CAINTER FOR 46" SESSION REGULAR BATCHES BOOK NO. 17, ADVANCED ACCOUNTING_GR.2_4GE(PART 2)_1CHAPTER INDEX CH. NO. CHAPTER NAME PAGE.NO. 2. _ |BUY BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS 24-228 MASTER MINDS: COMMERCE INSTITUTE PVT. LTD. Cell: 98851 25025 / 26 Visit us @ www.mastermindsindia.com | Mail: mastermindsinfo@ymail.com Facebook Page: MASTERMINDS For CA Android App: Masterminds online classes You tube Channel: MASTERMINDS FOR CA&CMA ISSUE DATE: 29-08-2021 MRP: RS.300coc 2. BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS NO. OF PROBLEMS IN 46e OF CA INTER: CLASSROOM - 4, ASSIGNMENT - 4 LEARNING OBJECTIVES 1) Meaning of Buy Back of Securities and its Accounting Treatment So a \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 2) Provisions of the companies Act,2013 w.r.t Buy Back of Securities 3) Differenti ion between two types of Share Capital &their Voting Rights 4) Concept of Equity Shares with Differential Rights &Procedure for issuing Equity Shares with Differential Rights MODEL WISE ANALYSIS Joumal Entries for Buy Back& Balance Sheet | | | ys]. |. : Preparation after Buy Back 2 [Computation of Maximum No. of Shares that canbe! {~~ | | | | 2 | 4s bought back 3. | Equity Shares with Differential Rights ear |e ee ests 5 ‘SIGNIFICANCE OF EACH PROBLEM COVERED IN THIS MATERIAL PROBLEM NO. IN ICAL RELEVANT PROBLEM INMM | RTPIMTPIPREVIOUS | RELEVANT PROBLEM IN MATERIAL - OCT 2020 EDITION MATERIAL EXAM MM MATERIAL ILLUSTRATION 1 SIMILAR TO ACSP 1(98%) M18 - RTP CRD 3(100%) ILLUSTRATION 2 ‘ACSP 2(100%) N19RTP CRO 4(100%) ILLUSTRATION 3 ACSP 3(100%) Nig-i5M RO 4(100%) ILLUSTRATION 4 ‘ACSP 4(100%) 19-10 ‘ASSIGN 3(100%) ILLUSTRATION 5 ‘ACSP 5(100%) N20-MTP— aM ASSIGN 1(a) (100%) ILLUSTRATION 6 RD 2(100%) AN 21-5H ASSIGN 1(b) (100%) PRACTICE QUESTION 1 ASSIGN 2(100%) JULY24-5M ‘ACSP 4(100%) PRACTICE QUESTION 2 ‘ACSP 1(100%) PRACTICE QUESTION 3 ‘ACSP 6(100%) PRACTICE QUESTION 4 ASSIGN 4(100%) CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 241PIONEER FOR MEC / CEC TO CA/ CMA FINAL DIVISION TOPIC 1) _ | THEORY FOR CLASSROOM DISCUSSION 2) _| PROBLEMS FOR CLASSROOM DISCUSSION (CRD) 3) _| ASSIGNMENT PROBLEMS (AP) 4) | ADDITIONAL CONCEPTS FOR SELF-PRACTICE (ACSP) 5) _| THEORY FOR SELF STUDY 6) _| SHORT ANSWER TYPE QUESTIONS (SELF STUDY) 7) __| MULTIPLE CHOICE QUESTIONS (SELF STUDY) 8) | WORKBOOK SOLUTIONS DIVISION 1: THEORY FOR CLASSROOM DISCUSSION MEANING OF BUY-BACK: 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. Acompany cannot buy its own shares for the purpose of investment OBJECTIVES/ADVANTAGES OF BUY-BACK/OF SHARES: 1) To improve earnings per share. 2) To increase promoters holding as the shares which are bought back are cancelled, 3) To prevent unwelcome takeover bids 4) To support the share price during periods of sluggish or depressed market conditions 5) To pay surplus cash to shareholders when the company does not need it for business 6) To improve return on capital, return on net worth and to enhance the long term shareholders value THREE SOURCES OF FUNDS FOR BUY-BACK: As per Sec. 68 (1) a company may purchase its own Shares or other specified securities out of - 1) Its free reserves; or 2) The securities premium account; or 3) The proceeds from 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 “specified securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time; > For the purposes of Section 68, "free reserves” includes securities premium account. CAINTER | ADVANCED ACCOUNTS| 46E 22coc So a \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 ‘THE BUY-BACK MAY BE: 1) 2) 3) from the existing security holder on a proportionate basis; or from the open market; or By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. BUY BACK -LEGAL PROVISIONS. 1) CONDITIONS FOR BUY-BACK: As per Sec 68 (2) Companies Act, 2013. a) The buy-back must be authorized by the Articles b) The buy-back should be made by passing special resolution in the General Meeting of shareholders but the same is not required when; The buy-back is up-to 10% of paid up equity capital + free reserves, the same may be done with the authorization of the board resolution ©) No offer of Buy-back must be made within a period of 365 days from the date of closure of a previous offer of Buy-back if any. d) The buy-back of the shares must not exceed 25%. of total paid-up capital (both equity &preference share capital) and free reserves. (Resource Test) @) The buy-back of equity shares in any financial year must not exceed 25% of its total paid-up equity capital (Share outstanding Test) f) The debt-equity ratio must not be more than 2:1 after such buy-back. But central government may prescribe higher ratio (Debt equity ratio test) Here, Debt = Secured + Unsecured Debt and includes long term as well as short term Equity = Capital + Free Reserves Free Reserves = Free Reserves as pér Sec. 2(43) + Securities Premium as per Sec 52 (1) Capital = Equity & Preference share capital or paid up capital Therefore, maximum number of shares to be bought back as per companies Act, 2013= Least of the above three tests. 2) 3 4) 5) g) All the shares or other specified securities for buy-back must be fully paid-up. 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 Reserve Account and details of such account shall be disclosed in the Balance Sheet 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. 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. 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 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. CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 23PIONEER FOR MEC / CEC TO CA/ CMA FINAL 6) 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. 7) 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, THE IMPORTANT PROVISIONS OF SEBI (BUY-BACK OF SECURITIES) (AMENDMENT) REGULATIONS, 2013 1) No offer of buy-back for fifteen per cent or more of the paid up capital and free reserves of the company shall be made from the open market. 