Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights - Test 3: answer key

Question 1 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. Vardhan Chemicals Ltd. is a listed non-Ind AS company preparing its financial statements for the year ended 31 March 2026. As at 1 April 2026, its balance sheet shows: equity share capital ₹1,00,00,000 (10,00,000 equity shares of ₹10 each, fully paid); free reserves comprising general reserve ₹30,00,000, securities premium ₹15,00,000 and profit and loss account credit balance ₹5,00,000 (total ₹50,00,000); and long-term borrowings ₹2,20,00,000. There is no subsisting default in repayment of deposits, debentures, preference shares, dividend or term loans. The buy-back is authorised by the articles. The company passed a special resolution to buy back 1,00,000 equity shares. The board wants to determine the maximum offer price per share that satisfies all three statutory numerical tests simultaneously: the shares outstanding test, the resources test and the debt-equity ratio test. For this purpose, the ICAI simultaneous-equation approach is to be applied, recognising that the nominal value of shares bought back out of free reserves must be transferred to the Capital Redemption Reserve (CRR) under Section 69. The company also wishes to know the consequences if it offers a higher price of ₹35 per share, and the premium that would be charged to free reserves after fully utilising the securities premium account. All shares are fully paid.

What is the maximum price per share at which Vardhan Chemicals Ltd. can buy back 1,00,000 equity shares, considering all three statutory tests simultaneously?

1. ₹37.50
2. ₹30.00 (correct answer)
3. ₹22.00
4. ₹35.00

Answer: B — ₹30.00

Explanation. Present equity = ₹1,00,00,000 + ₹50,00,000 = ₹1,50,00,000. Minimum equity after buy-back = ₹2,20,00,000/2 = ₹1,10,00,000. For 1,00,000 shares, CRR transfer x = ₹10,00,000. Applying the ICAI simultaneous approach: (₹1,50,00,000 − ₹10,00,000) − ₹1,10,00,000 = y, giving y = ₹30,00,000. Maximum price = ₹30,00,000/1,00,000 = ₹30.00. The resources test limit is 25% of ₹1,50,00,000 = ₹37,50,000 (₹37.50 per share), which is higher; hence the debt-equity test is binding at ₹30.00.

Where it goes wrong. Students often use the resources test limit of ₹37,50,000 to get ₹37.50 per share without checking the debt-equity test, or ignore the CRR adjustment.

Authority. Section 68(2)(c), 68(2)(d) and 68(2)(e) of Companies Act, 2013

Question 2 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

If Vardhan Chemicals Ltd. offers ₹35 per share, what is the maximum number of equity shares it can buy back under the debt-equity ratio test?

1. 1,14,286 shares
2. 1,00,000 shares
3. 88,889 shares (correct answer)
4. 80,000 shares

Answer: C — 88,889 shares

Explanation. Let N be the number of shares. CRR transfer = 10N. Post-buy-back equity = ₹1,50,00,000 − 10N − 35N = ₹1,50,00,000 − 45N. This must be at least ₹1,10,00,000. Therefore 45N ≤ ₹40,00,000, giving N ≤ 88,889 shares (rounded down). The resources test allows 35N ≤ ₹37,50,000, i.e. N ≤ 1,07,143 shares, so the debt-equity test is binding. Thus the maximum is 88,889 shares.

Where it goes wrong. Students often solve without subtracting the CRR from equity or confuse the debt-equity limit with the resources limit.

Authority. Section 68(2)(e) of Companies Act, 2013

Question 3 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

At the maximum price of ₹30 per share, what amount is transferred to the Capital Redemption Reserve on buy-back of 1,00,000 shares?

1. ₹20,00,000
2. ₹30,00,000
3. ₹5,00,000
4. ₹10,00,000 (correct answer)

Answer: D — ₹10,00,000

Explanation. Under Section 69(1), CRR is created equal to the nominal value of shares bought back out of free reserves or securities premium. Nominal value = 1,00,000 shares × ₹10 = ₹10,00,000. The premium of ₹20,00,000 is not transferred to CRR; it is adjusted against securities premium and free reserves.

Where it goes wrong. Students often transfer the total consideration of ₹30,00,000 or the premium of ₹20,00,000 to CRR.

Authority. Section 69(1) of Companies Act, 2013

Question 4 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

At the maximum price of ₹30 per share, after utilising the securities premium account to the maximum extent, what is the balance premium charged to the general reserve?

