Corporate Accounting and Financial Management · Related Aspects of Company Accounts

Accounting for Buy-back of Securities: Entries and Limits

Updated 11 October 2026 · Fact-checked

Buy-back is a company purchasing its own shares or specified securities out of free reserves, securities premium or fresh-issue proceeds. To solve a question, check the Section 68 limits, debit share capital and premium or reserves, credit bank, then transfer the nominal value bought back to Capital Redemption Reserve under Section 69.

Understand Accounting for Buy-back of Securities

A company can buy back its own shares. This shrinks its share capital and returns cash to shareholders. Because creditors rely on the capital, the law lets the company pay only from certain sources and sets strict limits.

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

Section 68(2) sets the conditions. The articles must authorise it. A special resolution is needed in general meeting, unless the buy-back is 10% or less of total paid-up equity capital and free reserves and the Board authorises 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 paid-up capital plus free reserves. All shares must be fully paid-up. Listed securities follow SEBI regulations. No fresh offer of buy-back can be made within one year of the closure of the preceding offer.

Section 70 lists the prohibitions. A company cannot buy back through a subsidiary or an investment company. It cannot buy back if it is in default on deposits, interest, redemption of debentures or preference shares, dividend, or term loans, unless the default is remedied and three years have passed after it ended. It also cannot buy back if it has not complied with sections 92, 123, 127 and 129.

Section 69 protects creditors. When 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 the Capital Redemption Reserve (CRR). If the buy-back is funded from a fresh issue, no CRR transfer is needed. CRR can later be used only to issue fully paid bonus shares.

Key rules to remember

Overall limit: Maximum buy-back ≤ 25% × (paid-up capital + free reserves); Section 68(2)(c). For equity shares, the 25% is applied to total paid-up equity capital in that financial year, as the proviso states.
Board-approval limit: Buy-back ≤ 10% × (paid-up equity capital + free reserves); Board resolution at a meeting is enough only up to this limit. Above it, a special resolution is needed.
Debt-equity test: Total secured + unsecured debts after buy-back ≤ 2 × (paid-up capital + free reserves after buy-back); Section 68(2)(d). Central Government may notify a higher ratio for a class of companies. Compute reserves after the buy-back.
CRR transfer: CRR = nominal value of shares bought back out of free reserves or securities premium; Section 69(1). Not the buy-back price. Not needed to the extent paid from a fresh issue.
Time rules: Complete within 1 year; destroy shares within 7 days; no new issue for 6 months; return within 30 days; no new offer for 1 year; Sections 68(4), 68(7), 68(8), 68(10) and the proviso to 68(2).
Penalty: Fine ₹1,00,000 to ₹3,00,000 on company and on each officer in default; Section 68(11) as amended in 2020.

How to solve Accounting for Buy-back of Securities questions

Use this order for any buy-back question. Do the legal tests first, then the entries.

1Write the data: paid-up capital, free reserves (including securities premium), debts, shares to be bought and price.
2Check eligibility: authorised by articles, shares fully paid, no Section 70 default or prohibition.
3Compute the 25% limit on capital plus free reserves. For equity shares, also check 25% of paid-up equity capital.
4Check the debt test: debts after buy-back must be at most twice (capital + free reserves after buy-back).
5Decide the approval: Board resolution if 10% or less, else special resolution.
6Work out the cost: shares × price. Split into nominal value and premium.
7Pass entries: pay the cost, then cancel capital and premium, then transfer nominal value to CRR from the right reserves.
8Show the revised balance sheet extract if asked, with CRR and the reduced reserves.

Quickest way: Limit table in three lines

When to use it: When the question asks how many shares can be bought back, or whether a proposed buy-back is permitted.

Compute 25% × (capital + free reserves) and 25% × equity capital. Take the lower for equity shares.
Compute the debt ceiling: 2 × (capital + free reserves) minus actual debts after buy-back. Check it is not exceeded, noting that reserves and capital both fall by the cost.
Divide the permitted amount by the buy-back price per share, and round down to whole shares.

Common mistakes in Accounting for Buy-back of Securities

Transferring the buy-back price to CRR instead of the nominal value.
Students mix up the amount paid with the amount of capital cancelled.
Fix: CRR equals only the nominal value of shares bought back out of free reserves or securities premium.
Using capital and reserves before the buy-back in the debt test.
The words 'after buy-back' are overlooked.
Fix: Section 68(2)(d) says debts after buy-back. Reduce capital and free reserves by the buy-back cost, then multiply by two.
Treating revaluation or capital reserve as free reserves.
Every reserve looks the same on the balance sheet.
Fix: Use only reserves available for dividend, plus securities premium. Leave out revaluation and capital reserves.
Missing the CRR rule when buy-back is funded from a fresh issue.
Students apply the transfer automatically.
Fix: Section 69 applies only to buy-back out of free reserves or securities premium. Transfer for the part paid from a fresh issue is not required.
Ignoring the Board-resolution proviso and always asking for a special resolution.
Students remember clause (b) but forget its proviso.
Fix: Check the 10% test. Within it, a Board resolution at a meeting is enough.
Debiting securities premium for the buy-back premium without checking which source the question gives.
Students forget that securities premium is part of free reserves and treat the two as unrelated.
Fix: Securities premium is part of free reserves, so the premium on buy-back may be met from securities premium or other free reserves, as the question specifies.

