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Thread: Restrictions on purchase by company, or loans by company for purchase, of its own or its holding company’s shares

  1. #1
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    Default Restrictions on purchase by company, or loans by company for purchase, of its own or its holding company’s shares

    • 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 capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402.

    • No public company and
    • no private company which is a subsidiary of a public company
    shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company

    Provided that nothing in this sub-section shall be taken to prohibit

    (a) the lending of money by a banking company in the ordi­nary course of its business or

    (b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried office or employment in the company or

    (c) the making by a company of loans, within the limit laid down in sub-section (3), to persons (other than directors or managers) bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership.


    No loan made to any person in pursuance of clause (c) as above stated shall exceed in amount his salary or wages at that time for a period of 6 months.


    If a company acts in contravention of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 10,000


    Nothing in this section shall affect the right of a company to redeem any shares issued under section 80 or under any corresponding provision in any previous companies law.


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    Default Power of company to purchase its own securities

    Overruling the entire act, except to the provisions of sub-section (2) of this section and section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to 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

    Provided 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.


    No company shall purchase its own shares or other specified securities, unless

    (a) the buy-back is authorised by its articles

    (b) a special resolution has been passed in general meeting of the company authorising the buy-back

    Provided that nothing contained in this clause shall apply in any case where

    (A) the buy-back is or less than 10 per cent of the total paid-up equity capital and free reserves of the company and

    (B) such buy-back has been authorised by the Board by means of a resolution passed at its meeting

    Provided further that no offer of buy-back shall be made within a period of 365days reckoned from the date of the preceding offer of buy-back, if any.

    offer of buy-back
    means the offer of such buy-back made in pursuance of the resolution of the Board referred in the first proviso

    (c) the buy-back is or less than 25 per cent of the total paid-up capital and free reserves of the company

    Provided that the buy-back of equity shares in any financial year shall not exceed 25 per cent of its total paid-up equity capital in that financial year

    (d) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back

    Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies.

    debt” includes all amounts of unsecured and secured debts

    (e) all the shares or other specified securities for buy-back are 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 the Securities and Exchange Board of India in this behalf

    (g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with the guidelines as may be prescribed.

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    Default Buy-back of shares

    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 and
    (e) the time limit for completion of buy-back.


    Every buy-back shall be completed within 12 months from the date of passing the special resolution or a resolution passed by the Board under clause (b) of sub-section (2).


    The buy-back under sub-section (1) may be


    (a) from the existing security holders on a proportionate basis or

    (b) from the open market or

    (c) from odd lots, .ie. where the lot of secu*rities 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.
    Last edited by companies act; 27-07-2010 at 03:30 PM.

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    Default Requirements for buy-back of shares

    Where a company has passed a special resolution under clause (b) of sub-section (2) or the Board has passed a resolution under the first proviso to clause (b) of that sub-section to buy-back its own shares or other securities under this section
    it shall, before making such buy-back, file
    • with the Registrar and
    • with SEBI
    a declaration of solvency
    in the form as may be prescribed and
    verified by an affidavit to the effect that the Board 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 1 year of the date of declaration adopted by the Board, and
    signed by at least 2 directors of the company, 1 of whom shall be the managing director, if any

    No declaration of solvency shall be filed with the SEBI by a company whose shares are not listed on any recognised stock exchange.


    Where a company buys-back its own securities
    • it shall extinguish and physically destroy the securities so bought-back
    • within 7 days of the last date of completion of buy-back.


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    Default After completion of the buy-back

    After completion of buy-back, the company shall not make further issue of the same kind of shares (including allotment of further shares under clause (a) of sub-section (1) of section 81) or other specified securities
    within a period of 6 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.

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    Default Requirements to be fulfiled after buy-back of shares is completed

    Company 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 pres-cribed

    Company shall, file with
    • the Registrar and
    • the SEBI
    a return containing such particulars relating to the buy-back within 30 days of such completion, as may be prescribed


    No return shall be filed with the SEBI by a company whose shares are not listed on any recognised stock exchange.


    If a company makes default in complying with the provisions of this section or any rules made thereunder, or any regulations made under clause (f) of sub-section (2),

    the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years, or with fine which may extend to Rs. 50000, or with both.

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    Default Transfer of certain sums to capital redemption reserve account under section 77AA

    Where a company purchases its own shares out of free reserves

    Then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause (d) of the proviso to sub-section (1) of section 80

    and details of such transfer shall be disclosed in the balance-sheet

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    Default Prohibition for buy-back in certain circumstances

    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.


    No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with the provisions of
    Section 159, 207 and 211

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