Restrictions on purchase by company or giving of loans by it for purchase of its shares
📚 Law Minded summary
A company generally may not buy its own shares, and may not lend money or give security to help anyone else buy them.
The concern is a company funding the purchase of itself, which weakens the capital creditors rely on.
There are exceptions: a lending company doing it in the ordinary course of business, loans to a trust that holds shares for employees, and loans to employees other than directors and key managerial personnel, up to their salary for six months.
(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 effected 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 ass istance 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 wh ich 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.