Page 94 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 4: Buy Back of Securities by Private Limited and Unlisted Public Limited Companies

If the escrow account consist of a bank guarantee, the said bank guarantee shall be in favour of Notes
the merchant banker which will be valid until thirty days after the closure of the offer. If the
escrow account consist of securities, then empower the merchant banker to realize the value of
such escrow account by sale or otherwise.

Opening Special Account

A special account has to be opened with the bankers , immediately after the date of closure of the
offer and deposit therein such sum due as would together with the amount lying in the escrow
account make up the entire sum due and payable as consideration for buy-back in terms of
Regulations and for this purpose the company may transfer the funds from the escrow account.
Make payment of consideration in cash, within 21 days from the closure of the offer, to those
shareholders whose offer has been accepted.

Extinguishment of Share Certificates bought back

The certificates of shares bought back by the company must be extinguished and physically
destroyed in the presence of a Company secretary or the Statutory Auditor of the company
within seven days from the date of acceptance of the shares.

In case the shares offered for buy-back by the company have already been dematerialized then
extinguish and destroy them in the manner specified under Securities and Exchange Board of
India (Depositories and Participants) Regulations, 1996 and the bye-laws framed therein.
The company has to furnish to the stock exchanges where shares of the company are listed, the
particulars of shares certificates extinguished and destroyed within seven days of such
extinguishment and destruction of the certificates.

Accounting Treatment

Transfer to capital redemption reserve account
Where a company purchases it own shares out of free reserves, then a sum equal to the nominal
value of the shares purchased shall be transferred to the Capital Redemption Reserve (referred
to in section 80(1) clause (d) & proviso) Account and details of such transfer will be shown in the
balance sheet. (Sec.77 AA)

Effect of buy-back on Earning per share

Whenever a Company resorts to buy-back, the basic idea underlying is that its own shares
represent the best investment opportunity available. Thus those who continue to hold the
shares of the Company find that their percentage of holding goes up because as a result of buy-
back the total number of outstanding shares, reduced. Further the Earning per share also goes up
because the cake is now divided among fewer people. Thus the value of shareholders holding
goes up without making any additional investment.
Section 2(22) of Income Tax Act, 1961 ( as amended ) defines as “Dividend” includes inter alia:

(a) any distribution by a company of accumulated profits, whether capitalised or not, if such
distribution entails to release by the company to its shareholders of all or any part of the
assets of the company.
(b) any distribution to its shareholders by a company of debentures etc., whether with or
without interest.

LOVELY PROFESSIONAL UNIVERSITY 87