Transfer And Buyback

Of Shares

Submitted By-

Shah Rukh Ahmad

3rd yr, J.M.I

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 Acknowledgement
I have taken efforts in this project but it wouldn't have been possible without the
support of many individuals. I would like to extend my sincere thanks to all of
them. I am highly indebted to Dr. Mohd. Qazi Usman for his guidance and
constant supervision as well as for providing necessary information regarding
the project and also for his support in completing the project. My thanks and
appreciations also go to my friends in developing the project and people who
have willingly helped me out with their abilities.

- Shah Rukh Ahmad

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 INDEX
INTRODUCTION

TRANSFER OF SHARES

BUYBACK OF SHARES

CONCLUSION

BIBLIOGRAPHY

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 INTRODUCTION

Section 82 of the Companies Act, 1956 provides that “The shares or debentures or other
interest of any member in a company shall be movable property, transferable in the manner
provided by the articles of the company”. Thus Section 82 empowers every shareholder to
transfer his shares in the manner laid down in the Articles and in accordance with the various
provisions of law. Section 82 is in keeping with the philosophy relating to transfer of shares
given in Palmer’s Company Law where it is stated that “It is well settled that unless the
articles provide otherwise the shareholder has a free right to transfer to whom he will. It is
not necessary to seek in the articles for a power to transfer for the Act itself gives such a
power. It is only necessary to look to the articles to ascertain the restrictions, if any, upon it.
Thus a member has a right to transfer his shares to another person unless this right is clearly
taken away by the articles”.1

Prior to the amendment of the Companies Act, 1956, buyback of shares in India was
prohibited. Section 77 of the Act, imposed a blanket ban on companies from buying their
own shares. Section 77A, 77AA and 77B have been introduced in 1999 in the Companies
Act, 1956 to enable companies to purchase their own shares or other specified securities. The
debate on the desirability of allowing companies to purchase their own shares (buy-back) has
raged intermittently through decades and has been the subject of many deliberations all over
the world. In India, under Section 77 of the Companies Act, 1956, no company had the power
to buy its own shares unless it was by way of reduction of share capital. The law also
prohibited a public company from extending any financial assistance for the purchase of
its own shares. The basic reason for such a prohibition was the feeling that allowing
companies to buy-back their shares could give rise to companies trafficking in their own
shares leading to undesirable practices in the stock market, like insider trading or other such
unhealthy influences on stock prices. This general prohibition has been diluted by statute.
The Companies (Amendment) Act, 1999 (Act 21 of 1999), permits a company whether
public or private, after following the prescribed procedure to buy-back its own securities with
suitable safeguards specified in Sections 77-A, 77-AA and 77-B.

1
N.Vijia Kumar, “Transfer of Shares” SEBI and Corporate Laws Vol. 35 (2002) at 124.

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Transfer of shares is the voluntary conveyance of the rights and possibly the duties of a
member as represented in a share in the company from a shareholder who wishes to cease to
be a member to a person desirous of becoming a member.2 Thus simply a transfer of shares
means a change in the ownership of the shares by the voluntary act of the parties.
Transmission of shares as distinct from a transfer of shares occurs when a change of
ownership in the shares takes place, not by agreement and the voluntary action of the parties,
but by the operation of the law and as a result of some other event, such as the death or
insolvency of the shareholder.3 Transmission of shares may also take place by legislation
providing for the nationalization of a particular industry. Section 109B of the Companies Act,
1956 deals with Transmission of Shares.

The contract by which a shareholder undertakes to transfer his shares is usually a contract of
sale whereby the proposed transferor agrees to sell, and the proposed transferee agrees to buy,
the shares; this contract may be concluded at the stock exchange or otherwise. It is to be
noted that the shares of a private company cannot be transferred at a stock exchange.4 The
obligation to transfer shares may arise from other types of contracts and agreements too. For
example, a settlor may undertake in the trust instrument to transfer specified shares to the
trustees.

In a contract for transfer of shares the following are usually the implied terms:5

 That the transferee will pay the price and that the transferor will hand over to him
genuine instruments of transfer and share certificates
 That the share certificate carries the rights and interests which it purports to convey
 That there is no undertaking by the transferor that the transferee will be registered
 That the transferor will do nothing to prevent the transferee from having the transfer
registered or to delay that event
 That the transferee will indemnify the transferor from any calls or liability which may
arise in respect of the shares subsequent to the transfer
These terms are usually implied in a contract providing for transfer of shares and they may be
nullified by clauses which have been expressly stated in the contract.