2) Accompany shall not make any offer of buy-back within a period of one year reckoned from the date of closure of the preceding offer of buy-back, if any. 3) The company shall ensure that at least fifty per cent of the amount earmarked for buy-back is utilized for buying-back shares or other specified securities. COMPUTATION OF MAXIMUM NO. OF SHARES TO BE BOUGHT BACK: Least of the “number of shares" arrived at by performing the following tests: 1) Shares outstanding test 2) Resource test 3) Debt — equity ratio test SHARES OUTSTANDING TEST: Step 1 — Ascertain the total no. of equity shares Step 2 — Maximum 25% of the no. of shares is eligible for buy back as per this test. RESOURCE TEST Step 1- Ascertain the shareholders funds (Paid up capital + Free reserves) Step 2- Ascertain the no. of shares as follows: (25% of Shareholders Funds)/ Buyback Price DEBT EQUITY TEST: Step 1- Compute total borrowed funds Step 2- Ascertain the minimum equity required -(Debt)/2 Step 3- Ascertain present equity (Shareholders funds) Equation 1: Maximum permissible buy-back of equity = (Present equity - Nominal value of buy-back transfer to CRR) - Minimum equity to be maintained. Equation 2: Maximum buy-back Meera Puy Pack _ XNominal value = Nominal value of the shares bought back to be transferred to CRR offer price for buy back By solving the above two equations we get the value of Maximum permitted buy back of equity. Maximum of permitted buy back of equity Number of shares to be bought back= Buy back price CAINTER | ADVANCED ACCOUNTS| 46E 24coc eae WWW.MASTERMINDSINDIA.COM | 98851 25025 /26 ACCOUNTING ENTRIES: The various journal entries to be passed on Buy-back are given as follows (gS Ne] EsSssssacasacesaseeeseuenseaeae af Uw sseessnssstsnssnseseretsereneesSToann] To make partly paid Equity Shares Fully paid up: ‘a)_On making Final Call Equity share final call Alc Dr. 1) To Equity Share Capital Alc b) On Receipt of Final Call Bank Alc Dr. To Equity share final call A/c To realize investment to provide cash for Buy-back: Bank Alc Or. 2) [Profit and Loss A/c. Dr. To Investments A/c To Profit and Loss Alc To issue fresh other kind of shares or securities A/c (Say preference shares) a) On receipt of Application Money Bank Alc Dr. To Pref. Share Application Alc b) On Allotment i) Hat par: Pref. share Allotment A/c. Or. To Pref. Share Capital A/c ii) if at Premium Pref. Share Allotment A/c Dr. To Pre. Share Capital Alc To Securities Premium Alc To transfer Free Reserves to Capital Redemption Reserve Account to the extent the Buy-back is out of free reserves & securities premium: Revenue Reserve Dr. 4) | Profit & Loss Alc Dr. To Capital Redemption Reserve A/c Tutorial Note: Capital Redemption Reserve can be utilized only for issuing fully paid bonus shares to members, 5) | To Make payment to Equity shareholders on Buy-back: Equity shares Buyback A/c Dr. [With Amount due] To Bank A/c To make money due to equity shareholders on Buy-back: a) If the buy-back is at par Equity Share Capital A/c Dr. [With Nominal Value] To Equity Share Buyback Alc 3) 8) (CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 25PIONEER FOR MEC / CEC TO CA/ CMA FINAL b) If the buy-back is at premium Equity Share Capital A/c Dr. [With Nominal Value] ‘Securities Premium A/c. Dr. [With Premium] To Equity Share Buyback Alc (With Total] ¢) If the buy-back is at discount Equity Share Capital A/c Dr. (With Nominal Value] To Equity Share Buyback Alc [With Net Amount} To Capital Reserve Alc [With Discount} CONCEPT QUESTION: Why CRR is created in the case of Buy Back? CRD 1: X Itd furnishes the following summarized balance sheet as at 31-03-2018. SPEGEEGES GE SIUSGUENGSTuESEOELIEgHi nab lGeaebuitiHia0 0/0 00/800 1800 cnsi80EH00p000 in es)iin pen UOiRahEt ‘Share capital Equity share capital of Rs 20 each fully paid up 50,00,000 10,000, 10% preference share of Rs 100 each fully paid up. 40,00,000| 60,00,000 Reserves & Surplus Capital reserve 4,00,000 ‘Security premium 12,00,000 Revenue reserve 5,00,000 Profit and loss 20,00,000 Dividend equalization fund 5,60,000| _ 43,50,000 Non-current liabilities 12% debenture 12,50,000 Current iabilties and provisions 5,50,000 Total 4,21,50,000 Fixed assets Tangible assets 1,00,75,000 Current assets tnvestment 3,00,000 lnventory 2,00,000 Cash and bank 15,75,000| _20,75,000 Total 4,21,50,000 ‘The shareholders adopted the resolution on the date of the above mentioned balance sheet to: 1) Buy back 25% of the paid up capital and it was decided to offer a price of 20% over market price. The prevailing market value of the company’s share is Rs 30 per share. 2) To finance the buyback of share company ; a) Issue 3000, 14% debenture of Rs.100 each at a premium of 20%. b) Issue 2500, 10% preference share of Rs 100 each CAINTER | ADVANCED ACCOUNTS| 46E 26(Lun one \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 3) Sell investment worth 1,00,000 for Rs 1,50,000 4) Maintain a balance of Rs 2,00,000 in revenue reserve 5) Later the company issue three fully paid up equity share of Rs 20 each by way of bonus share for every 15 equity share held by the equity shareholder. You are required to pass the necessary journal entries to record the above transactions and prepare balance sheet after buyback. What would be the impact on the question- CONCEPT a) If "Buy back 10% of the paid up capital plus free reserves” is given in Point no. instead of “Buy RUESTIONS: Back 25% of the paid up capital”, b) point no.384 are not given in the question. ‘ASSIGNMENT PROBLEM TO REFERENCES N19-15M Fae ea ee cenae Al FINAL ANSWER | Bis -1,05,60,000 ‘ABC CATEGORISATION A NOTES PRINTED SOLUTION In the books of X Particulars Dr. @) Cr. @) 1) | Bank Alc Dr. 3,60,000 To 14% Debentures Alc 3,00,000 To Securities Premium 60,000 (Being 14% debentures issued to'finance buy back) 2. | Bank Alc Dr. | 2,50,000 To 10% Preference share capital Alc 2,50,000 (Being 10% preference share issued to finance buy back) 3. | Bank Alc Dr. 1,50,000 To Investment A/c 1,00,000 To Profit on sale of Investment 50,000 (Being Investment sold on profit) 4, | Equity share capital Alc (62,500 x 220) Dr. | 12,50,000 Securities Premium Alc (62,500 x 216) Dr. | 10,00,000 To Equity shares buy back A/c (62,500 x %36) 22,50,000 (Being the amount due to equity shareholders on buy back) 5. | Equity shares buy back A/c Dr. | 22,50,000 To Bank Alc 22,50,000 (Being the payment made on account of buy back of 62,500 Equity shares as per the Companies Act) 6) | Revenue reserve Dr. 3,00,000 Securities premium Dr. | 2,60,000 Profit and Loss A/c Dr. 4,40,000 To Capital redemption reserve Alc 10,00,000 (Being amount equal to nominal value of buy back shares from free reserves transferred to capital redemption reserve account as per the law) (12,50,000 less 2,50,000) CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 27PIONEER FOR MEC / CEC TO CA/ CMA FINAL 7) | Capital redemption reserve Alc Dr. | 7,50,000 To Bonus to Shareholders A/c (W.N.1) 7,50,000 (Being the utilization of capital redemption reserve to issue 37,500 bonus shares) 8) | Bonus to Shareholders A/c Dr. | 7,50,000 To Equity shares capital A/c 7,50,000 (Being issue of 3 bonus equity share for every 15 equity shares held) “Alternatively, entry for combination of different amounts (from Revenue reserve. Securities premium and profit and Loss account.) may be passed for transferring the required amount to CRR NOTE: It may be noted that as per the provisions of the Companies Act, 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. Issue of debentures has been excluded for the purpose of "specified securities” and the entire amount of % 10,00,000 (after deducting only pref. share capital) has been credited to CRR while solving the question. Balance Sheet (After buy