Section 68(2)(d) of the Companies Act, 2013 ("the Act") provides that the ratio of the aggregate of secured and unsecured debts owed by the company after the buy-back shall not be more than twice the paid-up capital and free reserves. The ratio is 2:1, and it is computed on the post-buy-back balance sheet.
The Computation
The debt includes the secured and unsecured debts, and the equity includes the paid-up capital and free reserves. The ratio must be computed after adjusting for the buy-back, the Capital Redemption Reserve, and the reduction in the free reserves. The company must obtain a certificate from its statutory auditor confirming the ratio.
The Consequences
A buy-back that breaches the 2:1 ratio is invalid, and the company and its officers are liable to penalty. The buy-back may be set aside, and the company may be required to restore the shares. The company must also file the return of buy-back in Form SH-11, disclosing the ratio.
The Planning
The company should compute the ratio before the buy-back is approved, and it should ensure that the post-buy-back balance sheet complies with the limit. A company that is close to the limit should consider a smaller buy-back or a capital infusion before the buy-back.
Call to Action
Anuj Desai & Associates advises companies on the post-buy-back debt-equity ratio—from the computation and the auditor's certificate to the structuring of the buy-back to comply with the 2:1 limit. If your buy-back is approaching the limit, we can help you plan.
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