In this article we will discuss about the provisions for prohibition of buy-back of shares.
According to Section 77B of the Companies Act, no company shall, directly or indirectly, purchase its own shares or other specified securities:
(а) 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 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;
(d) In case it has not complied with the provisions of Section 159 with regard to annual return, Section 207 with regard to failure to distribute dividends within the specified time and Section 211 with regard to the form and contents of balance sheet and profit and loss account and compliance with the Accounting Standards.
In the following cases, however, a company is not taken to have purchased its own shares:
(i) Where its redeemable preference shares are redeemed;
(ii) Where it has forfeited its shares for non-payment of calls, or
(iii) Where it has accepted a valid surrender of shares.
Prohibition of financial assistance:
According to Section 77(2), a public company cannot give loan or provide financial assistance to any person to enable him to purchase company’s own shares or shares of its holding company.
However, this provision does not affect:
(a) The lending of money by a banking company in the ordinary course of its business, or
(b) The provision of money by a company for the purchase of fully paid-up shares in the company or its holding company for the benefit of employees of the company, including any director holding a salaried office or employment in the company;
(c) The making by a company of loans to persons other than directors or managers, bonafide in the employment of the company to enable them to purchase fully paid-up shares in the company or its holding company to be held by themselves by way of beneficial ownership. However, the loan made to any employee for this purpose shall not exceed his salary or wages at that time for a period of six months.