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The Companies Act, 1956

Title : The Companies Act, 1956

Year : 1956



(1) 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 capital is effected and sanctioned in pursuance of sections 100 to 104 or of section 402.

(2) No public company, and no private company which is a subsidiary of a 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:-

Provided that nothing in this sub-section shall be taken to prohibit-

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

(b) The provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaries office or employment in the company; or

(c) The making by a company of loans, within the limit laid down in sub-section (3), to persons (other than directors1[***] or managers) bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership

(3) No loan made to any person in pursuance of clause (c) of the foregoing proviso shall exceed in amount his salary or wages at that time for a period of six months.

(4) If a company acts in contravention of sub-sections (1) to (3) the company, and every office of the company who is in default shall be punishable with fine which may extend to2*[ten thousand rupees].

(5) Nothing in this section shall affect the right of a company to redeem any shares issued under section 80 or under any corresponding provision in any previous companies law.

77A - 3* Power of company to purchase its own securities

(1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2) of this section and section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to 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:-

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 in general meeting of the company authorising the buy-back;

4*[Provided that nothing contained in this clause shall apply in any case where-

(A) The buy-back is or less than ten per cent. of the total paid-up equity capital and free reserves of the company; and

(B) Such buy-back has been authorised by the Board by means of a resolution passed at its meeting:-

Provided further
that no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back, if any.

Explanation
.- For the purposes of this clause, the expression "offer of buy-back" means the offer of such buy-back made in pursuance of the resolution of the Board referred to in the first proviso;]

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

Provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year;

(d) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back:-

Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies.

Explanation
.-For the purposes of this clause, the expression "debt" includes all amounts of unsecured and secured debts;

(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 of India in this behalf;

(g) The buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with the guidelines as may be 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 material facts;

(b) The necessity for the buy-back;

(c) The class of security 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 twelve months from the date of passing the5*[special resolution or a 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 security holders on a proportionate basis; or

(b) From the open market; or

(c) From odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or

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

(6) Where a company has passed a special resolution under clause (b) of sub-section (2)5*[or the Board has passed a resolution under the first proviso to clause (b) of that sub-section] to buy-back its own shares or other securities under this section, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board 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 of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any:-

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

(7) Where a company buy-back its own securities, it shall extinguish and physically destroy the 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 further issue of the same kind of shares (including allotment of further shares under clause (a) of sub-section (1) of section 81) or other specified securities 6*[within a period of six months] except by way of 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 buy-back its securities under this section, it shall maintain a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of 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 of India, 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 of India by a company whose shares are not listed on any recognised stock exchange.

(11) If a company makes default in complying with the provisions of this section or any rules made there under, or any regulations made under clause (f) of sub-section (2), the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.

Explanation.-For the purposes of this section, -

(a) "Specified securities" includes employees' stock option or other securities as may be notified by the Central Government from time to time;

(b) "Free reserves" shall have the meaning assigned to it in clause (b) of Explanation to section 372A.]

77AA -7* Transfer of certain sums to capital redemption reserve account

Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause (d) of the proviso to sub-section (1) of section 80 and details of such transfer shall be disclosed in the balance sheet.

77B -7* Prohibition for buy-back in certain circumstances

(1) No company shall directly or indirectly purchase its own shares or other specified securities -

(a) Through any subsidiary company including its own subsidiary companies; or

(b) Through any investment company or group of investment companies; or

(c) If a default, by the company, in repayment of deposit or interest payable thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institution or bank, is subsisting.

(2) No company shall directly or indirectly purchase its own shares or oilier specified securities in case such company has not complied with the provisions of sections 159, 207 and 211.]

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1. The words ", managing agents, secretaries and treasurers" omitted by Act 53 of 2000, Section 33 (w.e.f. 13-12-2000).

