RESEARCH NOTE ON BUYBACK OF SHARES

INTRODUCTION
Buyback is governed by Section 68 of the Companies Act, 2013, 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 buyback 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.
A Listed/Unlisted company may purchase its own shares and other specified securities from
1) Its free reserves
2) Its Securities premium account
3) 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 other specified
securities.
Securities Premium Account (SPA) 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.
MEANING OF “RESERVES” AND “FREE RESERVES”
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”.
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”.
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.

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.