CA Intermediate · Advanced Accounting

Buyback of Securities: formula sheet

Full chapter guide

Key formulas

Permitted sources (Section 68): Free reserves | Securities premium account | Proceeds of a fresh issue of shares or other specified securities; Any one or a combination can be used. Learn all three. Securities premium is a separate source, not part of free reserves.
Prohibited source: Buyback of a kind of security ≠ out of proceeds of an earlier issue of the same kind; Proceeds of an earlier issue of the same kind are barred. A fresh issue of a different kind is the permitted alternative, e.g. a preference issue to buy back equity.
Free reserves available: Credit balance of P&L + General reserve + other free reserves, excluding securities premium; Exclude securities premium (listed separately in Section 68), capital redemption reserve, revaluation reserve and unrealised or notional gains.
Securities bought back: Total buyback amount = Number of shares × Buyback price per share; Price per share includes premium over face value.
Resources for the limits: Equity base (E) for the 25%, 10% and 2:1 tests = Total paid-up capital + Free reserves (including securities premium); Use this base for the 25% test and the 2:1 test. For the 10% approval test, use paid-up equity capital + free reserves. Free reserves under Section 2(43) include the securities premium account, so add it to the base. Do not add debt, revaluation reserve or capital reserve unless free for distribution.
25% limit: Maximum buyback = 25% × (Total paid-up capital + Free reserves); For equity shares, the shares bought back in a year also cannot exceed 25% of the total paid-up equity capital.
2:1 debt-equity test: Debt after buyback ≤ 2 × (Paid-up capital + Free reserves, after buyback); Debt means secured and unsecured debts of the company. A different ratio applies only if the Government notifies it for a class of companies.
Maximum buyback under 2:1 test: Maximum buyback = Equity base − (Debt ÷ 2); Derived from: Equity after buyback ≥ Debt ÷ 2. Assumes buyback is paid from equity and debt stays unchanged.
Final maximum buyback: Lower of (25% limit) and (2:1 test limit); Both conditions must be satisfied, so the smaller figure is the cap.
Approval rule: Buyback ≤ 10% of (Paid-up equity capital + Free reserves): board resolution. More than 10% and up to 25%: special resolution.; Articles must authorise buyback in both cases. The 10% test uses paid-up equity capital, while the 25% test uses total paid-up capital. The bases differ if preference capital exists.
Timing rules: Complete within 12 months of resolution; gap of 1 year between buyback offers; destroy securities within 7 days of completion; 6-month bar on fresh issue of same kind (Section 70); Exceptions to the 6-month bar: bonus issue and discharge of a subsisting obligation.
Total buyback consideration: Number of shares × buyback price per share; This is the cash paid. Credit bank, debit the buyback account first.
Premium on buyback: (Buyback price − nominal value) × number of shares; Debit securities premium first if the question allows it, then the free reserves.
Capital Redemption Reserve: CRR = Nominal value of shares bought back − face value of fresh issue proceeds (if any); If there is no fresh issue, CRR = nominal value bought back. Section 69 requires this where buyback is out of free reserves or securities premium.
Buyback at par: Equity Share Capital Dr; To Bank; No premium. Still create CRR for the nominal value from free reserves.
Total hit on free reserves (no fresh issue): Premium not met from securities premium + CRR transfer; Use this to check that free reserves are sufficient.
Shares outstanding test: Maximum shares = 25% × total paid-up equity shares outstanding; Applies to equity shares bought back in a financial year. Round down to a whole share.
Resources test: Maximum buyback amount = 25% × (paid-up capital + free reserves); shares = amount ÷ buyback price per share; Free reserves include securities premium, general reserve and credit balance of profit and loss (as free). Revaluation reserve and capital reserves are not free.
Debt-equity test: Minimum equity after buyback = Loan funds ÷ 2; maximum buyback amount = (paid-up capital + free reserves now) − minimum equity after buyback; Loan funds must not exceed 2 times paid-up capital plus free reserves after the buyback. Divide the amount by price to get shares.
Number of shares to buy back: Least of the three test results; If the question gives a fixed number of shares, check it against each test instead of computing the maximum.
Buyback amount split: Total outgo = shares × buyback price; nominal value = shares × face value; premium = total outgo − nominal value; Share capital is debited with nominal value. Premium is charged to securities premium account first, then other free reserves.
CRR transfer: CRR = nominal value of shares bought back (if funded fully from free reserves or securities premium); CRR = nominal value − proceeds of fresh issue (if part funded by fresh issue); Never transfer the premium to CRR. If fresh proceeds are at least the nominal value, no CRR is needed.
Special resolution rule: Up to 10% of paid-up capital plus free reserves: Board resolution; above 10% and up to 25%: special resolution; The 10% board limit and the 25% overall limit are for the total amount of the buyback.

