Advanced Accounting · Buyback of Securities

Buyback Calculations and Post-Buyback Balance Sheet

Updated 4 October 2026 · Fact-checked

Buyback calculations find the maximum shares a company can repurchase. That is the least of three limits: 25% of shares outstanding, 25% of paid-up capital plus free reserves, and the 2:1 debt-equity cap. You then pass entries, fund the premium from free reserves or securities premium, transfer to CRR, and redraw the balance sheet.

Understand Buyback Calculations and Post-Buyback Balance Sheet

A buyback is when a company buys its own shares or other specified securities from its holders and cancels them. It is allowed only under Section 68 of the Companies Act, 2013, and only if the company stays within set limits. Exam problems test whether you can check those limits and then show the effect on the balance sheet.

Three limits matter in numerical problems. First, the number of equity shares bought back in a year cannot exceed 25% of the total paid-up equity shares. Second, the total buyback amount cannot exceed 25% of the total paid-up capital plus free reserves. Third, after the buyback, loan funds cannot be more than twice the paid-up capital plus free reserves. Free reserves include the securities premium account for this purpose. Your answer is the lowest number of shares from the three tests.

The money can come from free reserves, the securities premium account, or the proceeds of an earlier fresh issue of shares or other specified securities. You cannot fund the buyback of a kind of shares from the proceeds of a fresh issue of the same kind. For example, equity shares cannot be bought back out of a fresh equity issue.

The Capital Redemption Reserve (CRR) protects creditors. If the buyback is paid out of free reserves or securities premium, an amount equal to the nominal value of the shares bought back must be moved to CRR. If fresh shares are issued to fund the buyback, only the shortfall needs to go to CRR. The shortfall is the nominal value of shares bought back minus the proceeds of the fresh issue. The premium paid is not part of the CRR transfer. It is charged to securities premium or free reserves.

Finally, share capital falls by the nominal value bought back, reserves fall by the premium and the CRR transfer, and cash falls by the full price paid. The balance sheet must still balance.

Key rules to remember

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.

How to solve Buyback Calculations and Post-Buyback Balance Sheet questions

Use the same order for every buyback problem. Do the tests first, then the entries, then the balance sheet.

1Write the data you need: shares outstanding, face value, buyback price, paid-up capital, each reserve, and loan funds.
2Find free reserves. Include securities premium, general reserve and profit and loss credit balance. Exclude capital reserve and revaluation reserve unless the question says they are free.
3Run the three tests: shares outstanding, resources, and debt-equity. Convert each amount to shares by dividing by the buyback price, and round down.
4Take the least of the three. If a fixed number of shares is given, check that it does not exceed this limit. If it does, state that the buyback cannot be done in full and use the permitted number.
5Compute nominal value, premium and total outgo. Decide the source: any fresh issue first (of a different kind of security), then securities premium for the premium, then other free reserves.
6Pass the entries: issue of fresh shares if any, buyback payment, and the CRR transfer. Remember the shortfall rule for CRR.
7Redraw the balance sheet: reduce share capital by nominal value, add CRR, reduce reserves used, reduce cash by the full outgo, add any fresh issue.
8Check that total equity and liabilities equals total assets. Show working notes for the tests and the reserves.

Quickest way: Three-test shortcut and balance sheet check

When to use it: Use this for both MCQs and long written problems when time is short.

MCQs: compute only the shares test first (25% of shares) and the resources test (25% of capital plus free reserves). The debt-equity test usually matters only when loans are large. Eliminate options above the lowest result.
Check the debt-equity test quickly: minimum equity after buyback = loans ÷ 2. If current equity minus this is larger than the buyback, it does not bind.
CRR in one line: nominal value bought back, less fresh issue proceeds if any. If an option adds the premium to CRR, it is wrong.
Total outgo reduces cash. Shares times face value reduces capital. The balance of the outgo reduces reserves. Together with the CRR transfer, reserves fall by outgo minus nominal plus CRR when CRR equals nominal.
Written answers: show three small working notes (tests, calculation of amounts, reserves), then entries, then the balance sheet. Each part earns separate marks.
Last check: total of the equity and liabilities side equals total assets after the buyback.