Worked examples

Example 1

Aarav Ltd has 1,00,000 equity shares of ₹10 each fully paid (₹10,00,000), securities premium ₹2,00,000 and general reserve ₹8,00,000. Total debt is ₹5,00,000. The company buys back 20,000 shares at ₹15 each, using securities premium for the premium and general reserve for the rest. Check the limits and pass the entries.

Show the solution

Free reserves including securities premium = 2,00,000 + 8,00,000 = ₹10,00,000. Capital plus free reserves = ₹20,00,000.
25% limit = ₹5,00,000. Buy-back cost is ₹3,00,000 (step 3), which is within ₹5,00,000, so the overall limit is satisfied.
Equity capital limit = 25% × 10,00,000 = ₹2,50,000 nominal, i.e. 25,000 shares. Buy-back is 20,000 shares, so it is within the equity-share limit.
Buy-back cost = 20,000 × 15 = ₹3,00,000. Nominal value = 20,000 × 10 = ₹2,00,000. Premium = ₹1,00,000.
Debt test: capital after = 10,00,000 − 2,00,000 = 8,00,000. Free reserves after = securities premium (2,00,000 − 1,00,000 = 1,00,000) + general reserve (8,00,000 − 2,00,000 CRR transfer = 6,00,000) = 7,00,000. Capital plus free reserves = 8,00,000 + 7,00,000 = 15,00,000. Twice = ₹30,00,000. Debt ₹5,00,000 is within it.
Ten per cent test: 10% × 20,00,000 = ₹2,00,000. Cost ₹3,00,000 is above it, so a special resolution is needed.
Entry 1: Buy-back account Dr 3,00,000 to Bank 3,00,000.
Entry 2: Equity share capital Dr 2,00,000, Securities premium Dr 1,00,000 to Buy-back account 3,00,000.
Entry 3: General reserve Dr 2,00,000 to Capital redemption reserve 2,00,000 (Section 69).

Answer: The buy-back is permitted. A special resolution is required. CRR of ₹2,00,000 is created from general reserve.

Example 2

Meera Ltd has 50,000 equity shares of ₹10 each fully paid and free reserves of ₹3,00,000. It wants to buy back shares at ₹12 each. Debts are ₹4,00,000. Find the maximum number of shares it can buy back, by the 25% tests and the debt test.

Show the solution

Capital plus free reserves = 5,00,000 + 3,00,000 = ₹8,00,000.
25% of ₹8,00,000 = ₹2,00,000 maximum cost. At ₹12 per share this allows 2,00,000 ÷ 12 = 16,666 shares (rounded down).
Equity capital test: 25% × 5,00,000 = ₹1,25,000 nominal = 12,500 shares.
The equity capital test is lower, so the cap from the 25% tests is 12,500 shares. Cost = 12,500 × 12 = ₹1,50,000, within the ₹2,00,000 limit.
Debt test maximum: for n shares, capital falls by 10n and free reserves fall by 12n (premium 2n plus CRR transfer 10n), so capital plus free reserves after = 8,00,000 − 22n. We need 2 × (8,00,000 − 22n) ≥ 4,00,000, so 8,00,000 − 22n ≥ 2,00,000, so n ≤ 6,00,000 ÷ 22 = 27,272 shares (rounded down). The debt test is not the binding limit.
Check at 12,500 shares: capital after = 5,00,000 − 1,25,000 = 3,75,000. Premium 25,000 (12,500 × 2) and CRR transfer 1,25,000 both come out of free reserves, leaving 3,00,000 − 25,000 − 1,25,000 = 1,50,000. Total = 3,75,000 + 1,50,000 = 5,25,000. Twice = 10,50,000, which is at least the debt of 4,00,000.

Answer: Maximum 12,500 shares, costing ₹1,50,000. The equity capital test is the binding limit; the debt test would allow up to 27,272 shares and is satisfied.

Exam tips

Write the section number beside each condition. ICSI answers earn marks for provision, application and conclusion.
Always end a limit question with a clear line: permitted or not permitted, and why.
Show the CRR entry separately. It is a frequent scoring point.
State the time rules in theory answers: one year to complete, seven days to destroy, six months no new issue, thirty days for the return.
List the Section 70 prohibitions in short bullets, including the three-year remedy rule for defaults.

Practice questions from Related Aspects of Company Accounts

Accounting for Buy-back 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.

Accounting for Buy-back of Securities: 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% applies to total paid-up equity capital of that year.

Why is a transfer to Capital Redemption Reserve required?

Section 69 requires a transfer equal to the nominal value of shares bought back out of free reserves or securities premium. It keeps creditors' cushion intact. CRR can later be used only to issue fully paid bonus shares.

Can the Board approve a buy-back without shareholders?

Yes, if the buy-back is 10% or less of total paid-up equity capital and free reserves and the Board authorises it by a resolution at its meeting. Otherwise a special resolution is needed.

When can a company buy back again after one buy-back?

No offer of buy-back can be made within one year from the closure of the preceding offer. After completion, no new shares of the same kind can be issued for six months, except by bonus issue or discharge of existing obligations.