## Accounting Entries for Buy-back of Shares

### Step-by-Step Journal Entries

Step 1 – Record the buy-back obligation

```

Equity Share Capital A/c Dr [FV × no. of shares]

Premium on Buy-back A/c Dr [(BB price − FV) × no. of shares]

To Equity Share Buy-back A/c [BB price × no. of shares]

```

Step 2 – Settle the buy-back payment

```

Equity Share Buy-back A/c Dr [BB price × shares]

To Bank A/c [BB price × shares]

```

Step 3 – Charge the premium on buy-back to reserves

(Use Securities Premium first, then General Reserve for any remainder)

```

Securities Premium A/c Dr [Amount available, upto premium]

General Reserve A/c Dr [Remaining premium, if any]

To Premium on Buy-back A/c [Total premium = (BB price − FV) × shares]

```

Step 4 – Create Capital Redemption Reserve (CRR)

```

General Reserve A/c Dr [FV × shares bought back]

To Capital Redemption Reserve A/c [FV × shares bought back]

```

---

### Why Is CRR Mandatory? [Section 69]

When shares are bought back out of free reserves or securities premium, the company must transfer an amount equal to the nominal (face) value of shares bought back to the Capital Redemption Reserve. This preserves the effective capital base — the reduction in paid-up equity capital is compensated by a non-distributable reserve.

> CRR can later be used to issue fully paid bonus shares.

### Priority for Using Reserves for Premium

1. Securities Premium Account — use fully first (only up to available balance)

2. General Reserve — absorb the balance of premium

### Worked Example: CDR Q016 — Equity Buy-back Entries

Buy-back: 11.175 lakh shares at ₹30 (face value ₹10)

Particulars	₹ lakh
ESC debited	111.75
Premium on BB debited	223.50
Total to Eq Sh BB A/c	335.25

Charging premium:

Sec Premium available: ₹28 lakh (used fully)
Balance premium from Gen Reserve: 223.50 − 28 = ₹195.50 lakh

CRR entry:

Gen Reserve Dr ₹111.75 lakh → CRR Cr ₹111.75 lakh

---

### Key Post Buy-back Obligations (Section 68)

Obligation	Timeframe
Extinguish and physically destroy securities	Within 7 days of last date of completion
No further issue of same kind of shares	For 6 months (except bonus issue, conversion obligations)
File return with Registrar and SEBI	Within 30 days of completion
Maintain register of securities bought back	Ongoing
Buy-back must be completed	Within 12 months of passing the resolution
Gap between two buy-back offers	Minimum 1 year from closure of previous offer

### Declaration of Solvency

Before buy-back under a special resolution, the Board must file a declaration of solvency (verified by affidavit) stating the company can meet its liabilities and will not become insolvent within 1 year. Must be signed by at least two directors, including the managing director (if any).

> Not required for companies whose shares are not listed on any recognised stock exchange.

Worked example

### Example 1

CDR Q016 Full Sequence (combined Preference Redemption + Equity Buy-back + Debenture Cancellation + Bonus):

1st April – Preference Share Redemption:

```

Preference Share Capital Dr 240

Premium on Redemption Dr 24

To Preference Shareholders 264

Preference Shareholders Dr 264

To Bank 264

Securities Premium Dr 24

To Premium on Redemption 24

General Reserve Dr 240

To CRR 240

```

Revised free reserves: Gen Reserve = 625−240 = 385; Sec Premium = 52−24 = 28; P&L = 148

2nd April – Equity Buy-back (11.175 lakh shares at ₹30):

```

ESC Dr 111.75

Premium on BB Dr 223.50

To Eq Sh BB A/c 335.25

Eq Sh BB A/c Dr 335.25

To Bank 335.25

Sec Premium Dr 28.00 (exhausted)

Gen Reserve Dr 195.50 (balance of 223.50)

To Premium on BB 223.50

Gen Reserve Dr 111.75

To CRR 111.75

```

2nd April – Debenture Cancellation (own debentures bought at cost ₹601, FV ₹751):

```

Debenture Liability A/c Dr 751

To Investment in Own Deb 601

To Capital Reserve (Profit) 150

```

4th April – Bonus Issue:

Remaining shares = 78 − 11.175 = 66.825 lakh shares

Bonus ratio derived from CRR balance = ₹133.65 lakh → bonus shares = 13.365 lakh shares

```

CRR Dr 133.65

To Bonus Shares A/c 133.65

Bonus Shares A/c Dr 133.65

To Equity Share Capital 133.65

```

⚠️ Common exam mistakes

Using Securities Premium for CRR transfer instead of General Reserve — Section 69 requires free reserves (typically General Reserve) for CRR; Securities Premium is used only for the premium portion.
Not exhausting Securities Premium before drawing on General Reserve for the buy-back premium.
Forgetting to separately credit the 'Equity Share Buy-back A/c' as a clearing/settlement account before paying bank — the two-step entry (record liability, then settle) is required.
Treating the Profit on Debenture Cancellation as a revenue profit and crediting P&L — it is a capital profit and goes to Capital Reserve.
After buy-back, issuing new equity shares of the same kind within 6 months (prohibited under Section 68(7)); bonus issues and conversion obligations are exceptions.
Computing bonus shares on total post-redemption shares instead of post-buy-back shares (bonus is declared after buy-back is completed).

Bare-Act text Section 69(1) · Companies Act, 2013 · click to expand

Where a company purchases its own shares out of the free reserves or securities premium account, a sum equal to the nominal value of shares so purchased shall be transferred to the Capital Redemption Reserve Account and details of such transfer shall be disclosed in the Balance Sheet.

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Buy-back of Shares – Accounting Entries, CRR, and Post Buy-back Obligations

Worked example

⚠️ Common exam mistakes