Buy-back Approvals and Debt-Equity Ceiling
Sunrise Infra Ltd has paid-up equity share capital of ₹1,00,00,000 divided into 10,00,000 shares of ₹10 each, free reserves of ₹80,00,000 and securities premium of ₹20,00,000. Its borrowings are ₹3,00,00,000. At its board meeting on 12 April 2024, the company proposes to buy back 60,000 equity shares at ₹150 per share. The buy-back premium is to be charged first to securities premium and the balance to free reserves; the nominal value is to be transferred to capital redemption reserve from free reserves. The company has no default in repayment of deposits or interest. The board wants to proceed by board resolution because the buy-back is only 6% of the number of shares. The CFO asks whether the proposal is legally permissible, what approvals are needed, and what the post-buy-back debt-equity ratio will be. The latest audited balance sheet is as at 31 March 2024.
1. Examine whether the original proposal of 60,000 shares at ₹150 can proceed. Compute the 10% threshold, the 25% nominal limit and the post-buy-back debt-equity ratio, and identify the approval required.
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Threshold tests. Paid-up capital + free reserves = ₹1,00,00,000 + ₹80,00,000 = ₹1,80,00,000. The 10% board-resolution threshold is ₹18,00,000. The proposed buy-back consideration is 60,000 × ₹150 = ₹90,00,000, which exceeds ₹18,00,000. Hence a board resolution is not enough; a special resolution under Section 68(2)(b) is required. The 25% nominal limit is 25% × ₹1,00,00,000 = ₹25,00,000. The nominal value proposed is 60,000 × ₹10 = ₹6,00,000, so that limit is satisfied.
Debt-equity test. Buy-back premium = 60,000 × ₹140 = ₹84,00,000. Securities premium of ₹20,00,000 is used first, leaving ₹64,00,000 to be charged to free reserves. Transfer to CRR = nominal value ₹6,00,000 from free reserves. Post buy-back free reserves = ₹80,00,000 − ₹64,00,000 − ₹6,00,000 = ₹10,00,000. Post buy-back paid-up capital = ₹1,00,00,000 − ₹6,00,000 = ₹94,00,000. Capital + free reserves = ₹1,04,00,000. Debt = ₹3,00,00,000. Ratio = 3,00,00,000 / 1,04,00,000 = 2.88:1, which exceeds the 2:1 ceiling in Section 68(2)(d). The proposal is therefore not permissible as it stands; the board must not proceed until the debt-equity ratio is brought within 2:1.
2. If the buy-back is scaled down to 20,000 shares at ₹150, state the approval required, compute the CRR transfer and the post-buy-back debt-equity ratio.
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Consideration = 20,000 × ₹150 = ₹30,00,000, still above ₹18,00,000, so a special resolution is required. Premium = 20,000 × ₹140 = ₹28,00,000. Use securities premium ₹20,00,000; charge ₹8,00,000 to free reserves. CRR transfer = nominal ₹2,00,000 from free reserves. Post free reserves = 80,00,000 − 8,00,000 − 2,00,000 = ₹70,00,000. Paid-up capital = ₹98,00,000. Capital + free reserves = ₹1,68,00,000. Debt-equity = 3,00,00,000 / 1,68,00,000 = 1.79:1, within 2:1. The buy-back is within the 25% nominal limit (₹2,00,000 vs ₹25,00,000). It can proceed with special resolution and the prescribed return filing after completion.
3. Record the journal entries for the scaled-down buy-back and the CRR transfer.
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Buy-back entry: Dr Equity Share Capital ₹2,00,000; Dr Securities Premium ₹20,00,000; Dr Free Reserves ₹8,00,000; Cr Bank ₹30,00,000. CRR entry: Dr Free Reserves ₹2,00,000; Cr Capital Redemption Reserve ₹2,00,000. The first entry records the reduction of share capital and the use of premium sources; the second entry preserves the nominal capital redeemed by converting free reserves into a non-distributable reserve.