Question

According to the Companies Act, a company cannot buy back its shares out of:

• A. Free Reserves
• B. Securities Premium Account
• C. Proceeds of an earlier issue of the same kind of shares
• D. Surplus in Statement of Profit and Loss

Hint:

Always remember Section 68(1) of the Companies Act, 2013.
A company can use Free Reserves and Securities Premium to buy back its shares.
However, it cannot use the proceeds of an earlier issue of the same kind of shares for this purpose.
Keep this exception in mind as it is a common point of evaluation in corporate accounting exams.

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
This question tests our knowledge of company law, specifically the provisions governing the buy-back of shares.
We need to identify the resource or source of funds from which a company is legally prohibited from buying back its own shares according to the Companies Act, 2013.

Step 2: Detailed Explanation:
1. Buy-back of shares refers to the purchase of its own shares by a company from its existing shareholders.
This practice reduces the number of outstanding shares in the open market.
2. Section 68(1) of the Companies Act, 2013, governs the sources of funds from which a company can purchase its own shares or other specified securities.
According to this section, a company may buy back its shares out of:
- Its Free Reserves,
- The Securities Premium Account, or
- The proceeds of the issue of any shares or other specified securities.
3. However, there is a key legal restriction (proviso) attached to this section.
The proviso states that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
4. This means, for example, that a company cannot issue new equity shares and use those exact proceeds to buy back existing equity shares.
Doing so would defeat the financial purpose of a buy-back, which is to return excess capital or adjust the debt-equity ratio, rather than engaging in a circular exchange of capital.
5. Let us review the options:
- Option (A) Free Reserves: This is a legal source.
- Option (B) Securities Premium Account: This is also a legally permitted source.
- Option (D) Surplus in Statement of Profit and Loss: Since this is a part of Free Reserves, it is a legally permitted source.
- Option (C) Proceeds of an earlier issue of the same kind of shares: This is explicitly prohibited by law.

Step 3: Final Answer:
According to the Companies Act, a company cannot buy back its shares out of the proceeds of an earlier issue of the same kind of shares.
Therefore, Option (C) is the correct answer.