Section 67(1) of Companies Act, 2013 prohibits buying by a company of its own shares. Thus, unless the transaction is one in which shares are bought (for consideration), Section 67(1) would not apply (since buying contemplates payment by buyer some consideration to the seller). Section 67(1) would not apply if a company holds its own shares, if the shares so held have not been acquired by the company by paying some consideration but they have been given to the company as gist or bequest.

67. Restrictions on purchase by company or giving of loans by it for purchase of its shares;

(1) No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is affected under the provisions of this Act.

(2) No 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.

(3) Nothing in sub-section (2) shall apply to—

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

(b) the provision by a company of money in accordance with any scheme approved by company through special resolution and in accordance with such requirements as may be prescribed, for the purchase of, or subscription for, fully paid up shares in the company or its holding company, if the purchase of, or the subscription for, the shares held by trustees for the benefit of the employees or such shares held by the employee of the company;

(c) the giving of loans by a company to persons in the employment of the company other than its directors or key managerial personnel, for an amount not exceeding their salary or wages for a period of six months with a view to enabling them to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership:

Provided that disclosures in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates shall be made in the Board’s report in such manner as may be prescribed.

(4) Nothing in this section shall affect the right of a company to redeem any preference shares issued by it under this Act or under any previous company law.

(5) If a company contravenes the provisions of this section, it shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Section 68 of the Companies Act, 2013 gives power to companies for Buyback its own shares;

68. Power of company to purchase its own securities

(1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2), a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of—

(a) its free reserves;

(b) the securities premium account; or

(c) the proceeds of the issue 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.

(2) No company shall purchase its own shares or other specified securities under sub-section (1), unless—

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

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

Provided that nothing contained in this clause shall apply to a case where—

(i) the buy-back is, ten per cent-age or less of the total paid-up equity capital and free reserves of the company; and

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

(c) the buy-back is twenty-five per cent. or less of the aggregate of paid-up capital and free reserves of the company:

Provided that in respect of the buy-back of equity shares in any financial year, the reference to twenty-five per cent-age in this clause shall be construed with respect to its total paid-up equity capital in that financial year;

(d) the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves:

Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies;

(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 in this behalf; and

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

Provided that no offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back,if any.

(3) The notice of the meeting at which the special resolution is proposed to be passed under clause (b) of sub-section (2) 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 shares or securities 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.

(4) Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board under clause (b) of sub-section (2).

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

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

(b) from the open market;

(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

(6) Where a company proposes to buy-back its own shares or other specified securities under this section in pursuance of a special resolution under clause (b) of sub-section (2) or are solution under item (ii) of the proviso thereto, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board, a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, in such form as may be prescribed and verified by an affidavit to the effect that the Board of Directors of the company 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 one year from the date of declaration adopted by the Board:

Provided that no declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange.

(7) 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.

(8) Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub-section (1) of section 62 or other specified securities within a period of six months except by way of a 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.

(9) Where a company buys back its shares or other specified securities under this section, it shall maintain a register of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities,the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed.

(10) A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed:

Provided that no return shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognised stock exchange.

(11) If a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, for the purposes of clause (f)of sub-section (2), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

NOTE:  from above it is clear that a company can buyback its shares after satisfying provisions of Section 68 and rules as may be prescribed from time to time.

LET’S CONSIDER OUR TOPIC

This is a general principal that a company cannot become its own member and hence any bequest or gift of shares of the company to the company is not valid because a company cannot hold its own shares in its own name and its name cannot be entered in the Register of members. Even if valid transfer of shares in the name of company is not valid.

Shares may be transferred to a held aby a nominee in trust for the company, provided no part of the company’s fund is applied for that purpose.

CASTIGLIONE’S Vs. WILL TRUST CASE;  in this case a testator directed that 1000 ordinary shares in a limited company should be held on trust for his son for life , and if the son should die without issue, the trustees of the Will were to transfer them to the company at the date of his death. There were certain restrictions on the transfer of shares in the Articles of Association of the company. On the death of son, without issue, the court was asked to determine, whether the shares should be transferred to the nominees of the company or whether they fall into testator’s residuary estate. The court held that , although the company could not hold its own shares , since it could not become member of itself, there could be a trust for the company under which certain person, registered as holders of the shares, held them on trust for the company as beneficiary , accordingly , the company was entitled to direct that the shares should be transferred into the names of nominees , who must be properly qualified under the company’s Articles of Association to hold the shares.

NOTE: a gift or bequest of shares of company on its own name seems not to be invalid and contravene any provisions of law, provided that the shares gifted or bequested must be registered in the name of nominees according to the terms and conditions of Article of Association of the Company. The shares must be held in trust for the company and name of nominee is entered in the Register of Member of the Company. A company can have beneficial interest in its own shares registered in the name of any other person, whose name has entered in the register of members of the company as Registered Owner.

Section 123 of Transfer of Property Act, 1882 provides that a shareholder intending to make gift should make it either by a registered instrument of gift or by delivery of share certificate. If gift is made through an instrument, then it must be registered under provisions of Registration Act, 1908 [Section 18].

The instrument of gift along with share certificate should be handed over to the nominee of the company, who shall be duly authorised by company to hold shares on its behalf. In share transfer form the name of the nominee should be written as transferee, who shall execute the share transfer form on behalf of company.

The company should enter into some agreement with nominee to record that;

i) The nominee will be holding the shares merely as nominee/s of the company;

ii) They shall not have and they or their legal representatives shall not claim any beneficial interest in the concerned shares;

iii) The company shall be beneficial owner of the shares, that it is merely because of the prohibition that a company cannot be its own member’

iv) The nominee(s) will be registered holder of share(s);

v) The nominee(s) should pass on to the company the dividend received from the company and act according to the instructions of the company related to bonus shares, right shares and all rights privileges to which a member of a company is entitled under Companies Act, the Article, etc.

Section 122 of Transfer of Property Act, 1882:  provides that acceptance of a gift by the done during life time of donor, is essential, the company should before convey in writing its acceptance of the gift from the shareholder without consideration.

The registration of transfer of shares in favor of company must be held according to the provisions of the Companies Act, 2013, read with applicable provisions of Articles of Association of the Company.

After registration of shares in the name of nominee(s), company will issue the share certificates duly endorsed in favor of nominee(s).

A company is required to declare its beneficial interest in shares of its own according to the provisions of Section 89 of the Companies Act, 2013.

CONCLUSION:  a company cannot be its own member is a well-established fact. The provisions of the Companies Act, 2013 prohibits buying of own’s shares by company (except in case of buyback of shares). It is valid transaction when a shareholder surrenders, bequests or gift its shares to the company.  But company cannot register these shares in its own name. There should be some authorised person or nominee, who shall hold these shares in trust for the company and register himself as registered holders of shares. In this case a company can hold beneficial interest in shares bequested or gifted. Thus, a shareholder can gift its shares to the company.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.

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