Corporate Accounting and Auditing · Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares

Buy Back of Shares: Section 68 Conditions and Journal Entries

Updated 10 October 2026 · Fact-checked

Buy-back is a company purchasing its own shares or specified securities under section 68 of the Companies Act, 2013. To solve a problem, find the permitted maximum, pay out of free reserves, securities premium or fresh issue proceeds, cancel the shares, and transfer the nominal value bought back to Capital Redemption Reserve under section 69.

Understand Buy-back of Shares

A buy-back means a company buys its own shares or other specified securities from its shareholders and cancels them. Cash leaves the company, and share capital shrinks. Because creditors rely on capital, the law limits how much can be bought and from which funds.

Section 68(1) allows buy-back out of three sources: free reserves, the securities premium account, or the proceeds of a fresh issue of shares or other specified securities. There is a proviso: no buy-back of any kind of shares or securities can be made out of the proceeds of an earlier issue of the same kind. Explanation II to section 68 says free reserves include the securities premium account.

Section 68(2) sets the conditions. The articles must authorise it. A special resolution at a general meeting is needed, unless the buy-back is ten per cent or less of total paid-up equity capital and free reserves and the Board has authorised it by a resolution at its meeting. The buy-back must be 25% or less of the aggregate of paid-up capital and free reserves. For equity shares in a financial year, the 25% is applied to total paid-up equity capital of that year. Debts after buy-back must not exceed twice the paid-up capital and free reserves, unless the Central Government notifies a higher ratio for a class of companies. All shares must be fully paid-up.

Timelines matter too. The buy-back must be completed within one year of the resolution. No new offer can be made within one year from the closure of the preceding offer. Shares must be extinguished and physically destroyed within seven days of completion. After completion, the company cannot make a further issue of the same kind of shares for six months, except by bonus issue or to discharge subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures.

Section 69 protects creditors. When shares are bought out of free reserves or securities premium, a sum equal to the nominal value of the shares bought back goes to the Capital Redemption Reserve (CRR). CRR can later be used only to issue fully paid bonus shares. If the buy-back is out of fresh issue proceeds, no CRR transfer is needed.

Key rules to remember

Overall limit (all securities): Maximum buy-back ≤ 25% × (paid-up capital + free reserves); Section 68(2)(c). For equity shares in a year, the 25% applies to total paid-up equity capital of that year as the proviso states. Free reserves include securities premium.
Debt-equity test: (Secured + unsecured debts after buy-back) ≤ 2 × (paid-up capital + free reserves after buy-back); Section 68(2)(d). Recompute capital and reserves after the buy-back. A higher ratio applies only if the Central Government notifies it for a class of companies.
Board-only route: Buy-back ≤ 10% × (paid-up equity capital + free reserves), with Board resolution; Proviso to section 68(2)(b). Above this, a special resolution is needed.
CRR transfer: CRR = Nominal value of shares bought back (out of free reserves or securities premium); Section 69(1). Use nominal value, not the buy-back price.
Buy-back cost: Total payment = Number of shares × buy-back price per share; Premium = buy-back price − nominal value. Premium is charged to securities premium or free reserves.
Key time limits: Complete within 1 year; destroy shares within 7 days; return within 30 days; no new offer for 1 year; no further issue for 6 months; Sections 68(2) proviso, 68(4), 68(7), 68(10) and 68(8).

How to solve Buy-back of Shares questions

Use this order for any buy-back question, whether it asks for journal entries, a legal test or the revised balance sheet.

1Write the balances: paid-up equity capital, securities premium, general reserve, profit and loss balance, other free reserves, and debts. Note which reserves are free (distributable).
2Compute the maximum: 25% of (paid-up capital + free reserves), and the equity-share cap of 25% of paid-up equity capital. Take the lower if both apply. Check the 10% Board-only limit if the question asks about the resolution.
3Run the debt-equity test after buy-back: debts ≤ 2 × (capital + free reserves after the buy-back). Check that shares are fully paid.
4Compute the buy-back cost: shares × price. Split it into nominal value and premium.
5If funded by a fresh issue, record the issue first. Then pass the buy-back entries.
6Pass entries: Dr Equity Share Capital (nominal), Dr Securities Premium or other reserve (premium), Cr Bank (total). Then transfer to CRR from free reserves (usually general reserve or profit and loss) equal to the nominal value less any fresh issue of the same kind.
7Show the revised balance sheet figures, and write one line on legal compliance (limits, timelines, one-year gap).

