CA Inter P1 · Chapter 10
Buyback of Securities MCQs with Answers
10 multiple-choice questions on Buyback of Securities for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under section 68 of the Companies Act, 2013, a company may buy back its shares with the authorisation of only its board of directors (without a special resolution) provided the buyback does not exceed:
- A) 15% of the paid-up equity capital alone
- B) 25% of the total paid-up equity capital and free reserves
- C) 10% of the total paid-up equity capital and free reserves
- D) 5% of the free reserves alone
Show answer & explanation
Answer: C) 10% of the total paid-up equity capital and free reserves
Section 68 permits a buyback authorised by a board resolution passed at a meeting if the buyback is 10% or less of the total paid-up equity capital and free reserves. For a buyback up to 25%, a special resolution of the shareholders is required.
Question 2
Case: Garima Ltd has paid-up equity share capital of ₹50,00,000 (shares of ₹10 each), securities premium of ₹10,00,000 and general reserve of ₹30,00,000. It proposes a buyback at ₹30 per share with a special resolution. Considering only the shares outstanding test and the resources test under section 68, the maximum number of shares it can buy back is:
- A) 30,000
- B) 1,25,000
- C) 75,000
- D) 66,666
Show answer & explanation
Answer: C) 75,000
Shares outstanding test: 25% of 5,00,000 shares = 1,25,000 shares. Resources test: 25% of (paid-up capital + free reserves including securities premium) = 25% x 90,00,000 = 22,50,000; at ₹30 per share = 75,000 shares. The lower of the two, 75,000 shares, is the maximum.
Question 3
Case: After a proposed buyback, Harsha Ltd will have secured and unsecured debt of ₹3,60,00,000. Assuming no higher ratio has been notified for its class of company, to satisfy the debt-equity condition of section 68, the minimum aggregate of its paid-up capital and free reserves after the buyback must be:
- A) ₹1,20,00,000
- B) ₹3,60,00,000
- C) ₹90,00,000
- D) ₹1,80,00,000
Show answer & explanation
Answer: D) ₹1,80,00,000
Section 68 requires that the ratio of aggregate secured and unsecured debts owed by the company after the buyback should not be more than twice the paid-up capital and its free reserves. So equity must be at least 3,60,00,000 / 2 = ₹1,80,00,000.
Question 4
Case: Ishita Ltd bought back 50,000 equity shares of ₹10 each at ₹40 per share, wholly out of its securities premium and general reserve. Under section 69 of the Companies Act, 2013, the amount to be transferred to the Capital Redemption Reserve is:
- A) ₹5,00,000
- B) ₹20,00,000
- C) ₹0
- D) ₹15,00,000
Show answer & explanation
Answer: A) ₹5,00,000
Section 69 requires that where a company purchases its own shares out of free reserves or securities premium, a sum equal to the nominal value of the shares so purchased is transferred to the Capital Redemption Reserve. Nominal value = 50,000 x 10 = ₹5,00,000. The premium paid of 15,00,000 is adjusted against securities premium/free reserves but is not transferred to CRR.
Question 5
Case: Jatin Ltd buys back 1,00,000 equity shares of ₹10 each at ₹15 per share. To part-finance the buyback, it issues 10% preference shares of ₹6,00,000 at par; the balance is met out of general reserve. Following the usual ICAI approach, the proceeds of the preference issue are applied first towards the nominal value of the shares bought back. The amount to be transferred to the Capital Redemption Reserve is:
- A) ₹10,00,000
- B) ₹4,00,000
- C) ₹0
- D) ₹9,00,000
Show answer & explanation
Answer: B) ₹4,00,000
Nominal value of shares bought back = 1,00,000 x 10 = 10,00,000. Under section 69, a transfer to CRR is required only to the extent the nominal value is met out of free reserves or securities premium; the part met out of the proceeds of a fresh issue of a different kind of shares (6,00,000 of preference shares) needs no transfer. CRR = 10,00,000 - 6,00,000 = ₹4,00,000, transferred from general reserve. The premium of 5,00,000 (1,00,000 x ₹5) is also borne by general reserve but is not transferred to CRR.
Question 6
Which of the following is NOT a permitted source for financing a buyback of equity shares under section 68?
- A) Securities premium account
- B) Proceeds of an earlier issue of equity shares
- C) Free reserves
- D) Proceeds of an issue of preference shares
Show answer & explanation
Answer: B) Proceeds of an earlier issue of equity shares
Section 68 allows a buyback out of free reserves, the securities premium account, or proceeds of the issue of any shares or other specified securities, but no buyback of any kind of shares can be made out of the proceeds of an earlier issue of the same kind of shares. Hence equity shares cannot be bought back out of proceeds of an issue of equity shares.
Question 7
Case: Kaustubh Ltd has 8,00,000 fully paid equity shares outstanding. Under section 68, the maximum number of equity shares it can buy back in a financial year, considering only the limit on the number of shares, is:
- A) 80,000
- B) 1,60,000
- C) 2,00,000
- D) 4,00,000
Show answer & explanation
Answer: C) 2,00,000
Section 68 provides that the buyback of equity shares in any financial year shall not exceed 25% of its total paid-up equity capital in that financial year. 25% of 8,00,000 shares = 2,00,000 shares. 80,000 reflects the 10% figure, which is the value-based limit for a board-only buyback, not the limit on the number of shares.
Question 8
Case: Lavanya Ltd completed a buyback of its equity shares last month. Under section 68, the company cannot make a further issue of the same kind of shares (other than by way of bonus issue or in discharge of subsisting obligations such as conversion of warrants or preference shares/debentures) within a period of:
- A) Three years
- B) One month
- C) One year
- D) Six months from the completion of the buyback
Show answer & explanation
Answer: D) Six months from the completion of the buyback
Section 68(8) prohibits a company that has completed a buyback from making a further issue of the same kind of shares, including allotment of new shares, within six months, except by way of bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock options, sweat equity or conversion of preference shares or debentures into equity shares.
Question 9
Under the proviso to section 68(2), no offer of buyback shall be made by a company within what period from the date of closure of its preceding offer of buyback?
- A) One year
- B) Six months
- C) Three months
- D) Two years
Show answer & explanation
Answer: A) One year
The proviso to section 68(2) states that no offer of buyback shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buyback, if any. The six-month restriction is a separate rule relating to fresh issues after a buyback.
Question 10
Case: Manas Ltd has paid-up equity capital of ₹2,00,00,000 (shares of ₹10 each) and free reserves, including securities premium, of ₹1,20,00,000. It has negligible debt. It proposes a buyback at ₹32 per share with a special resolution of shareholders. The maximum number of shares it can buy back is:
- A) 5,00,000
- B) 1,00,000
- C) 3,75,000
- D) 2,50,000
Show answer & explanation
Answer: D) 2,50,000
Resources test: 25% x (2,00,00,000 + 1,20,00,000) = 80,00,000; / ₹32 = 2,50,000 shares. Shares outstanding test: 25% x 20,00,000 shares = 5,00,000 shares. The debt-equity test is satisfied since debt is negligible. Maximum = lower of the two = 2,50,000 shares. (1,00,000 would be the limit for a board-only buyback.)