Accountancy Part AAccounting for Shares

A company can buy its own shares when-

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Article of Association must authorise and special resolution has been passed for the buy back of shares.

Under Section 68 of the Companies Act, 2013, a buy-back needs authority in the Articles of Association and a special resolution, besides limits on size and debt.

Why the other options are incorrect

Option (1) The debt - Equity ratio is not more than 1:1 after the buy back. — Incorrect. The limit is 2:1, not 1:1.
Option (2) The amount of buy back shares in any financial year not exceeding 20% of the paid-up capital and free reserves. — Incorrect. The limit is 25% of the paid-up capital and free reserves.
Option (3) Partly paid up shares are considered buy back. — Incorrect. Only fully paid-up shares can be bought back.

NCERT (2026-27 edition):
Buy-back of Shares – “… The following procedures have been laid down for buy back of shares : (a) The Articles of the Association must authorise the company for the buy back of shares. (b) A special resolution must be passed in the companies’ Annual General Body meeting. (c) The amount of buy back of shares in any financial year should not exceed 25% of the paid-up capital and free reserves. (d) The debt-equity ratio should not be more than a ratio of 2:1 after the buy back. (e) All the shares of buy back should be fully paid-up.”