Quick revision

Buyback means a company buys its own shares or other specified securities, which are then extinguished.
Permitted sources: free reserves, securities premium account, or proceeds of a fresh issue of shares or other specified securities.
You cannot buy back out of the proceeds of an earlier issue of the same kind of shares or specified securities.
Buyback must be authorised by the articles. If the articles do not authorise it, the company must first alter them.
A buyback of up to 10% of the aggregate of paid-up equity capital and free reserves can be approved by a board resolution (Section 68(2)(b)), without a special resolution, provided the articles authorise the buyback. Above 10% and up to 25% of that aggregate, a special resolution is required. Authorisation by the articles is only one of the conditions.
Keep two 25% tests separate. Test 1: the total buyback cannot exceed 25% of the aggregate of paid-up capital and free reserves. Test 2: the buyback of equity shares in any financial year cannot exceed 25% of the total paid-up equity capital of the company. Apply both and take the lower result.
After the buyback, the debt (secured and unsecured) to equity (paid-up capital plus free reserves) ratio must not exceed 2:1.
Shares bought back must be fully paid up. This is only one of the conditions, so do not treat this list as the complete set.
After a buyback, the company cannot make a fresh issue of the same kind of shares or other specified securities for 6 months from completion of the buyback. Exceptions include bonus shares and discharge of subsisting obligations such as conversion of warrants, stock options, sweat equity, or conversion of preference shares or debentures into equity.
The gap between the closure of one buyback offer and the next buyback offer must be at least one year.
The company must extinguish and physically destroy the shares bought back within seven days of the last date of completion of the buyback.
Where the buyback is out of free reserves or securities premium, CRR equals the nominal value of shares bought back, and the transfer is made out of free reserves or the securities premium account (Section 69(1)).
If part of the buyback is funded by a fresh issue, CRR = nominal value of shares bought back less the proceeds (not the nominal value) of the fresh issue.
Premium on buyback may be adjusted against securities premium and/or free reserves, as the question directs. It need not be charged to securities premium first.
CRR can be used to issue fully paid bonus shares.

Common mistakes

Treating capital redemption reserve as free reserve. Fix: CRR is not available for distribution as dividend and cannot fund a buyback. Keep it out of free reserves.
Including revaluation reserve in free reserves. Fix: Unrealised gains are not free reserves. Exclude them.
Applying only the 25% limit and ignoring the 2:1 debt-equity test. Fix: Always compute both limits and pick the lower. Check the debt figure in the question.
Using debt ÷ equity before the buyback instead of after it. Fix: Test the ratio on post-buyback equity. Use the formula: maximum buyback = equity base − debt ÷ 2.
Forgetting to create CRR Fix: Make CRR the final step in your template. Before finishing, ask: did I transfer the nominal value to CRR?
Creating CRR on the total price instead of nominal value Fix: CRR is linked to nominal value only, never to the premium. Compute nominal value × number of shares.
Using only the 25% of capital and reserves test and ignoring the other two Fix: Always run all three tests and take the least. Write them as Test 1, 2 and 3 in your working note.
Excluding securities premium from free reserves in the tests Fix: For Section 68 limits, free reserves include securities premium. Add it with general reserve and profit and loss credit balance.

Exam tips

Questions often hide capital redemption reserve or revaluation reserve among the balances; strike them out first.
In theory answers, name all three sources and add the same-kind restriction. Examiners look for it.
Always compute total buyback cost using the buyback price, not face value.
Remember that securities premium is not part of free reserves; show it as a separate source line.
MCQs commonly test which item is not a permitted source; pick the option naming CRR or revaluation reserve.
In calculation questions, always show both limits (25% and 2:1) even if one is obviously lower. The examiner gives marks for each step.
Write the equity base as a working note and list each item you include. Show free reserves on their own lines, and include securities premium among them, since Section 2(43) treats it as a free reserve.
In theory questions, answer in the order: provision, facts, conclusion. Name the condition (for example, the 10% board resolution threshold), apply it to the numbers, then state whether the buyback is allowed.