## Three Tests for Maximum Buyback of Shares
A company must satisfy all three tests before proceeding with a buyback. The maximum permissible buyback is the minimum result across all three tests.
---
### Test 1 — Shares Outstanding Test
> Maximum shares that can be bought back = 25% of total paid-up equity share capital (by number of shares)
This is a headcount cap — it answers how many shares, not how much money.
Formula:
```
Max shares = Total paid-up equity shares × 25%
```
---
### Test 2 — Resources Test
> Total buyback consideration must not exceed 25% of (paid-up capital + free reserves)
Formula:
```
Max BB amount = (Paid-up capital + Free reserves) × 25%
Max shares = Max BB amount ÷ Buyback price per share
```
Free reserves include: Securities Premium, General Reserve, Profit & Loss (credit balance). Deduct any accumulated debit balance in P&L.
---
### Test 3 — Debt-Equity Ratio Test
> Post-buyback: Total Debt ≤ 2 × Total Equity (D:E ratio must not exceed 2:1)
Step-by-step:
1. Identify Total Debt = Secured borrowings + Unsecured borrowings + Current liabilities (Trade payables excluded if given separately; ICAI permits both treatments)
2. Minimum equity post-buyback = Total Debt ÷ 2
3. Maximum buyback amount = Present Equity − Minimum Equity (net of simultaneous CRR transfer — see CRR Calculation topic)
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### Decision Rule
| Test | Result |
|---|---|
| 1 – Shares Outstanding | X shares |
| 2 – Resources | Y shares |
| 3 – Debt-Equity | Z shares |
| Maximum permissible | min(X, Y, Z) |
If the company proposes a buyback ≤ min(X, Y, Z), it complies with the Companies Act 2013.
Special situations:
- If present equity is already below the required minimum equity (D:E already breached), no buyback is permissible under Test 3.
- If present equity exactly equals minimum equity, the D:E test allows zero buyback.