Can a Private Limited Company Hold Treasury Stock Under the Companies Act, 2013?

Can a Private Limited Company Hold Treasury Stock in India? The Treasury Stock Concept under the Companies Act, 2013

Summary: The article explains that the Companies Act, 2013 does not recognise the concept of treasury stock in the manner followed in certain foreign jurisdictions, as Section 68(7) requires every share bought back under a buy-back to be extinguished and physically destroyed within seven days of completion. It distinguishes between buy-backs under Section 68 and the separate exemption available to certain private companies from Section 67 under MCA notifications, noting that the latter has given rise to an unsettled professional debate on whether eligible private companies may purchase their own shares outside Section 68. The article states that this interpretation is not judicially settled, may involve compliance risks in light of Section 66, and recommends treating extinguishment as the only safe and settled position. It outlines the applicable statutory provisions, MCA exemption notifications, procedural requirements for buy-backs, practical compliance steps, the tax treatment following the Finance (No. 2) Act, 2024, an illustrative example, frequently asked questions, and concludes that fresh issue mechanisms are the better-tested alternative where a future equity pool is required.

The Issue in Brief

“Treasury stock” is the practice , familiar from US and UK company law , of a company buying back its own shares and then holding them in its own name, rather than cancelling them, so that they can be reissued, sold, or used for employee schemes at a later date. Indian company law does not carry this concept forward in the same form. Every buy-back of shares under the Companies Act, 2013 must end in the shares being extinguished and physically destroyed within a fixed statutory window , there is no lawful route under Section 68 by which a company, public or private, can buy back its own shares and simply warehouse them for future use. Separately, private companies enjoy an exemption from the general bar on purchasing their own shares, and this exemption is sometimes read , not entirely without controversy , as opening a narrow, untested route to something resembling treasury stock. The practical takeaway for a private company: treat the extinguishment route as the only safe, settled position, and treat any “treasury buy-back” structure as a live compliance risk rather than a routine option.

What the Law Says

No , not in the sense the term is used internationally. Under Section 68(7) of the Companies Act, 2013, every share or specified security bought back by a company must be extinguished and physically destroyed within seven days of the last date of completion of the buy-back. This extinguishment requirement applies uniformly to public and private companies alike; there is no carve-out anywhere in the Act or in the private-company exemption notifications that lifts it. A separate and more debated question arises out of Section 67, which generally bars a company from purchasing its own shares outside the regulated Section 68 route, but from which private companies meeting specified conditions have been exempted by the Ministry of Corporate Affairs (MCA). A minority of professional opinion reads this exemption as permitting a private company to purchase its own shares outside Section 68 , and, on that reading, without the extinguishment mandate attaching. This position is not judicially settled, carries a real risk of being characterised as an unauthorised reduction of capital under Section 66, and is not the position this firm recommends a client rely on without NCLT-level comfort.

Applicable Legal Provisions

• Section 66, Companies Act, 2013 , reduction of share capital, which (other than through Sections 68–70) requires a company to obtain confirmation from the National Company Law Tribunal (NCLT).
• Section 67, Companies Act, 2013 , restricts a company from purchasing its own shares, and from giving financial assistance for the purchase of its own shares, except as permitted under Section 68. Section 67(2) already carves out private companies from parts of this restriction, and the MCA has separately exempted a wider class of private companies by notification (discussed below).
• Section 68, Companies Act, 2013 , the operative buy-back provision, available to both public and private companies, setting out permitted sources of funds, quantitative limits, procedural conditions, and , critically , the extinguishment mandate under sub-section (7).
• Section 69, Companies Act, 2013 , requires a sum equal to the nominal value of shares bought back out of free reserves or the securities premium account to be transferred to the Capital Redemption Reserve (CRR).
• Section 70, Companies Act, 2013 , prohibits buy-back in specified circumstances, including buy-back through a subsidiary (including the company’s own subsidiaries) or through an investment/group of investment companies, and where the company has defaulted in repayment of deposits, interest, redemption of debentures/preference shares, or payment of dividend (subject to the default being remedied and a cooling-off period having elapsed).
• Rule 17, Companies (Share Capital and Debentures) Rules, 2014 , the procedural mechanics of a buy-back: notice, letter of offer, declaration of solvency (Form SH-9), register of buy-back (Form SH-10), return of buy-back (Form SH-11) with certificate (Form SH-15).
• MCA Exemption Notification G.S.R. 464(E) dated 5 June 2015, as amended by Notification dated 13 June 2017 , exempts specified private companies from Section 67, subject to conditions.

Relevant Extracts

Section 68(7) , the extinguishment mandate:

“Where a company buys back its own shares or other specified securities … it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.”

Section 68(8) , the six-month lock-out on fresh issue of the same class of shares:

A company that has completed a buy-back may not make a further issue of the same kind of shares (including a fresh allotment under Section 62(1)(a)) within six months, except by way of a bonus issue or to discharge subsisting obligations such as ESOP conversions, sweat equity, or conversion of debentures/preference shares.

