Most Asked — 4 Papers Q2Debentures — Definition & Kinds
Most Asked — 4 Papers Q3Dividend — Declaration & Payment Rules
Important — 2 Papers Q4Buy-back of Shares
Important — 2 Papers
💡 ALLOTMENT OF SHARES — PRINCIPLES & STATUTORY RESTRICTIONS
Core Concept: Allotment is when a company says "Yes, these shares are yours" after you applied. But the company cannot just allot shares freely — the law imposes strict conditions.
📈 What is a Share?
- Sec 2(84): A share is a share in the share capital of a company.
- Think of it like a slice of a pizza — each shareholder owns a slice of the company.
- Shares are movable property and transferable (Sec 44).
✅ General Principles
🟢 Proper Authority: Board of Directors must pass a resolution.
🟢 Reasonable Time: Allotment must be made within reasonable time of application.
🟢 As Per Prospectus: Terms must match the prospectus.
🟢 Application Money: Minimum 5% of nominal value (Sec 39).
🚫 Statutory Restrictions (The Rules Companies MUST Follow)
1️⃣ Minimum Subscription (Sec 39(1)): Company cannot allot shares unless minimum subscription stated in prospectus is received.
2️⃣ Bank Deposit (Sec 40(3)): Application money must be deposited in a scheduled bank.
3️⃣ 60-Day Rule (Sec 39(3)): If allotment not made within 60 days, refund the money.
4️⃣ Return of Allotment (Sec 39(4)): File return with ROC within 30 days.
5️⃣ SEBI Guidelines: Listed companies must follow SEBI norms.
⚖️ Landmark Case: Gulab Chand v. Hyderabad Co
Irregular allotment (made without meeting statutory conditions) is voidable at the option of the applicant. The applicant can choose to accept or reject the allotment.
🧠 Mnemonic: "PAMRR" — Remember the Restrictions
P = Proper authority (Board resolution) | A = Application money (min 5%) | M = Minimum subscription received | R = Refund within 60 days if not allotted | R = Return of allotment to ROC in 30 days
- Share defined under Sec 2(84) as a share in the share capital of a company; shares are movable property under Sec 44.
- Allotment requires proper authority — the Board of Directors must pass a resolution authorizing the allotment of shares.
- Application money must be minimum 5% of the nominal value of shares as per Section 39 of the Companies Act, 2013.
- Minimum subscription stated in the prospectus must be received before any allotment can be made (Sec 39(1)).
- Application money must be deposited in a scheduled bank and cannot be used by the company until allotment is made (Sec 40(3)).
- 60-day refund rule: If allotment is not made within 60 days of closing the issue, all money must be refunded (Sec 39(3)).
- Return of allotment must be filed with the Registrar of Companies within 30 days of allotment (Sec 39(4)).
- Irregular allotment is voidable at the option of the applicant — the allotment itself is not void but can be avoided (Gulab Chand v. Hyderabad Co).
| Section | What It Says | Why It Matters |
|---|---|---|
| Sec 2(84)Defines "share" as a share in the share capital of a company. | Definition of Share | Foundation of understanding share allotment |
| Sec 39Allotment of securities by company. Deals with minimum subscription, refund on non-allotment, return of allotment. | Allotment of securities — minimum subscription, 60-day refund, return to ROC | Core statutory restriction on allotment |
| Sec 40Securities to be dealt with in stock exchanges. Application money to be kept in scheduled bank. | Application money deposited in scheduled bank | Protects applicants' money |
| Sec 44Nature of shares or debentures. Shares are movable property, transferable as provided by articles. | Shares are movable property | Establishes legal nature of shares |
| Sec 45Numbering of shares. Each share shall be distinguished by its distinctive number. | Each share has a distinctive number | Identification and tracking of shares |
- PAMRR: Proper authority, Application money (5%), Minimum subscription, Refund in 60 days, Return to ROC in 30 days
- Sec 2(84) = Share definition | Sec 39 = Allotment rules | Sec 40 = Bank deposit
- Irregular allotment = Voidable (not void) — applicant's choice
- Minimum subscription must be received before ANY allotment
- Application money goes to scheduled bank — company cannot touch it until allotment
- Case: Gulab Chand v. Hyderabad Co — irregular allotment voidable
Allotment of shares is the appropriation of shares by a company to an applicant. A share is defined under Section 2(84) of the Companies Act, 2013 as a share in the share capital of a company. The general principles of allotment require that it be made by proper authority (Board resolution), within reasonable time, in accordance with the terms of the prospectus, and with application money of at least 5% of the nominal value. The statutory restrictions under Sections 39 and 40 mandate that minimum subscription must be received before allotment, application money must be deposited in a scheduled bank, allotment must be made within 60 days of closing the issue (failing which a full refund is required), and a return of allotment must be filed with the ROC within 30 days. Listed companies must also comply with SEBI guidelines. An irregular allotment made without meeting these conditions is voidable at the option of the applicant, as held in Gulab Chand v. Hyderabad Co.