Common mistakes in Buyback Calculations and Post-Buyback Balance Sheet

Using only the 25% of capital and reserves test and ignoring the other two
It is the most remembered rule, so students stop after one test.
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
Students treat securities premium as a capital item.
Fix: For Section 68 limits, free reserves include securities premium. Add it with general reserve and profit and loss credit balance.
Transferring the premium to CRR as well
Students transfer the total buyback amount instead of only the nominal value.
Fix: CRR equals only the nominal value of shares bought back (or the shortfall). The premium is charged to securities premium or free reserves.
Forgetting the shortfall rule when fresh shares are issued
Students always transfer the full nominal value.
Fix: Transfer nominal value minus fresh issue proceeds. If proceeds are at least the nominal value, no CRR transfer is needed.
Funding an equity buyback from a fresh issue of equity shares
Students see 'proceeds of fresh issue' as an allowed source and ignore the same-kind restriction.
Fix: The fresh issue must be of a different kind of security, for example preference shares for an equity buyback.
Rounding the number of shares up
A fraction like 3,33,333.33 looks like it should round to 3,33,334.
Fix: Round down. Rounding up would breach the permitted limit.

Worked examples

Example 1

The balance sheet of Alpha Ltd shows: 10,00,000 equity shares of ₹10 each fully paid ₹1,00,00,000; securities premium ₹10,00,000; general reserve ₹60,00,000; profit and loss account ₹30,00,000; loan funds ₹1,20,00,000. Assets: fixed assets ₹2,00,00,000; bank ₹50,00,000; other current assets ₹70,00,000. The company wants to buy back the maximum number of shares at ₹15 per share. Find the permitted number of shares and show the balance sheet after the buyback. Premium is to be adjusted against securities premium first. Treat all reserves shown as free.

Show the solution

Paid-up capital plus free reserves = 1,00,00,000 + 10,00,000 + 60,00,000 + 30,00,000 = ₹2,00,00,000.
Test 1, shares outstanding: 25% × 10,00,000 = 2,50,000 shares.
Test 2, resources: 25% × 2,00,00,000 = ₹50,00,000; ÷ ₹15 = 3,33,333 shares (rounded down).
Test 3, debt-equity: minimum equity after buyback = 1,20,00,000 ÷ 2 = ₹60,00,000. Maximum buyback amount = 2,00,00,000 − 60,00,000 = ₹1,40,00,000; ÷ ₹15 = 9,33,333 shares.
Least of the three = 2,50,000 shares.
Total outgo = 2,50,000 × 15 = ₹37,50,000. Nominal value = 2,50,000 × 10 = ₹25,00,000. Premium = ₹12,50,000.
Entry 1: Equity share capital A/c Dr 25,00,000; Securities premium A/c Dr 10,00,000; General reserve A/c Dr 2,50,000; To Bank A/c 37,50,000.
Entry 2: General reserve A/c Dr 25,00,000; To Capital redemption reserve A/c 25,00,000.
General reserve after = 60,00,000 − 2,50,000 − 25,00,000 = ₹32,50,000. Securities premium = nil. Bank = 50,00,000 − 37,50,000 = ₹12,50,000.
Balance sheet after buyback. Equity and liabilities: share capital (7,50,000 shares of ₹10) ₹75,00,000; reserves and surplus: CRR ₹25,00,000, general reserve ₹32,50,000, profit and loss ₹30,00,000 (total ₹87,50,000); loan funds ₹1,20,00,000. Total ₹2,82,50,000. Assets: fixed assets ₹2,00,00,000; bank ₹12,50,000; other current assets ₹70,00,000. Total ₹2,82,50,000.

Answer: Maximum shares that can be bought back: 2,50,000 (limited by the 25% shares test). Total outgo ₹37,50,000. CRR ₹25,00,000. Balance sheet total after buyback ₹2,82,50,000.

Example 2

Beta Ltd has 1,00,000 equity shares of ₹10 each fully paid (₹10,00,000), securities premium ₹30,000, general reserve ₹3,00,000, profit and loss account ₹1,00,000, and loan funds ₹2,00,000. Assets: fixed assets ₹10,00,000; other current assets ₹4,00,000; bank ₹2,30,000. The company buys back 10,000 equity shares at ₹15 each. To part-fund this, it first issues 6,000 preference shares of ₹10 each at par. Premium is adjusted against securities premium first. Show the buyback is permitted and prepare the balance sheet after the buyback.