2
Supra note 5 at 386.
3
B.K Sen Gupta, Company Law (New Delhi: Eastern Law House, 1990) at 181.
4
Supra note 5 at 41.
5
Supra note 5 at 387-388.

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Once the contract has been entered into the transferee has an equitable title to the shares and
the transferor holds them, until registration, as trustee for the transferee. However until the
purchase price is fully paid the seller remaining on the register is entitled vis-à-vis the
purchaser to vote in respect of the shares without respect to the wishes of the purchaser.6

It is to be noted that a transfer is incomplete and invalid until it is registered. Pending

registration, the transferee has only an equitable right to the shares transferred to him. He
does not become the legal owner until his name is entered on the register in respect of these
shares.7

Thus, having understood the meaning of transfer of shares and what exactly a transfer of a
share entails it is imperative to analyse restrictions on transfer of shares and related issues in
order to fully comprehend transfer of shares in private companies.

 Restrictions On Transfer Of Shares In Private Companies

Section 3(1)(iii)(a) of the Companies Act, 1956 compulsorily requires private companies to
impose restrictions on the transfer of shares by incorporating such restrictions in their
Articles of Association. The Companies Act, 1956 however, does not specify any particular
form of restriction or prescribe the maximum extent or scope of the restriction required. Thus
the restrictions may be as slight or as severe as the framers of the articles desire. The statute
merely requires that the articles of a private company limited by shares must contain
restrictions on the transfer of shares. Such restrictions should be general and apply uniformly
to all the shareholders and to all types of shares8. They should not exempt certain
shareholders or a certain class of shares.

Restriction Not Prohibition

It is also important to see that these restrictions are not construed as a ban or a prohibition on
the transfer of shares. The Courts have consistently held that the restriction upon transfer
means any restriction that will give some control to the company over transferability of
shares9. It does not mean a prohibition on the transfer of shares. It was held in Chiranji Lal
Jasrasaria v. Mahabir Dhelia10 that a restriction which amounts to a prohibition on transfer

6
Supra note 5 at 388.
7
Section 108 of the Companies Act, 1956.
8
A.K Majumdar and Dr. G.K Kapoor, Company Law and Practice (New Delhi: Taxmann Publications Limited,
2000) at 33.
9
A. Ramaiya, Guide to the Companies Act Part I 14th ed. (New Delhi: Wadhwa and Company Law Publishers,
1998) at 73.
10
AIR 1966 Assam 48

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of shares or which precludes a shareholder altogether from transferring is invalid. Moreover a
prohibition on the transfer of shares will amount to violation of Section 82 of the Companies
Act, 1956 and Section 6 of the Transfer of Property Act, 1872. Therefore if a clause in the
articles provides that shares are not transferable but heritable will be valid. This is because:
Shares are property and under Section 6 of the Transfer of Property Act, 1872 prohibiting
transfer of property is not allowed. Transferability is the general nature of property and even
when there is a restriction on transfer, when the person dies the restriction will not apply.

Need for Restrictions on the Transfer of Shares

In the United States of America Private Companies are referred to as ‘Close Corporations’.11
This term implies that private companies are closely knit family or friendly affairs. The
members of a private company are connected by bonds of kinship, friendship or similar close
ties and the intrusion of a stranger as a shareholder would be felt to be undesirable unless his
admission is accepted by the existing members. Some private companies are in fact so
constructed so as to amount to in economic terms as nothing more than incorporated
partnerships with extremely close ties between the members. Thus these restrictions are
needed in order to preserve the soul of the private company ie. the partnership principle.
These restrictions on transfer of shares prevent anybody or everybody from acquiring shares
of the company by transfer and help to keep the close ties amongst the members intact.

Thus the main reasons for which Restrictions on transfer of shares are needed in private
companies are:12

 To keep the control of the company in the hands of a small group of persons bound
together by ties of friendship, kinship etc.
 To ensure that shares are not transferred to persons who are unacceptable to the
existing members.

Strict Construction of Restrictions

Lord Greene MR in Smith and Fawcett Ltd., Re13 stated that “In construing the relevant
provisions in the articles it is to be borne in mind that one of the normal rights of a
shareholder is the right to deal freely with his property and to transfer it to whomsoever he
pleases and this right is not to be cut down by uncertain language or doubtful implications”.

