Alteration and Reduction of Share Capital and Buy-back for CA Inter

Understand Alteration and Reduction of Share Capital; Buy-back

Key rules to remember

Sources of buy-back (Section 68(1))

Free reserves | Securities premium account | Proceeds of issue of any shares or other specified securities

No buy-back of any kind of shares or securities out of the proceeds of an earlier issue of the same kind. Free reserves includes securities premium account (Explanation II).

Size limit (Section 68(2)(c))

Buy-back ≤ 25% of (paid-up capital + free reserves)

For buy-back of equity shares in a financial year, the 25% is applied to total paid-up equity capital in that year.

Board-resolution limit (Section 68(2)(b) proviso)

Buy-back ≤ 10% of (total paid-up equity capital + free reserves)

If within this limit, Board resolution at a meeting is enough and no special resolution is needed. Articles must still authorise buy-back.

Debt-equity test (Section 68(2)(d))

(Secured + unsecured debts owed after buy-back) ≤ 2 × (paid-up capital + free reserves)

The Act measures the debts owed after the buy-back against twice the paid-up capital and free reserves. It does not say that capital and reserves are reduced by the buy-back amount. The usual exam convention is to reduce them by the buy-back amount, unless the question says otherwise. The Central Government may notify a higher ratio for a class of companies.

Time gaps and deadlines

Complete within 1 year; no new offer within 1 year of closure of previous offer; destroy securities within 7 days; no further issue of same kind for 6 months; return within 30 days

One year runs from the date of the special resolution or Board resolution. The 7 days run from the last date of completion. The 30-day return goes to the Registrar (and SEBI for listed companies).

Penalty for buy-back default (Section 68(11))

Company: ₹1,00,000 to ₹3,00,000; every officer in default: ₹1,00,000 to ₹3,00,000

Fine only; imprisonment was omitted in 2020.

How to solve Alteration and Reduction of Share Capital; Buy-back questions

1. 1Identify the event: alteration (no return of capital), reduction (capital cut) or buy-back (company purchases own securities).
2. 2For alteration, check that the articles authorise it and the change is one of the five listed in Section 61(1). Note that sub-division must keep the same paid-to-unpaid proportion on each share.
3. 3For reduction, state the special resolution, then the Tribunal application, notice to Central Government, Registrar, SEBI (if listed) and creditors, and the three-month window for representations.
4. 4For reduction, check the bar: no reduction if the company is in arrears in repaying deposits or interest. Add the auditor's certificate on accounting treatment and the filing of the Tribunal order with the Registrar within 30 days.
5. 5For buy-back, list the conditions in order: articles, resolution, 25% limit, 2:1 debt ratio, fully paid-up shares, SEBI regulations or rules, one-year gap.
6. 6Do the arithmetic: compute paid-up capital plus free reserves, take 25% (and 10% for the Board route), then compare the debts owed after the buy-back with twice the paid-up capital and free reserves. State your convention: in exam problems, capital and reserves are usually reduced by the buy-back amount unless the question says otherwise.
7. 7Add procedure: explanatory statement, declaration of solvency, completion in one year, destruction in 7 days, register, return within 30 days.
8. 8Write a conclusion: buy-back permitted or not, and what the company must do or change.

Quickest way: Buy-back in 60 seconds: the 25, 10, 2, 1 check

Common mistakes in Alteration and Reduction of Share Capital; Buy-back

• Saying alteration of share capital needs Tribunal approval.

  Students mix Section 61 with Section 66.

  Fix: Alteration is by general meeting if articles authorise it. Tribunal is needed only for reduction, and for a consolidation and division that changes voting percentages.

• Treating cancellation of unissued shares under Section 61 as a reduction of capital.

  Both involve diminishing capital.

  Fix: Section 61(2) says cancellation of shares not taken or agreed to be taken is not a reduction. No Tribunal order is needed.

• Measuring the debts before the buy-back in the debt-equity test.

  Students use the balance sheet as given.

  Fix: Section 68(2)(d) tests the debts owed after the buy-back against twice the paid-up capital and free reserves. The Act does not spell out a reduction of capital and reserves by the buy-back amount. That adjustment is the usual exam convention, so state it as your assumption and follow any instruction in the question.

• Applying 25% to total capital for equity shares without reading the proviso.

  Students memorise only the headline limit.

  Fix: For equity shares in a financial year, the 25% is measured against total paid-up equity capital in that year. Read what the question asks.

• Thinking a Board resolution is enough for any buy-back.

  The 10% exception is remembered but its conditions are forgotten.

  Fix: Board route needs a buy-back of 10% or less of total paid-up equity capital and free reserves, plus authorisation by articles. Above 10% needs a special resolution.

• Forgetting post-buy-back obligations such as 7-day destruction and the 6-month bar on fresh issue.

  Students stop at the conditions.

  Fix: Add the list: destroy within 7 days, register of buy-back, return within 30 days, no further issue of same kind for six months except bonus issue or discharge of subsisting obligations.

Worked examples