Commerce and Accountancy MCQs-5

1. For accounting purposes, employee share-based payment plans are classified as:
(a) Equity settled and cash settled
(b) Liability settled and cash settled
(c) Equity settled, cash settled and employees share based payment plans with cash alternatives.

Ans. (c)
Explanation: For accounting purposes, employee share based payment plans are classified into the following
categories:
● Equity settled: Under these plans, employees receive shares
● Cash settled: Under these plans, the employees receive cash based on the price (or value) of enterprise’s
shares.
● Employees share based payment plans with cash incentives: Under these plans, either the enterprise of the
employee has a choice of whether the enterprise settles the payment in cash or by issue of shares.

2. Under the Companies Act 2013, there shall be a minimum period of

(a) Two years between grant of options and vesting of option
(b) One year between grant of options and vesting of option
(c) Six months between grant of options and vesting of option

Ans. (b)
Explanation: Vesting Period is the time period over which the Shares are to be granted to the Employee. The Employer
is free to decide the Vesting Period as per his requirements but in the case of listed companies, the SEBI Guidelines
provide for a minimum vesting period of one year from the date of grant of the options. At the end of the Vesting
period, the employee can exercise his right to subscribe to the shares.

3. The excess of the market price of the share under ESOS over the exercise price of the option is
(a) Exercise price
(b) Intrinsic price
(c) Fair value

Ans. (b)
Explanation:
Exercise price: It is the price payable by the employee for exercising the option granted to him in pursuance of ESOS.
Intrinsic price: It is the excess of market price of the share under ESO over the exercise price of the option (including
up-front payment if any)
Fair Value: It is the amount for which a stock option granted or share offered for purchase could be exchanged
between knowledgeable, willing parties in an arm’s length transaction.

4. Which amount would be recognised for share based payment?

(a) Fair value of share prices
(b) Amount as per agreement
(c) Fair value of goods/ services received unless it is not reliably measurable, then fair value of share prices would

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 be used

Ans. (c)

5. As per section 68(1) of the Companies Act, buy back of the own shares by the company, shall not exceed:
(a) 25% of the total paid-up capital and free reserves of the company
(b) 20% of the total paid-up capital and free reserves of the company
(c) 15% of the total paid-up capital and free reserves of the company

Ans. (a)
Explanation: No company shall purchase its own shares or other specified securities under sub-section (1), unless the
buy-back is twenty-five per cent. or less of the aggregate of paid-up capital and free reserves of the company. Also, in
respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent. in this clause shall
be construed with respect to its total paid-up equity capital in that financial year;

6. The companies are permitted to buy back their own shares out of:
(a) Free reserves and securities premium
(b) Proceeds of the issue of any shares
(c) Both (a) and (b)

Ans. (c)
Explanation: According to Section 68(1) of Companies Act 2013, a company may purchase its own shares or other
specified securities (referred to as buy-back) out of—
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities
But 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.

7. When a company purchases its own shares out of the free reserves; a sum equal to nominal value of shares so
purchased shall be transferred to
(a) Revenue redemption reserve
(b) Capital redemption reserve
(c) Buyback reserve

Ans. (b)
Explanation: According to Section 69 of Companies Law 2013, if a company purchases its own shares out of free
reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be
transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance
sheet.

8. There shall be a minimum gap of ______ in buyback offer from the date of closure of the previous buy back.
(a) one year
(b) two years
(c) three years
(d) five years

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 Ans. (a)
Explanation: Section 68(2) states that no offer of buy-back under this sub-section shall be made within a period of one
year reckoned from the date of the closure of the preceding offer of buy-back, if any.

9. Which of the following is not the objective of buy-back of shares:

(a) To increase the earning per share of the company
(b) To decrease the share of promoters holding
(c) To pay surplus cash to shareholders
(d) To discourage others to make hostile bid to take over the company

Ans. (b)
Explanation: The following may be the advantages/objectives of buy back of shares:
● To increase earning per share if there is no dilution in company’s earnings as the buy back of shares reduces
the outstanding number of shares
● To increase the promoter holdings as the shares which are bought back are cancelled
● To discourage others to make a hostile bid to takeover the company as the buyback will increase the
promoters holdings
● To support the share price on the stock exchanges when the share price, in the opinion of the management, is
less than its worth, especially in a depressed market.
● To pay surplus cash to shareholders when the company does not need it for business

10. Buy back of shares by a company has the following effect on the share capital of the company:
(a) No effect on share capital
(b) Increase in share capital
(c) Decrease in share capital
(d) Cannot be predicted

Ans.(c)
Explanation: Buy back of shares means purchase of its own shares by a company. When shares are bought back by a
company, they have to be cancelled by the company. Thus, shares buyback results in decrease in share capital of the
company. A company cannot buy its own shares for the purpose of investment.

11. Who among the following cannot be granted ESOP?

(a) Permanent employee of the company
(b) Employees of a subsidiary out of india
(c) Director of the company (who is not whole time director)
(d) An employee who is a promoter

Ans. (d)
Explanation:
According to the Guidelines, only the following persons can be granted ESOPs:
● a permanent employee of the company working in India or out of India; or
● a director of the company, whether a whole-time director or not;
● or an employee as defined above of a subsidiary in India or out of India, or of a holding company of the
company.

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 An employee who is a promoter or who belongs to the promoter group is ineligible to participate in an ESOP. Further,
a director holding > 10% of equity shares of a company, whether directly or indirectly, is ineligible to participate in the
ESOP.

12. What is the percentage of equity capital of the company that can be set aside for the ESOP?
(a) 15%
(b) 20%
(c) 25%
(d) No limit set

Ans. (d)
Explanation: The percentage of Equity Capital set aside for the ESOP depends entirely on the company. There is no
statutory requirement for this and it varies from company to company.

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