1. Introduction
Allotment of shares is a crucial step in the process of raising capital by a company. It is the act by which the company appropriates a certain number of shares to an applicant in response to an application. The Companies Act, 2013 lays down both general principles and statutory restrictions governing allotment to protect the interests of investors and ensure transparency in the capital-raising process.
2. Definition of Share
Under Section 2(84) of the Companies Act, 2013, a share is defined as a share in the share capital of a company. It includes stock. Shares are movable property transferable in the manner provided by the articles of the company (Section 44). Each share is distinguished by its distinctive number (Section 45).
3. General Principles of Allotment
(i) Proper Authority
Allotment must be made by the Board of Directors through a duly passed Board resolution. No individual director can allot shares unilaterally.
(ii) Reasonable Time
Allotment must be made within a reasonable time after the receipt of the application. An offer to purchase shares lapses if not accepted within a reasonable time.
(iii) As Per Prospectus Terms
Shares must be allotted strictly in accordance with the terms stated in the prospectus. Any material deviation renders the allotment irregular.
(iv) Application Money
The application money payable on each share must not be less than 5% of the nominal value of the share, as prescribed under Section 39.
4. Statutory Restrictions on Allotment
(a) Minimum Subscription — Section 39(1)
No allotment shall be made unless the minimum subscription amount stated in the prospectus has been received by the company. This ensures the company has sufficient funds to commence business operations.
(b) Deposit of Application Money — Section 40(3)
All moneys received on application for shares must be deposited in a scheduled bank and shall not be utilized by the company until the allotment is made. This protects investors' money.
(c) SEBI Guidelines
For listed companies, the Securities and Exchange Board of India (SEBI) prescribes additional guidelines regarding pricing, disclosure, and allotment procedures that must be strictly followed.
(d) Allotment Within 60 Days — Section 39(3)
If the company fails to make allotment within 60 days from the date of closure of the issue, the entire application money must be refunded to the applicants. If the refund is not made within a further period of 15 days, the company and every officer in default shall be liable to pay interest at the rate of 12% per annum.
(e) Return of Allotment — Section 39(4)
The company must file a return of allotment with the Registrar of Companies (ROC) within 30 days of making the allotment. This return contains details of the shares allotted, the names and addresses of allottees, and the amount paid or due on each share.
5. Irregular Allotment
An allotment made in violation of the statutory conditions (such as without receiving minimum subscription or without depositing application money in a scheduled bank) is called an irregular allotment. Under Section 39, such allotment is voidable at the option of the applicant. The applicant may choose to:
- Rescind the contract and get a refund, or
- Accept the allotment and become a shareholder.
In Gulab Chand v. Hyderabad Co, it was held that irregular allotment is not void but voidable, meaning it remains valid unless the aggrieved applicant chooses to set it aside.
6. Conclusion
The law governing allotment of shares under the Companies Act, 2013 strikes a balance between enabling companies to raise capital efficiently and protecting investors from fraudulent or careless corporate practices. The general principles ensure fairness, while statutory restrictions under Sections 39 and 40 provide a safety net for applicants. Irregular allotment, though not void, gives the aggrieved party a right of rescission.
