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CA Intermediate · Advanced Accounting · Buyback of Securities

Narmada Ltd has paid-up equity capital of ₹50 lakh and free reserves of ₹150 lakh. Its total secured and unsecured debt is ₹360 lakh. The company proposes a buyback out of free reserves and must keep the post-buyback debt-equity ratio at no more than 2:1, as well as the 25% limit on paid-up capital and free reserves. What is the maximum buyback amount?

The maximum buyback is ₹20 lakh. The 25% limit would allow ₹50 lakh, but with debt of ₹360 lakh and a 2:1 ceiling, equity must stay at or above ₹180 lakh. Equity of ₹200 lakh can therefore fall by only ₹20 lakh.

  1. A₹50 lakh
  2. B₹20 lakhCorrect
  3. C₹12.5 lakh
  4. D₹100 lakh

Explanation

Total capital and free reserves are ₹200 lakh, so the 25% limit gives ₹50 lakh. For a 2:1 ratio with debt of ₹360 lakh, post-buyback equity must be at least ₹180 lakh. This allows a reduction of 200 − 180 = ₹20 lakh. The maximum is the lower of the two limits, ₹20 lakh. ₹50 lakh ignores the debt-equity condition.

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