B.

Com SEMESTER 3

CORPORATE ACCOUNTING

MODULE 1: ISSUE OF SHARES AND BUY BACK

MEANING OF SHARES:-

A share represents a unit of ownership in a company. It entitles the shareholder to a

portion of the company’s profits and assets, and sometimes voting rights, depending on the
type of share held. Shares are typically categorized into equity shares and preference
shares, each with distinct rights and characteristics.

Shares are governed by various laws to ensure transparency and protect shareholders.

Types of Shares

Shares represent units of ownership in a company, allowing investors to hold a stake in the
business. Companies issue shares to raise capital for operations, expansion, or debt
repayment. Shareholders receive returns in the form of dividends and capital appreciation.
There are two main types: equity shares, which provide voting rights and variable
dividends, and preference shares, which offer fixed dividends with priority over equity
shareholders. Shares are traded in stock markets, where their value fluctuates based on
company performance and market conditions. Owning shares provides limited liability,
meaning investors risk only their invested amount.

Equity Shares

Equity shares represent ownership in a company, giving shareholders voting rights and a
share in profits through dividends. These shares are issued to raise long-term capital and
fluctuate in value based on market performance. Equity shareholders are considered
residual claimants, meaning they receive returns after all liabilities and preference
dividends are paid. They carry higher risk but offer higher returns. Equity shares provide
limited liability, meaning shareholders are only liable up to their investment. Companies
issue them in different classes, such as ordinary or differential voting rights (DVR) shares.

Features of Equity Shares:

 Ownership Rights
Equity shares represent ownership in a company, giving shareholders a claim on assets and
profits. Shareholders are considered partial owners and have voting rights to influence
corporate decisions. The extent of ownership depends on the number of shares held. This
ownership provides shareholders with the ability to participate in key decisions such as
mergers, acquisitions, and board member elections. Since equity shareholders are the last
to receive payments in case of liquidation, their claim on company assets comes after
creditors and preference shareholders. This ownership gives them the highest risk but also
the highest rewards.

 Voting Power

Equity shareholders have the right to vote on important corporate matters, making them
influential stakeholders. Their voting power is proportional to the number of shares they
own. They can vote on electing board members, approving mergers, and other strategic
business decisions. Some companies also issue Differential Voting Rights (DVR) shares,
which offer lower or higher voting power than regular shares. Although retail investors
often do not participate in voting, institutional investors play an active role. Shareholders
can also vote via proxies, allowing others to vote on their behalf in company meetings.

 Dividends Based on Profits

Unlike preference shares, equity shares do not guarantee fixed dividends. Instead,
dividends depend on the company’s profitability. If a company performs well, it may
distribute high dividends; if it incurs losses, it may choose not to distribute dividends at all.
Companies usually pay dividends annually or quarterly, but there is no obligation to do so.
Dividend payments are decided by the board of directors and approved by shareholders.
Some companies reinvest profits into growth instead of paying dividends, benefiting
shareholders through stock price appreciation in the long run.

 Residual Claim in Liquidation

Equity shareholders are considered residual claimants, meaning they receive their share of
assets only after all liabilities, creditors, and preference shareholders have been paid in the
event of liquidation. This makes equity shares riskier than other forms of investment. If a
company goes bankrupt, there is no guarantee that equity shareholders will receive
anything. However, if the company has sufficient assets left after paying debts, equity
shareholders can claim their portion. While this poses a financial risk, it also provides the
potential for high returns if the company performs well over time.

 High-Risk, High-Return Investment

Equity shares are considered a high-risk, high-return investment. Their prices fluctuate
based on company performance, market conditions, and investor sentiment. Unlike bonds
or preference shares, equity shares do not provide fixed returns. Investors may experience
significant capital appreciation if the company grows, but they may also face losses if it
underperforms. The risk factor is influenced by economic conditions, industry trends, and
regulatory changes. Long-term investors often benefit from market growth, while short-
term traders take advantage of price volatility. Equity shares suit investors who can
tolerate financial risk for potential higher rewards.

 Limited Liability

Equity shareholders enjoy limited liability, meaning their financial risk is restricted to the
amount they have invested in the company. If the company incurs losses or goes bankrupt,
shareholders are not personally responsible for repaying debts beyond their investment.
Unlike sole proprietors or partners, shareholders do not risk their personal assets. This
makes equity shares an attractive investment option, as investors can participate in
business growth without worrying about unlimited financial exposure. However, while
their liability is limited, the value of their shares can fluctuate significantly based on
market conditions.

