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i. The term buy back means buying back by company of its equity shares
from equity shareholders for immediate cancellation.
ii. According to Section 77 of The Companies Act, 1956, no company having
share capital shall have power to buy its own shares except-
a. Redemption of Preference Shares Under Section 80 or
b. Capital Reduction under Section 100-104.
iii. However Section 77A introduced in Companies Act, empowers the
company to buyback (Cancel) its equity shares either out of-
a. Fresh Issue of Preference Shares. Or
b. Free Reserves. Or
c. Partly out of Fresh Issue and partly out of free reserves.
iv. A company cannot buy back its equity shares unless it is fully paid.
v. Free reserves utilised for purpose of buy back of equity shares are
immediately transferred to an account called as “CRR A/c” (Section
77AA).
vi. Free reserves include not only revenue profits but also Securities
Premium.
vii. Premium on buy back is a capital loss and can be set out of Free
Reserves.
Problem 1
Infobyte Ltd. resolved to buy back 30000 of its fully paid equity shares of
Rs.10 each at Rs.12 per share. For this purpose, it issued 1000 10%
preference shares of Rs.100 each at par. The Total amount was payable
on application. The company has Rs.85000 balance to the credit of the
Securities Premium Account, which was to be used for buy back. The
company has sufficient balance in the General reserve to meet the legal
requirements for buy back. Pass the necessary journal entries.
Sr. Amt
Particulars
No. (Rs.)
1 Limit of 25% of own Funds:
25%[Paid up Equity+ Preference+ Free Reserves-Misc. XXX
Expenses]
2 Debt-Equity Limit:
XXX
Own Funds-(Debt./2)
3 Limit of 25% of Equity Shares:
XXX
25% X Equity Shares issued X Buy Back Price
Debt = Secured Loan + Unsecured Loan
Buy Back Amount=Least of the above three
Problem 2
Problem 3
Assume that the buy-back is carried out actually on the legally permissible
terms, record the entries in the Journal of Manish Ltd. And prepare its Balance
Sheet thereafter.