Explanation:

Free Reserve means the reserve which is free for distribution of dividend as per last Balance Sheet and which includes the credit balance of Securities Premium also. It is interesting to note that the Companies Act, 1956, remains silence about the term for the purpose of buy-back of shares

free reserve includes:

• Credit Balance of General Reserve and Profit and Loss Account;
• Realised Capital Profit (which arises from the sale of investment or fixed assets);
• Dividend Equalisation Reserve;
• Dividend Fluctuation Reserve;
• Subsidy receive from the Government in cash;
• Sinking Fund.

But it must be remembered that, as a matter of prudence, the whole amount of free reserve should not be utilised for the purpose of buy-back.