## Buy Back of Equity Shares
Governing Law: Section 68, Companies Act 2013
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### What is Buy Back?
Buy back of shares means a company purchases its own shares from existing shareholders, thereby reducing its paid-up share capital.
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### Four-Step Journal Entry Framework
Every buy back transaction follows the same four-step sequence:
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#### Step 1 — Cancel the Shares Bought Back
| Account | Dr / Cr | Amount |
|---|---|---|
| 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 Shareholders (Shares Bought Back) A/c | Cr | BB Price × No. of shares |
> The "Premium on Buy Back" account is a temporary liability account — it is written off in Step 3.
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#### Step 2 — Pay the Shareholders
| Account | Dr / Cr | Amount |
|---|---|---|
| Equity Shareholders (Shares Bought Back) A/c | Dr | BB Price × No. of shares |
| To Cash / Bank A/c | Cr | BB Price × No. of shares |
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#### Step 3 — Write Off the Premium on Buy Back
Use Securities Premium first, then Free Reserves for any remaining balance:
| Account | Dr / Cr | Amount |
|---|---|---|
| Securities Premium A/c | Dr | Up to available balance |
| Free Reserves A/c | Dr | Remaining amount (if any) |
| To Premium on Buy Back A/c | Cr | Total premium on BB |
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#### Step 4 — Transfer Face Value to Capital Redemption Reserve (CRR)
| Account | Dr / Cr | Amount |
|---|---|---|
| Free Reserves A/c | Dr | FV × No. of shares |
| To Capital Redemption Reserve A/c | Cr | FV × No. of shares |
> Securities Premium cannot be used for this transfer. Only Free Reserves (e.g., General Reserve, Revenue Reserve, P&L balance).
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### Why is CRR Created? (Creditor Protection Logic)
The Companies Act requires CRR to protect outside creditors after buy back reduces cash and share capital.
Illustration — Before Buy Back:
| Amount | |
|---|---|
| Equity Share Capital | ₹100 |
| Free Reserves | ₹100 |
| Outside Liabilities | ₹100 |
| Cash / Bank | ₹300 |
Creditor cover = ₹300 assets ÷ ₹100 liabilities = 3×
After buying back 2 shares at FV ₹10 (₹20 paid out) — without CRR:
| Amount | |
|---|---|
| Equity Share Capital | ₹80 |
| Free Reserves | ₹100 |
| Outside Liabilities | ₹100 |
| Cash / Bank | ₹280 |
Creditor cover = ₹280 ÷ ₹100 = 2.8× → Creditors are less protected.
After transferring ₹20 from Free Reserves → CRR:
| Amount | |
|---|---|
| Equity Share Capital | ₹80 |
| Free Reserves | ₹80 |
| CRR (non-distributable) | ₹20 |
| Outside Liabilities | ₹100 |
| Cash / Bank | ₹280 |
CRR + ESC = ₹100 (unchanged from original ESC). The capital buffer for creditors is preserved.
Key principle: CRR replaces the permanent capital that was returned to shareholders. It is locked — not distributable.
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### CRR — Only One Permitted Use
CRR can only be used to issue Bonus Shares:
```
CRR A/c Dr
To Equity Share Capital A/c
```
This moves CRR → ESC (both non-distributable). No impact on creditor protection. CRR does not reduce; it converts into share capital.
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### Securities Premium — Special Rules for Buy Back
Securities Premium is not a free reserve in general law. However, for buy back purposes:
| Purpose | Securities Premium usable? |
|---|---|
| Writing off Premium on Buy Back (Step 3) | ✅ Yes — treated as free reserve |
| Transfer to CRR (Step 4) | ❌ No — cannot be used |
| Determining buy-back eligibility (25% of paid-up + free reserves) | ✅ Treated as free reserve |
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### Exception: Fresh Issue Made for Buy Back
If the company issues fresh equity or preference shares specifically to fund the buy back, Step 4 (transfer to CRR) is not required to the extent covered by the fresh issue proceeds.
Logic: New capital has entered the company to replace the capital leaving — no need to lock additional funds in CRR.
| Scenario | CRR Transfer Required? |
|---|---|
| Buy back funded purely from existing reserves | ✅ Yes |
| Buy back funded (fully/partly) from fresh issue | ❌ No (to extent of fresh issue) |
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### Redemption of Preference Shares — Same Entries
The journal entry pattern for redemption of preference shares is identical to buy back of equity shares. Apply all four steps in the same sequence.