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CS Professional · Corporate Restructuring, Valuation and Insolvency · Types of Corporate Restructuring

Meera Pharma Ltd has 50 lakh equity shares, a free reserve balance of Rs 40 crore and a share price of Rs 200. It buys back 5 lakh shares at Rs 200 using its free reserves. What is the effect of this buyback on the share capital and on the company's shareholding structure?

The share count falls from 50 lakh to 45 lakh because the bought-back shares are extinguished. Shareholders who did not tender now hold a larger percentage of a smaller total. The Rs 10 crore cost is met from free reserves.

  1. AShare count falls to 45 lakh, and the remaining shareholders' proportionate holding risesCorrect
  2. BShare count stays at 50 lakh because buybacks are only a reduction of reserves
  3. CShare count rises to 55 lakh because of reissue of shares
  4. DShare count falls to 45 lakh, but proportionate holdings stay unchanged for every shareholder

Explanation

Buying back 5 lakh shares leaves 50 - 5 = 45 lakh shares, and the shares bought back are extinguished. A shareholder who did not tender holds the same shares out of a smaller total, so the percentage holding rises. Cash of Rs 10 crore (5 lakh x 200) is paid out of free reserves.

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