Preference Shares

Preference Shares provide shareholders with a fixed dividend before equity shareholders
receive any dividends. They combine features of equity and debt, offering stable income
with limited voting rights. In case of liquidation, preference shareholders have a higher
claim on assets than equity shareholders. These shares come in various forms: cumulative,
non-cumulative, convertible, non-convertible, redeemable, and irredeemable. Preference
shares are ideal for investors seeking steady returns without ownership control. Companies
use them to attract conservative investors who prefer lower risk over potentially higher but
uncertain equity returns.

Features of Preference Shares:

 Fixed Dividend Payout

Preference shareholders receive a fixed dividend, unlike equity shareholders whose

dividends fluctuate based on company profits. This makes preference shares a stable
income source, attracting risk-averse investors. The dividend rate is pre-determined at the
time of issuance, ensuring predictable returns. Even if a company earns high profits,
preference shareholders receive only the fixed dividend, while equity shareholders benefit
from profit surges. This fixed nature makes preference shares similar to bonds, offering
regular income with lower volatility. However, dividends are paid only if the company has
distributable profits.

 Priority in Dividend Payment

Preference shareholders have the advantage of receiving dividends before equity

shareholders. If a company declares dividends, preference shareholders are paid first,
ensuring consistent returns. This priority makes preference shares more attractive to
investors seeking steady income with lower risk. Even if a company faces financial
difficulties, preference shareholders still have a better chance of getting paid than equity
shareholders. This feature provides financial security for investors, making preference
shares an ideal choice for those who prefer stability over the uncertainty of fluctuating
dividends.

 Priority in Liquidation

In case of a company’s liquidation, preference shareholders have a higher claim on assets

than equity shareholders. After repaying debts and liabilities, preference shareholders
receive their dues before any distribution is made to equity shareholders. This reduces the
risk associated with investment in shares, as preference shareholders are more likely to
recover their funds if the company goes bankrupt. However, they rank below creditors,
meaning they will only be paid if funds remain after settling debts. This makes preference
shares a safer investment compared to equity shares.

 Limited or No Voting Rights

Unlike equity shareholders, preference shareholders generally do not have voting rights in
company decisions. They cannot vote on management policies, mergers, or business
strategies. However, in special cases, such as when dividends are unpaid for a certain
period, preference shareholders may gain voting rights. Some companies issue preference
shares with limited voting rights, allowing shareholders to participate in specific corporate
matters. This feature makes preference shares more like debt instruments, offering
financial benefits without significant control over the company’s decision-making process.

 Convertible and Non-Convertible

Preference shares can be classified as convertible or non-convertible. Convertible

preference shares can be converted into equity shares after a specified period or under
certain conditions, offering investors the potential for capital appreciation. This makes
them attractive for investors looking for both stability and long-term growth opportunities.
On the other hand, non-convertible preference shares remain as preference shares
throughout their tenure, providing fixed dividends without conversion benefits. Investors
choose based on their risk appetite—convertible shares for growth potential and non-
convertible shares for stable income.

 Redeemable and Irredeemable Options

Preference shares can be redeemable, meaning the company repurchases them after a fixed
period, or irredeemable, meaning they exist indefinitely. Redeemable preference shares
provide companies with financial flexibility, as they can buy back shares when it is
financially viable. This benefits investors by offering a guaranteed return of principal after
a set period. Irredeemable preference shares, however, remain part of the company’s
capital structure indefinitely, ensuring long-term dividend income. Companies issue
different types based on their financial strategies and investor preferences.
Issue of Equity Share, Procedure, Kinds of Share Issues

Equity Shares are the main source of finance of a firm. It is issued to the general public.
Equity shareholders do not enjoy any preferential rights with regard to repayment of
capital and dividend. They are entitled to residual income of the company, but they enjoy
the right to control the affairs of the business and all the shareholders collectively are the
owners of the company.

Issue of Shares:

When a company wishes to issue shares to the public, there is a procedure and rules that it
must follow as prescribed by the Companies Act 2013. The money to be paid by
subscribers can even be collected by the company in installments if it wishes. Let us take a
look at the steps and the procedure of issue of new shares.