💡 DEBENTURES — DEFINITION & KINDS
Core Concept: A debenture is basically an "I Owe You" (IOU) from the company. The company borrows money and gives you a certificate promising to pay it back with interest.
💰 Debenture vs Share
- 🟢 Share = Ownership in company (you are a member)
- 🔴 Debenture = Loan to company (you are a creditor)
- Shareholders get dividend (not guaranteed) vs Debenture holders get interest (guaranteed)
📚 Sec 2(30) Definition
"Debenture" includes debenture stock, bonds, and any other instrument of a company evidencing a debt. It is essentially a written acknowledgment of a loan.
📌 Five Types of Debentures
1️⃣ Secured vs Unsecured (Naked): Secured = backed by company assets; Unsecured = no security, just company's promise.
2️⃣ Registered vs Bearer: Registered = name in register, transfer by deed; Bearer = transferable by delivery like cash.
3️⃣ Redeemable vs Irredeemable: Redeemable = repaid on fixed date; Irredeemable (perpetual) = no fixed date — now prohibited under Sec 71.
4️⃣ Convertible vs Non-convertible: Convertible = can become shares later; Non-convertible = always remain as debt.
5️⃣ First vs Second: First = priority in repayment; Second = paid after first debentures are satisfied.
⚖️ Key Cases
Knightsbridge Estates v. Byrne: A debenture is an acknowledgment of a loan. The holder is a creditor, not an owner.
Levy v. Abercorris Slate Co: Established the nature of floating charge over company assets.
🧠 Mnemonic: "SR-RR-CN-FS" — 5 Types
Secured/Unsecured | Registered/Bearer | Redeemable/Irredeemable | Convertible/Non-convertible | First/Second
- Sec 2(30) defines debenture as including debenture stock, bonds, and any other instrument evidencing a debt of the company.
- Debenture is a creditor instrument — the holder is a creditor of the company, not a member/owner.
- Secured debentures carry a charge (fixed or floating) on company assets; unsecured (naked) debentures have no security.
- Irredeemable (perpetual) debentures are now prohibited under Section 71 of the Companies Act, 2013.
- Convertible debentures can be converted into equity shares on a predetermined date and ratio, subject to SEBI guidelines.
- Debenture Trust Deed (Sec 71(7)) is mandatory when debentures are issued to the public; it appoints a trustee to protect holders' interests.
- Floating charge covers all assets of the company generally and crystallizes into a fixed charge on default; fixed charge attaches to specific identified assets.
- Remedies of debenture holders include: suing for payment, appointing a receiver, and enforcing the security through sale of charged assets.
| Section | What It Says | Why It Matters |
|---|---|---|
| Sec 2(30)Defines "debenture" to include debenture stock, bonds, and any other instrument of a company evidencing a debt. | Definition of debenture — includes bonds and instruments of debt | Foundation for understanding debenture law |
| Sec 71Debentures. Covers issuance, redemption, prohibition of perpetual debentures, creation of debenture redemption reserve, and requirement of debenture trust deed. | Comprehensive provision on issuance, redemption, trust deed, prohibition of perpetual debentures | Main governing section for debentures |
| Sec 71(7)Debenture Trust Deed. Where debentures are issued to the public, a debenture trust deed must be executed appointing a trustee for debenture holders. | Debenture Trust Deed mandatory for public issue | Protects debenture holders' collective interests |
- Sec 2(30) = Debenture definition (includes bonds, debenture stock, instruments of debt)
- 5 Types: Secured/Unsecured | Registered/Bearer | Redeemable/Irredeemable | Convertible/Non-convertible | First/Second
- Perpetual debentures PROHIBITED under Sec 71
- Debenture Trust Deed (Sec 71(7)) — mandatory for public issue
- Fixed charge = specific asset | Floating charge = all assets generally (crystallizes on default)
- Remedies: Sue for payment + Appoint receiver + Enforce security
- Cases: Knightsbridge (debenture = loan acknowledgment) | Levy (floating charge valid)
A debenture, defined under Section 2(30) of the Companies Act, 2013, includes debenture stock, bonds, and any other instrument evidencing a debt of the company. It is essentially a written acknowledgment of a loan, as held in Knightsbridge Estates v. Byrne. Unlike shares, debentures create a creditor-debtor relationship, not ownership. Debentures are of five main kinds: (i) Secured (backed by a charge on company assets) and Unsecured/Naked (no security); (ii) Registered (transferred by deed) and Bearer (transferred by delivery); (iii) Redeemable (repaid on fixed date) and Irredeemable/Perpetual (now prohibited under Section 71); (iv) Convertible (can become shares) and Non-convertible (remain as debt); (v) First (priority in repayment) and Second (subordinate). A Debenture Trust Deed under Section 71(7) is mandatory for public issues. The security may be a fixed charge on specific assets or a floating charge on all assets generally, as recognized in Levy v. Abercorris Slate Co. Debenture holders may sue for payment, appoint a receiver, or enforce their security.
