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CA Intermediate · Advanced Accounting · Buyback of Securities

Tulsi Pharma Ltd decides to buy back 1,50,000 of its equity shares of ₹10 each at ₹18 per share. To part-fund the buyback, it first issues 50,000 12% redeemable preference shares of ₹10 each at par, receiving ₹5,00,000. The remaining payment is made out of free reserves. What amount must be transferred to Capital Redemption Reserve?

The CRR transfer is ₹10,00,000. Nominal value bought back is ₹15,00,000, but since ₹5,00,000 came from a fresh issue of a different kind of shares, CRR is required only for the nominal value in excess of those proceeds, namely ₹15,00,000 less ₹5,00,000.

  1. A₹10,00,000Correct
  2. B₹15,00,000
  3. C₹22,00,000
  4. D₹5,00,000

Explanation

Nominal value of shares bought back = 1,50,000 × 10 = ₹15,00,000. Because preference shares are a different kind and their proceeds fund the buyback, CRR is needed only for the nominal value exceeding those proceeds: 15,00,000 − 5,00,000 = ₹10,00,000. ₹15,00,000 ignores the fresh issue; ₹22,00,000 wrongly subtracts the proceeds from the total outflow of ₹27,00,000.

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