back and issue of bonus shares) TEEIHEE Euan Ea EET dana PAPUIGMIBES Fete iaininiain tate Note No_ Amount (2) JA) Equity and Liabilities 4) Shareholder’s Funds a) Share Capital 57,50,000| b) Reserves and Surplus 27,10,000| 2) Non-Current Liabilities a)_Long-term borrowings 15.50,000 3) Current Liabilities a) Trade payables b) current liabilities & Provisions 5,50,000 B) Assets 4) Non-current assets Total 1,05,60,000 a) Property, Plant and Equipment 4,00,75,000 2) Current assets a) Investments 2,00,000 b) Inventory 2,00,000 ¢) Cash and cash equivalents (W.N. 2) 85,000) Total 1,05,60,000 Notes to Accounts [Share capital: Equity share capital (Fully paid-up shares of € 20 each) (2,50,000-62,500+37,500 shares) 45,00,000) 10% preference shares @ 2 100 each (10,00,000 + 2,50,000) 12,50,000 87,50,000| 2. [Reserves and Surplus Capital Reserve 1,00,000) Revenue reserve 2,00,000 Securities premium 12,00,000 CAINTER | ADVANCED ACCOUNTS| 46E 2.8|Add: Premium on debenture 60,000 Less: Adjustment for premium paid on buy back _ 10,00,000 Less: Transfer to CRR (2,60,000) Nil Capital Redemption Reserve Transfer due to buy-back of shares from P&L 10,00,000 Less: Utilisation for issue of bonus shares (750,000) 2,50,000 Profit & Loss A/c 20,00,000 |Add: Profit on sale of investment 50,000 Less: Transfer to CRR (440.000) 16,10,000 Dividend equalization reserve 5,50,000} _27,10,000 Long-term borrowings -12% Debentures. 12,50,000 14% Debentures 3,00,000 15,50,000) Working Notes: 1) Amount of bonus shares = [(2,50,000 -25%)3/15] x 20 = 37,500 x 20=7,50,000 2) Cash at bank after issue of bonus shares. @ Cash balance as on 30.3.2018 15,75,000) |Add: Issue of debenture 3,60,000) |Add: issue of preference shares 2,50,000 |Add: Sale of investments 1,50,000} 23,35,000 Less: Payment for buy back of shares (22,50,000) 85,000, CRD 2: Perrotte Ltd. (a non-listed company) has the following Capital Structure as on 31,03.20X1: Particulars (@ in crores) 1)_|Equity Share Capital (Shares of @ 10 each fully paid) : 330 2)_|Reserves and Surplus General Reserve 240 - ‘Securities Premium Account 20 : Profit & Loss Account 90 - Infrastructure Development Reserve 180 600 3)_|Loan Funds 1,800 The Shareholders of Perrotte Ltd., on the recommendation of their Board of Directors, have approved on 12.09.20X1 a proposal to buy-back the maximum permissible number of Equity shares considering the large surplus funds available at the disposal of the company. The prevailing market value of the company's shares is €25 per share and in order to induce the existing shareholders to offer their shares for buy-back, it was decided to offer a price of 20% over market. You are also informed that the Infrastructure Development Reserve is created to satisfy Income- tax Act requirements. CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 2.9PIONEER FOR MEC / CEC TO CA/ CMA FINAL You are required to compute the maximum number of shares that can be bought back in the light of the above information and also under a situation where the loan funds of the company were either 1,200 crores or 1,500 crores. ‘Assuming that the entire buy-back is completed by 09.12.20X1, show the accounting entries in the company's books in each situation. ‘What would be the impact on the question, if a) If there is C.R.R of 180 lakhs instead of infrastructure development reserve of Rs.180 lakhs b) If Capital Reserve of Rs.20 lakhs and Share options outstanding Alc balance of Rs.5 lakhs is also given in the questi PRINTED SOLUTION: g Statement determining the maximum number of shares to be bought back Shares Outstanding Test (W.N.1) 8.25 8.25 8.25 Resources Test (W.N.2) 6.25 6.25 6.25 Debt Equity Ratio Test (W.N.3) Nil 3.75] Nil Maximum number of shares that can be bought Nil 3.75] Nil back [least of the above] Journal Entries for the Buy-Back {applicable only when loan fund is Rs. 1,200 crores)(Amount in Crores) a)_| Equity share buy-back account Dr | 1125 To Bank account 112.5 (Being buy-back of 3.75 crores equity shares of 10 each @ & 30 per share) b) | Equity share capital account Dr. 375 | [Securities premium account Dr. 5 To Equity share buy-back account 112.5] (Being cancellation of shares bought back) ¢) |General reserve account Dr. 375) ‘To Capital redemption reserve account 375) (Being transfer of free reserves to capital redemption reserve to the extent of nominal value of share capital bought back out of| redeemed through free reserves) CAINTER | ADVANCED ACCOUNTS| 46E 2.10Gu ee ade WWW.MASTERMINDSINDIA.COM | 98851 25025 /26 Working Notes: 1) Shares Outstanding Test Particulars (Shares in crores) Number of shares outstanding 33 25% of the shares outstanding 8.25 2) Resources Test Particulars Paid up capital (& in crores) 330 Free reserves (2 in crores) 420 Shareholders’ funds (? in crores) 750 25% of Shareholders fund (2 in crores) 2 187.5 crores Buy-back price per share 230] Number of shares that can be bought back (shares in crores) 6.25 crores shares| 3) Debt Equity Ratio Test When loan fund is Particulars 1,800 | €1,200 ‘| & 1,500 crores crores crores (a)_|Loan funds (2 in crores) 1,800 4,200/ 1,500 (b) [Minimum equity to be maintained after buy-back in 900 600 750 the ratio of 2:1 (@ in crores) (0)_ [Present equity shareholders fund ( in crores) 750 750| 750) (d) |Future equity shareholder fund (%in crores) (See) NA.| 712.5 (750-37.5)| NA Note 2) (e) [Maximum permitted buy-back of Equity (@ in crores) Nil] 112.5 (by Nil [(d) - (b)] (See Note 2) simultaneous equation) () [Maximum number of shares that can be bought Nil] 3.75 (by Nil back @ @ 30 per share (shares in crores) (See Note simultaneous 2) equation) NOTE: 1) Under Situations 1 & 3 the company does not qualify for buy-back of shares as per the provisions of the Companies Act, 2013 2) As per section 68 of the Companies Act, 2013, the ratio of debt owed by the company should not be more than twice the capital and its free reserve after such buy-back. In the question, it is stated that the company has surplus funds to dispose of therefore, it is presumed that buy- back is out of free reserves or securities premium and hence a sum equal to the nominal value of the share bought back shall be transferred to Capital Redemption Reserve (CRR). Utilization of CRR is restricted to issuance of fully paid-up bonus shares only. It means CRR is not available for distribution as dividend. Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. share capital and free reserves, amount transferred to CRR on buy-back has to be excluded from present equity. Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method 3) Suppose amount equivalent to nominal value of bought back shares transferred to CRR account is ‘x and maximum permitted buy-back of equity is ‘y’ CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 241PIONEER FOR MEC / CEC TO CA/ CMA FINAL Then Equation 1: (Present equity - Nominal value of buy-back transfer to CRR) — Minimum equity to be maintained= Maximum permissible buy-back of equity (750 -)-600 = y 0) Since 150-x=y Equation 2: {Maximum buy — back _ 6 minal value Offer price for buy ~ back ) = Nominal value of the shares bought -back to be transferred to CRR -( Xx 10) =x 30, [here (30 = 25% x 120] Or 3x= (2) by solving the above two equations we get x= % 37.5 crores y=% 112.5 crores CRD 3: Following is the summarized Balance Sheet of Complicated Ltd. as on 31° March, 2016: Liabilities ‘Amount Equity shares of Rs. 10 each, fully paid up 12,50,000 Bonus shares of Rs. 10 each, fully paid up 1,00,000 Share option outstanding Account 4,00,000 Revenue Reserve 15,00,000 Securities Premium 2,50,000 Profit & Loss Account 1,25,000 Capital Reserve 2,00,000 Unpaid dividends 1,00,000 12% Debentures (Secured) 18,75,000 ‘Advance from related parties (Unsecured) 10,00,000 Current maturities of long term borrowings 16,50,000 Application money received for allotment due for refund 2,00.000 86,50,000 Fixed Assets 46,50,000 Current Assets 40,00,000 86,50,000 The Company wants to buy back 25,000 equity shares of Rs. 10 each, on 1* April, 2016 at Rs. 20 per share. Buy back of shares is duly authorized by its Articles and necessary resolution has been passed by the Company towards this. The buy-back of shares by the Company is also within the provisions of the Companies Act, 2013. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Current Assets. CAINTER | ADVANCED ACCOUNTS| 46E 242coc So a \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 You are required to prepare the necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares. WHAT WOULD BE THE IMPACT ON THE QUESTION, CONCEPT | a) IF THE COMPANY WANTS TO BUY BACK 30,000 EQUITY SHARES QUESTIONS |) if IN THE ABOVE INFORMATION ,THERE WAS ALSO PREFERENCE SHARE CAPITAL OF RS.2,00,000 WHICH WAS ISSUED TWO MONTHS BEFORE FOR THE PURPOSE OF BUY BACK. ‘ASSIGNMENT PROBLEM TO REFERENCES M1B-RTP Be SoLVEDAR REWORK 3 FINAL ANSWER | BIS - 81,50,000 ‘ABC CATEGORISATION A NOTES EQUITY SHARES WITH DIFFERENTIAL RIGHTS ‘As we know that share capital is of two types -equity and preference. Preference share capital with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to 1) Payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and 2) Repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-tip, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company Section 43(a) of the Act defines equity share capital to include of two types viz. 1) With voting rights; or 2) With differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed It must be appreciated that preference shares are not issued with differential rights. It is only the equity shares, which are issued. Thus new issues of share capital shall be only two kinds only, as depicted in the chart given below: Two Kinds of Share Capital Equity Share Capital Preference Share Capital Wvoting or otherwise in accordance wit such rules and subject to such conditions as may be prescribed. With voting rights; or CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 2.13PIONEER FOR MEC / CEC TO CA/ CMA FINAL VOTING RIGHTS: Section 2 (93) defines “voting right," as the right of a member of a company to vote in any meeting of the company or by means of postal ballot. Of the two types of shares, equity shares have a general voting right, whereas preference shares have restrictive voting rights. 1) EQUITY SHAREHOLDER VOTING RIGHTS: a) Every member of a company limited by shares and holding equity share capital therein, shall have a right to vote on every resolution placed before the company; and b) His voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company. 2) PREFERENCE SHAREHOLDER RESTRICTIVE VOTING RIGHTS: Normally preference shareholders have superior financial rights but less management control rights. Every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a restrictive right to vote only on resolutions placed before the company a) Which directly affect the rights attached to his preference shares and, b) Any resolution for the winding up of the company or ©) For the repayment or d) Reduction of its equity or preference share capital In these situations, preference shareholders voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company. yf Preferens shareholder rictive voting rights: It is provided further that where: the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company : It is further provided that the proportion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares, Equity shares with Differential Rights: Equity shares with Differential Rights means the share with dissimilar rights as to dividend, voting or otherwise. Purpose of Equity shares with differential rights: Normally, the blanket rule in Companies Act is one share-one vote. This gives equal voting right to every shareholder. This is a fairly democratic process and is quite robust from the corporate governance perspective. However, sometime a segment of shareholders, normally promoters and executive management may like to have more control over decision-making process. But that may not be possible if shareholding is quite diffused, This intention of shareholders / management can be activated if they have more voting rights, even if they hold fewer shares. This can be structured by giving them shares with superior voting rights. This is enabled by section 43(a)(i) in the form of equity shares with differential rights. It must be appreciated that preference shares are not issued with differential rights. It is only the equity shares, which are issued. Hence, differentiation can be done by giving superior dividend / Superior voting right diluted voting right to a class of equity shareholder. This kind of arrangement certainly dilutes the corporate governance perspective. The system clearly violates the principles of democracy. It creates classes within classes, CAINTER | ADVANCED ACCOUNTS| 46E 2.14(Lun one \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Exampk «TATA were the first in 2008 to issue equity shares with differential rights. They came out with a differential right issue under the nomenclature of class A shares, the voting rights were diluted to /0th and the rate of the dividend was 5% more as compared to the other category of Tata motors shares being traded on the stock exchange. ‘+ Similarly, Pantaloons issued bonus shares with differential voting rights with an additional 5% dividend but one-tenth voting rights to ordinary equity shares. ‘+ Gujarat NRE Coke and Jain Irrigation Systems issued similar bonus shares with differential voting rights. WITH EQUITY SHARES WITH DIFFERENTIAL RIGHTS [Sec 43(A)(II)] 1) The articles of association of the company authorizes the issue of shares with differential rights; 