1. Introduction
A company may raise capital either by issuing shares (equity capital) or by borrowing through debentures (debt capital). While shareholders are owners of the company, debenture holders are its creditors. The Companies Act, 2013 provides a comprehensive framework for the issuance, classification, and regulation of debentures.
2. Definition of Debenture
Under Section 2(30) of the Companies Act, 2013, the term debenture includes debenture stock, bonds, and any other instrument of a company evidencing a debt, whether or not constituting a charge on the assets of the company. In Knightsbridge Estates v. Byrne, it was held that a debenture is fundamentally an acknowledgment of a loan made to the company.
Distinction from Shares
A share represents ownership and makes the holder a member of the company with voting rights and entitlement to dividends. A debenture represents a loan and makes the holder a creditor with a right to fixed interest and repayment of principal. Shareholders bear risk; debenture holders have security.
3. Kinds of Debentures
(i) Secured and Unsecured (Naked) Debentures
Secured debentures are backed by a charge on the company's assets. The charge may be a fixed charge (attached to specific identified assets like land or buildings) or a floating charge (covering all assets of the company generally, crystallizing into a fixed charge upon default). In Levy v. Abercorris Slate Co, the concept of floating charge was recognized. Unsecured (naked) debentures carry no security; the holder is an ordinary unsecured creditor.
(ii) Registered and Bearer Debentures
Registered debentures are those where the name of the holder is entered in the company's register of debenture holders. Transfer requires execution of a transfer deed and registration. Bearer debentures are payable to the bearer and transferable by mere delivery, similar to currency notes.
(iii) Redeemable and Irredeemable (Perpetual) Debentures
Redeemable debentures are repaid by the company on a specified date or at the option of the company after giving due notice. Irredeemable (perpetual) debentures had no fixed date of repayment and were repayable only on winding up or at the company's discretion. However, under Section 71 of the Companies Act, 2013, the issuance of perpetual debentures is now prohibited. Companies must redeem debentures in accordance with the terms of issue.
(iv) Convertible and Non-convertible Debentures
Convertible debentures carry an option for the holder to convert them into equity shares of the company at a predetermined date and conversion ratio, subject to SEBI guidelines. Non-convertible debentures (NCDs) cannot be converted into shares and remain as debt instruments throughout their tenure. They are repaid on maturity along with interest.
(v) First and Second Debentures
First debentures carry a first charge on the company's assets and enjoy priority in repayment during winding up. Second debentures carry a subordinate charge and are repaid only after first debentures have been fully satisfied.
4. Debenture Trust Deed
Under Section 71(7), where a company issues debentures to the public, it must execute a Debenture Trust Deed appointing one or more debenture trustees to protect the interests of the debenture holders. The trustee has the power to enforce the terms of the deed against the company.
5. Remedies of Debenture Holders
When a company defaults, debenture holders have the following remedies:
- Sue for payment — file a suit for recovery of the principal and interest.
