The union government has extended the companies Act in 1998, permitting Indian Companies to buy-back their own shares. The extension has introduced two new sections: 77A and 77B in the Companies Act 1956, which laid down the provisions and restrictions to buy-back of shares. Buy-back of shares results in reduction the capital of the company.
Meaning: Buy-back of shares essentially means repurchase by a company of its own shares. This may be done at par or premium or discount. The par value of the shares purchased is reduced from equity capital. Any excess paid (i.e. premium is debited to reserve and surplus). If the purchase is at discount, the same will be credited to capital reserve.
Conditions of Buy-back:
The following are the necessary conditions for buy-back under the Indian Companies Act:
1. Buy-back should be authorized by the Articles of Association.
If articles are silent they have to be commended.
2. A company should pass a special resolution in a general meeting authorized buy-back.
3. The buy-back doesn’t exceed 25% of paid-up capital and free reserves of the company.
4. The debt-equity ratio (including free reserves) isn’t more than 25% after such buy-back.
5. Partly paid-up shares or securities can’t buy-back by the company.
6. Buy-back must be computed within 12 months by the date of special resolution.
7. The securities and shares brought back should be physically destroyed within 7 days from complication of buy-back.
8. A company can buy-back from any of the following:
a) From existing share holders on a proportionate basis.
b) From open market.
c) From holders having odd lots.
d) From employee to whom shares earlier issued under ESOP (Employees Stock Option Plan) or Sweat Equity Shares.
9. After complication of buy-back, a company cannot issue some kind of shares for 20 months shares.
10. Money borrowed from banks and financial institution can’t be utilized for the purpose of buy-back.
11. Company which has default in repaying fixed deposits of interest there on or redemption of debentures or preference shares, payment of debentures or repayment of term loan is not permitted to buy-back.
12. A company defaulting filling of annual returns, preparation of annual account or whose accounts don’t reflect “true and fair view” is also not permitted to buy-back of its shares.
Accounting Entries:
1) Nominal value of the shares due for buy-back:
Equity share capital A/c ………………. Dr.
To Equity shareholders A/c
(Being ………. Number of shares is due for buy-back)
Payment:
Equity shareholders A/c …………………….. Dr.
To bank A/c
(Being shareholders discharged)
2) Buy-back at premium:
Premium payable on buy-back A/c …………… Dr.
To equity shareholders A/c
Share premium A/c …………….. Dr. or.
Free-reserves A/c …………….... Dr.
To premium payable on buy-back
(Being premium payable on buy-back)
3) Buy-back on discount:
Equity share capital A/c ………………. Dr.
To equity shareholders A/c
To discount on purchase one buy-back of share
Discount on buy-back of share A/c …………….. Dr.
To capital reserve A/c
(Being discount allowed on buy-back of shares)
Meaning: Buy-back of shares essentially means repurchase by a company of its own shares. This may be done at par or premium or discount. The par value of the shares purchased is reduced from equity capital. Any excess paid (i.e. premium is debited to reserve and surplus). If the purchase is at discount, the same will be credited to capital reserve.
Conditions of Buy-back:
The following are the necessary conditions for buy-back under the Indian Companies Act:
1. Buy-back should be authorized by the Articles of Association.
If articles are silent they have to be commended.
2. A company should pass a special resolution in a general meeting authorized buy-back.
3. The buy-back doesn’t exceed 25% of paid-up capital and free reserves of the company.
4. The debt-equity ratio (including free reserves) isn’t more than 25% after such buy-back.
5. Partly paid-up shares or securities can’t buy-back by the company.
6. Buy-back must be computed within 12 months by the date of special resolution.
7. The securities and shares brought back should be physically destroyed within 7 days from complication of buy-back.
8. A company can buy-back from any of the following:
a) From existing share holders on a proportionate basis.
b) From open market.
c) From holders having odd lots.
d) From employee to whom shares earlier issued under ESOP (Employees Stock Option Plan) or Sweat Equity Shares.
9. After complication of buy-back, a company cannot issue some kind of shares for 20 months shares.
10. Money borrowed from banks and financial institution can’t be utilized for the purpose of buy-back.
11. Company which has default in repaying fixed deposits of interest there on or redemption of debentures or preference shares, payment of debentures or repayment of term loan is not permitted to buy-back.
12. A company defaulting filling of annual returns, preparation of annual account or whose accounts don’t reflect “true and fair view” is also not permitted to buy-back of its shares.
Accounting Entries:
1) Nominal value of the shares due for buy-back:
Equity share capital A/c ………………. Dr.
To Equity shareholders A/c
(Being ………. Number of shares is due for buy-back)
Payment:
Equity shareholders A/c …………………….. Dr.
To bank A/c
(Being shareholders discharged)
2) Buy-back at premium:
Premium payable on buy-back A/c …………… Dr.
To equity shareholders A/c
Share premium A/c …………….. Dr. or.
Free-reserves A/c …………….... Dr.
To premium payable on buy-back
(Being premium payable on buy-back)
3) Buy-back on discount:
Equity share capital A/c ………………. Dr.
To equity shareholders A/c
To discount on purchase one buy-back of share
Discount on buy-back of share A/c …………….. Dr.
To capital reserve A/c
(Being discount allowed on buy-back of shares)
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