Show the solution

Free reserves = 30,000 + 3,00,000 + 1,00,000 = ₹4,30,000. Capital plus free reserves = 10,00,000 + 4,30,000 = ₹14,30,000.
Test 1: 25% × 1,00,000 = 25,000 shares. Proposed 10,000 is within the limit.
Test 2: 25% × 14,30,000 = ₹3,57,500. Buyback outgo is 10,000 × 15 = ₹1,50,000, which is within the limit.
Test 3: after buyback, equity (capital plus free reserves) is well above ₹1,00,000 (half of loan funds ₹2,00,000), so loans are within 2 times equity.
Nominal value = 10,000 × 10 = ₹1,00,000. Premium = 1,50,000 − 1,00,000 = ₹50,000. Fresh issue proceeds = 6,000 × 10 = ₹60,000, which is a different kind of security (preference).
Entry 1: Bank A/c Dr 60,000; To Preference share capital A/c 60,000.
Entry 2: Equity share capital A/c Dr 1,00,000; Securities premium A/c Dr 30,000; General reserve A/c Dr 20,000; To Bank A/c 1,50,000.
CRR = nominal value − fresh issue proceeds = 1,00,000 − 60,000 = ₹40,000. Entry 3: General reserve A/c Dr 40,000; To Capital redemption reserve A/c 40,000.
General reserve after = 3,00,000 − 20,000 − 40,000 = ₹2,40,000. Bank = 2,30,000 + 60,000 − 1,50,000 = ₹1,40,000.
Balance sheet after buyback. Equity and liabilities: equity share capital (90,000 shares) ₹9,00,000; preference share capital ₹60,000; reserves: CRR ₹40,000, general reserve ₹2,40,000, profit and loss ₹1,00,000 (total ₹3,80,000); loan funds ₹2,00,000. Total ₹15,40,000. Assets: fixed assets ₹10,00,000; other current assets ₹4,00,000; bank ₹1,40,000. Total ₹15,40,000.

Answer: The buyback is permitted. CRR transfer is ₹40,000 (the shortfall). Balance sheet total after buyback is ₹15,40,000.

Exam tips

In RTP and MTP style questions, the data is usually built so one test clearly binds. Compute all three, but expect the shares test or the debt-equity test to be the least.
If a question states a fixed number of shares to be bought back, check it against each test. If it breaches one, say so and use the permitted number.
Always mention the source of funds in a one-line note. Examiners give marks for stating that premium comes from securities premium or free reserves, and CRR equals the nominal value.
Show a working note for free reserves, a working note for the three tests and the journal entries before the balance sheet. A wrong final total still earns step marks.
For MCQs, round shares down and watch whether the question asks for the number of shares, the amount, or the CRR. Many wrong options are the answers to the other two.

Practice questions from Buyback of Securities

Buyback Calculations and Post-Buyback Balance Sheet in other exams

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

Buyback Calculations and Post-Buyback Balance Sheet: frequently asked questions

How do I calculate the number of shares that can be bought back?

Run three tests: 25% of equity shares outstanding, 25% of paid-up capital plus free reserves divided by the buyback price, and the debt-equity limit of 2:1 after buyback. Take the lowest number of shares. Round down to a whole share.

What is the difference between buyback and redemption of shares?

Redemption normally applies to preference shares and is done as per the terms of issue, out of profits or fresh issue proceeds. Buyback is the company repurchasing its own shares, including equity, under Section 68 with limits on the quantity and funding. Both transfer an amount to CRR when paid out of profits or reserves. In a buyback, the premium is charged to securities premium or free reserves.

When is CRR not required in a buyback?

CRR is needed only to the extent the buyback is funded out of free reserves or securities premium. If the fresh issue proceeds equal or exceed the nominal value of the shares bought back, no CRR transfer is needed. If the proceeds are less, you transfer the shortfall.

Can the premium on buyback be paid out of securities premium?

Yes. Securities premium is a permitted source for the buyback. In problems, charge the premium to securities premium first and then to other free reserves, unless the question says otherwise.