Quickest way: Fast check and entry routine

When to use it: Use this in a time-bound problem where you must show entries and a limit test quickly.

Compute the 25% limit first. If the buy-back exceeds it, the answer is: not permitted, state the maximum shares allowed.
Compute shares allowed = limit ÷ buy-back price, using equity capital as the base if the question buys equity shares.
Post one three-line entry: Dr Share Capital, Dr Premium source, Cr Bank.
CRR = nominal value bought back. Debit the free reserve you choose, as the question states. Do not use the premium amount.
Update the balance sheet by changing only share capital, reserves, and bank/cash, and check that totals still match.

Common mistakes in Buy-back of Shares

Transferring the buy-back price or premium to CRR.
Students confuse CRR with the total payment.
Fix: Transfer only the nominal value of shares bought back (section 69(1)).
Applying 25% to equity capital alone and ignoring free reserves, or the reverse.
The proviso about equity shares is half remembered.
Fix: Test both: 25% of (paid-up capital + free reserves) overall, and for equity shares 25% of total paid-up equity capital in that year. The permitted limit is the lower of the two.
Testing debt-equity before the buy-back.
Students use the given balance sheet figures directly.
Fix: Section 68(2)(d) speaks of debts after buy-back. Reduce capital and reserves for the buy-back and then check debt ≤ 2 × the new total.
Creating CRR even when the buy-back is funded wholly by a fresh issue of the same kind.
Students remember CRR for every buy-back.
Fix: Section 69 applies when shares are bought out of free reserves or securities premium. If the money came from fresh issue proceeds, only the part funded from reserves needs CRR. Note that buy-back cannot be out of earlier issue of the same kind.
Forgetting the time rules: one-year completion, seven-day destruction, one-year gap between offers, six-month bar on fresh issue.
These look like theory points and students skip them.
Fix: Keep a one-line list of time limits. Write the relevant ones in theory answers or the compliance note.
Ignoring section 70 prohibitions, such as default in repaying deposits or paying dividend.
Students focus on section 68 only.
Fix: Add a check: no buy-back through a subsidiary or investment company, or while in default. A default can be cured and then a three-year period must lapse.

Worked examples

Example 1

Aarav Ltd has 4,00,000 equity shares of ₹10 each fully paid (₹40,00,000), securities premium ₹6,00,000, general reserve ₹14,00,000 and profit and loss balance ₹10,00,000. It buys back 60,000 shares at ₹15 each, paying from free reserves and securities premium. Check the 25% limit and pass the entries. Premium is to be taken first from securities premium.

Show the solution

Free reserves = 6,00,000 + 14,00,000 + 10,00,000 = ₹30,00,000.
Paid-up capital + free reserves = 40,00,000 + 30,00,000 = ₹70,00,000. 25% = ₹17,50,000.
Equity cap: 25% of paid-up equity capital = 25% × 40,00,000 = ₹10,00,000.
Buy-back: 60,000 × ₹15 = ₹9,00,000, which is within ₹10,00,000 and ₹17,50,000. Within the limit.
Nominal value = 60,000 × 10 = ₹6,00,000. Premium = 60,000 × 5 = ₹3,00,000.
Entry 1: Equity Share Capital A/c Dr 6,00,000; Securities Premium A/c Dr 3,00,000; to Bank A/c 9,00,000.
CRR transfer = nominal value ₹6,00,000. Entry 2: General Reserve A/c Dr 6,00,000; to Capital Redemption Reserve A/c 6,00,000.
Revised: Equity capital ₹34,00,000; securities premium ₹3,00,000; general reserve ₹8,00,000; CRR ₹6,00,000; profit and loss ₹10,00,000.