- Appoint a receiver — if the trust deed permits, appoint a receiver to manage charged assets.
- Enforce security — realize the charged assets through sale to recover the amount due.
6. Conclusion
Debentures are a vital instrument of corporate borrowing. The Companies Act, 2013, through Section 2(30) and Section 71, provides a robust framework for their classification and regulation. The prohibition of perpetual debentures and the mandatory requirement of a debenture trust deed for public issues reflect the legislature's intent to protect creditors while enabling companies to access debt capital markets.
💡 DIVIDEND — DECLARATION & PAYMENT RULES
Core Concept: A dividend is your "share of the profit" as a shareholder. Think of it as your reward for investing in the company — but the company can only pay from actual profits, never from capital.
💰 Declaration Rules
- 🟢 Only from profits (current year or accumulated) — Sec 123(1)
- 🟢 Board recommends, shareholders approve at AGM
- 🔴 Shareholders cannot exceed Board's recommended amount
- 🟢 Depreciation must be provided before declaring
⏰ Payment Rules
- Pay within 30 days of declaration (Sec 127)
- Default = imprisonment up to 2 years
- Unpaid dividend → special account within 7 days (Sec 124)
- After 7 years → transferred to IEPF (Sec 125)
⚖️ Case: Bacha F. Guzdar v. CIT
A dividend is a return on investment, not a share in the profits of the company in the strict sense. The shareholder has no right to the profits until a dividend is declared.
🧠 Mnemonic: "BRAD-7-7" — Dividend Flow
Board recommends | Resolution at AGM | After depreciation provided | Distribute within 30 days | 7 days to transfer unpaid to special account | 7 years then to IEPF
- Dividend is a distribution of profits to shareholders in proportion to their paid-up share capital in the company.
- Only from profits (Sec 123(1)) — dividends can only be declared from current year profits, accumulated profits, or money provided by Central/State Government for the purpose.
- Board recommends, shareholders approve at AGM — shareholders cannot declare a dividend higher than what the Board recommends.
- Depreciation must be provided before declaring any dividend — companies cannot distribute profits without first accounting for asset depreciation.
- Interim dividend (Sec 123(3)) may be declared by the Board from surplus in the profit and loss account or from profits of the current financial year.
- Payment within 30 days (Sec 127) — failure to pay within 30 days of declaration is a criminal offence punishable with imprisonment up to 2 years and a fine.
- Unpaid Dividend Account (Sec 124(1)) — any dividend remaining unpaid for 30 days must be transferred to a special bank account within 7 days of the 30-day period.
- IEPF transfer after 7 years (Sec 125) — unclaimed dividends in the special account for 7 years are transferred to the Investor Education and Protection Fund.
| Section | What It Says | Why It Matters |
|---|---|---|
| Sec 123Declaration of dividend. Dividend only from profits (current or accumulated). Depreciation must be provided. Board recommends, AGM approves. | Declaration of dividend — sources, depreciation, Board recommendation | Primary section governing dividend declaration |
| Sec 123(3)Interim dividend. The Board of Directors may declare interim dividend from surplus in the profit and loss account or from profits of the current financial year. | Interim dividend by Board resolution | Allows mid-year distribution without waiting for AGM |
| Sec 124Unpaid Dividend Account. Company to transfer unpaid/unclaimed dividend to a special account in a scheduled bank within 7 days. | Transfer unpaid dividend to special bank account within 7 days | Protects shareholders' unclaimed dividends |
| Sec 125Investor Education and Protection Fund. Amounts unclaimed for 7 years transferred to IEPF established by Central Government. | Unclaimed amounts for 7 years go to IEPF | Ultimate protection mechanism for unclaimed corporate dues |
| Sec 127Punishment for failure to distribute dividends. If dividend not paid within 30 days: imprisonment up to 2 years, fine up to Rs 1000/day. | Default in payment — imprisonment up to 2 years | Criminal consequence ensures timely payment |
- Sec 123 = Declaration | Sec 124 = Unpaid account | Sec 125 = IEPF | Sec 127 = Punishment
- Source: Current profits OR accumulated profits ONLY (never from capital)
- Process: Board recommends → AGM approves (cannot exceed recommendation)
- Depreciation must be provided BEFORE declaring dividend