MCA Exemption Notification (5 June 2015, as amended 13 June 2017) , conditions for the Section 67 exemption:

Section 67 does not apply to a private company where: (i) no other body corporate has invested any money in its share capital; (ii) the borrowings of the company from banks, financial institutions, or any body corporate are less than twice its paid-up share capital, or ₹50 crore, whichever is lower; and (iii) the company is not in default in repayment of such borrowings subsisting at the time of the transaction.

Legal Position

Two distinct fact patterns need to be kept separate here, because the Act treats them very differently.

(a) Buy-back under Section 68 , permitted, but always ends in extinguishment.

Both public and private companies are permitted to buy back their own shares under Section 68, subject to funding-source restrictions, quantitative caps, a maximum debt-equity ratio, and procedural compliance. The starting position for this route is “permitted, subject to conditions.” But whichever company undertakes it, the shares bought back must be physically destroyed within seven days of completion , the Act gives the company no discretion to instead hold the shares as an asset on its own books. This forecloses the classic treasury-stock model (buy back today, reissue at a higher price tomorrow) for every company under Indian law.

(b) Purchase outside Section 68, relying on the private-company exemption from Section 67 , an unsettled, higher-risk reading.

Section 67(1) separately bars any company from purchasing its own shares except through the Section 68 mechanism. A private company that satisfies the three conditions in the 2015/2017 MCA notification is exempted from Section 67. Because that exemption is worded as relief from Section 67 rather than as a cross-reference back into Section 68, a strand of professional commentary has asked whether an exempted private company could purchase its own shares outside the Section 68 route altogether , and, since Section 68(7)’s extinguishment mandate is a condition attached to a Section 68 buy-back specifically, whether such a purchase would sidestep the extinguishment requirement entirely. On this reading, the company could, in principle, continue to hold the shares it has purchased , something close to a “treasury buy-back.” The starting position for this route is best described as “not the settled or intended reading,” not “permitted.” The difficulty is that Section 66 exists as a separate, general gateway for any transaction that has the effect of reducing a company’s share capital, and requires NCLT confirmation precisely to protect creditors and minority shareholders. A purchase of own shares that permanently sits outside Section 68’s regulated buy-back framework is difficult to reconcile with Section 66’s scheme, because it achieves an economic reduction in the company’s effective share capital without either extinguishment (Section 68) or Tribunal sanction (Section 66).

Exemptions / Relaxations

• Section 67 exemption for eligible private companies , by MCA Notification dated 5 June 2015 (G.S.R. 464(E)), as amended on 13 June 2017, subject to the three conditions extracted above. This is the only exemption that touches the “can a private company purchase its own shares outside Section 68” question, and it is the source of the treasury-buy-back debate discussed in the Legal Position section.
• No exemption from Section 68(7) , confirmed on checking the private company, Section 8 company, Small Company, OPC, and Specified IFSC company exemption notifications: none of them relaxes the extinguishment-within-seven-days requirement for any class of company. A buy-back under Section 68, whoever undertakes it, always ends in destruction of the shares.
• No exemption from Section 66 , the NCLT-confirmation route for capital reduction is not relaxed for private companies as such; private companies use the same Section 66 process (or the simplified Section 66-adjacent routes available generally) as any other company.

Case Laws / Judicial View / Professional Interpretation

There is no reported NCLT, NCLAT, or High Court ruling directly deciding whether the Section 67 exemption permits a private company to hold treasury stock outside Section 68 , the position is not judicially settled, and this firm is not aware of any court having tested it. What is on record is the legislative history behind Section 68(7) itself: during the drafting of the 2013 Act, a treasury-stock option (allowing companies to hold and reissue bought-back shares, as is common abroad) was considered and consciously rejected, out of concern that companies could use warehoused shares to manage market perception or extract undisclosed personal profit at shareholders’ expense. That policy background is a useful interpretive aid: it supports reading the extinguishment mandate as a deliberate, considered bar on treasury stock rather than a technical formality that a differently-worded exemption elsewhere in the Act was meant to bypass. Professional opinion on the interplay between Sections 66, 67, and 68 following the 2015 notification remains divided, and firms that have looked at this closely have generally flagged it as an open interpretational question rather than a green light.