1. ₹5,00,000 (correct answer)
2. ₹20,00,000
3. ₹15,00,000
4. ₹10,00,000

Answer: A — ₹5,00,000

Explanation. Total premium = 1,00,000 × (₹30 − ₹10) = ₹20,00,000. Securities premium available = ₹15,00,000. Balance premium charged to general reserve = ₹20,00,000 − ₹15,00,000 = ₹5,00,000. In addition, the CRR transfer of ₹10,00,000 is also charged to general reserve; both charges are independent.

Where it goes wrong. Students often charge the entire premium to general reserve or forget that the CRR transfer is a separate charge to free reserves.

Authority. Section 68(1) and Section 69(1) of Companies Act, 2013

Question 5 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. Zenith Technologies Ltd. is an unlisted non-Ind AS company. As at 1 April 2026, it has 12,00,000 equity shares of ₹10 each, each carrying one vote. The company proposes to issue equity shares with differential rights (DVR shares) as to voting, each DVR share carrying 8 votes. The company has had distributable profits for the three financial years preceding the year of issue, has not defaulted in payment of dividend or interest on debentures, has not defaulted in filing financial statements and annual returns for three financial years, and has not been penalised under the Companies Act or any other Act in the last three years. The issue will be authorised by an ordinary resolution. The company proposes to issue 4,00,000 DVR shares of ₹10 each at par. The management seeks to verify whether the proposed issue complies with the 74% voting power cap and the 74% share capital cap under Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014. It also wants to determine the maximum number of DVR shares it could issue if the DVR shares were to carry 12 votes each. The company is aware that a special resolution is not required for DVR shares, unlike a buy-back under Section 68.

What is the total voting power of the DVR shares as a percentage of the total voting power after the proposed issue of 4,00,000 DVR shares with 8 votes each?

1. 66.67%
2. 72.73% (correct answer)
3. 74.00%
4. 80.00%

Answer: B — 72.73%

Explanation. Normal equity shares carry 12,00,000 votes. DVR shares carry 4,00,000 × 8 = 32,00,000 votes. Total voting power = 12,00,000 + 32,00,000 = 44,00,000 votes. DVR voting power percentage = 32,00,000/44,00,000 = 72.73%. This is within the 74% cap under Rule 4.

Where it goes wrong. Students often compute DVR shares as a percentage of total shares (25%) instead of voting power.

Authority. Rule 4(2)(f) of Companies (Share Capital and Debentures) Rules, 2014

Question 6 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Is the proposed issue of 4,00,000 DVR shares with 8 votes each valid under Rule 4?

1. Invalid, because DVR voting power exceeds 74%
2. Valid, because DVR shares are within 74% of total share capital
3. Valid, because DVR voting power is 72.73%, within the 74% cap (correct answer)
4. Invalid, because a special resolution is required

Answer: C — Valid, because DVR voting power is 72.73%, within the 74% cap

Explanation. Rule 4 requires that the total voting power of DVR shares shall not exceed 74% of total voting power. Here, DVR voting power is 72.73%, which is within the cap. The share capital cap is also satisfied (4,00,000/16,00,000 = 25%). An ordinary resolution suffices for DVR shares; a special resolution is not required.

Where it goes wrong. Students often confuse the 74% share capital cap with the 74% voting power cap, or think a special resolution is required.

Authority. Rule 4(2) of Companies (Share Capital and Debentures) Rules, 2014

Question 7 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

What is the maximum number of DVR shares with 8 votes each that Zenith Technologies Ltd. can issue under the 74% voting power cap?

1. 4,00,000 shares
2. 3,60,000 shares
3. 5,00,000 shares
4. 4,26,923 shares (correct answer)

Answer: D — 4,26,923 shares

Explanation. Let N be the maximum DVR shares. The condition is 8N/(12,00,000 + 8N) ≤ 0.74. Solving: 8N ≤ 8,88,000 + 5.92N, so 2.08N ≤ 8,88,000, giving N ≤ 4,26,923 shares (rounded down). The share capital cap would allow 34,15,385 shares, so the voting power cap is the binding constraint.

Where it goes wrong. Students often set 8N/12,00,000 = 0.74, forgetting that the denominator includes DVR votes, or apply the share capital cap.

Authority. Rule 4(2)(f) of Companies (Share Capital and Debentures) Rules, 2014

Question 8 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

If the DVR shares carry 12 votes each, what is the maximum number of DVR shares the company can issue under the 74% voting power cap?

