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Buy Back - debt equity ratio

Sangeet Hunjan (Company Secretary) (92 Points)

20 February 2009

Hi All !

Can you please help me with this query?

Sec 77A(2) lays down the conditions for buy back, one of them being that the ratio of debt owed by the company should not exceed twice the capital and free reserves post buy back. It is understood that one has to make this calculation before taking the decision of buy back.

Which financial statements should be the basis for calculating the debt equity ratio? Audited? Unaudited? And how old can they be?

Thanks

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pratik (student) (25 Points)
Replied 09 March 2009

Originally posted by :Sangeet Hunjan
"	Hi All ! Can you please help me with this query? Sec 77A(2) lays down the conditions for buy back, one of them being that the ratio of debt owed by the company should not exceed twice the capital and free reserves post buy back. It is understood that one has to make this calculation before taking the decision of buy back. Which financial statements should be the basis for calculating the debt equity ratio? Audited? Unaudited? And how old can they be? Thanks	"

dear this ratio has to be main tained by company after buy back.

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Sangeet Hunjan (Company Secretary) (92 Points)
Replied 26 March 2009

But the estimation of ratio is to be made before going in for buy back. Only on that basis on can find out if one should go for buy back or not.

Hashim (na) (22 Points)
Replied 09 July 2010

Here's a good rule of thumb to follow regarding debt to equity ratio

From a shareholders’ point of view, including debt in the capital structure of a company is acceptable so long as the risk is not too great, and that the return on borrowed capital is greater than the cost of borrowing the debt (Weighted Average Cost of Capital). For instance, if Juakali Corp. borrows $200 thousand from the bank and invests in opening new stores that are projected to increase revenues of the company by 25%, and if the interest rate payable on the debt is 10%, then this is desirable because the return from borrowed capital outweighs the cost of borrowing the capital (10%).

The formula you're looking at is: Debt to Equity ratio = Total Liabilities / Shareholder’s Equity
Source: https://www.best-dividend-paying-stocks.com/debt-equity-ratio.html

Sometimes debt can have the effects of increasing the return to shareholders and is thus described as gaining financial leverage. A firm is considered highly leveraged if a large portion of its company’s assets are financed by debt.

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(Guest)

Debt-Equity ratio is of the day, when the Buy-back offer closes.

Any, financial statement can be taken, whether Audited or Unaudited doesn’t matter.

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Fort Earth (Analyst) (22 Points)
Replied 14 November 2020

1.1 Notified with effect from 1st April 2014, sections 68, 69 and 70 of the Companies Act, 2013 (“the new act”) provide for the buy-back of securities in place of sections 77A, 77AA and 77B of the Companies Act, 1956 (“the old act”) respectively.

1.2 The Securities and Exchange Board of India (“SEBI Buy-back Regulations, 2018”) (as amended from time to time) apply to buy-back of shares or other specified securities of a company listed on a stock exchange.

1.3 In respect of private limited companies and unlisted public limited companies, buy-back of securities is governed by Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 (“Rules”) with effect from 1st April 2014 which replace the Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999.

one of the main conditions for allowability of buy back of securities is that the ratio of the aggregate of secured and unsecured debts owed by the Company after buy back is not more than twice the paid up capital and free reserves, provided that if a higher ratio has been specified under the Companies Act, 2013, the same shall prevail. In 2016, the Central Government had specified a debt to capital and free reserves ratio of 6:1 for Companies within the meaning of clause (45) of Sec. 2 of Companies Act, 2013 which carry on Non-Banking Finance Institution and Housing Finance activities.