Practical Interpretation

For a private company that wants to buy back its own shares, the safe and settled compliance path is the Section 68 route, end to end , not a purchase structured around the Section 67 exemption. In practice, that means:

• Confirm the Articles of Association authorise buy-back; amend the AOA by special resolution first if they do not.
• Identify the funding source , free reserves, the securities premium account, or proceeds of a fresh issue of a different class of shares/securities (proceeds of the same class cannot be used to buy back that class).
• Check the quantitative limits: buy-back approved by board resolution alone (no special resolution) cannot exceed 10% of the aggregate of paid-up equity capital and free reserves, and is available only once in a financial year; buy-back going up to 25% of paid-up capital and free reserves requires a special resolution, subject to the buy-back of equity shares in that year not exceeding 25% of paid-up equity share capital.
• Confirm the post-buy-back debt-equity ratio will not exceed 2:1 (subject to any higher ratio the Central Government may prescribe for a class of companies).
• Ensure only fully paid-up shares are offered for buy-back, and that no offer of buy-back is made within one year of the closure of a preceding buy-back offer.
• File the declaration of solvency (Form SH-9), complete the buy-back within the time allowed, and extinguish and physically destroy the shares within seven days of completion , this step is not optional and has no private-company carve-out.
• File the return of buy-back (Form SH-11) with the certificate (Form SH-15), and maintain the register of buy-back (Form SH-10).
• Observe the six-month lock-out on fresh issue of the same kind of shares under Section 68(8), subject to the bonus/ESOP/conversion exceptions.
• Where the company or its officers fail to comply with Section 68, a fine is prescribed under Section 68(11) for the company and its officers in default , the exact fine and any imprisonment exposure should be verified against the current text of the Act at the time of advice, since the Companies (Amendment) Act, 2020 decriminalised a number of penal provisions across the Act and the position on any specific sub-section should not be assumed from memory.
• On the tax side, note that with effect from 1 October 2024, the Finance (No. 2) Act, 2024 removed the company-level buy-back distribution tax under Section 115QA of the Income-tax Act, 1961 and instead treats the entire buy-back consideration received by a shareholder as deemed dividend under Section 2(22)(f), taxable in the shareholder’s hands at their applicable slab rate, with the cost of the shares available only as a capital loss. This is a material commercial input into whether a buy-back is the right tool at all, independent of the treasury-stock question.

If a client specifically wants the economic effect of treasury stock , shares held for future reissue, an ESOP pool, or a future strategic investor , the cleaner and better-tested alternative is usually to route the shares through an ESOP trust structure or a fresh issue mechanism, rather than structuring a purchase around the Section 67 exemption and hoping the extinguishment requirement does not apply.

Example

Suppose Alpha Fabrics Private Limited, a private company with no body corporate shareholder and modest bank borrowings well within the notification’s threshold, wants to buy back 8% of its paid-up equity capital from two exiting founders and hold the shares for possible reissue to a future employee under an ESOP scheme two years later. Because Alpha satisfies the three conditions in the 2015/2017 notification, it is exempt from Section 67. That exemption, however, does not let Alpha skip Section 68 if it wants a settled, low-risk buy-back: it must still pass a board resolution (8% is within the 10% board-approval limit), fund the purchase from free reserves or securities premium, complete the process within the prescribed timeline, and , within seven days of completion , extinguish and physically destroy the shares. If Alpha instead wants to keep the shares alive for the ESOP two years later, the shares bought back under Section 68 cannot be used for that purpose once destroyed; the correct route for the ESOP allotment is a fresh issue under Section 62(1)(b) closer to the time it is actually needed, not a warehoused buy-back.

Conclusion

Treasury stock, in the sense of a company buying back and then holding its own shares for later reissue, is not a lawful, settled option for private companies in India. Section 68(7) requires extinguishment and physical destruction of every share bought back, within seven days, with no exception carved out for private companies. The private-company exemption from Section 67 has occasionally been read as opening a narrower “treasury buy-back” route outside Section 68, but that reading is untested, sits uneasily against Section 66’s NCLT-confirmation requirement for capital reduction, and runs against the policy reasons Section 68(7) was drafted the way it was. Until this question is authoritatively settled , by an amendment, an MCA clarification, or a Tribunal ruling , the conservative and recommended position for a private company is to treat every buy-back as ending in extinguishment, and to use fresh issuance routes rather than warehoused shares wherever the underlying commercial goal is to keep an equity pool available for the future.

FAQs

Can any private company in India legally hold treasury stock?

No. Whatever route is used to acquire the shares, Section 68(7)’s extinguishment mandate applies to every buy-back under Section 68, and no notification exempts any class of company from it.

If my private company qualifies for the Section 67 exemption, can it buy back shares without following Section 68 at all?

This is the debated question addressed above. This firm’s recommended position is to still follow the Section 68 process and extinguish the shares, given the unsettled interplay with Section 66 and the absence of any judicial or MCA clarification on point.

What happens if a company simply forgets to extinguish shares within seven days?

It is treated as non-compliance with Section 68, exposing the company and officers in default to the fine prescribed under Section 68(11) , verify the current quantum and any imprisonment exposure against the Act as amended, given the 2020 decriminalisation changes, before advising a client.

Is there any other way to keep an equity pool available for future employees or investors, instead of treasury stock?

Yes , a fresh issue closer to the time of need (including under an ESOP scheme via Section 62(1)(b)) is the better-tested route, and avoids the extinguishment problem altogether.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).