- 30 days to pay | 7 days to transfer unpaid to special account | 7 years to IEPF
- Default punishment: Imprisonment up to 2 years + fine
- Case: Bacha F. Guzdar v. CIT — no right to profits until dividend declared
A dividend is the portion of a company's profits distributed to shareholders in proportion to their shareholding. Sections 123 to 127 of the Companies Act, 2013 govern dividends. Declaration rules: dividends can only be declared from profits — either current year profits or accumulated reserves (Sec 123(1)). The Board of Directors recommends the dividend, and shareholders approve it at the AGM; they cannot exceed the Board's recommendation. Depreciation must be provided before declaring any dividend. The Board may also declare an interim dividend under Sec 123(3). Payment rules: dividends must be paid within 30 days of declaration; failure to do so is punishable with imprisonment up to 2 years (Sec 127). Any dividend remaining unpaid for 30 days must be transferred to a special Unpaid Dividend Account in a scheduled bank within 7 days (Sec 124(1)). After 7 years, unclaimed amounts are transferred to the Investor Education and Protection Fund (Sec 125). As held in Bacha F. Guzdar v. CIT, a shareholder has no right to profits until dividend is declared.
1. Introduction
A dividend represents the return that shareholders receive on their investment in a company. It is the mechanism through which corporate profits are shared with the members. The Companies Act, 2013, through Sections 123 to 127, establishes a comprehensive framework for the declaration and payment of dividends to protect both the company and its shareholders.
2. Definition of Dividend
A dividend is the share of profits of a company distributed among its shareholders in proportion to the amount paid up on their shares. The Companies Act does not explicitly define "dividend" but Section 2(35) defines "dividend" to include interim dividend. In Bacha F. Guzdar v. CIT, the Supreme Court held that a shareholder has no right to the profits of the company until a dividend is declared, and once declared, the dividend becomes a debt owed by the company to the shareholder.
3. Rules Regarding Declaration of Dividend
(a) Source of Dividend — Section 123(1)
Dividends can only be declared or paid from:
- Profits of the current financial year after providing for depreciation.
- Accumulated profits (undistributed profits of previous years) after providing for depreciation.
- Money provided by the Central or State Government for the payment of dividend in pursuance of a guarantee given by the Government.
Depreciation must be provided before any dividend can be declared. This ensures the company maintains the value of its assets.
(b) Board Recommendation and Shareholder Approval
The Board of Directors recommends the rate and amount of dividend. This recommendation is then placed before the shareholders at the Annual General Meeting (AGM) for approval. The shareholders may approve the dividend at the recommended rate or at a lower rate, but they cannot declare a dividend exceeding the Board's recommendation.
(c) Interim Dividend — Section 123(3)
The Board of Directors may declare an interim dividend during any financial year from the surplus in the profit and loss account or from the profits of the current financial year. The amount of interim dividend, if any, already paid, is deducted from the final dividend declared for the year.
4. Rules Regarding Payment of Dividend
(a) Time of Payment — Section 127
The dividend must be paid within 30 days from the date of its declaration to every shareholder entitled to receive it. If a company fails to pay dividend within this period, every director who is knowingly a party to the default shall be punishable with imprisonment up to 2 years and a fine of Rs. 1,000 per day of default.
(b) Unpaid Dividend Account — Section 124(1)
Where a dividend has been declared but has not been paid or claimed within 30 days from the date of declaration, the company must, within 7 days from the expiry of the 30-day period, transfer the total amount of such unpaid or unclaimed dividend to a special account called the Unpaid Dividend Account in any scheduled bank.
(c) Transfer to IEPF — Section 125
Any money transferred to the Unpaid Dividend Account which remains unclaimed for a period of 7 years from the date of transfer shall be transferred to the Investor Education and Protection Fund (IEPF) established by the Central Government under Section 125. The IEPF is used for investor education and awareness programs.
