company purchases its own shares out of 
the free reserves or securities premium account, a sum equal to the nominal 
value of shares so purchased shall be transferred to the Capital Redemption 
© The Institute of Chartered Accountants of India