Procedure of Issue of New Shares

 Issue of Prospectus

Before the issue of shares, comes the issue of the prospectus. The prospectus is like an
invitation to the public to subscribe to shares of the company. A prospectus contains all the
information of the company, its financial structure, previous year balance sheets and profit
and Loss statements etc.

It also states the manner in which the capital collected will be spent. When inviting deposits
from the public at large it is compulsory for a company to issue a prospectus or a document
in lieu of a prospectus.

 Receiving Applications

When the prospectus is issued, prospective investors can now apply for shares. They must
fill out an application and deposit the requisite application money in the schedule bank
mentioned in the prospectus. The application process can stay open a maximum of 120
days. If in these 120 days minimum subscription has not been reached, then this issue of
shares will be cancelled. The application money must be refunded to the investors within
130 days since issuing of the prospectus.

 Allotment of Shares

Once the minimum subscription has been reached, the shares can be allotted. Generally,
there is always oversubscription of shares, so the allotment is done on pro-rata bases.
Letters of Allotment are sent to those who have been allotted their shares. This results in a
valid contract between the company and the applicant, who will now be a part owner of the
company.
If any applications were rejected, letters of regret are sent to the applicants. After the
allotment, the company can collect the share capital as it wishes, in one go or in
instalments.

Features of Equity Shares

 Ownership and Control

Equity shareholders are the owners of a company, holding a proportional stake based on
the number of shares they own. They influence major corporate decisions by voting on
critical matters, including mergers, acquisitions, and board member elections. Their level
of control depends on their shareholding percentage. While they don’t manage daily
operations, their votes impact strategic directions. This ownership grants them residual
claims on profits and assets, making them key stakeholders in the company’s growth and
decision-making processes.

 Voting Rights

Equity shareholders have voting rights that allow them to participate in key company
decisions. Voting power is typically proportional to the number of shares owned.
Shareholders vote on electing directors, approving financial policies, and strategic moves
like mergers. Some companies issue shares with differential voting rights (DVR), offering
varied voting privileges. While many retail investors do not actively use their voting rights,
institutional investors influence company policies significantly. Shareholders may also vote
through proxies, delegating their voting authority to representatives.

 Dividend Payments

Equity shareholders receive dividends, but payments are not fixed and depend on the
company’s profitability. The board of directors determines dividend distribution, and
shareholders approve it. If a company performs well, it may distribute higher dividends; if
it incurs losses, dividends may not be paid at all. Some companies prefer reinvesting profits
into business expansion rather than distributing dividends. While dividends provide
income, shareholders primarily seek capital appreciation, as stock value growth often leads
to higher long-term returns than periodic dividend payouts.

 Residual Claim in Liquidation

Equity shareholders have a residual claim on a company’s assets if it goes into liquidation.
After repaying debts, liabilities, and preference shareholders, remaining funds are
distributed among equity shareholders. Since they are the last to receive payments, equity
shares are riskier than debt instruments or preference shares. If a company’s liabilities
exceed assets, shareholders may receive nothing. Despite this risk, the potential for high
returns attracts investors. The residual claim feature reflects the high-risk, high-reward
nature of equity investments.

 High-Risk, High-Return Investment

Equity shares carry high risk but offer significant return potential. Their market price
fluctuates due to company performance, economic conditions, industry trends, and investor
sentiment. Unlike bonds or preference shares, equity shares do not provide guaranteed
income. Investors may experience significant capital appreciation if the company grows,
but losses if it underperforms. Long-term investments in well-performing companies often
yield substantial gains, while short-term trading benefits from price volatility. Equity
shares suit investors willing to tolerate risks for higher financial rewards.

 Limited Liability

Equity shareholders enjoy limited liability, meaning their financial risk is restricted to
their investment amount. If the company incurs heavy losses or goes bankrupt,
shareholders are not personally responsible for repaying debts. Their maximum loss is
limited to the value of their shares, unlike proprietors or partners who may be liable for
company debts. This protection makes equity investment attractive, as investors can
participate in company growth without risking personal assets. However, share prices may
fluctuate, affecting the overall investment value.

Different Types of Issues:

 Initial Public Offering (IPO)

An Initial Public Offering (IPO) is when a company issues shares to the public for the first
time to raise capital. It helps businesses expand, repay debts, or fund new projects.
Companies must comply with regulatory requirements, such as those set by SEBI in India.
Investors can buy shares at a predetermined price or through a book-building process.
Once issued, these shares are listed on stock exchanges for trading. An IPO allows
companies to transition from private to public ownership, increasing their market visibility
and credibility.