5. Conclusion
The law of dividends under the Companies Act, 2013 ensures that profits are distributed fairly and transparently. The requirement that dividends be paid only from profits protects the company's capital base. The strict timelines for payment and the criminal penalties for default ensure that shareholders receive their dues promptly. The IEPF mechanism ensures that even unclaimed dividends ultimately serve the public interest through investor education.
💡 BUY-BACK OF SHARES — COMPANY BUYING ITS OWN SHARES
Core Concept: Imagine a pizza company buying back slices from customers. The total pizza gets smaller, but each remaining slice becomes a bigger portion. That is buy-back!
💵 Sources of Buy-back
- 🟢 Free reserves (retained profits)
- 🟢 Securities premium account
- 🟢 Proceeds of any issue (but NOT same kind of shares)
🚫 Key Limits
- 🔴 Not more than 25% of total paid-up capital in a year
- 🔴 Debt-equity ratio must not exceed 2:1 after buy-back
- 🔴 Only fully paid-up shares can be bought back
- 🔴 No fresh issue for 6 months after (except bonus/ESOP)
⚖️ Case: Trevor v. Whitworth (1887)
This landmark House of Lords case established the common law prohibition against a company purchasing its own shares, as it amounts to a reduction of capital and prejudices creditors. The Companies Act, 2013 (Sec 68-70) now provides a statutory exception to this rule, allowing buy-back subject to strict conditions.
🧠 Mnemonic: "ASF-DEF-7" — Buy-back Conditions
Articles must authorize | Special resolution (or Board if ≤10%) | Fully paid-up shares only | Debt-equity max 2:1 | Extinguish within 7 days | Fresh issue banned for 6 months | Max 25% of paid-up capital per year
- Buy-back means a company purchasing its own shares from existing shareholders, governed by Sections 68-70 of the Companies Act, 2013.
- Three permissible sources: free reserves, securities premium account, or proceeds of any issue (but not the same kind of shares being bought back).
- Must be authorized by the Articles of the company and approved by special resolution (or Board resolution if buy-back does not exceed 10% of paid-up capital).
- Debt-to-equity ratio must not exceed 2:1 after the buy-back, ensuring the company remains financially healthy.
- Only fully paid-up shares can be bought back; partly paid shares are excluded from buy-back.
- Maximum 25% of total paid-up capital and free reserves in any financial year — this prevents excessive reduction of capital.
- Shares bought back must be extinguished (destroyed) within 7 days of the last date of completion of buy-back; no fresh issue of same kind for 6 months (except bonus/ESOP).
- Trevor v. Whitworth (1887) established the common law prohibition against buy-back; the Companies Act now provides a statutory exception with strict conditions.
| Section | What It Says | Why It Matters |
|---|---|---|
| Sec 68Power of company to purchase its own securities. Lays down conditions: authorization by articles, special resolution, sources of buy-back, debt-equity limit, 25% cap. | Power and conditions for buy-back — articles, resolution, sources, limits | Primary governing section for buy-back |
| Sec 69Transfer of certain sums to capital redemption reserve account. Company must transfer nominal value of bought-back shares to CRR when bought from free reserves. | Transfer to Capital Redemption Reserve | Maintains capital integrity after buy-back from free reserves |
| Sec 70Prohibition for buy-back in certain circumstances. Prohibits buy-back through subsidiary or investment company, or if default in repayment of deposits/debentures. | Prohibition — no buy-back through subsidiary, default situations | Prevents misuse and protects creditors |
| Sec 67Restrictions on purchase by company or giving of loans by it for purchase of its shares. Company cannot buy its own shares through subsidiary or investment company. | Company cannot buy own shares through subsidiary | Anti-avoidance provision |
- Sec 68 = Buy-back power & conditions | Sec 69 = Capital Redemption Reserve | Sec 70 = Prohibitions
- Sources: Free reserves | Securities premium | Proceeds of issue (NOT same kind)
- Conditions: Articles authorize + Special resolution (Board if ≤10%) + Fully paid-up only
- Limits: Max 25% of paid-up capital/year | Debt-equity ≤ 2:1
