Skip to content

CA Intermediate · Advanced Accounting · Buyback of Securities

Ganga Ltd, listed company, has paid-up equity capital Rs 20,00,000 and free reserves Rs 40,00,000. Its secured and unsecured debts total Rs 1,20,00,000 before buy-back. Which condition regarding debt-equity ratio must be satisfied after the buy-back of shares?

After the buy-back, the company's debt must not be more than twice its paid-up capital and free reserves. This 2:1 debt-equity ceiling is a statutory condition for buy-back and applies to all companies, listed or otherwise, not only unlisted ones.

  1. ADebt must not be more than twice the paid-up capital and free reserves after buy-backCorrect
  2. BDebt must not exceed the paid-up capital and free reserves after buy-back
  3. CDebt must not exceed three times the paid-up capital and free reserves after buy-back
  4. DNo condition on debt-equity ratio applies to listed companies

Explanation

The rule requires that the ratio of debt owed by the company to its paid-up capital and free reserves after the buy-back must not be more than 2:1. Hence debt up to twice the post-buy-back equity is allowed. Options with 1x or 3x state wrong ratios, and the rule applies to all companies.

Did you get it right without looking?

One question tells you little. A timed set on Buyback of Securities shows your real accuracy, how long you take and where you lose marks.

Practise Buyback of SecuritiesFree diagnostic mock

More Buyback of Securities questions