12.6.19 (Purchase of its own Shares by a Company)

No company limited by shares and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of share capital is effected and sanctioned by the court in pursuance of s.100 to 104 or of s.402. Further, no public company and no private company which is a subsidiary of a public company can directly or indirectly (through loans or guarantee) provide financial assistance to any person to buy shares in the company or in its holding company.

If default is made in compliance of s.77, then the company and every officer of the company in default shall be punishable with a fine upto Rs 1 lakh.

There are, however, certain exceptions to s.77. They are: (1) A company may redeem its redeemable preference shares issued under s.80; or (2) A banking company may lend money for the purpose in the ordinary course of its business; or (3) A company in pursuance of scheme for the purchase of fully paid-up shares in the company to be held by trustees for the benefit of its employees including salaried directors, may advance loan for the purchase; or (4) A company may advance loans to its bona fide employees (excluding directors managers) to enable them to purchase fully paid shares for amount not exceeding six months' salary or wages of each employee; or (5) An unlimited company can purchase its own shares; or (6) A private company which is not a subsidiary of a public company may advance loan or offer guarantee for purchase of its shares. However, even such a company cannot purchase its own shares.

The Companies (Amendment) Act,1999 has inserted three new sections -77A,77 AA and 77B.The companies have been allowed to buy-back their shares subject to certain safeguards. SEBI (Buy Back of Securities) Regulations, 1998 have also been issued. These provisions are summarized below.

Section 77A provides that a company may purchase its own shares or, other. specified securities (also known as "buy-back") out of (i) its free reserves; or (ii) the securities premium account; or (iii) the proceeds of any shares or other specified securities. However, 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. This buy-back is allowed only if the following conditions are satisfied; (a) the buy-back is authorised by the articles, (b) a special resolution has been passed in general meeting of the company authorising the buy-back; (c) the buy back does not exceed 25% of the total paid-up capital and free reserves of the company; also, the buy-back of equity shares in any financial year shall not exceed 25% of the total paid-up equity capital in the financial year; (d) the ratio of the debt owed by the company must not be more than twice the capital and its free reserves after such buy-back. However, the Central Government may prescribe a higher ratio of the debt for a class or classes of companies. The term 'debt' here includes all amounts of unsecured and secured debts; (e) all the shares or other specified securities, for buyback must be fully paid-up; (f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by SEBI; (g) the buy-back in respect of unlisted shares or other specified securities is in accordance with the guidelines prescribed.

The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating (a) a full and complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of security intended to be purchased under the buy-back, (d) the amount to be invested under the buy-back; (e) the time limit for completion of buy-back. In any case every buy-back shall be completed within 12 months from the date of passing the special resolution.

The buy-back may be (a) from the existing security-holders on a proportionate basis; or (b) from the open-market; or (c) from odd lots, (i.e., where the lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or (d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Where a company has passed a special resolution to buy-back its own shares or other securities, it shall, before making such buy-back file with the Registrar of Companies and the SEBI a declaration of solvency in the prescribed form. This declaration is to be verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board and signed by at least two directors of the company, one of whom shall be the managing director, if any.

However, in case if a company whose shares are not listed on a recognised stock exchange, no such declaration need be filed with SEBI.

Where a company buys back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last day of completion of buy-back.

Where a company completes a buy-back of its shares or other specified securities, it shall not make further issue of the same kind of shares [including allotment of further shares under s.81 (1)] or other specified securities within a period of 24 months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

Where a company buys-back the securities, it shall maintain a register of the securities so bought, the consideration paid for the securities bought back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other particulars as may be prescribed.

A company shall, after the completion of the buy-back, file with the Registrar and SEBI, a return containing such particulars relating to the buy-back within 30 days of such completion as may be prescribed. However, no such return need be filed with SEBI, in the case of a company whose shares are not listed on any recognized stock exchange.

If a company makes a default in complying with the above provisions, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend upto 2 years, or with fine which may extend upto Rs 50,000 or with both.

For the purposes of this Section - (i) 'specified securities' includes employees' stock option or other securities as may be notified by the Central Government from time to time, (ii)" free reserves" shall have the meaning assigned to it in s.372A

Transfer of certain sums to capital redemption reserve account (s.77AA). Where a company purchases its own shares out of free reserves, then 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.

Prohibition for buy-back in certain circumstances (s.77b). This section provides that no company shall directly or indirectly purchase its own shares or other specified securities (a) through any subsidiary company including its own subsidiary companies, or (b) through any investment company or group of investment companies; or (c) if a default, by the company, in repayment of deposit or interest payable thereon, redemption of debentures, or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institution or bank, is subsisting.

Further no company shall directly or indirectly purchase its own shares or other specified securities in case it has not complied with provisions of Ss. 159, 207 and

211.