2) The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders: Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot; 3) The shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time; 4) The company having consistent track record of distributable profits for the last three years, 5) The company has not defaulted in filing financial statements’ and annual retums for three financial years immediately preceding the financial year in which itis decided to issue such shares; 6) The company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend; 7) The company has not defaulted in-payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government; 8) The company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators. It is further clarified that the company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice-versa Itis further clarified that the holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued. CONCEPT QUESTION: Why do you think, very few companies in India have issued Equity Shares with Differential Rights in India? CRD 4: L, M,N and O hold Equity capital in the proportion of 30:30:20:20 in AB Ltd. X, Y, Z and K hold preference share capital in the proportion of 40:30:20:10. You are required to identify the voting rights of shareholders in case of resolution of winding up of the company if the paid-up capital of the company is Rs. 80 Lakh and Preference share capital is Rs. 40 Lakh. CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 2.45PIONEER FOR MEC / CEC TO CA/ CMA FINAL What would be the impact on the question, CONCEPT 4) Ifit is given that Equity Capital held by L is Rs. 30 lakhs instead of total paid up capital of Rs.80 lakhs QUESTIONS | b)_Ifitis given that Preference Share Capital held by X is Rs.20 lakhs instead of total paid up capital of Rs.40 lakhs ‘ASSIGNMENT PROBLEM TO REFERENCES N1g-RTP Reece ne cewaak 4 FINAL ANSWER ABCCATEGORISATION [A Nor PRINTED SOLUTION: L, M, N and O hold Equity capital in the proportion of 30:30:20:20 and X, Y, Z and K hold preference share capital in the proportion of 40:30:20:10. As the paid-up equity share capital of the company is Z 80 Lakhs and Preference share capital is Z 40 Lakh (2:1), then relative weights in the voting right of equity shareholders and preference shareholders will be 2/3 and 1/3. The respective voting right of various shareholders will be = 2/3X30/100 = 3/15 M = 2/3X30/100 = 3/15 N = 23X20/100 = 2/15 0 = 2/3X20/100 = 2/15 X = 1/3X40/100 = 2/15 Y = 1/3X30/100 = 1/10 Zz 15 K =4/8X10/100 = 1/30 ASSIGN 1(a): The following was the summarized balance sheet of Bhoomi Ltd. as on 31% March, 2020: Equity & liability @ (in lakhs) |Assets @ (in lakhs) Authorised Capital Property, plant and equipment | __ 1,412,000 Equity shares of @ 10 each 80.000] Investments 24,000) Issued Capital (Cash at Bank 13,200 Equity Shares of 210 each Fully Paid up 64,000 |Trade Receivables 66,000 10% Redeemable Preference Shares of| 20,000 10 each, Fully Paid Up Reserves & Surplus: Capital Redemption Reserve 8,000 Securities Premium 6,400 General Reserve 48,000 Profit & Loss Account 2,400 9% Debentures 40,000 Trade Payables 26.400 2,15,200 2,15,200 ‘On 1* April, 2020 the Company redeemed all its Preference Shares at a Premium of 10% and bought back 25% of its Equity Shares at 2 20 per Share. In order to make Cash available, the Company sold all the Investments for 2 25,000 Lakhs and raised a Bank Loan amounting to * 16,000 lakh on the ‘Security of the Company's Plant. CAINTER | ADVANCED ACCOUNTS| 46E 2.16(Lun one \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Give the necessary Journal Entries considering that the buyback is authorised by the articles of company and necessary resolution is passed by the company for this. The amount of Securities premium may be utilized to the maximum extent allowed by law. What would be the impact on the question Teeee 4) fit is given that Sec.133 of Companies Act, is applicable to Bhoomi Lid b) If itis given that there was a bonus issue in the ratio of 1:4 immediately after redemption of preference shares and buy back ‘ASSIGNMENT PROBLEM TO REFERENCES N20-MTP1 - 8M BE ROCVEDAG EMRE : FINAL ANSWER ‘ABC CATEGORISATION A NOTES ASSIGN 1(b): The Directors of Umang Ltd. passed a resolution to buyback 5,00,000 of its fully paid equity shares of @ 10 each at & 15 per share. This buy back is in compliance with the provisions of the Companies Act. 2013. For this purpose, the company a) Sold its investments of & 30.00.00 for & 25.00.000. b) Issued 20,000, 12% preference shares of & 100 each at’par, the entire amount being payable with application. ©) Used % 15,00,000 of its Securities Premium Account apart from its adequate balance in General Reserve to fulfill the legal requirements regarding buy-back. d) The company has necessary cash balance for the payment to shareholders. You are required to pass necessary Journal Entries (including narration) regarding buyback of shares in the books of Umang Ltd. Gorstions | MinPoint no.) Debentures wa issued instead of Praerance shares ‘ASSIGNMENT PROBLEM TO REFERENCES (JAN21-5M BE SOLVED AS REWORK : FINAL ANSWER ‘ABC CATEGORISATION B NOTES ASSIGN 2: SMM Ltd. has the following capital structure as on 31st March, 20X1: 2 in crore Particulars Situation! | Situation II a) _|Equity share capital (shares of @ 10 each) 1,200 1,200 b) Reserves: |General Reserves 1,080 1,080 Securities Premium 400 400 Profit & Loss 200 200 CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 2.47PIONEER FOR MEC / CEC TO CA/ CMA FINAL Infrastructure Development Reserve (Statutory 320 320 Reserve) ¢) [Loan Funds 3,200 6,000 The company has offered buy-back price of = 30 per equity share. You are required to calculate maximum permissible number of equity shares that can be bought back in both situations and also required to pass necessary Journal Entries. What would be the impact on the question, if OEE REARS (iif there is C.RR of 320 lakhs instead of infrastructure development reserve of Rs.320 lakhs (int Capital Reserve of Rs.200 lakhs and Share options outstanding Alc balance of Rs.50 lakhs is also given in the question. ‘ASSIGNMENT PROBLEM TO REFERENCES © BE SOLVED AS REWORK. 7 FINAL ANSWER | Maximum no. of shares that can be bought back -24 Crore, Nil | ABG GATEGORISATION A NoTES ASSIGN 3: Following is the summarized Balance Sheet of Super Ltd. as on 31°" March. 