 Follow-on Public Offering (FPO)

A Follow-on Public Offering (FPO) occurs when a company that is already publicly listed
issues additional shares to raise more capital. It is used to fund expansion, reduce debt, or
improve financial stability. FPOs can be of two types: dilutive, where new shares increase
total supply, reducing existing shareholders’ ownership percentage, and non-dilutive,
where existing shareholders sell their shares without affecting the total share count.
Investors analyze FPOs carefully, as they can impact stock prices based on the company’s
financial health and growth prospects.
  Rights Issue

A rights issue allows existing shareholders to purchase additional shares at a discounted

price in proportion to their current holdings. This method helps companies raise funds
without issuing shares to the general public. Shareholders can either subscribe to new
shares or sell their rights in the market. Rights issues prevent ownership dilution by giving
preference to existing investors. However, if shareholders do not participate, their
ownership percentage decreases. This type of share issue is often used when a company
needs urgent capital for expansion or debt repayment.

 Bonus Issue

A bonus issue involves a company distributing free additional shares to its existing
shareholders based on their holdings, without any cost. This is done from the company’s
reserves or retained earnings. For example, a 2:1 bonus issue means shareholders receive
two extra shares for every one they own. While it does not change the company’s total
value, it increases the number of outstanding shares, reducing the stock price per share.
Bonus issues enhance liquidity and investor confidence, rewarding shareholders without
impacting cash flow.

 Private Placement

Private placement is the issuance of shares to a select group of investors, such as

institutional investors, venture capitalists, or high-net-worth individuals, instead of the
general public. This method helps companies raise capital quickly without the regulatory
complexities of a public offering. Private placements can be preferential allotment, where
shares are issued at a pre-agreed price, or qualified institutional placement (QIP), which is
exclusive to institutional investors. It is a cost-effective alternative to an IPO, allowing
companies to raise funds with minimal market fluctuations.

 Employee Stock Option Plan (ESOP)

An Employee Stock Option Plan (ESOP) allows employees to purchase company shares at
a predetermined price after a specific period. It is a form of employee benefit, motivating
and retaining key talent by aligning their interests with the company’s success. ESOPs are
granted as an incentive, and employees can exercise their options once they meet the
vesting period. This increases employee engagement and long-term commitment.
Companies use ESOPs to attract skilled professionals, enhance productivity, and create a
sense of ownership among employees.

Issue of Shares at Par, Premium and Discount

Companies raise capital by issuing shares, and the method of issuance determines how
these shares are distributed among investors. The three main types of share issues
are Initial Public Offering (IPO), Follow-on Public Offering (FPO), and Private Placement.
 1. Initial Public Offering (IPO): An IPO is when a private company offers its shares to
the public for the first time, transitioning into a publicly traded company. This
method helps businesses raise funds for expansion, debt repayment, or operational
growth. IPOs can be priced either through a fixed-price method, where a pre-
determined price is set, or a book-building process, where investors bid for shares
within a price range. Once issued, shares are listed on stock exchanges for trading.
Regulatory authorities such as SEBI (in India) oversee IPOs to ensure transparency.
2. Follow-on Public Offering (FPO): After an IPO, companies may issue additional
shares through an FPO to raise more capital. This can be dilutive, where new shares
are created, reducing the ownership percentage of existing shareholders, or non-
dilutive, where existing shareholders sell their shares to new investors. Companies
use FPOs to fund expansion, acquisitions, or improve financial stability.
3. Private Placement: Instead of offering shares to the general public, companies may
issue them to specific investors such as venture capitalists, institutional investors, or
high-net-worth individuals. This method is quicker and avoids regulatory
complexities, making it a preferred option for raising capital efficiently.

Issue of Shares at Par

When shares are issued at par, they are sold at their nominal value (also called face value).
The nominal value is the price printed on the share certificate, typically set at ₹10, ₹100, or
another standard amount. This means investors pay exactly the face value of the share
without any additional premium or discount.

For example, if a company issues 1,000 shares with a face value of ₹10 each, the total
capital raised will be ₹10,000.

