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CA Intermediate · Advanced Accounting · Buyback of Securities

Himalaya Engineering Ltd has 4,00,000 equity shares of ₹10 each fully paid, so paid-up equity capital is ₹40,00,000. Free reserves, including securities premium, are ₹60,00,000, and there is no other capital. Debt is ₹1,00,00,000. The company wants to buy back equity shares at ₹20 per share through a special resolution. Considering the 25% limit on paid-up capital and free reserves, the 25% limit on paid-up equity capital in a year, and the debt-equity test, what is the maximum number of shares it can buy back?

The maximum is 1,00,000 shares. The 25% funds limit allows ₹25,00,000, which at ₹20 is 1,25,000 shares. However, only 25% of the 4,00,000 equity shares can be bought back in a year, which is 1,00,000. The debt-equity test is satisfied at that level.

  1. A1,25,000 shares
  2. B1,00,000 sharesCorrect
  3. C50,000 shares
  4. D40,000 shares

Explanation

The funds limit is 25% of ₹1,00,00,000 = ₹25,00,000, giving ₹25,00,000 ÷ ₹20 = 1,25,000 shares. The equity share limit is 25% of 4,00,000 shares = 1,00,000 shares, which is lower. Check: outlay ₹20,00,000 leaves equity ₹80,00,000 against debt ₹1,00,00,000, which is well within 2:1. The maximum is therefore 1,00,000 shares. The figure of 1,25,000 ignores the cap on equity shares.

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