2018. Liabilities zg Share Capital Equity Shares of f 10 each fully paid up 17,00,000 Reserves & Surplus Revenue Reserve 23,50,000| Securities Premium 2,50,000 Profit & Loss Account 2,00,000 Infrastructure Development Reserve 1,50,000) Secured Loan 9% Debentures 22,50,000| Unsecured Loan 8,50,000 Current Maturities of Long term borrowings 15,50,000 '93,00,000| Assets Fixed Assets Tangible Assets '58,50,000| Current Assets Current Assets 34,50,000| :93,00,000| ‘Super Limited wants to buy back 35,000 equity shares of Rs. 10 each fully paid up on 1% April, 2018 at Rs. 30 per share. Buy Back of shares is fully authorised by its articles and necessary resolutions have been passed by the company towards this. The payment for buy back of shares will be made by the company out of sufficient bank balance available as part of the Current Assets CAINTER | ADVANCED ACCOUNTS| 46E 2.18SN uci WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Comment with calculations, whether the Buy Back of shares by the company is within the provisions of the Companies Act, 2013 Concert What would be the impact onthe question, QUESTIONS | a) Ifthe company wants to buy back 40,000 equity shares [ASSIGNMENT PROBLEM TO REFERENCES M19 -10m AEST POL: . FINAL ANSWER | Max numberof shares that can be bought back-7,500 shares __| ABC CATEGORISATION A NoTES ASSIGN 4: W, X, Y and Z hold Equity capital is held by in the proportion of 40:30:10:20. A, B, C and D hold preference share capital in the proportion of 30:40:20:10. If the paid up capital of the company is 40 Lakh and Preference share capital is € 20 Lakh, find their voting rights in case of resolution of winding up of the company. What would be the impact on the question, Aen a) _Ifitis given that Equity Capital held by Wis Rs. 20 lakhs instead of total paid up capital of Rs.40 lakhs b) Ifitis given that Preference Share Capital held by A is Rs.9 lakhs instead of total paid up capital of Rs.20 lakhs ‘ASSIGNMENT PROBLEM TO ee © BE SOLVED AS REWORK FINAL ANSWER | W-4/15 X15 7-115 2.2115 A-1/06-2/15,C415 0-110 ‘ABC CATEGORISATION A NoTES DIVISION 4: ADDITIONAL CONCEPTS FOR SELF PRACTICE (ACSP) CATEGORY 4; NIL CATEGORY 2 ACSP4: Refer Practical Question 2, Page No. 4.38 in the Study Material ACSP 2: Refer Illustration 2, Page No. 4.10 in the Study Material ACSP 3: Refer Illustration 3, Page No. 4.14 in the Study Material ACSP 4: Refer QP-JULY 21 ACSP 5: Refer Illustration 5, Page No. 4.23 in the Study Material ACSP 6: Refer Practical Question 3, Page No. 4.40 in the Study Material CATEGORY 3 THEOR’ REFERENCE-PAGE NO.4.33(FROM DILUTION INCASE OF PRIVATE COMPANIES) & 4.34 PROBLEMS: NIL CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 2.19PIONEER FOR MEC / CEC TO CA/ CMA FINAL DIVISION 5: THEORY FOR SELF STU! FREE RESERVES DEFINITION: ‘Free reserves’ means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend: Provided that- 1) any amount representing un-realised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or 2) any change in carrying amount of an asset or a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves. PROCEDURAL COMPLIANCES IN BUY BACK: 1) 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; ) the class of security intended to be purchased under the buy-back; ) the amount to be invested under the buy-back, e) the time limit for completion of the buy-back. 2) Where a company has passed a special resolution under clause (b) of Subsection (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: 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. 3) 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 retum 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 4) Ifa company makes default in complying with the provisions of this section or any regulations made by SEB! 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. CERTAIN RESTRICTIONS ON BUY BACK-[Sec 70] 1) No company shall directly or indirectly purchase its own shares or other specified securities— a) through any subsidiary company including its own subsidiary companies; or b) through any investment company or group of investment companies; or ©) if @ default is subsisting, in repayment of deposit or interest payable 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 institutions or bank. Provided that the CAINTER | ADVANCED ACCOUNTS| 46E 2.20coc So a \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 buy-back is not prohibited if the default is remedied and a period of three years has elapsed sinoe the cessation of the default 2) In accordance with schedule Ill, no company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with provisions of Sections 92 {filing of annual return), 123 (payment of dividend within 30 days of declaration), 127 (failure to distribute dividend) and 129 (preparation of financial statement of the company). DIVISION 6: SHORT ANSWER TYPE QUESTIONS (SELF STUDY) 1) What are the conditions to be fulfilled by a Joint Stock Company to buy-back its equity shares as per Companies Act, 2013? Explain in brief. 2) Explain the meaning of equity shares with differential rights 3) Can preference shares be also issued with differential rights? Explain 4) Explain the conditions under Rule 4 under Companies (Share Capital and Debentures) Rules, 2014, to deal with equity shares with differential rights. DIVISION 7: MULTIPLE CHOICE QUESTIONS (SELF STUDY) 1) As per section 68(1) of the Companies Act, buy-back of own-shares by the company, shall not exceed a) 25% of the total paid-up capital and free reserves of the company. b) 20% of the total paid-up capital and free reserves of the company. ©) 15% of the total paid-up capital and free reserves of the company. 2) The companies are permitted to buy-back their: own shares out of a) Free reserves and Securities premium b) Proceeds of the issue of any shares. c) Both (a) and (b) 3) When a company purchases its own Shares out of free reserves; a sum equal to nominal value of shares so purchased shall be transferred to a) Revenue redemption reserve. b) Capital redemption reserve. ©) Buy-back reserve 4) Of the following, preference shareholders do not have a right to vote on resolutions a) Which directly affect the rights attached to his preference shares. b) For entering a private equity agreement to raise further capital diluting their overall stake in the company. ©) For the repayment 5) Preference shareholders will have a right to vote on all resolutions if the dividend on their share remains unpaid for a) 1 year b) 2 year ©) 3 year 6) The differential in the class of equity shares can be created for a) Dividend. ) Voting rights. ©) Both (a) and (b). 7) State which of the following statements is true? a) Buy-back is for more than twenty-five per cent of the total paid-up capital and free reserves of the company. b) Partly paid shares cannot be bought back by a company. ©) Buy-back of equity shares in any financial year shall exceed twenty-five per cent of its total paid-up equity capital in that financial year. CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 2.21PIONEER FOR MEC / CEC TO CA/ CMA FINAL 8) Premium (excess of buy-back price over the par value) paid on buy-back should be adjusted against a) Free reserves b) Securities premium. ©) Both (a) and (b) 9) Advantages of Buy-back of shares include to a) Encourage others to make hostile bid to take over the company. b) Decrease promoters holding as the shares which are bought back are cancelled ©) Discourage others to make hostile bid to take over the company as the buy-back will increase the promoters holding. PART 1: ANSWERS FOR CONCEPT QUESTIONS TO CRD PROBLEMS cRD-41 1) If it is just given that buyback 10% of paid-up capital-it just seems like a condition or restriction w.rt no. of shares-hence paid up equity capital /face value gives you no. of shares to be bought back. (.