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Buy back of shares - max. no. of shares that can be buyback

vipin (none) (33 Points)

23 August 2015

dear frnds, please help me as we know will calculating max. no. of shares that can buy back. we perform 3 test for this as follows: 1.shares o/s test 2.resource test 3.debt equity ratio test. now I am facing problem with debt equity ratio test the question problem is as follow: present equity share holder funds (equity paid up capital @ 330 + free reserve @ 420) = 750, loan (debt)= 1200, where nominal value is 10 and buyback price is 30. so how much is max. buyback

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Shishir Nayak ((Expert)) (369 Points)
Replied 23 August 2015

Present Equity shareholder fund is paid up capital 330 + free reserve 420 = 750

25% shareholder fund is 750*25%= 187.5

Loan fund is 1200, so minimum equity to be maintained after buy back in the ratio of 2:1 is 600, So Maximum permitted buy back is 750-600= 150

So Fund can be used lower of 187.5 and 150. that is 150 crore can be used.

So maximum share can bought back is 150/30= 5crore share

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CA Sam (CA) (64 Points)
Replied 23 August 2015

Solution along with reasoning:

Equity= 750

Debt = 1200

After buy-back Debt-Equity ratio of 2:1 should be maintained

So, Minimum equity to be maintained =1200/2 => 600

As present equity (750) > Minimum equity to be maintained (600), buy-back of shares can be made.

If buyback is made out of

Distributable profits (Revenue Reserves)
Securities Premium

then,

an amount equal to face value (nominal value) of shares bought back should be transferred to “Capital Redemption Reserve (CRR)”

As Companies Act, 2013,

After buy-back Debt-Equity ratio of 2:1 should be maintained

Further, “CRR” is not part of “Equity” hence a Linear programming equation needs to be formulated

Because you should determine both Amount available for buy back and amount to be transferred to “CRR” at the same time, as there exists a cross linkage

(Just like In case of Cross Holdings in Amalgamation where the net assets are computed by using a linear programming equation)

So, on the basis of above reason/logic,

Amount available for buy-back =

((Present equity – amount required to be transferred to CRR)) –min equity req to be maintained

Further

Amount equal to face value of shares bought back should be transferred to CRR

So, on the basis of above reason/logic,

Amount available for buy-back x Face value per share = amount required to be transferred to CRR

Buy-back price per share

Let,

Amount available for buy-back be “x”

Amount required to be transferred to CRR be “y”

X =(present equity – y)- min equity to be maintained

Y= ________x________ X face value per share

Buy-back price per share

X =(750-y)-600
Y= __ x__ x 10

By solving

(Amount available for buy-back )= 112.50
(Amount required to be transferred to CRR )= 37.50

Number of shares eligible for buy-back under debt-equity test

= Amount available for buy-back = 112.50 = 3.75 shares

Buy-back price per share 30

Attached File : 1487097 20150823124353 dear frnds.pdf downloaded: 1207 times

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vipin (none) (33 Points)
Replied 23 August 2015

Thanks Abcxyz frnd, for providing reason exactly what I want you provided that only, thanks once again. I have one more query on same matter can you please help me. While computing future equity funds above explanation why we have not deducted/less equity capital buyback amount(10) AND loss on buyback (30-10=20) also.

vipin (none) (33 Points)
Replied 23 August 2015

And thanks shisher for reply but you have provide ans. As per Co. Act ,1956. I was looking for as 2013 but any ways thanks

CA Sam (CA) (64 Points)
Replied 24 August 2015

what you are calculating (amount of buyback) is by itself the amount of equity share capital to be cancelled (10/-) and the premium on buyback (20/-) so no need to deduct them again

and these two amounts are met out of revenue reserves and securities premium

the same can be verified as follows:

after passing the buy-back entries compute the debt-equity ratio and it will be equal to 2:1

so no need to deduct them (10/- & 20/-) again because we are infact doing the the same ("cancellling" in your terminology "deduction")

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majumusk majumusk (2 Points)
Replied 05 November 2017

Rishi Kesh (4 Points)
Replied 31 March 2018

wat is the diff between the two acts

Rishi Kesh (4 Points)
Replied 31 March 2018

why treatment as per cos act 1956 nd cos act 2013 are different

satish (teaching) (2046 Points)
Replied 31 March 2018

treatment is same

Sai Varun Daripally (Student) (22 Points)
Replied 19 May 2019

You transfer an amount equal to the face value of the shares redeemed out of free reserves to CRR, hence you reduce the amount to be transferred from the existing PSC + FR, so this reduces the nominal value of the shares to be bought back. So the equity capital gets reduced, since you are providing premium on buy back from the free reserves , premium gets adjusted in the journal entries as follows

Securities Premium A/c Dr 20 -

To premium on buy back A/c - 20

if you still don’t understand refer the journal entries thoroughly, it helps a lot.

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CS Aman Kesarwani (3 Points)
Replied 03 August 2019

Hi, Can anyone guide me, if a Company having negative reserves, such that the net worth is negative, Can it buy back its shares out of proceed of new issue of different kind of shares. If yes please provide the maximum amount which can be brought back considering following example:

Paid Up Capital = 100

Reserves = -150

Debt = 0

Jaya Sachdev (8 Points)
Replied 02 April 2020

But when we calculate no of equity shares in debt equity ratio test and resource test why we divide the value by buy back price which is including premium rather than face value

satish (teaching) (2046 Points)
Replied 02 April 2020

When sufficient balance of free reserves are available, but no liquid is available for buyback of shares, in that case company will go for issue of new equity shares.
in the above case for calculating number of equity shares, we should use issue price not face value per share.
above explanation not as per sec 55 of the companies act 2013.