Features of Shares Issued at Par:

1. Fair Valuation: The share price is neither inflated nor reduced, reflecting its actual
worth as per the company’s books.
2. Common for New Companies: Startups and newly established firms often issue
shares at par because they do not have a market reputation to justify a premium.
3. No Capital Gains for the Company: Since shares are issued at their face value, the
company does not earn any extra capital beyond the nominal value.
4. Lower Investor Risk: Investors do not overpay, reducing risks associated with stock
market volatility.
5. Transparency in Pricing: The fixed price prevents speculation and manipulation.

Shares issued at par are considered a straightforward and risk-free way to raise capital,
especially for companies that are just entering the market.

Issue of Shares at Premium

When shares are issued at a premium, they are sold at a price higher than their nominal
value. This happens when a company has strong financial performance, a good reputation,
or high demand for its shares. The extra amount over the face value is called the securities
premium and is credited to the company’s Securities Premium Account.

For example, if a company issues shares with a face value of ₹10 at ₹50 per share, the ₹40
excess is the premium.

Reasons for Issuing Shares at a Premium:

1. Strong Market Reputation: Companies with good earnings history can charge a
premium due to high investor confidence.
2. Demand Exceeds Supply: If many investors want the shares, companies set higher
prices.
3. Profitability and Growth Prospects: Companies with consistent profits and
expansion plans attract investors willing to pay a premium.
4. Reserves for Future Needs: The premium amount can be used for writing off
expenses, issuing bonus shares, or funding business expansion.
5. Enhances Market Perception: A higher issue price reflects strong company
fundamentals, boosting investor trust.

Issuing shares at a premium benefits both the company (by raising more capital) and
investors (who gain ownership in a promising business). However, it also carries risks, as
the stock price may fluctuate post-issue, affecting investor returns.

Issue of Shares at Discount

When shares are issued at a discount, they are sold at a price lower than their nominal
value. Companies generally avoid this method, as issuing shares below face value indicates
financial instability. However, in special cases, businesses may offer discounted shares to
attract investors.

For example, if a company issues shares with a face value of ₹10 at ₹8 per share, the ₹2
difference is the discount.

Reasons for Issuing Shares at a Discount:

1. Financial Difficulties: Companies struggling to raise funds may offer discounts to

attract investors.
2. Encouraging Subscription: If there is low demand, a discount helps ensure the
shares are fully subscribed.
3. Compensating Initial Investors: Sometimes, early investors or employees are given
discounted shares as incentives.
4. Clearing Unsold Shares: Companies that fail to sell shares in an IPO or FPO may
offer discounts to encourage purchases.
5. Special Approvals Required: In many countries, issuing shares at a discount
requires regulatory approval to prevent misuse.
Pro-rata basis Allotment of Share

Pro-rata Allotment of Shares refers to the proportional distribution of shares among

applicants when the number of shares applied for exceeds the shares available for issuance,
typically in cases of oversubscription. Under this system, each applicant receives shares in
proportion to the amount they applied for. For example, if an investor applies for 1,000
shares in an issue that is oversubscribed by 200%, they may receive only 500 shares (i.e.,
half of their application). Pro-rata allotment ensures a fair and equitable distribution of
shares to all applicants.

Reasons of Pro-rata basis Allotment of Shares:

1. Fair Distribution:

Pro-rata allotment ensures a fair and equitable distribution of shares among applicants.
When demand exceeds supply, this method allows each applicant to receive shares in
proportion to their applications, minimizing feelings of unfairness among investors.

2. Equity Among Investors:

By allotting shares on a pro-rata basis, companies uphold the principle of equity. Each
applicant receives an opportunity to invest in proportion to their interest, regardless of the
size of their application, thus maintaining investor confidence in the fairness of the process.

3. Mitigation of Oversubscription issues:

In cases where a public offering is oversubscribed, pro-rata allotment provides a

structured way to address the excess demand. This method simplifies the allocation process
and helps manage investor expectations, as they know they will receive a portion of their
requested shares.

4. Transparency:

Pro-rata allotment promotes transparency in the share allocation process. The method is
straightforward, and investors can easily understand how many shares they will receive
based on their application size, enhancing trust in the company’s operations.

5. Encourages Participation:

Knowing that shares will be allotted fairly encourages more investors to participate in
future offerings. This can lead to a more extensive shareholder base, which can be
beneficial for companies in terms of stability and market presence.

6. Simplified Accounting:
From an accounting perspective, pro-rata allotment simplifies the share issuance process.
Companies can easily calculate the number of shares to be allotted to each applicant based
on the total number of shares applied for, streamlining record-keeping and reporting.