¢ 10% of 50,00,000/20 =25,000 shares) If is given that buyback 10% of paid-up capital plus free reserves, then clearly it is a condition or restriction on amount. In such a case, first we find 10% ofpaid-up capital plus free reserves, then divide it by buy back price, then we will get the no. of shares to be bought back. 2) If point no.3 is not given in the question, to that extent cash balance will reduce by 1,50,000 and P&L Balance will reduce by 50,000. There will not be any impact on amount to be transferred to RR. (Take an assumption that sufficient bank balance is there) If point no.4 is not given in the question, then entire 4,00,000 can be used for transfer to C.RR RD -2 1) There will not be any impact on.computation of no. of shares to be bought back, since whether C.R.R or infrastructure development reserve, both are not free reserves and are not part of equity. 2) There will not be any impact on computation of no. of shares to be bought back, since Capital Reserve and Share Options outstanding A/c balance, both are not free reserves and are not part of equity CRD-3 1) If company wants to buy back 30,000 shares, it is not within the provisions of companies act,2013 because maximum no. of shares as per the 3 conditions, will be in 28,750 in the given question. In such a case, entries also has to be written only for 28,750 shares 2) Then in such a case, amount to be transferred will be only Rs.50,000 because Amount to be transferred to C.R.R will be Nominal value of Shares bought back less proceeds of fresh issue for buy back in other words, Nominal value of shares bought back through free reserves will be transferred to C.R.R CRD-4 1) If itis given that Equity capital held by L is 30lakhs, then total paid up equity capital of AB Ltd is 100lakhs (because equity capital ratio is 30:30:20:20). In such case, Voting rights of total equity shareholders=100/(100+40)=5/7. Total voting rights of Preference Shareholders=2/7 The Voting rights of Equity and preference shareholders also will change individually. CAINTER | ADVANCED ACCOUNTS| 46E 2.22coc So a \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 2) Ifitis given that Preference capital held by X is 20lakhs, then total preference capital of AB Ltd is 50 lakhs (because preference capital ratio is 40:30:20:10).In such case, Voting rights of total equity shareholders=80/(80+50)=8/13, Total voting rights of Preference Shareholders=5/13 The Voting rights of Equity and preference shareholders also will change individually PART 2: SOLUTIONS TO ASSIGNMENT PROBLEMS ASSIGN 1) Journal entries In the books of Bhoomi Ltd. 1) | Bank Alc Or 25,000 To Investments A/c 24,000 To Profit and Loss A/c 1,000 (Being Investments sold and, profit being credited to Profit and Loss Account) 2) | 10% Redeemable Preference Share Capital A/c Dr. 20,000 Premium payable on Redemption of Preference Shares Alc Dr. 2,000 To Preference Shareholders A/c 22,000 (Being amount payable on redemption of Preference shares, at a Premium of 10%) 3) | Securities Premium Alc Dr. 2,000 To Premium payable on Redemption of Préterence Shares A/c 2,000 (Being Securities Premium utilised to provide Premium ‘on Redemption of Preference Shares) 4) | Equity Share Capital Alc Dr. 16,000 Premium payable on Buyback A/c Dr. 16,000 To Equity Share buy back A/c 32,000 (Being the amount due on buy-back) 5) _ | Securities Premium Alc (6,400 — 2,000) Dr. 4,400 General Reserve Alc (balancing figure) Dr. 11,600 To Premium payable on Buyback A/c 16,000 (Being premium on buyback provided first out of Securities Premium and the balance out of General Reserves.) 6) | Bank Alc Dr 16,000 To Bank Loan Alc 46,000 (Being Loan taken from Bank to finance Buyback) 7) _ | Preference Shareholders A/c Dr. 22,000 Equity Shares buy back Alc Dr. 32,000 To Bank Alc 54,000 (Being payment made to Preference Shareholders and Equity Shareholders) 8) | General Reserve Account Or. 36,000 To Capital Redemption Reserve Account 36,000 (Being amount transferred to Capital Redemption Reserve Account to the extent of face value of preference shares redeemed and equity Shares bought back) (20,000 + 16,000) (CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 2.23PIONEER FOR MEC / CEC TO CA/ CMA FINAL Answers to concept question: a) Then Securities Premium cannot be used for adjustment of premium payable on redemption of preference shares. b) Then bonus issue also to be recorded i) CRR Dr. 12,000 To Bonus to Shareholders A/c 12,000 ii) Bonus to Shareholders A/c Dr. 12,000 To Equity Share Capital A/c 12,000 ASSIGN 4(b) Dr. @) | Cr @) 4) [Bank Alc Dr. | 25,00,000 Profit and Loss A/c Dr. | 5,00,000) To Investment A/c 30,00,000! (Being investment sold for the purpose of buy-back of Equity Shares) 2) [Bank Alc Dr. | 20,00,000] 20,00,000) To 12% Pref. Share capital A/c (Being 12% Pref. Shares issued for & 20,00,000) 3) [Equity share capital Alc Dr. | 50,00,000 Premium payable on buy-back Dr. | 25,00,000 To Equity shares buy-back Aid Equity shareholders Alc 75,00,000| (Being the amount due on buy-back of equity shares) 4) [Equity shares buy-back Aid Equity shareholders Ale Dr. | 75,00,000 To Bank Alc 75,00,000| (Being payment made for buy-back of equity shares) 5) | Securities Premium A/c Dr. | 15,00,000 General Reserve Ale Dr._| 10,00,000 To Premium payable on buy-back 25,00,000! (Being premium payable on buy-back charged from Securities premium) 6) |General Reserve Ale Dr. | 30,00,000) To Capital Redemption Reserve Alc 30,00,000| (Being creation of capital redemption reserve to the extent of the equity shares bought back after deducting fresh pref. shares issued) Answers to concept question: The proceeds of fresh issue from debentures need not be reduced from nominal value of shares bought back to get amount to be transferred to CRR. CAINTER | ADVANCED ACCOUNTS| 46E 2.24coc ASSIGN 2: Statement determi So a \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 ing the maximum number of shares to be bought back Number of shares (in crores) ‘Shares Outstanding Test (W.N. 1) 30 30 Resources Test (W.N.2) 24 24 Debt Equity Ratio Test (W.N.3) 32 Nil ‘Maximum number of shares that can |be bought back [least of the 24 Nil above] Journal Entries for the Buy-Back {applicable only when loan fund is “3,200 crores) a) Equity shares buy-back account Dr. 720 To Bank account 720 (Being payment for buy-back of 24 crores equity shares of Z 10 each |@ 2 30 per share) b) Equity share capital account Dr. 240 