1. 2,84,615 shares (correct answer)
2. 3,33,333 shares
3. 4,00,000 shares
4. 2,50,000 shares

Answer: A — 2,84,615 shares

Explanation. The condition is 12N/(12,00,000 + 12N) ≤ 0.74. Solving: 12N ≤ 8,88,000 + 8.88N, so 3.12N ≤ 8,88,000, giving N ≤ 2,84,615 shares (rounded down). This is the maximum number of DVR shares with 12 votes each that can be issued without breaching the 74% voting power cap.

Where it goes wrong. Students often set 12N/12,00,000 = 0.74, which gives 74,000 shares, forgetting to include DVR votes in the denominator.

Authority. Rule 4(2)(f) of Companies (Share Capital and Debentures) Rules, 2014

Question 9 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. Which of the following is NOT a restriction on buy-back under Section 70 of the Companies Act, 2013?

Which of the following is NOT a restriction on buy-back under Section 70 of the Companies Act, 2013?

1. Buy-back through a subsidiary company
2. Buy-back through an investment company
3. Buy-back when there is a default in repayment of deposits
4. Buy-back when the company has distributable profits for only two years (correct answer)

Answer: D — Buy-back when the company has distributable profits for only two years

Explanation. Section 70 prohibits buy-back through a subsidiary or investment company, or when there is a subsisting default in repayment of deposits, debentures, preference shares, dividend or term loans. Having distributable profits for only two years is not a Section 70 restriction; the three-year profit condition applies to DVR shares under Rule 4.

Where it goes wrong. Students often confuse the DVR share conditions under Rule 4 with the Section 70 buy-back restrictions.

Authority. Section 70 of Companies Act, 2013 and Rule 4 of Companies (Share Capital and Debentures) Rules, 2014

Question 10 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company had a subsisting default in repayment of deposits, which was fully remedied on 1 September 2023. On which date can it first undertake a buy-back under Section 70?

A company had a subsisting default in repayment of deposits, which was fully remedied on 1 September 2023. On which date can it first undertake a buy-back under Section 70?

1. 1 September 2025
2. 1 September 2026 (correct answer)
3. 1 April 2026
4. 1 September 2027

Answer: B — 1 September 2026

Explanation. Section 70(1)(c) prohibits buy-back while a default subsists. The proviso permits buy-back if the default is remedied and a period of three years has elapsed since the cessation of the default. Three years from 1 September 2023 ends on 1 September 2026. Hence, buy-back is permitted on or after that date.

Where it goes wrong. Students often apply a one-year gap or six-month restriction instead of the three-year post-default cooling period.

Authority. Proviso to Section 70(1)(c) of Companies Act, 2013

Question 11 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company has paid-up equity capital of ₹60,00,000, free reserves of ₹30,00,000 and debt of ₹1,20,00,000. It proposes to buy back equity shares at ₹20 per share. What is the maximum amount of buy-back under the debt-equity ratio test?

A company has paid-up equity capital of ₹60,00,000, free reserves of ₹30,00,000 and debt of ₹1,20,00,000. It proposes to buy back equity shares at ₹20 per share. What is the maximum amount of buy-back under the debt-equity ratio test?

1. ₹22,50,000
2. ₹30,00,000
3. ₹20,00,000 (correct answer)
4. ₹15,00,000

Answer: C — ₹20,00,000

Explanation. Present equity = ₹90,00,000. Minimum equity after buy-back = ₹1,20,00,000/2 = ₹60,00,000. Let N be the number of shares. CRR transfer x = 10N; buy-back amount y = 20N. Equation: (₹90,00,000 − 10N) − ₹60,00,000 = 20N, giving 30N = ₹30,00,000, so N = 1,00,000 shares. Maximum buy-back = 1,00,000 × ₹20 = ₹20,00,000. The resources test allows ₹22,50,000, so the debt-equity test is binding.

Where it goes wrong. Students often use the resources test limit of ₹22,50,000 or forget the CRR adjustment.

Authority. Section 68(2)(e) of Companies Act, 2013

Question 12 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. Which of the following is a condition for issuing equity shares with differential rights under Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014?

Which of the following is a condition for issuing equity shares with differential rights under Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014?

1. The company must have distributable profits for the last three financial years (correct answer)
2. The company must have a credit rating of AA or above
3. The issue must be authorised by a special resolution
4. The DVR shares must carry at least 10 votes per share

Answer: A — The company must have distributable profits for the last three financial years

Explanation. Rule 4 requires the company to have distributable profits for the three financial years preceding the year of issue, among other conditions. A credit rating is not required; an ordinary resolution is sufficient; and there is no minimum votes-per-share requirement. The 74% voting power cap applies.

Where it goes wrong. Students often confuse the resolution type (special vs ordinary) or think a credit rating is mandatory.

