CA Intermediate · Advanced Accounting

Buyback of Securities: CA Intermediate Advanced Accounting Chapter Guide

Buyback of securities is when a company buys back its own shares or other specified securities from holders, paid for out of free reserves, securities premium or proceeds of a fresh issue. To solve it, check the Section 68 limits, pass the entries, transfer to Capital Redemption Reserve, then redraw the balance sheet.

What this chapter covers

Buyback of Securities deals with a company purchasing its own shares or other specified securities and cancelling them. The company pays cash to shareholders, so its capital shrinks. The law allows this only from certain sources and within limits, so that creditors are not harmed.

The chapter has two sides. The legal side is Section 68 of the Companies Act, 2013 and the related rules: the sources of funds, the ceilings on the quantum, the debt-equity test and the conditions to follow. The accounting side is the journal entries, the transfer to Capital Redemption Reserve (CRR), and the balance sheet after the buyback.

This chapter sits with the company accounts block of Advanced Accounting. It builds on share capital, reserves and surplus, and the Schedule III balance sheet format. It also links to redemption of preference shares, because both use CRR and the same idea of protecting capital. Once you are comfortable here, the numerical questions are mostly mechanical.

Buyback is a compact chapter with a clear pattern, so it is easy to turn into marks once you practise. A typical question asks you to check the permitted buyback, pass the entries, and show the balance sheet. You earn step marks for each stage, and the MCQs often test the limits and the CRR amount. Because the logic is the same every time, a few days of focused practice can make this a reliable scoring chapter.

Buyback of Securities: topics in the order to study them

1Buyback of Securities: Meaning and Sources of FundsStart with what a buyback is and where the money may come from, because every later rule and entry depends on the source used.
2Conditions and Legal Provisions under Section 68Next learn the limits and conditions, since you need them to decide how many shares can be bought back in a question.
3Accounting Entries for Buyback and Capital Redemption ReserveOnce you know what is allowed, learn how to record it, including the CRR transfer that depends on the source of funds.
4Buyback Calculations and Post-Buyback Balance SheetFinish with full numericals that combine the limits, entries and revised balance sheet, which is how the exam tests the chapter.

How to prepare Buyback of Securities

Treat this chapter as a fixed sequence: check the limits, find the funds, pass the entries, then redraw the balance sheet. Practise that sequence until it is automatic.

Read the meaning and the permitted sources of funds, and write them in your own words from memory.
Learn the Section 68 conditions and the limits on the buyback amount and number of shares. Write each limit as a one-line test you can apply.
Learn the entries in order: payment on buyback, cancellation of shares, premium paid on buyback, and the transfer to CRR. Know which account the premium is charged to.
Practise the CRR amount: under Section 69(1), where shares are bought back out of free reserves or securities premium, a sum equal to the nominal value of the shares bought back is transferred to CRR. The transfer is made out of free reserves or the securities premium account. If part of the buyback is funded by a fresh issue of shares, CRR equals the nominal value of shares bought back less the proceeds (not the nominal value) of that fresh issue. Understand why it is needed.
Solve numericals that ask for the maximum buyback first. Apply every limit, then take the lowest result.
Redraw the balance sheet after the buyback using the Schedule III headings. Check that it still balances.
Finish with MCQs on conditions and limits, since they need no working but need exact recall.

Common mistakes in Buyback of Securities

Crediting the whole buyback price to CRR instead of only the nominal value.
Fix: Remember that CRR replaces the capital that has been extinguished. Take the nominal value of the shares bought back, less the proceeds of any fresh issue made for the buyback.
Applying only one limit and ignoring the others when finding the maximum buyback.
Fix: Run every test, including the amount limit, the share-count limit and the debt-equity test. The answer is the lowest result.
Charging the premium on buyback to the wrong account.
Fix: Charge the premium to securities premium and/or free reserves, as the question directs. Do not assume securities premium must be used first. Show the entry clearly.
Using a source that is not allowed, such as a prior issue of the same kind of shares.
Fix: List the sources and the restriction beside each question. Check the source before computing.
Showing an incorrect post-buyback balance sheet that does not balance.
Fix: After the entries, update each line and check that totals agree. Review every reserve and capital line.
Writing long legal theory without applying it to the facts in the question.
Fix: Use a provision-facts-conclusion format. State the rule, apply the given figures, and give a clear conclusion.

Last-day revision: Buyback of Securities

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.

Buyback of Securities practice questions

Buyback of Securities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Buyback of Securities: frequently asked questions

Is Buyback of Securities mostly theory or numericals?

It is both. The legal conditions are tested in MCQs and short answers, while numericals ask for the maximum buyback, entries and the balance sheet. Prepare both sides together.

How much time should I give this chapter?

It is a small chapter. A few focused sessions are usually enough for the concepts, followed by practice on numericals. Revise it close to the exam because the limits need exact recall.

Why is Capital Redemption Reserve created in a buyback?

It protects creditors by keeping an amount equal to the capital extinguished in a reserve with restricted use. This means the company cannot pay it out as dividend.

Do I need to memorise the Section 68 limits?

Yes, because MCQs and numericals use them directly. Learn them as short tests and check the current provisions in your study material before the exam.