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CA Intermediate · Advanced Accounting · Buyback of Securities

Meghdoot Ltd has 4,00,000 equity shares of Rs 10 each fully paid. It plans to buy back shares out of its free reserves, with the buyback approved by a special resolution. Paid-up capital plus free reserves are Rs 90,00,000. Applying the 25% limit on paid-up capital and free reserves for the buyback, what is the maximum amount the company can spend on the buyback in a year?

The maximum buyback is Rs 22,50,000. A company may buy back up to 25% of the total of its paid-up capital and free reserves in a financial year, and 25% of Rs 90,00,000 equals Rs 22,50,000. Using only paid-up capital as the base would be wrong.

  1. ARs 10,00,000
  2. BRs 22,50,000Correct
  3. CRs 40,00,000
  4. DRs 90,00,000

Explanation

The maximum buyback is 25% of the aggregate of paid-up capital and free reserves. 25% of Rs 90,00,000 = Rs 22,50,000. Rs 10,00,000 wrongly uses 25% of paid-up capital alone (Rs 40,00,000 x 25%). Rs 40,00,000 is just the paid-up capital.

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