Authority. Rule 4(2) of Companies (Share Capital and Debentures) Rules, 2014

Question 13 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company has paid-up equity capital of ₹1,20,00,000, free reserves of ₹60,00,000 and debt of ₹2,40,00,000. It wants to buy back 1,20,000 equity shares. What is the maximum price per share considering all three statutory tests?

A company has paid-up equity capital of ₹1,20,00,000, free reserves of ₹60,00,000 and debt of ₹2,40,00,000. It wants to buy back 1,20,000 equity shares. What is the maximum price per share considering all three statutory tests?

1. ₹40.00
2. ₹30.00
3. ₹45.00
4. ₹37.50 (correct answer)

Answer: D — ₹37.50

Explanation. Present equity = ₹1,80,00,000. Resources test limit = 25% of ₹1,80,00,000 = ₹45,00,000. At 1,20,000 shares, maximum price by resources test = ₹45,00,000/1,20,000 = ₹37.50. The debt-equity test alone would allow ₹40.00 (since y = ₹48,00,000), but that exceeds the resources test limit. Hence, the resources test is binding and the maximum price is ₹37.50.

Where it goes wrong. Students often compute only the debt-equity test and get ₹40.00, ignoring the resources test cap of ₹45,00,000.

Authority. Section 68(2)(c) and 68(2)(e) of Companies Act, 2013

Question 14 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. A company wants to buy back its shares through its wholly-owned subsidiary. Is this permitted under Section 70?

A company wants to buy back its shares through its wholly-owned subsidiary. Is this permitted under Section 70?

1. No, buy-back through a subsidiary is prohibited (correct answer)
2. Yes, if the subsidiary is wholly-owned
3. Yes, if the subsidiary is not an investment company
4. No, unless the subsidiary is listed

Answer: A — No, buy-back through a subsidiary is prohibited

Explanation. Section 70(1)(a) prohibits a company from directly or indirectly purchasing its own shares through any subsidiary company, including its own subsidiary companies. There is no exception for wholly-owned subsidiaries or unlisted subsidiaries.

Where it goes wrong. Students often think a wholly-owned subsidiary is exempt from the prohibition.

Authority. Section 70(1)(a) of Companies Act, 2013

Question 15 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company has paid-up equity capital of ₹50,00,000 and free reserves of ₹25,00,000. It buys back 50,000 equity shares of ₹10 each at ₹30 per share. What is the amount transferred to CRR and the premium charged to free reserves after utilising the securities premium of ₹8,00,000?

A company has paid-up equity capital of ₹50,00,000 and free reserves of ₹25,00,000. It buys back 50,000 equity shares of ₹10 each at ₹30 per share. What is the amount transferred to CRR and the premium charged to free reserves after utilising the securities premium of ₹8,00,000?

1. CRR ₹15,00,000; premium to free reserves ₹2,00,000
2. CRR ₹5,00,000; premium to free reserves ₹10,00,000
3. CRR ₹5,00,000; premium to free reserves ₹2,00,000 (correct answer)
4. CRR ₹5,00,000; premium to free reserves ₹7,00,000

Answer: C — CRR ₹5,00,000; premium to free reserves ₹2,00,000

Explanation. CRR = nominal value = 50,000 × ₹10 = ₹5,00,000. Total premium = 50,000 × (₹30 − ₹10) = ₹10,00,000. Securities premium utilised = ₹8,00,000. Balance premium charged to free reserves = ₹10,00,000 − ₹8,00,000 = ₹2,00,000. The CRR transfer is a separate charge to free reserves.

Where it goes wrong. Students often transfer the total consideration of ₹15,00,000 to CRR or forget to deduct the securities premium utilised.

Authority. Section 69(1) of Companies Act, 2013

Question 16 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. When a company buys back shares entirely out of the proceeds of a fresh issue of preference shares, what is the amount transferred to CRR?

When a company buys back shares entirely out of the proceeds of a fresh issue of preference shares, what is the amount transferred to CRR?

1. Nominal value of shares bought back
2. Nil, because the buy-back is not out of free reserves (correct answer)
3. Total buy-back consideration
4. Premium paid on buy-back

Answer: B — Nil, because the buy-back is not out of free reserves

Explanation. Section 69(1) requires CRR to be created only when shares are bought back out of free reserves or securities premium. If the buy-back is funded entirely from proceeds of a fresh issue of preference shares (a different kind of security), no CRR is required because there is no reduction in free reserves. The share capital is effectively replaced by preference capital.

