Buyback of Shares: Testing the 25% Ceiling, the Special Resolution and Debt-Equity
Vikas Ltd's balance sheet at 31 March 2025 shows equity share capital ₹60,00,000 (6,00,000 shares of ₹10), General Reserve ₹18,00,000, Profit & Loss ₹12,00,000, Securities Premium ₹6,00,000, Revaluation Reserve ₹10,00,000, 9% Debentures ₹40,00,000 and a working capital loan of ₹10,00,000 from a bank. The board proposes to buy back 1,50,000 equity shares at ₹24 each, funded by ₹6,00,000 from securities premium, ₹12,00,000 from Profit & Loss and ₹18,00,000 from General Reserve. The company has no default in repayment of deposits or interest. The CFO believes that because the buyback is funded from reserves and securities premium, the 25% ceiling does not apply, and that no special resolution is needed because the amount is below ₹40,00,000.
1. Test the proposed buyback against the 25% ceiling and determine whether a special resolution is required.
Read the worked answer
Free reserves. General Reserve ₹18,00,000 + P&L ₹12,00,000 = ₹30,00,000. Securities Premium and Revaluation Reserve are excluded: securities premium is not distributable as dividend and the revaluation reserve is expressly excluded from free reserves.
25% ceiling. 25% × (paid-up equity capital + free reserves) = 25% × (60,00,000 + 30,00,000) = 25% × 90,00,000 = ₹22,50,000.
The proposal is 1,50,000 × ₹24 = ₹36,00,000, which exceeds the ceiling by ₹13,50,000. The buyback cannot proceed in this form. The source of funding does not enlarge the ceiling: the 25% limit is applied to paid-up capital and free reserves, and securities premium is not part of that base even though it is an eligible source of payment.
Special resolution. A special resolution is required for a buyback exceeding 10% of paid-up capital plus free reserves. 10% × 90,00,000 = ₹9,00,000. The proposal is far above that, so a special resolution is required. The CFO is wrong on both counts. The maximum permissible amount is ₹22,50,000, i.e. 93,750 shares at ₹24.
2. Comment on the proposed funding from securities premium and on whether the revaluation reserve can be used.
Read the worked answer
Section 68 permits a buyback to be funded out of (a) free reserves, (b) securities premium account, or (c) proceeds of a fresh issue of shares or other specified securities. Securities premium is therefore a permitted source, but its use does not convert it into a free reserve for the 25% ceiling. The ₹6,00,000 earmarked from securities premium is available to pay for the buyback, but the overall spend must still fit within ₹22,50,000.
Where the buyback price exceeds the face value of the shares, the premium paid is charged first against securities premium and then against free reserves; the face value is adjusted against share capital. Accounting for the maximum permitted buyback of ₹22,50,000 at ₹24 would reduce share capital by 93,750 × ₹10 = ₹9,37,500 and charge ₹13,12,500 to securities premium/free reserves.
The Revaluation Reserve cannot be used. It is not a free reserve, is not a permissible source under Section 68, and is excluded from the ceiling computation. Using it would overstate distributable strength and understate the true cost of the buyback.
3. Assuming the buyback is scaled down to the maximum permissible amount, test the post-buyback debt-equity ratio and state the number of shares that can be bought at ₹24.
Read the worked answer
Maximum amount = ₹22,50,000. At ₹24 per share, maximum shares = 22,50,000 / 24 = 93,750 shares. (Fractional entitlements would be handled in cash.)
Post-buyback position (approximate, at maximum).
| Item | ₹ |
|---|---|
| Equity capital (60,00,000 − 9,37,500) | 50,62,500 |
| Free reserves (30,00,000 − 13,12,500) | 16,87,500 |
| Equity + free reserves | 67,50,000 |
| Debentures | 40,00,000 |
| Bank loan | 10,00,000 |
| Total debt | 50,00,000 |
Debt-equity ratio = 50,00,000 / 67,50,000 = 0.74 : 1, well within the permitted 2 : 1. The debt-equity condition is therefore not the binding constraint; the 25% ceiling is.
Note that the securities premium of ₹6,00,000 will be fully exhausted in funding the premium element, and the balance of the premium will come from free reserves. The company must also ensure the buyback is completed and the shares extinguished within the statutory timelines, and that the declaration of solvency is filed.