7. Reduced Administrative Burden:

By adopting a pro-rata approach, companies can reduce the administrative burden

associated with managing oversubscriptions. Instead of handling individual requests and
conducting lotteries or other complex allocation methods, a pro-rata system simplifies the
process.

8. Legal Compliance:

Pro-rata allotment can help companies comply with regulatory requirements. Many
jurisdictions have guidelines regarding fair allotment processes, and adhering to a pro-rata
system can help ensure compliance with these rules, minimizing legal risks.

Accounting of Pro-rata basis Allotment of Shares:

Accounting for pro-rata allotment of shares involves recording the applications, allotment,
and any refund due to oversubscription.

Example Scenario:

 A company issued 10,000 shares at ₹10 each.

 Applications were received for 15,000 shares, resulting in oversubscription.
 The company refunds 5,000 shares and allots the remaining 10,000 shares on a pro-
rata basis.

Accounting Entries for Pro-rata Allotment:

Transaction Journal Entry Amount (₹)

1. On receipt of application Money: Bank A/c Dr. 1,50,000

– To Share 1,50,000
Application A/c

(Being application money received for 15,000 – –

shares @ ₹10 per share)
 2. On transfer of application money to share Share Application 1,00,000
Capital: A/c Dr.

To Share Capital A/c 1,00,000

(Being application money for 10,000 shares – –

transferred to share capital)

3. On refund of excess application Money: Share Application 50,000

A/c Dr.

– To Bank A/c 50,000

(Being refund made to applicants for 5,000 shares – –

on pro-rata basis)

4. On allotment of Shares: Share Allotment 50,000

A/c Dr.

– To Share Capital 50,000

A/c

(Being allotment of 10,000 shares at ₹10 each) – –

CONCEPTS:-

1. Right Issue

A Right Issue is when a company offers additional shares to its existing shareholders in
proportion to their current shareholding. These shares are usually offered at a price lower
than the market rate. It helps the company raise fresh capital without involving the public.
Shareholders can accept or reject the offer.

2. Private Placement
Private Placement is the issue of shares or securities to a select group of investors (like
institutions or HNIs) rather than to the general public. It is a quicker, cost-effective method
of raising funds with fewer regulatory requirements. The company can tailor the terms to
suit investors.

3. IPO (Initial Public Offering)

An IPO is the process by which a private company offers its shares to the public for the
first time and becomes a publicly listed entity. It helps raise capital for expansion and
increases the company's visibility and credibility. Shares are then traded on a stock
exchange.

4. FPO (Follow-on Public Offering)

An FPO is a subsequent issue of shares by a company that is already listed on the stock
exchange. It helps the company raise additional funds for growth, expansion, or debt
repayment. It can be dilutive or non-dilutive based on whether new shares are issued.

5. Book Building

Book Building is a method of determining the issue price of securities based on investor
demand. Investors bid within a price band, and the final price is decided based on bids
received. It ensures fair pricing and transparency in the share issuance process.

6. Prospectus
7.

A Prospectus is a formal legal document issued by a company inviting the public to

subscribe to its shares or debentures. It contains essential information like company
background, financials, objectives of the issue, risks, and terms of the offer to help
investors make informed decisions.

7. Red Herring Prospectus

A Red Herring Prospectus is a preliminary prospectus used in book-building IPOs. It

contains most of the company's details except the final price and number of shares offered.
It helps gauge investor interest before finalizing the offer.

8. Issue of Bonus Shares

Bonus Shares are free additional shares given to existing shareholders in a certain ratio out
of the company’s reserves or retained earnings. It rewards shareholders, increases the
number of outstanding shares, and improves stock liquidity without affecting the
company’s cash position.
9. Reasons for Issuing Bonus Shares

 To convert accumulated profits into share capital

 To reward shareholders without cash outflow
 To reduce share price and make it affordable
 To enhance share liquidity and market perception

Buyback of Shares

Meaning:

Buyback of shares refers to the process where a company repurchases its own shares from the
existing shareholders. After the buyback, these shares are usually cancelled, reducing the total
number of outstanding shares in the market.

It is a method used by companies to return surplus cash to shareholders and improve financial
ratios like Earnings Per Share (EPS) and Return on Equity (ROE).

