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CA Intermediate · Advanced Accounting · Buyback of Securities

Sundaram Ltd has equity share capital of Rs 40,00,000 (4,00,000 shares of Rs 10 each), securities premium Rs 6,00,000, general reserve Rs 14,00,000, profit and loss balance Rs 10,00,000 and a revaluation reserve of Rs 5,00,000. It has secured loans of Rs 60,00,000. The company wants to buy back shares by special resolution. Under the 2:1 debt-equity test (post-buyback secured and unsecured debt not more than twice paid-up capital plus free reserves) and the 25% limit, what is the maximum buyback amount, taking free reserves as general reserve, profit and loss and securities premium?

The maximum buyback is Rs 17,50,000. Free reserves are Rs 30,00,000, excluding revaluation reserve, so capital plus free reserves is Rs 70,00,000 and 25% is Rs 17,50,000. The debt-equity test would allow up to Rs 40,00,000, so the 25% cap is binding.

  1. ARs 17,50,000Correct
  2. BRs 20,00,000
  3. CRs 13,75,000
  4. DRs 15,00,000

Explanation

Free reserves = 6,00,000 + 14,00,000 + 10,00,000 = Rs 30,00,000 (revaluation reserve excluded). Capital + free reserves = Rs 70,00,000. 25% limit = Rs 17,50,000. Debt test: after buyback of X, 60,00,000 <= 2 x (70,00,000 - X), so X <= 40,00,000. Binding limit is Rs 17,50,000. Including revaluation reserve would give a wrong base of Rs 75,00,000 (Rs 18,75,000).

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