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Corporate Legal Framework

Notes (v) Purchase of shares of a member by the company under s. 402. The Company Law Board
may order the purchase of shares of any member of the company by the company, under
certain circumstances.
Reduction of capital vs. diminution of capital. Reduction of capital involves working off past
losses against capital cancellation of the uncalled capital or repayment of surplus capital. It may
involve reduction of issued capital, subscribed or paid up share capital. Diminution of capital
denotes cancellation of the authorised or issued capital (but not subscribed). Diminution of
capital does not constitute a reduction of capital within the meaning of the Companies Act. The
distinction between reduction and diminution of capital is as follows:
1. Diminution of capital is the reduction of the issued capital. Reduction of capital involves
reduction of subscribed or paid up capital; there is no reduction of issued capital.

2. Both require authorisation by Articles but whereas ‘diminution’ can be effected by an
ordinary resolution (if so authorised by Articles), reduction of capital cannot be effected
without passing a special resolution.

3. ‘Reduction’ requires confirmation by Court (s.100) but ‘diminution’ needs no confi rmation

by the Court (s.94).
4. In case of ‘reduction’, Court may order the company to add the words ‘and reduced’ after
its name [s.102 (3) but no such order can be passed in case of ‘diminution’ s.94].
5. In case of ‘diminution’, notice is to be given to Registrar within 30 days from the date
of cancellation whereupon the Registrar shall record the notice and make the necessary
alteration in the Memorandum of Association and Articles of Association. In case of
‘reduction’ more detailed procedure has been prescribed though there is no time limit as in
case of ‘diminution’.

10.1.4 Purchase of its own Shares by a Company (S. 77)

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 fi ne upto ` 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 or 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 inserted three new sections – 77A, 77AA 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 are:
1. Section 77A provides that a company may purchase its own shares or other specifi ed
securities (also known as “buy-back”) out of (i) its free reserves; or (ii) the securities

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