Premium Payable on buy-back account Dr. To Equity share buy-back account 480 720 (Being cancellation of shares bought back) /Securities Premium account Or. 400 [General Reserve / Profit & Loss A/c Dr. 80 ‘To Premium Payable on buy-back account 480 (Being Premium Payable on buy-back account charged to securities, premium and general reserve/Profit & Loss A/c) ©) |General Reserve / Profit & Loss Alc Dr. 240 To Capital redemption reserve account 240 (Being transfer of free reserves to capital redemption reserve to the Jextent of nominal value of share capital bought back out of redeemed through free reserves) Working Notes: 1) Shares Outstanding Test Number of shares outstanding 120 25% of the shares outstanding 30 2) Resources Test Paid up capital (2 in crores) Free reserves in crores) (1,080 + 400 +200) ‘Shareholders’ funds (? in crores) 25% of Shareholders fund (? in crores) Buy-back price per share Number of shares that can be bought back 4,200 1,680 2,880 % 720 crores| %30 24 crores shares| (CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46 2.25PIONEER FOR MEC / CEC TO CA/ CMA FINAL 3) Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy- Back Particulars When loan fund is % 3,200 crores | & 6,000 crores a) [Loan funds (@) 3,200) 6,000 b) [Minimum equity to be maintained after buy-back in the 1,600] 3,000 ratio of 2:1 (2) (a/2) ¢)_|Present equity shareholders fund (&) 2,880) 2,880 d) | Future equity shareholders fund (2) (see W.N.4) 2,560 (2,880- NA 320) e) [Maximum permitted buyback of Equity (8) [(d) - (b)] 960 Nil ) [Maximum number of shares that can be bought back @ 32 crore Nil % 30 per share shares| As per the provisions of the Companies Act, 2013, Qualifies Does not| company Qualify 4) Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method ‘Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is y Then Equation 1: (Present Equity- Transfer to CRR)- Minimum Equity to be maintained = Maximum Permitted Buy-Back. = (2,880-x)-1,600=y = 1280-x=y (1) Equation 2: Maximum Permitted Buy-Back X Nominal Value Per Share/Offer Price Per Share y/30 x 10 = or ox=y (2) by solving the above two equations we get x= 2320 y= ® 960 Answers to concept question: 1) There will not be any impact on computation of no. of shares to be bought back, since whether C.RR or infrastructure development reserve, both are not free reserves and are not part of equity. 2) There will not be any impact on computation of no. of shares to be bought back, since Capital Reserve and Share Options outstanding A/c balance, both are not free reserves and are not part of equity ASSIGN 3: Determination of maximum no. of shares that can be bought back as per the Companies Act, 2013. 1) Shares Outstanding Test Particulars (Shares) Number of shares outstanding 1,70,000 25% of the shares outstanding 42,500 CAINTER | ADVANCED ACCOUNTS| 46E 2.26coc So a \WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 2) Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves Particulars Paid up capital (2) 17,00,000 Free reserves (2) (23,50,000 + 2,50,000 + 2,00,000) 28.00.000 ‘Shareholders’ funds (@) 45.00.00 25% of Shareholders fund (2) 11,25,000 Buy back price per share =30 Number of shares that can be bought back (shares) 37,500 3) Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Shareholder’s Funds post Buy Back Particulars z (a)_|Loan funds (&) (22,50,000+8,50,000+15,50,000) 46,50,000 (b)_[Minimum equity to be maintained after buy back in the ratio of 2:1 (2) (a/2)_| _ 23,25,000 (o)_|Present equity/shareholders fund (2) 45,00,000 (@)_|Future equity/shareholders fund (2) (see W.N.) (45,00,000 -5,43,750) 39,568,250" (e)_|Maximum permitted buy back of Equity (2) ((d) - (b)] 16,31,250 () [Maximum number of shares that can be bought back @ @ 30 per share 54,375 shares| Summary statement determining the maximum number of shares to be bought back Particulars Number of shares Shares Outstanding Test 42,500| Resources Test 37,500) Debt Equity Ratio Test 54,375) ‘Maximum number of shares that can be bought back least of the above] 37,500) Company qualifies all tests for buy-back of shares and it can buy back maximum 37,500 shares on 1st April, 2018. However, company wants to buy-back only 35,000 equity shares @ % 30. Therefore, buy-back of 35,000 shares, as desired by the company is within the provisions of the Companies Act, 2013. Working Note: Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method. ‘Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is'y. Then (45,00,000 — x ) -23,50,000 (1) ¥ 10) =xorax= (310)-xorax-y @ By solving the above equation, we get X = %5,43,750 Y = %16,31,250 CH.2 | BUY - BACK OF SECURITIES AND EQUITY SHARES WITH DIFFERENTIAL RIGHTS | 46E 2.27PIONEER FOR MEC / CEC TO CA/ CMA FINAL Answers to concept questions: If company wants to buy back 40,000 shares, it is not within the Provisions of companies act,2013 because maximum no. of shares as per the 3 conditions, will be in 37,500 in the given question. In such a case, entries also has to be written only for 37,500 shares ASSIGN 4: W, X, Y and Z hold Equity capital is held by in the proportion of 40:30:10:20 and A, B, C and D hold preference share capital in the proportion of 30:40:20:10. As the paid up equity share capital of the company is 40 Lakhs and Preference share capital is 20 Lakh (2:1), then relative weights in the voting right of equity shareholders and preference shareholders will be 2/3 and 1/3. The respective voting right of various shareholders will be We 2/3X40/100 = 4/15 X = 2/3X30/100 = 3/15 Y = 2/3X10/100 = 1/15 Z = 2/3X20/100 = 2/15 A= 1/3X30/100 = 1/10 B = 1/3X40/100 = 2/15, C= 1/3X20/100 = 1/15 3X10/100 = 1/30 Answers to concept question: 41) Ifitis given that Equity capital held by W is 20lakhs; then total paid up equity capital of Company is 50 lakhs (because equity capital ratio is 40:30:20:10): In such case, Voting rights of total equity shareholders=50/(50+20)=5/7. Total voting rights of Preference Shareholders=2/7 The Voting rights of Equity and preference shareholders also will change individually. 2) If it is given that Preference capital held:by A is 9 lakhs, then total preference capital of the company is 30 lakhs (because preference capital ratio is 30:40:20:10). In such case, Voting rights of total equity shareholders=40/(40+30)=4/7. Total voting rights of Preference Shareholders=3/7 The Voting rights of Equity and preference shareholders also will change individually. ANSWERS TO SHORT ANSWER TYPE QUESTIONS [SELF STUDY) 4) Reference: PG NO: 2.2-Buy Back Legal Provisions-Conditions for Buy Back 2) Reference: PG NO: 2.13 3) Reference: PG NO: 2.14 4) Reference: PG NO: 2.14- Conditions under Companies (Share Capital and Debentures) Rules, 2014, KEY TO MCQs (SELF STUDY) a: ee: ee ee: eS THEEND Copyrights Reserved To MASTER INDS COMMERCE INSTITUTE PVT.LTD. CAINTER | ADVANCED ACCOUNTS| 46E 2.28