Company Accounts

BBAN- 203

By-: SHUBHAM MISHRA

(ASST. PROFESSOR)
 ST. ANDREWS INSTITUTE OF TECHNOLOGY & MANAGEMENT

1.3 Buy Back of shares

Meaning of Buy Back of Shares:
Buy-back of shares can be described as a procedure which enables a company to go
back to the holders of its shares and offer to purchase the shares held by them.

Buy-back helps a company by giving a better use for its funds than reinvesting these
funds in the same business at below average rates or going in for unnecessary
diversification or buying growth through costly acquisitions.

When a company has substantial cash resources, it may like to buy its own shares
from the market particularly when the prevailing rate of its shares in the market is
much lower than the book value or what the company perceives to be its true value.

This mode of purchase is also called ‘Shares Repurchase’. A company can utilize
its reserves to buy-back equity shares for the purpose of extinguishing these or
treasure operations. The former option results in reduction of the paid up capital,
and consequently higher earnings and book value per share. Naturally, the market
price of equity goes up.

The reduction in share capital strengthens the promoter’s control and enhances the
equity value for shareholders. In the latter option, companies buy their shares from
open market and keep these as ‘treasury stock’.

This enables the promoters to strengthen their control over the shares bought back,
without any investment of their own. In case of treasure operations, there is a
diversion of company’s funds to buy shares and reduction in the value of equity for
the shareholders.

The main aim of shares repurchase might be reduce the number of shares in
circulation in order to improve the share price, or simply to return to the
shareholders resources no longer needed by the company.

The shares repurchase may be by way of purchase from the open market or by
general tender offer to all shareholders made by the company to repurchase a fixed
amount of its securities at pre-stated price.

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 ST. ANDREWS INSTITUTE OF TECHNOLOGY & MANAGEMENT

 Conditions for Buy-back of Shares:

(a) The buy-back is authorised by the Articles of Association of the company.

(b) A special resolution has been passed in general meeting of the company
authorizing the buy-back.

(c) The buy-back does not exceed 25 per cent of the total paid-up capital and free
reserves of the company. Further, the buy-back of equity shares in any financial year
cannot exceed 25 per cent of its total paid-up equity capital in that financial year.

(d) The ratio of the debt owed by the company is not more than twice the capital and
its free reserves after such buy-back. However, the Central Government may
prescribe a higher ratio of the debt than that specified in this clause for a class or
classes of companies.

(e) All the shares are fully paid-up.

(f) The buy-back of the shares listed on any stock exchange is in accordance with the
regulations made by the Securities and Exchange Board of India (SEBI) in this
behalf.

 Restrictions on Buy-back of Shares:

(i) Through any subsidiary company including its own subsidiary company

(ii) Through any investment company or group of investment companies; or

(iii) If a default by the company is subsisting in repayment of deposit or interest

payable thereon, 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.

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 ST. ANDREWS INSTITUTE OF TECHNOLOGY & MANAGEMENT

 Contents of Notice of Meeting:

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

(i) A full and complete disclosure of all material facts

(ii) The necessity for the buy-back

(iii) The class of shares intended to be purchased under the buy-back

(iv) The amount to be invested under the buy-back and

(v) The time limit for completion of buy-back.

 Time-limit for Buy-back of Shares:

In any case, the buy-back has to be completed within twelve months from the date of
passing the special resolution.

 Sources for Buy-back of Shares:

The company may purchase its own shares from out of:

(i) Its free reserves, or

(ii) The securities premium account; or

(iii) The proceeds of any shares or other specified securities like employees’ stock
option.

No buy-back of shares can be made out of the proceeds of an earlier

issue of the same kind of shares.

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 Picking Shares for Buy-back:

The buy-back may be from the existing shareholders on a proportionate basis; or

(a) From the open market; or

(b) From odd lots, that is to say, where the lot of shares of a public company whose
shares are listed on a recognised stock exchange is smaller than such marketable lot
as may be specified

(c) By the stock exchange; or

(d) By purchasing the shares issued to employees of the company pursuant to a

scheme of stock option or sweat equity.

 Important Things After Buy-back of Shares:

After the buy-back, the company is required to extinguish and physically destroy the
shares so bought-back within 7 days of the last date of completion of buy- back The
company is not allowed to make further issue of the same kind of shares as bought-
back within a period of 6 months of the buy-back.

 Advantages of Buy-back of Shares:

The main advantage of buy-back of shares is that it facilitates capital restructuring of the
company. By getting rid of the capital not required by it, the company is able to step-up its
earnings per share. The buy-back can also be used by the company to take -over of the
company by undesirable persons.

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Illustration XYZ Ltd. resolved to buy back 3,00,000 of its fully paid equity shares of Rs 10
each at Rs 12 per share. For the purpose, it issued 10,000 13% preference shares of Rs 100 each at
par, the total sum being payable with applications. The company uses Rs 8,50,000 of its balance in
Securities Premium Account apart from its adequate balance in General Reserve Account to fulfill
the legal requirements regarding buy-back.

Pass journal entries for all the transactions involved in the buy-back.

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