Buy back of shares

By:-Krishnaprasad M N

Meaning "Buyback is the buying back of shares from the

existing shareholders of a company by the company.“

Buy-back is the reverse of issue of shares.

Buy-back simply means buying of own shares.

Reasons and Benefits of Buy-Back

• Buy back of share helps to increase the earning per share(companies profitability).

• The market price of the share will go up.• It increases promoters holding in the

company.• It is a reward for investors• It will improve the company image• It helps to restructure the capital base of the

company.

Dangers or Limitations Of Buy-Back

• It may be used as a tool of insider trading. This gives an opportunity to insiders to make extra money.

• It may be used for manipulating(to manage) the prices of shares.

• It weakens the position of minority shareholders.

Buyback from Open Market

• The buy-back of shares from the open market may be in any one of the following methods:a)through stock exchangeb)Book Building process.

(a) Through stock exchange

• Under this method , a company can buy back its shares at the prevailing quoted price in a stock exchange with electronic trading facility.

(b)Book Building process.

• Here the company will receive the offers from the shareholders. The merchant banker and the company shall determine the buy back price based on the acceptance received.

• The final price of buy-back shall be the highest price accepted.

ExampleQ A ltd issued 2,00,000 equity shares of Rs. 10

each .It wanted to buy back 30,000 equity shares at par. It issued 6% 3,000 preference shares of Rs.100 each, the proceeds being utilized for the purpose of buy back. Expenses relating to the buy back amounted to Rs.18,000.Give the journal entries ?

Date Particulars DR.Amount CR.Amount

Bank A/c Dr. To 6% Preference Share Capital A/c

3,00,0003,00,000

(Being issue of preference shares at par)

Equity Share Capital A/c (30,000 *10) Dr. To Bank A/c(Being buy back of 30,000 equity shares at par)

3,00,0003,00,000

Buy Back Expenses A/c Dr. To Bank A/c

18,00018,000

(Being buy back expenses paid)

Profit and loss appropriation A/c Dr. To Buy back expenses A/c(being buy back expenses written off to P/L A /c)

18,000 18,000

Journal Entries

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