Page 278 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

Notes
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’.
11.4.6 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 fine up to ` 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 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.
2. 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.
3. 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

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