Objectives of Buyback of Shares

1. To Increase Shareholder Value

By reducing the number of shares in circulation, earnings are distributed over fewer
shares, increasing EPS and potentially boosting the market price.
2. To Utilize Surplus Cash
When the company has excess cash and limited profitable investment options, buyback
helps in efficient use of funds.
3. To Prevent Hostile Takeovers
By reducing the number of shares available to outsiders, buyback can prevent
accumulation of shares by a potential hostile party.
4. To Improve Financial Ratios
It improves metrics such as EPS, ROE, and Book Value per Share.
5. To Return Capital to Shareholders
It is an alternative to paying dividends, often offering tax advantages to shareholders.
6. To Support Share Price
Companies may buy back shares when they believe the share price is undervalued in the
market.
Legal Framework for Buyback of Shares under the Companies Act, 2013

The buyback of shares by companies in India is governed by Sections 68, 69, and 70 of the
Companies Act, 2013, along with related rules. If the company is listed, SEBI (Buyback of
Securities) Regulations also apply.

1. Section 68 – Power of a Company to Buy Back its Own Securities

A company can buy back its own shares or other specified securities using the following sources:

 Free reserves (accumulated profits not distributed as dividends),

 Securities premium account,
 Proceeds of a fresh issue of shares or other specified securities (not of the same kind
that is being bought back).

 The company’s Articles of Association (AOA) must authorize the buyback.

 Approval by:
o The Board of Directors (if buyback is up to 10% of paid-up equity capital and
free reserves).
o A special resolution passed at a general meeting (if buyback is above 10% and
up to 25%).

 The buyback limit in any financial year must not exceed 25% of the aggregate of paid-
up capital and free reserves.
 In the case of equity shares, the buyback in one financial year should not exceed 25% of
total paid-up equity capital.
 Only fully paid-up shares or other specified securities can be bought back.
 After the buyback, the debt-equity ratio must not exceed 2:1 (unless a higher ratio is
permitted for a specific class of companies).

 The buyback process must be completed within 1 year from the date of passing the
special resolution or board resolution, as applicable.

 The shares or securities bought back must be extinguished and physically destroyed
within 7 days from the date of completion of the buyback.

The company must file:

 A Declaration of Solvency (Form SH-9) with the Registrar of Companies (RoC) before
the buyback begins, signed by at least two directors (one must be the Managing Director,
if applicable).
 A return of the buyback (Form SH-11) with the RoC within 30 days of completion of the
buyback.

2. Section 69 – Transfer to Capital Redemption Reserve (CRR)

When a company buys back shares out of free reserves or securities premium, it must transfer
an amount equal to the nominal value of the shares bought back to a special account called the
Capital Redemption Reserve (CRR).

 The CRR is treated as part of shareholders’ funds, similar to share capital.

 This reserve can be utilized only for issuing fully paid bonus shares to existing
shareholders.

3. Section 70 – Restrictions and Prohibitions on Buyback

A company is prohibited from buying back its shares or other specified securities under the
following conditions:

 A company cannot buy back shares through any subsidiary company, including its
own subsidiaries.
 Cannot buy back through an investment company or if it is itself an investment
company.

A company cannot undertake buyback if it has defaulted in:

 Repayment of deposits or interest on deposits,

 Redemption of debentures or preference shares,
 Repayment of any term loan or interest payable to banks or financial institutions,
 Payment of dividends to shareholders.

However, a company may proceed with buyback if the default has been remedied and a period of
3 years has lapsed since such default was made good.

No buyback is allowed if the company has:

Not complied with the provisions of Sections 92, 123, 127, and 129 related to:

o Filing of annual return,

o Declaration and payment of dividends,
o Repayment of unpaid dividends,
o Preparation and filing of financial statements.

Additional Rules for Listed Companies

For listed companies, in addition to the Companies Act, they must comply with:

SEBI (Buyback of Securities) Regulations, 2018, which specify:

o Modes of buyback (tender offer, open market, etc.),

o Buyback size, disclosures, public announcements,
o Escrow mechanism, and shareholder protections.
 Provision Description

Section 68 Governs the sources, limits, approval process, and procedure for buyback

Mandates creation of Capital Redemption Reserve from buyback done using free
Section 69
reserves

Section 70 Lists restrictions and disqualifications for companies to buy back shares

SEBI
Apply additionally to listed companies for investor protection and transparency
Regulations