Where it goes wrong. Students often assume CRR is required for all buy-backs, regardless of the source of funds.

Authority. Section 69(1) of Companies Act, 2013

Question 17 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company has paid-up capital of ₹1,00,00,000 (equity ₹80,00,000 and preference ₹20,00,000), free reserves of ₹40,00,000 and debt of ₹2,00,00,000. It buys back shares at ₹40 per share. What is the maximum amount of buy-back under the debt-equity ratio test using the ICAI simultaneous-equation approach?

A company has paid-up capital of ₹1,00,00,000 (equity ₹80,00,000 and preference ₹20,00,000), free reserves of ₹40,00,000 and debt of ₹2,00,00,000. It buys back shares at ₹40 per share. What is the maximum amount of buy-back under the debt-equity ratio test using the ICAI simultaneous-equation approach?

1. ₹32,00,000 (correct answer)
2. ₹35,00,000
3. ₹40,00,000
4. ₹28,00,000

Answer: A — ₹32,00,000

Explanation. Present equity = ₹1,40,00,000. Minimum equity = ₹2,00,00,000/2 = ₹1,00,00,000. Let y be the maximum buy-back and x = CRR = (y/40) × 10 = 0.25y. Equation: (₹1,40,00,000 − 0.25y) − ₹1,00,00,000 = y, giving ₹40,00,000 = 1.25y, so y = ₹32,00,000. The resources test allows ₹35,00,000, so the debt-equity test is binding.

Where it goes wrong. Students often ignore the CRR adjustment or use the resources test limit of ₹35,00,000 directly.

Authority. Section 68(2)(e) of Companies Act, 2013

Question 18 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. The equity shares with differential rights issued by a company shall not carry voting power exceeding what percentage of the total voting power?

The equity shares with differential rights issued by a company shall not carry voting power exceeding what percentage of the total voting power?

1. 75%
2. 51%
3. 26%
4. 74% (correct answer)

Answer: D — 74%

Explanation. Rule 4(2)(f) of the Companies (Share Capital and Debentures) Rules, 2014 provides that the total voting power of all equity shares with differential rights shall not exceed 74% of the total voting power of all equity shares.

Where it goes wrong. Students often confuse the 74% cap with 75%, 51% or 26%.

Authority. Rule 4(2)(f) of Companies (Share Capital and Debentures) Rules, 2014

Question 19 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company has paid-up equity capital of ₹60,00,000, free reserves of ₹40,00,000 and debt of ₹1,60,00,000. It wants to buy back 50,000 equity shares. What is the maximum price per share under the debt-equity ratio test?

A company has paid-up equity capital of ₹60,00,000, free reserves of ₹40,00,000 and debt of ₹1,60,00,000. It wants to buy back 50,000 equity shares. What is the maximum price per share under the debt-equity ratio test?

1. ₹50.00
2. ₹40.00
3. ₹30.00 (correct answer)
4. ₹25.00

Answer: C — ₹30.00

Explanation. Present equity = ₹1,00,00,000. Minimum equity = ₹1,60,00,000/2 = ₹80,00,000. For 50,000 shares, x = ₹5,00,000. Debt-equity equation: (₹1,00,00,000 − ₹5,00,000) − ₹80,00,000 = y, giving y = ₹15,00,000. Maximum price = ₹15,00,000/50,000 = ₹30.00. The resources test allows ₹25,00,000 (₹50 per share), so the debt-equity test is binding.

Where it goes wrong. Students often use the resources test limit of ₹25,00,000 to get ₹50.00 per share, ignoring the debt-equity constraint.

Authority. Section 68(2)(e) of Companies Act, 2013

Question 20 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. A company had a subsisting default in payment of dividend to shareholders. It fully remedied the default on 1 April 2024. On which date can it first undertake a buy-back under Section 70?

A company had a subsisting default in payment of dividend to shareholders. It fully remedied the default on 1 April 2024. On which date can it first undertake a buy-back under Section 70?

1. 1 April 2025
2. 1 April 2027 (correct answer)
3. 1 April 2026
4. 1 April 2028

Answer: B — 1 April 2027

Explanation. Section 70(1)(c) prohibits buy-back while a default subsists. The proviso permits buy-back if the default is remedied and a period of three years has elapsed since the cessation of the default. Three years from 1 April 2024 ends on 1 April 2027. Hence, buy-back is permitted on or after that date.

Where it goes wrong. Students often apply a one-year gap or confuse the three-year cooling period with the three-year profit condition for DVR shares.

Authority. Proviso to Section 70(1)(c) of Companies Act, 2013