- Post buy-back: Extinguish shares in 7 days | No fresh issue for 6 months (except bonus/ESOP)
- Prohibition: Cannot buy through subsidiary (Sec 67)
- Case: Trevor v. Whitworth — common law prohibition against buy-back (now statutorily permitted with conditions)
Buy-back of shares means a company purchasing its own shares from existing shareholders, governed by Sections 68-70 of the Companies Act, 2013. At common law, buy-back was prohibited as held in Trevor v. Whitworth (1887), since it amounts to reduction of capital prejudicing creditors. The Act now permits buy-back from three sources: free reserves, securities premium account, or proceeds of any issue (not the same kind of shares). The conditions include: (i) authorization by articles, (ii) special resolution (or Board resolution if not exceeding 10% of paid-up capital), (iii) debt-to-equity ratio not exceeding 2:1 after buy-back, (iv) only fully paid-up shares, and (v) not exceeding 25% of total paid-up capital in any financial year. The company cannot buy back through any subsidiary or investment company (Sec 67). Shares bought back must be extinguished within 7 days, and the company cannot make a fresh issue of the same kind of securities within 6 months of buy-back (except bonus shares or ESOP).
1. Introduction
Buy-back of shares refers to the purchase by a company of its own shares from the existing shareholders. Under common law, this was prohibited as established in the landmark case of Trevor v. Whitworth (1887), where the House of Lords held that a company cannot purchase its own shares as it amounts to reduction of capital. However, the Companies Act, 2013, through Sections 68-70, now provides a statutory framework permitting buy-back subject to strict conditions.
2. Sources of Buy-back
Under Section 68, a company may buy back its shares from:
- Free reserves — retained profits available for distribution.
- Securities premium account — premium received on issue of shares.
- Proceeds of any issue of shares or other specified securities, provided the buy-back is NOT of the same kind of shares or securities being issued.
3. Conditions for Buy-back
(i) Authorization by Articles
The buy-back must be authorized by the Articles of Association of the company.
(ii) Special Resolution
A special resolution must be passed in a general meeting authorizing the buy-back. However, if the buy-back does not exceed 10% of the total paid-up equity capital and free reserves, a Board resolution is sufficient.
(iii) Debt-to-Equity Ratio
After the buy-back, the ratio of debt to equity (including the aggregate of secured and unsecured debts) must not exceed 2:1. This ensures the company does not become over-leveraged.
(iv) Fully Paid-up Shares Only
Only fully paid-up shares can be bought back. Partly paid shares are excluded from buy-back.
(v) Quantitative Limit
The buy-back must not exceed 25% of the total paid-up capital and free reserves of the company in any financial year.
4. Prohibitions
Under Section 67, a company cannot purchase its own shares through any subsidiary company or through any investment company. Under Section 70, buy-back is prohibited if there is any default in repayment of deposits, redemption of debentures or preference shares, payment of dividend, or repayment of term loans.
5. Post Buy-back Obligations
- Extinguishment: Shares bought back must be extinguished and physically destroyed within 7 days of the last date of completion of buy-back.
- Restriction on fresh issue: The company shall not make any further issue of the same kind of shares within a period of 6 months from the date of buy-back, except by way of bonus shares or in discharge of subsisting obligations (such as ESOP).
- Capital Redemption Reserve (Sec 69): Where buy-back is out of free reserves, the company must transfer a sum equal to the nominal value of bought-back shares to a Capital Redemption Reserve Account.
6. Conclusion
The buy-back of shares is a significant corporate tool that enables companies to return surplus cash to shareholders, improve earnings per share, and consolidate promoter holding. The strict conditions under Sections 68-70, including the 25% cap, 2:1 debt-equity ratio, and prohibition on buy-back through subsidiaries, ensure that the interests of creditors are protected and the capital base of the company is not unduly depleted.