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Buy back of shares

Pankaj Arora (Learner) (3134 Points)

24 October 2011

When company buy back their shares from shareholder in that case what will be the impact of balance sheet of company?

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12 Replies

Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 24 October 2011

The following entries will be passed and accordingly effect on financial statements will be taken

1) ESC A/c Dr.------------------B/S

Loss on buy back A/c Dr.--------P&L

To Bank-----------------B/S

2) Free reserves (e.g. p&l, general reserve) Dr.--------B/S

To Capital redemption reserve ----------------B/s

Plz correct me if m wrng

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Pankaj Arora (Learner) (3134 Points)
Replied 24 October 2011

Thanks boss could you also tell me if B co. want to acquire stake in A ltd co. of 20 % paid up capital than wat will be the accounting entry in A ltd co. books and B Ltd co. books?

Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 24 October 2011

In books of B ltd

Investment in A ltd. A/c Dr

To bank a/c

In books of A ltd.

Bank A/c Dr.

To ESC A/c

plz correct me if m wrng

Pankaj Arora (Learner) (3134 Points)
Replied 24 October 2011

thanks sir for your reply one more query…. Why company buy back their own shares and I also see another companies bring an open offer for target company why co. bring open offer or buy back their own shares?

ashish gupta ( student) (1922 Points)
Replied 24 October 2011

I think there will not be any entry in books of A ltd. if shares are purchased by B ltd from the shareholders of the A ltd.

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Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 24 October 2011

Ashish......then how will youaccount for the cash recd by A ltd from B ltd for purchase of d stake?

ashish gupta ( student) (1922 Points)
Replied 24 October 2011

cash will be given to the shareholders only and not to the company

Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 24 October 2011

here Bltd is directly purchasing the stake 4m Altd...rather than from the shareholders of A ltd sir from the market.........

i may b wrong too..dats y wrote above...."plz correct me if m wrng"

ashish gupta ( student) (1922 Points)
Replied 24 October 2011

It depends upon the transaction i.e. whether or not A ltd is going to issue fresh shares to dilute the promoters holding.

Sumit Grover (Chartered Accountant ) (3652 Points)
Replied 24 October 2011

Yeah!..............fully agreed wid dat

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Pankaj Arora (Learner) (3134 Points)
Replied 24 October 2011

Ankit Agarwal (Article) (204 Points)
Replied 25 October 2011

@ Pankaj:The main reason for a company doing buy back is:

1.The company is having surplus cash and there are no INVESTMENT avenues available to the company.

2.Shares of the company are trading in the market at a very lower rate which ultimately reduces the confidence of the shareholders,therefore the company purchases its own shares from the shareholders at a price higher than the market price to regain the confidence of the shareholders.

3.To prevent dilution of control.More shareholders means more dilution of control.

4.To cancel the odd lot shares.