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Quick Limited has Equity Capital ₹45 lakh (45,000 shares of ₹100), Reserves: General ₹74 lakh, Securities Premium ₹30 lakh, P&L ₹25 lakh, Revaluation Reserve ₹4 lakh, Statutory Reserve ₹6.5 lakh; Loan Funds ₹350 lakh. Market price ₹250; buy-back at 20% over market. What is the maximum permissible number of equity shares that can be bought back if Loan Fund is ₹350 lakh?
ANil shares
B14,500 shares
C11,250 shares
D6,000 shares
Answer & Solution
Correct answer: A. Nil shares
1. Step 1: Section 68(2)(e) — debt-equity ratio post buy-back must not exceed 2:1 of (Paid-up capital + Free reserves).
2. Step 2: Free reserves = General + Securities Premium + P&L = 74+30+25 = ₹129 lakh (excluding Revaluation and Statutory). Paid-up + Free Reserves = 45 + 129 = ₹174 lakh. Debt-Equity max = 2 × 174 = ₹348 lakh.
3. Step 3: Existing Loan ₹350 lakh > ₹348 lakh permissible. Test fails. No buy-back permissible. Hence Nil shares.
_Source: ICAI BoS CA Inter Paper 1 Practice MCQ Paper (89270bos-aps3012-int-p1), Q.11_