Answer: The buy-back of ₹9,00,000 is within the limits. Entries: Dr Share Capital 6,00,000 and Securities Premium 3,00,000, Cr Bank 9,00,000; then Dr General Reserve 6,00,000, Cr CRR 6,00,000.

Example 2

Meera Ltd has 1,00,000 equity shares of ₹10 each (₹10,00,000) and free reserves of ₹8,00,000. It wants to buy back 30,000 shares at ₹12 each, paying wholly from free reserves. Debts are ₹20,00,000. Can the company do it? If not, what is the maximum number of shares it can buy back, and does that number pass the debt test?

Show the solution

Paid-up capital + free reserves = 10,00,000 + 8,00,000 = ₹18,00,000.
Overall 25% limit = 25% × 18,00,000 = ₹4,50,000.
Equity cap: 25% × paid-up equity capital = 25% × 10,00,000 = ₹2,50,000.
The lower limit, ₹2,50,000, governs.
Proposed buy-back = 30,000 × 12 = ₹3,60,000. This exceeds ₹2,50,000, so the proposal is not permitted.
Maximum shares = 2,50,000 ÷ 12 = 20,833.33, so 20,833 whole shares.
Payment = 20,833 × 12 = ₹2,49,996. Nominal value = 20,833 × 10 = ₹2,08,330. Premium = 20,833 × 2 = ₹41,666.
Entry 1: Equity Share Capital A/c Dr 2,08,330; Free Reserves A/c Dr 41,666; to Bank A/c 2,49,996.
CRR transfer = nominal value ₹2,08,330. Entry 2: Free Reserves A/c Dr 2,08,330; to Capital Redemption Reserve A/c 2,08,330.
After the buy-back: paid-up capital = 10,00,000 − 2,08,330 = ₹7,91,670. Free reserves = 8,00,000 − 41,666 − 2,08,330 = ₹5,50,004. CRR = ₹2,08,330.
Debt test (section 68(2)(d)), using capital and free reserves only: 7,91,670 + 5,50,004 = ₹13,41,674. Twice this = ₹26,83,348.
Debts of ₹20,00,000 are not more than ₹26,83,348, so the test is passed. It is also passed if CRR is included: 2 × 15,50,004 = ₹31,00,008.

Answer: The proposed buy-back of 30,000 shares (₹3,60,000) is not permitted because it exceeds the ₹2,50,000 equity cap. The maximum is 20,833 shares, costing ₹2,49,996. The debt test is passed, since debts of ₹20,00,000 are within 2 × (capital + free reserves) = ₹26,83,348. CRR of ₹2,08,330 is created.

Exam tips

Write the limit working in a small table before the entries. The calculation earns step marks even if the final entry has an error.
In MCQs, check the 25% limit and the nominal-value CRR transfer first. These are the usual traps.
State the source of funds in the entry narration: free reserves, securities premium or fresh issue.
In theory answers, list conditions as short numbered points: authorisation, special resolution, 25%, 2:1 debt ratio, fully paid, one-year completion.
Mention section 70 prohibitions when a question gives a default in dividend, deposits or loans.

Practice questions from Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares

Buy-back of Shares in other exams

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

Buy-back of Shares: frequently asked questions

What is the maximum buy-back allowed under section 68?

The buy-back must be 25% or less of the aggregate of paid-up capital and free reserves. For equity shares in a financial year, the 25% is measured against total paid-up equity capital of that year. Take the lower figure when both apply.

How much should be transferred to Capital Redemption Reserve?

Transfer a sum equal to the nominal value of the shares bought back when the buy-back is out of free reserves or securities premium. The premium paid is not transferred. Under section 69, CRR can be used only to issue fully paid bonus shares.

Is a special resolution always needed for buy-back?

No. If the buy-back is ten per cent or less of total paid-up equity capital and free reserves, a Board resolution passed at its meeting is enough. Otherwise a special resolution at a general meeting is needed. The articles must also authorise the buy-back.

Within what time must the bought-back shares be destroyed?

The shares must be extinguished and physically destroyed within seven days of the last date of completion of the buy-back. The buy-back itself must be completed within one year of the resolution date.