Scribd
Upload
19 views36 pages

Buy Back of Shares TYBAF

A buyback of shares occurs when a company repurchases its own shares from the market, reducing outstanding shares and returning capital to investors. The objectives include increasing share value, earnings per share, and preventing takeovers, while benefits encompass improved capital structure and shareholder satisfaction. However, drawbacks include potential manipulation of share prices and misuse of company funds for personal gain.

Uploaded by

jdharod8
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
19 views36 pages

Buy Back of Shares TYBAF

A buyback of shares occurs when a company repurchases its own shares from the market, reducing outstanding shares and returning capital to investors. The objectives include increasing share value, earnings per share, and preventing takeovers, while benefits encompass improved capital structure and shareholder satisfaction. However, drawbacks include potential manipulation of share prices and misuse of company funds for personal gain.

Uploaded by

jdharod8
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 36

Buy Back Of

Shares
Financial Accounting – V tyBAF
Meaning Of Buy Back Of
Share
• A buyback of shares occurs when a
company purchases its own shares in
the stock market. Through buyback, a
company takes outstanding shares off
the market and returns capital to
investors. It can be done through a
tender offer or an open market offer.
Effect OF Buy Back Of Share
• There is a reduction in the share capital to the
extent of the face value of the shares bought back
• There is a payment from the company to the
extent of the price of the shares paid to the
• The shareholders whose shares are bought cease
to be the shareholders of the company Their
shareholders. names are removed from the
Register of Members.
OBJECTIVES Buy-Back of equity
shares
• To increase the intrinsic value of the share:
• To increase the earnings per share (EPS):
• To reduce the excess share capital;
• To use surplus cash lying idle in the business;
OBJECTIVES Buy-Back of equity
shares
• To increase the shareholding of the promoters or
the present management;
• To prevent take-over attempts of competitors;
• To effect financial restructuring or compromise or
arrangement or amalgamation
Benefits Buy Back Of Share
• The share capital structure can be re-organised suitably;
• Return on capital, net profitability and Earning Per Share
(EPS) can be improved;
• The remaining shareholders are happy because of regular
dividend and increase in share value in the long run;
• Existing promoters/management can keep their control on
the company due to less shares available for sale in the
market;
• Existing business plans and policies can continue without
outside interference
Benefits Buy Back Of Share
• Investors can sell back the shares to the company, normally at
a price higher than the market price;
• Encourages equity investments in family-run small
businesses, as buy-back enables the family to keep control
and the investors to liquidate their funds.
• Helps family rearrangements, partitions etc. as claims of
dissatisfied members can be settled:
• Enables the company to buy out discontented shareholders or
employee share holdings when the employment ceases;
DRAWBACKS / DISADVANTAGES
of Buy- Back of shares
• Buyback may help unscrupulous promoters
to use company's money to increase their
personal investment in the company.
• Buyback may lead to manipulation in share
prices
• Money used for buyback could have been
used for productive investments.
Exhibit 1 : Buyback VS
Redemption
Buyback of Shares Redemptions of
Preference Shares
Any Shares can be Only Preference Shares
bought back can be redeemed
Buyback date is not Redemptions date is
known on date of known at the time of
issue issue of Preference
Shares
Buyback is subject Redemptions is
to rules by SEBI subject to rules by
Buyback of Shares Redemptions of
Preference Shares
Buyback can be out of Redemptions of
free reserves + Preference Shares can
Securities premium be out of only divisible
Buyback is governed by Redemptions of
S.68 of the companies Preference Shares
Act 2013 Governed by S.55 of the
companies act 2013
Companies Act is silent S.55 States that premium
about how premium payable on redemption
payable on redemption should be provided out of
on buyback should be the profits of the
Accounting Entries
Sources for Buyback of Equity Shares
1. Proceeds of earlier specific issue of pref.shares
Bank A/c Dr
to pref.shares capital A/C
2. Sale of asset/ investments
Bank Dr
To Asset / Investment A/c
To profit & Loss A/c
RECORDING AMOUNT PAYABLE ON BUY-
BACK

3. Amount Payable on Buy-back


Equity Share Capital A/c
Dr.
Premium on Buy-back of Shares
A/c Dr.
To Equity Shareholders A/c

4. Free Reserves tfd. to Capital


Redemption Reserve
P&L A/c or...(Revenue) Reserve A/c
RECORDING PAYMENT ON BUY-BACK

5. Payment to Shareholders
Equity Shareholders A/c Dr. Actual
payment
To Bank A/c
AFTER BUY-BACK

6. Premium on Buy-back Adjusted


Security Premium A/c
Dr
Profit & Loss A/c (Revenue) Reserve A/c
Dr
SOURCES OF BUY-BACK

A company can buy back its shares out of


i. free reserves as defined u/s 2(43)
ii. securities premium account
iii.proceeds of earlier issue made for buy-
back. The total of all these sources
indicates the funds available for financing
the pay-out for buy-back.
Free Reserves
• As per Section 2(43) of the Act, "free reserves"
means such reserves, which, as per the latest
audited balance sheet of a company, are available
for distribution as dividend: except –
• any amount representing unrealized gains, notional
gains or revaluation of assets, whether shown as a
reserve or otherwise, or
• any change in carrying amount of an asset or of a
liability recognized in equity, including surplus in
profit and loss account on measurement of the
asset or the liability at fair value. The following
Free Reserves Other Reserves
Profit & Loss Account Revaluation Reserve
General Reserve Capital Redemption
Reserve (old)
Dividend Equalisation Debenture Redemption
Reserve Reserve
Funds (after deducting Shares Forfeited Account
liability, if any)
e.g. Workmen's Compensation
Fund, Insurance Fund,
Sinking Fund etc.
Investment Fluctuation Profits before
Reserve incorporation
Notes:(1) Capital Reserve: If any actual profit realised in cash on
sale of fixed asset or investment isdirectly credited to Capital
Reserve, it is taken as free reserve. If no details are given,
capitalreserve is not treated as a free reserve.

(2) Statutory reserves are funds a company must keep aside for a
specific period as per tax laws. These funds cannot be used for
distribution during this time. Using them early results in losing
tax benefits.
Example: Investment Allowance Reserve is a statutory reserve,
but Investment Allowance (Utilized) Reserve is not.

(3) Deduetions: Out of the total divisible profits (free reserves)


ascertained as above following amounts should be deducted.
(a) accumulated depreciation, not provided for, if any.
(b)(b) accumulated losses (debit balance ofP& Lale), if any. The
net amount of free reserves can be used for buy-back
Securities Premium Account
• Companies Amendment Act, 1998 has substituted
the term 'securities premium account in place of
earlier 'share premium account'. Securities
premium is a broader term which covers premium
on shares as well as on other securities like
employee's stock options etc. Balance in securities
premium can be used for buy-back.
Proceeds of Earlier Issue

• (1) Buy-back of equity shares is not allowed out


of fresh issue of equity shares.
• (2) However, buy-back of equity shares is
possible out of proceeds of an earlier issue of
securities other than equity shares (i.e. issue of
preference shares, debentures etc.) made
specifically for this purpose.
MAXIMUM LIMITS ON BUY-
BACK()
• Maximum Amount:
• Limit for NV of Equity Shares:
DEBT-CAPITAL RATIO AFTER BUY-
BACK

• Ratio
• Debt
• Own Funds Post Buyback
• Date
THREE TESTS TO CHECK
CONDITIONS
• 1. Maximum Limit of Amount of Equity Shares to be
bought back :

• Maximum Limit of Number of Equity Shares to be bought


back in any Financial Year
• Maximum Debt-Equity Ratio :
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q10
Q11

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy