What is Share Buyback – Meaning, Objectives, Methods

Table of Content

1. Introduction
2. Meaning of Buyback of Shares
3. Objectives/Advantages of Buyback
4. Limitations of Buyback
5. Legal Provisions of Buyback
6. Prohibition of Buyback in certain cases
7. SEBI Regulations
8. Buyback Methods
9. Accounting Treatments
10. Illustrations

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1. Introduction

Originally there was no provision for buyback of shares in the Companies Act, 1956. But there had been a persistent demand for buyback of own shares from the corporate sector. The Central Government approved the buyback of shares by companies and ordinance to this effect was issued by the President on 31st October, 1998. Consequent to this the Companies (Amendment) Act, 1999 was passed which become effective w.e.f. 31st October, 1998, the date of the ordinance, whereunder the companies were permitted to buyback their own shares and other specified securities subject to certain conditions. Thus, the provisions for buyback of shares were introduced w.e.f. 31-10-1998 in the Companies Act, 1956, SEBI also framed certain regulations for buyback of securities in case of listed companies in 1999. Section 68 of the Companies Act, 2013 gives power to company to purchase its own shares and other specified securities.

2. Meaning of Buyback of Shares

Buy back of shares means purchase of its own shares by a company: When shares are bought back by a company, they have to be cancelled by the company. Thus, share buy back results in decrease in share capital of the company. A company cannot buy its own shares for the purpose of investment. A company having sufficient cash may decide to buy its own shares.

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3. Objectives/Advantages of Buyback

The following may be the objectives/advantages of buyback of shares:

(a)  To increase promoters holding as the shares which are bought back are cancelled.

(b)  To increase earnings per share if there is no dilution in company’s earnings as the buyback of shares reduces the outstanding number of shares.

(c)  To support the share price on the stock exchanges when the share price, in the opinion of the company management, is less than its worth, especially in the depressed market.

(d)  To discourage others to make hostile bid to take over the company as the buy back will increase the promoters holding.

(e)  To pay surplus cash to the shareholders when the company does not need it for the business.

(f)  To reward the shareholders by buyback of shares at substantially higher price than market price.

4. Limitations of Buyback

The following are the limitations of buyback of shares:

(a)  It may be used as a tool for insider trading.

(b)  It increases promoters holding and thus decreases the public shareholding in case of listed companies, especially when the public shareholding is less.

5. Legal Provisions of Buyback

The following are the provision of buyback of shares:

5.1 Sources of buyback

Section 68 of the Companies Act, 2013 allows a company to buy its own shares and other specified securities out of its:

(i)  free reserves; or

(ii)  the securities premium account; or

(iii)  the proceeds of any shares or other specified securities. However, buyback of any kind of shares or other specified securities cannot be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other securities.

Securities Premium Account includes premium on issue of shares, debentures, bonds or other financial instrument.

According to section 69 of the Companies Act, 2013, where buy-back is done out of free reserves or securities premium account, then an amount equal to the nominal value of shares bought back must be transferred to “Capital Redemption Reserve Account” and its detail must be disclosed in the Balance Sheet. As per section 55, Capital Redemption Reserve Account can be used only for issue of fully paid bonus shares.

As per Explanation II to section 68, for the purposes of section 68 “free reserves” includes securities premium account.

Free reserves should be calculated after adjusting losses and unamortised expenses. Following reserves amongst others, are not available for buyback of shares :

(a)  Capital redemption reserve

(b)  Debenture redemption reserve

(c)  Share forfeited account

(d)  Revaluation Reserve

(e)  Profit prior to incorporation

(f)  Statutory reserves created under the Income-tax Act.

5.1.1. Meaning of “Reserve” and “Free Reserves”

Reserve: The Companies Act, 2013 does not define the term “reserve”. A reference can be made to clause 82 of Table F of Schedule I of the Companies Act, 2013. This clause inter alia, prescribes that the Board of Directors of a company may before recommending any dividend set aside such sums as they deem fit as reserve or reserves and the company may also carry forward profit of the company without setting aside them as reserves. Further, the profit which has been carried forward without setting aside as reserve or reserves would be considered as “surplus”. Although, Table F is not mandatory for all companies but it has relevance as it is part of the Companies Act, 2013. Thus, the profit which has been carried forward by the company would not form part of the reserve.

Further reference can also be made to Schedule III of the Companies Act, 2013. The Schedule III prescribes that “surplus” refers to Balance of the Statement of Profit and Loss after disclosing allocations and appropriations made by the company such as dividend, bonus shares, transfer to reserves and transfer from reserves. It further prescribes that debit balance of Statement of Profit and Loss shall be shown as a negative figure under the head ‘“surplus”. Thus, carried forward profit of the company, i.e. accumulated profit of past years would constitute “surplus”’ and not “reserve”. As there are restrictions on use of reserve for distribution as dividend, the companies generally retain their excess profit under Profit and Loss Account or Surplus Account.

Free Reserves: The expression “free reserves” was not specifically defined under the Companies Act, 1956. There were references to free reserves in some sections where such definition was required. For instance, section 372A of the Companies Act, 1956 defined free reserves for limited purpose of that section.

According to section 2(43) of the Companies Act, 2013, “Free reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:

Provided that—

(i)  any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

(ii)  any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserve.

Thus, the expression “free reserves” under the Companies Act, 1956 was defined specifically for the purpose for which the definition was required, whereas under the Companies Act, 2013 it is defined in generic sense, unless any section provides for specific alteration. For example, for the purposes of section 68, “free reserves” includes securities premium account.

5.1.2. Meaning of Specified Securities

Explanation I to section 68 provides as follows :

For the purposes of this section (i.e. section 68) and section 70, “specified securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time.

No security has so far been notified as “specified securities”.

5.1.3. Meaning of “Proceeds of any shares or other specified securities”

As per section 68 of the Companies Act, 2013, buyback of shares and other specified securities can be made out of the proceeds of earlier issue of other kind of shares or other kind of specified securities made for the purpose of buyback of shares. For example, preference shares may be issued for buy-back of equity shares; and equity shares may be issued for buy-back of preference shares.

When shares are issued at par, proceeds mean par value of the shares issued. When shares are issued at premium, the proceeds in this case also mean the par value of the shares issued, because securities premium can be used only for five purposes mentioned in section 52 of the Companies Act, 2013.

5.2 Conditions for buyback

Section 68 of the Companies Act, 2013 provides that no company shall purchase its own shares or other specified securities unless the following conditions are satisfied :

(a) The share buy-back must be authorised by its articles.

(b) A special resolution has been passed in general meeting of the company authorising buy-back. However, if the buy-back is upto 10% of the total paid up equity capital and free reserves of the company, the Board of Directors by passing a resolution at its meeting may authorise the company for such buy-back. But only one such buy-back is allowed in a year.

(c)  The buy-back must be equal to or less than 25% (i.e. not more than 25%) of the total paid-up capital and free reserves of the company. (Resource Test)

(d)  Further, the buyback of equity shares in any financial year must not exceed 25% of its paid-up equity capital in that financial year. (Share outstanding Test)

 (e)  The ratio of secured and unsecured debt owed by the company must not be more than twice the capital and its free reserves after such buy-back However, the Central Government may prescribe a higher ratio of debt for a class or classes of companies. ‘Debt’ here should include both long term debt as well as short term debt (‘Debt’ ‘Equity’ Test)

(f)  All the shares or other specified securities for buy-back must be fully paid up.

(g)  The buyback of the shares or other specified securities listed on any stock exchange must be in accordance with the regulations made by the SEBI in this behalf.

(h)  The buy-back in respect of shares not listed on any recognized stock exchange must be in accordance with the rules as may be prescribed. Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 deals with buyback of shares and other specified securities.

Note : The maximum amount of share buy-back amount in a financial year will be lowest of the three figures calculated as per the above point numbers (c), (d) and (e). These three conditions may be called test conditions. They have been explained later in this chapter. Other conditions may be called procedural conditions.

According to the aforesaid Rule 17, private companies and unlisted public companies shall comply, amongst others, with the following norms:

(i)  The company which has been authorised by a special resolution shall, before buying back of shares, file with the Registrar of Companies a letter of offer in the prescribed form along with the fee.

(ii)  The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than 21 days from its filing with the Registrar of Companies.

(iii) The offer of buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer.

(iv) In case the number of shares or other specified securities offered by the shareholders or security holders is more than the total number of shares or securities to the bought back by the company, the acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back.

(v) The company shall complete the verification of the offers received within 15 days from the date of the closure of the offer and the shares or other specified securities lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the date of the closure of the offer.

(vi) The company shall immediately after the closure of the offer, open a separate bank account and deposit therein, such sum, as would make up the entire sum and payable as consideration for the shares tendered for buy-back in terms of these rules.

(vii) The company shall within the prescribed time —

(a)  make payment of consideration in case to those shareholders whose securities have been accepted; or

(b)  return the share certificates to the shareholders whose securities have not been accepted at all or the balance of the securities in case of part acceptance.

5.3 Notice of the meeting

The notice of the meeting at which special resolution is supposed to be passed must be accompanied by an explanatory statement stating—(a) a full and complete disclosure of all material facts; (b) the necessity of the buy-back; (c) the class of security intended to be purchased under the buy-back; (d) the amount to be invested under the buy back; and (e) the time limit for completion of the buy back.

5.4 Completion of buyback

Every buy back must be completed within 12 months from the date of passing of the special resolution or resolution passed by the Board.

5.5 Methods of buyback

The buy-back may be : (a) from the existing shareholders or security holders on a proportionate basis; or (b) from the open market, or (c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

5.6 Declaration of insolvency

Before making the buy-back, the company is required to file with the Registrar, and in case of listed company with the SEBI also, a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board of Directors made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board of Directors. It must be signed by at least two directors of the company, one of whom shall be the managing director, if any. However, in case of a company whose shares are not listed on a recognised stock exchange, the declaration of insolvency is to be filed only with the Registrar.

5.7 Extinguishment of securities

The company must extinguish and physically destroy the securities bought back within seven days of the last date of completion of buy-back.

5.8 Further issue of securities

Where a company completes a buy-back of its shares or other specified securities, it must not make further issue of same kind of shares or other specified securities within a period of 6 months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option scheme sweat equity or conversion of preference shares or debentures into equity shares.

5.9 Register of bought back securities

The company who buys-back the shares or other specified securities is required to maintain a register containing the particulars of bought-back securities.

5.10 Filing of return of buyback

After the completion of buy-back, the company has to file a return in the prescribe form with the Registrar (and also with SEBI in case of a listed company) within 30 days of such completion.

6. Prohibition of Buyback in certain cases

Section 70 of the Companies Act, 2013 provides that no company shall directly or indirectly purchase its own-shares or other specified securities:

(a)  through any subsidiary company including its own subsidiary companies; or

(b)  through any investment company or group of investment companies; or

(c)  if a default is subsisting in repayment of deposits or interest due thereon, redemption of debentures or preference shares, or payment of dividend, or repayment of any term loan or interest thereon to any financial institution or bank.

It is further provided that no company shall directly or indirectly purchase its own shares or other specified securities if the company has not complied with the provision of Section 92 (filing of annual return), Section 123 (payment of dividend within 30 days of declaration) Section 127 (Failure to distribute dividend), and Section 129 (preparation of Balance Sheet and Statement of Profit and Loss) in accordance with Schedule III.

7. SEBI Regulations

SEBI (Buy Back of Securities) Regulations, 1999, inter alia, provide that the notice of the meeting at which special resolution regarding buy-back is proposed to be passed shall be accompanied by an explanatory statement stating :

(a)  a full and complete disclosure of all material facts

(b)  the necessity for the buy-back;

(c)  the class of security intended to be purchased under the buy-back

(d)  the amount to be invested under the buy-back;

(e)  the amount limit for completion of buy-back

(f)  the specific price or maximum price at which buyback of shares shall be made.

(g)  if the promoter intends to offer their shares:

(i)  the quantum of shares proposed to be tendered, and

(ii)  the details of their transactions and their holdings for the last 6 months prior to the passing of the special resolution for buy-back including information on number of shares acquired, the price and the date of acquisition.

8. Buyback Methods

The following are the main methods of buyback of shares and other specified securities:

8.1 Tender Method

Under this method the company fixes a price at which it wishes to buy-back a specified number of shares from its shareholders. If the number of shares offered for buy-back at the stated price is more than the number of shares to be bought-back, then the shares are bought-back from each shareholder proportionately.

8.2 Open Market Purchases

Under this method, buy-back is done in the following two ways:

(a)  Open Market through Stock Exchange: Under this method the company buys-back shares through the stock exchange at the prevailing market price till it purchases the pre-determined number of shares it had originally decided to buy-back and the market price does not exceed the pre-determined maximum price for buy-back. SEBI guidelines provide that in case of buyback of shares through the stock market route, the purchases shall not be made from the promoters or persons in control of the company and the buyback of shares shall be made only on stock exchange with electronic trading facility.

(b)  Open Market through Book-building process: In this method, a company makes an offer to buy-back a specified number of shares to the shareholders at a specified price range, say ` 40 to ` 45 per share. The shareholders are invited to make a bid quoting a price within the price range and the number of shares offered for buy-back. After receiving the bids the company selects the offered price from the lowest price onwards at which the cumulative number of shares offered equals or exceeds the maximum number of shares the company proposes to buy-back. The company fixes the buy-back price within the range of minimum offer price and the “highest price accepted” which shall be paid to all the shareholders whose shares are accepted for buy-back.

SEBI guidelines do not permit the buy-back through negotiated deals, spot transactions and private placement.

9. Accounting Treatment

The following points should be kept in mind while passing journal entries for buyback of shares:

1. 1. Sources of buy-back: As stated earlier Section 68 provides that a company may buy-back its own shares or other specified securities out of : (i) its free reserves; or (ii) the securities premium account; or (iii) the proceeds of any shares or other specified securities. However, no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of specified securities. Thus, for example, if equity shares are to be bought-back, preference shares may be issued for the purpose.
   2. Fully paid-up shares: The shares or other specified securities which are proposed to be bought-back must be fully paid-up.
   3. Transfer to CRR A/c: Section 69 provides that if the shares are bought-back out of free reserves, then an amount equal to the nominal value of the shares so bought-back must be transferred to the “Capital Redemption Reserve Account.” Capital Redemption Reserve Account can be used only for issuing fully paid bonus shares.
   4. Premium on buy-back: Premium (excess of buy-back price over the par value) paid on buy-back should be adjusted against free reserves and/or securities premium account. Revaluation reserve represents unrealised profit and hence it cannot be used for buyback of securities.

Accounting treatment of buyback of shares is similar to that of the redemption of preference shares. The accounting treatment is as follows :

(i)  For making the partly paid shares fully paid

Only fully paid shares can be bought-back. Therefore, if the shares are not fully paid up, they have to be made fully paid up by passing the entry for making the final call due and for receipt of the call.

(a)	Share Final Call A/c	Dr.
	To Share Capital A/c
	(Final call made due)
(b)	Bank A/c	Dr.
	To Share Final Call A/c
	(Receipt of call money)

Note : If free reserves are used to make partly paid up equity share fully paid up by way of bonus, free reserves (individually) will be debited instead of bank account.

(ii)  For realizing investments to provide cash for buy-back

(a)	Bank A/c	Dr.	(with sale proceeds)
	*Profit and Loss A/c	Dr.	(with loss on sale)
	To Investments A/c		(with book value of investments sold)
	To *Profit and Loss A/c		(with profit on sale)
	*Either of the two may appear.

Note :

• • If some other asset (fixed asset or current asset) is sold to provide cash for buyback of shares, then that asset should be credited in addition to or in place of investments, as the case may be.
  • If bank loan is taken to provide cash for buyback of shares, Bank A/c should be debited and Bank Loan A/c should be credited.

(iii)  For fresh issue of other kind of shares

If the company decides to buyback equity shares, it can issue preference shares and if the company decides to buy-back preference shares, it can issue equity shares. If the company decides to make a fresh issue of preference shares as a source of buyback of equity shares, the following journal entries will be passed :

(a)   When shares are issued at par

(i)	Bank A/c                                                                          Dr.
	To Preference Share Application A/c
	(Being the application money received)
(ii)	Preference Share Application A/c
	To Preference Share Capital A/c
	(Being transfer of share application on money on allotment of preference shares)

(b)   When shares are issued at premium

(i)	Bank A/c	Dr.
	To Preference Share Application A/c
	(Being share application money received)
(ii)	Preference Share Application A/c	Dr.
	To Preference Share Capital A/c		(with nominal value)
	To Securities Premium A/c		(with  securities premium)
	(Being transfer of share application money on allotment of shares)

Note: A combined Share Application and Allotment Account may be opened when full amount is called as share application money, instead of Share Application Account.

(iv) For payment to equity shareholders

Equity Share Buy-Back A/c or
Equity Shareholders A/c	Dr.
To Bank A/c
(Being payment for buyback of shares)

Note: As per Rule 17(8) of the Companies (Share Capital and Debentures) Rules, 2014 every company is required to open a separate bank account and deposit therein, such sum, as would make up the entire sum due and payable as consideration for the shares tendered for buy-back. This account shall be opened immediately after the date of the closure of the offer. Therefore, in such cases the following entries should be passed in place of the aforesaid entry :

(a) For opening separate bank account

Share Buy-Back Bank A/c	Dr.
To Bank A/c

(b) For payment

Equity Share Buy-Back A/c or
Equity Shareholders A/c	Dr.
To Share Buy-Back Bank A/c

(v) For transfer of nominal value of shares redeemed out of free reserves and securities premium account to capital redemption reserve account

Securities Premium A/c	Dr.
Free Reserves (individually)	Dr.
To Capital Redemption Reserve A/c
(Being transfer of nominal value of shares bought-back to CRR A/c)

Amount of fresh issue or transfer to CRR A/c can be calculated as follows:

Nominal value of shares bought back

=

Nominal value of fresh issue of other kind of shares for the purpose of buy back

+

Transfer to capital redemption reserve account

(vi)  For cancellation of shares bought back

(a) When shares are bought back at par

Equity Share Capital A/c	Dr.
To Equity Share Buy-Back A/c or Equity Shareholders A/c
(Being cancellation of bought back shares)

(b) When shares are bought back at premium

(i)	Equity Share Capital A/c	Dr.	(with nominal value of shares bought back)
	Premium on Share Buy Back A/c	Dr.	(with premium payable on buy-back)
	To Equity Share Buy-Back A/c or Equity Shareholders A/c
	(Being cancellation of bought back shares)
(ii)	Securities Premium A/c	Dr.
	Free Reserves A/c (Individually)	Dr.
	Profit and Loss A/c	Dr.
	To Premium on Share Buy-Back A/c
	(Being premium on bought back equity shares written off)

(c) When shares are bought back at discount

Equity Share Capital A/c	Dr.	(with nominal value of shares
		bought back)
To Equity Share Buy-Back A/c or
Equity Shareholders A/c		(with the amount paid)
To Capital Reserve A/c		(with discount i.e. profit on share buy-back)
(Being cancellation of bought back shares)

(vii)  For payment of buy-back expenses

Buy Back Expenses A/c	Dr.
To Bank A/c
(Being payment of buy-back expenses)

(viii) For transfer of buy-back expenses

Profit and Loss A/c	Dr.
To Buy-Back Expenses A/c
(Being buy-back expenses written off)

(ix) For payment of tax on distributed income

Distributed income is the excess of buy-back price of the shares over issue price of those shares. As per section 115QA of the Income-tax Act, 1961, if an unlisted company buys-back the shares, it is required to pay tax on distributed income @ 20% of the distributed income plus 12% surcharge (as a percentage of distribution tax) and 4% education cess, etc. (as a percentage of distribution tax and surcharge) i.e. a total of 23.376% of the distributed income. The tax rate may change from time to time. For this purpose, the following two entries are passed :

(a) For payment

Tax on Distributed Income for Share Buy-Back A/c	Dr.
To Bank A/c

(b) For transfer of the tax

Profit and Loss A/c or Surplus A/c	Dr.
(Surplus i.e. Balance in the Statement of Profit and Loss)
To Tax on Distributed Income for Share Buy-Back A/c

10. Illustrations

Illustration 1: (Buyback of shares out of free reserves at premium)

RS (P) Ltd. purchases 50,000 equity shares of ` 10 each @ ` 40 per share. No fresh issue is made for this purpose. There is a balance of ` 50 lakhs in General Reserve Account. Pass journal entries in the books of the company in accordance with the provisions of company law :

Solution:

In the books of RS Ltd.
JOURNAL ENTRIES

Date	Particulars		L.F.	Dr.  (`)	Cr.  (`)
	Share Buy-Back Bank A/c	Dr.		20,00,000
	To Bank A/c				20,00,000
	(Separate bank account for buy-back opened)
	Equity Share Buy Back A/c	Dr.		20,00,000
	To Share Buy-Back Bank A/c				20,00,000
	(Purchase of 50,000 shares for cancellation)
	Equity Share Capital A/c	Dr.		5,00,000
	Premium on Share Buy-Back A/c	Dr.		15,00,000
	To Equity Share Buy-Back A/c				20,00,000
	(Cancellation of 50,000 bought-back shares of ` 10 each @ ` 40 per share)
	General Reserve A/c	Dr.		15,00,000
	To Premium on Share Buy Back A/c				15,00,000
	(Being writing off of premium on share buy-back)
	General Reserve A/c	Dr.		5,00,000
	To Capital Redemption Reserve A/c				5,00,000
	(Transfer of nominal value of shares bought-back to Capital Redemption Reserve Account)

Illustration 2: (Buy-back of shares at discount partly out of fresh issue and partly out of free reserves and securities premium)

Sangeeta Ltd., an unlisted company, had issued capital of ` 50 lakh divided into equity shares of ` 10 each. The balance in the Security Premium Account was ` 2 lakh and General Reserve ` 3 lakh. The company decided to buy-back 1,00,000 shares of ` 10 each at ` 8 per share. The company had issued 50,000, 10% Preference Shares of ` 10 each 3 months back for the purpose of buy-back of equity shares. Record the transaction in the Journal of the company.

Solution:

In the books of Sangeeta Ltd.

JOURNAL ENTRIES

Date	Particulars		L.F.	Dr.  (`)	Cr.  (`)
	Share Buy Back Bank A/c	Dr.		8,00,000
	To Bank A/c				8,00,000
	(Separate bank account opened for buyback of shares)
	Equity Share Buy Back A/c	Dr.		8,00,000
	To Share Buy Back Bank A/c				8,00,000
	(Buy-back of 1,00,000 equity shares of ` 10 at ` 8 each)
	Equity Share Capital A/c	Dr.		10,00,000
	To Equity Share Buy Back A/c				8,00,000
	To Capital Reserve A/c				2,00,000
	(Cancellation of bought back 1,00,000 equity shares of ` 10 each at ` 8 per share)
	Securities Premium A/c	Dr.		2,00,0000
	General Reserve A/c	Dr.		3,00,000
	To Capital Redemption Reserve A/c				5,00,000
	(Transfer of nominal value of equity shares redeemed out of General Reserve and Securities Premium to Capital Redemption Reserve Account)

Illustration 3: (Buyback of shares partly by issue of fresh shares and partly out of free reserve and securities premium)

The Balance Sheet of Ishaan Ltd. as at 31st March 2020 is given below :

Particulars	Note No.	` in lakhs
I. Equity and Liabilities
1. Shareholders’ Funds
(a)   Share Capital	1	2,400
(b)   Reserves and Surplus	2	1,640
2. Non-Current Liabilities
Long-term Borrowings (10% debentures)		1,800
3. Current liabilities
Trade payables		1,160
(Total outstanding due to creditors other than micro and small enterprises)
Total		7,000
II. Assets
1. Non-Current Assets
(a)   Property, Plant and Equipment (Tangible Assets)	3	4,050
(b)   Non-Current Investments (Investments)		150
2. Current Assets
(a)   Inventories (Stock-in-Trade)		1,200
(b)   Trade Receivables		800
(c)   Cash and Cash Equivalents (Cash at Bank)		800
Total		7,000

Notes to Accounts

Particulars	` in lakhs
1. Share Capital
Subscribed and Fully Paid up
240 lakh Equity Shares of ` 10 each	2,400
2. Reserves and Surplus
(a)   Securities Premium	350
(b)   General Reserve	950
(c)   Profit and Loss Account	340
(Surplus i.e. Balance in the statement of Profit and Loss)
	1,640
3. Tangible Assets
Building	450
Machinery	3,600
	4,050

On 1st April, 2020, the company announced the buy-back of 50 lakhs equity shares at ` 18 per share. For this purpose, it sold all its investments at a profit of 20% and issued 3 lakhs 12% preference shares of ` 100 each at a premium of 10 per cent, the entire amount being payable with application.

The issue was fully subscribed and the company bought back the announced number of equity shares through open market purchases. Pass journal entries to record the above transactions in the books of the company assuming that the company is not a listed company.

Solution:

Date	Particulars		L.F.	Debit (`) in lakhs	Credit (`) in lakhs
	Bank A/c	Dr.		180
	To Investments A/c				150
	To Profit and Loss A/c (Profit on sale of Investment)				30
	(Being sale of investments at a profit of 20%)
	Bank A/c	Dr.		330
	To Preference Share Application and Allotment A/c				330
	(Being the application money received on 3 lakhs 12% pre- ference shares @ ` 110 per share)
	Preference Share Application and Allotment A/c	Dr.		330
	To 12% Preference Share Capital A/c				300
	To Securities Premium A/c				30
	(Being transfer of share application money to preference share capital @ ` 100 and the securities premium account @ ` 10 each)