2. Substituted by Act 53 of 2000, Section 33, for "one thousand rupees" (w.e.f. 13-12-2000).

3. Inserted by Act 21 of 1999, Section 4 (w.r.e.f. 31-10-1998).

4. Inserted by Act 57 of 2001, Section 2 (w.r.e.f. 23-10-2001).

5. Substituted by Act 57 of 2001, Section 2, for "special resolution" (w.r.e.f 23.10.2001).

6. Substituted by Act 57 of 2001, Section 2, for "within a period of twenty four months" (w.r.e.f 23.10.2001).

7. Inserted by Act 21 of 1999, Section 4 (w.r.e.f. 31-10-1998).

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(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called "the1*[securities] premium account"; and the provisions of this Act relating to the reduction of the1*[securities]capital of a company shall, except as provided in this section apply as if the1*[securities] premium account were paid-up1*[securities] capital of the company.

(2) The1*[securities] premium account may, notwithstanding anything in sub-section (1), be applied by the company -

(a) In paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares;

(b) In writing off the preliminary expenses of the company;

(c) In writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or

(d) In providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

(3) Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares had been issued after the commencement of this Act:
Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company's reserves within the meaning of Schedule VI shall be disregarded in determining the sum to be included in the1[securities] premium account.

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1. Substituted by Act 21 of 1999, Section 5, for "share" (w.r.e.f. 31-10-1998).

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(1) A company shall not issue shares at a discount except as provided in this section.

(2) A company may issue at a discount shares in the company of a class already issued, if the following conditions are fulfilled, namely: -

(i) The issue of the shares at a discount is authorised by a resolution passed by the company in general meeting, and sanctioned by the1*[Central Government]

(ii) The resolution specifies the maximum rate of discount2[***] at which the shares are to be issued;

3*[Provided that no such resolution shall be sanctioned by the4*[Central Government] if the maximum rate of discount specified in the resolution exceeds ten per cent,5*[unless the Central Government is of opinion] that a higher percentage of discount may be allowed in the special circumstances of the case;]

(iii) Not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business; and

(iv) The shares to be issued at a discount are issued within two months after the date on which the issue is sanctioned by the1*[Central Government] or within such extended time as the1*[Central Government] may allow.

(3) Where a company has passed a resolution authorising the issue of shares at a discount it may apply to the1*[Central Government] for an order sanctioning the issue; and or any such application, the1*[Central Government] if, having regard to all the circumstances of the case, it thinks proper so to do, may make an order sanctioning the issue on such terms and conditions as it thinks fit.

6*[Provided that in the case of revival and rehabilitation of sick industrial companies under Chapter VIA, the provisions of this section shall have effect as if for the words "Central Government", the word 'Tribunal" had been substituted.]

(4) Every prospectus relating to the issue of the shares shall contain particulars of the discount allowed on the issue of the shares or of so much of that discount as has not been written off at the date of the issue of the prospectus.

If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to7*[five hundred rupees].

79A - 8*Issue of sweat equity shares

(1) Notwithstanding anything contained in section 79, a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled, namely:-

(a) The issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting;

(b) The resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

(c) Not less than one year has, at the date of the issue, elapsed since the date on which the company was entitled to commence business;

(d) The sweat equity shares of a company, whose equity shares are listed on a recognised stock exchange, are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf:-

Provided
that in the case of a company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed.

Explanation.-For the purposes of this sub-section, the expression "a company" means the company incorporated, formed and registered under this Act and includes its subsidiary company incorporated in a country outside India.

Explanation
II. -For the purposes of this Act, the expression "sweat equity shares" means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

(2) All the limitations, restrictions and provisions relating to equity shares shall be applicable to such sweat equity shares issued under sub-section (1).]

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1. Substituted by Act 41 of 1974, Section 9, for "Court" (w.e.f. 1-2-1975) and again Substituted by Act 11 of 2003, Section 12, for "Company Law Board".

2. Certain words omitted by Act 41 of 1974, Section 9 (w.e.f. 1-2-1975).

3. Added by Act 41 of 1974, Section 9 (w.e.f. 1-2-1975).

4. Substituted by Act 11 of 2003, Section 12 for "Company Law Board".

5. Substituted by Act 11 of 2003, Section 12 for "unless that board is of opinion".

6. Inserted by Act 11 of 2003, Section 12.

7. Substituted by Act 53 of 2000, Section 34, for "fifty rupees" (w.e.f. 13-12-2000).

8. Inserted by Act 21 of 1999, Section 6 (w.r.e.f. 31-10-1998).

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Last updated on August, 2016

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