11
Richard W. Jennings and Richard M. Buxbaum, Corporations- Cases and Materials ( Minnesota: West
Publishing Company, 1979) at 367.
12
Another reason may be to prevent key personnel or members from leaving the company.
13
[1942]1 All ER 542

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Any limitation on the right of transfer must be strictly complied with. Thus as the restrictions
on transfer of shares are strictly construed and wherever a certain restriction can be
interpreted in several ways the narrower construction will be adopted the framers of the
articles must be extremely careful in drafting the restrictions on the transfer of shares so as to
prevent any injustice to the shareholders.14
The courts should not always literally interpret the restrictions as sometimes a literal
interpretation of these restrictions can defeat the very purpose of the restrictions contained in
the articles.

In V.B Rangaraj v. V.B Gopalakrishnan and Others15 the Supreme Court of India held that:
Shares are movable property and their transfer is regulated by the Articles of Association of
the company. The Articles of Association are the regulations of the company binding on the
company and its shareholders. Therefore, the only permissible restrictions on the transfer of
shares are those which are contained in the Articles of Association. An additional restriction
not contained in the articles but in a private agreement between two shareholders which
places further obstacles in the way of transferability is not binding either on the company or
on the shareholders. The vendee of the shares cannot be denied the registration of the shares
purchased by him on a ground other than stated in the Articles.

Types of Restrictions
Restrictions on the rights of shareholders to transfer their shares generally take two common
forms:16

a) Right of Pre-emption in favour of the other members

b) Powers of the Board of Directors to refuse to register transfer of shares

Pre-emption Clause
In Bishan Singh v. Khazan Singh17 the Court stated that the right of pre-emption is not a right
to the thing sold but a right to the offer of a thing to be sold. The most common type of
transfer restriction is the right of pre-emption. The pre-emption clause in the articles
generally provides that when a member wishes to sell some or all of his shares, he shall first
offer them to the other members for purchase at a price ascertained in accordance with a

14
Paul L. Davies, Gower’s Principles of Modern Company Law (London: Sweet and Maxwell Limited, 1997) at
345-346.
15
(1992)1 SCC 160
16
Robert R. Pennington, Company Law (London: Butterworths, 1990) at 752.
17
1959 SCR 878

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formula set out in the articles, or at a fair price at which the shares are valued by the directors
or by the company’s auditors and he shall transfer the shares to his proposed transferee only
if the other members do not exercise their right of pre-emption.18 The pre-emption clause
goes a long way in ensuring that the control of the shares does not fall into the hands of
undesirable persons as it ensures that the existing shareholders get the opportunity to buy the
shares first.
Various types of pre-emption clauses are found in the articles of private companies.
Sometimes it is provided that the proposing transferor shall offer the shares first to all other
shareholders rateably; sometimes he is entitled to select the shareholder to whom he wants to
sell; sometimes the first offer has to be made to certain shareholders e.g. those holding
founder’s shares; sometimes the articles provide that in certain circumstances e.g. in the case
of death of a member, the surviving members or directors are obliged to acquire the deceased
member’s shares. It is usual to supplement these pre-emption clauses with the general
restriction clause by providing, for example, that after the failure of those entitled to pre-
emptive rights to acquire the shares and after their subsequent offer to another person, the
directors may decline the transfer19. There is no doubt as to the validity of these pre-emption
clauses and courts have consistently upheld the validity of the pre-emption clause in the
article of a private company.20

The pre-emptive clause is brought into operation where shareholders agree to sell the shares,
receive the purchase price and retain it.21 Where the pre-emption clause provides-as is
normally the case- that a share may be transferred to any member but shall not be transferred
to a person who is not a member so long as any member is willing to purchase the same at the
fair value, the transfer between members is completely unrestricted and does not bring into
operation the provisions of the pre-emption clause.22

Implementation of Pre-emptive Rights

Where the articles provide a procedure for implementation of pre-emptive rights the
procedure laid down has to be followed. The procedure that is usually laid down in the
articles is to require the transferor to give to the company a notice of his intention to transfer

18
Supra note 15 at 74
19
Supra note 5 at 394.
20
In Ontario Jockey Club v. Samuel Mcbridge, AIR 1928 PC 291 the Court held that “A restriction which
precludes a shareholder altogether from transferring may be invalid, but a restriction which does no more than
give a right of pre-emption is valid”.
21
Lyle and Scott Ltd. v. Scott’s Trustee, [1959]2 All ER 661
22
Greenhalgh v. Mallard, [1943]2 All ER 234.

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his holding and asking the company to notify the other members of the availability of the
shares and the price at which they will be available to them for acquisition and the time
within which they should communicate to the company their desire to purchase the proffered
shares. When the articles do not provide any machinery for implementation of pre-emption
rights the member who wants to transfer his shares must notify all the members of his
intention to do so. He should then allow them a reasonable time to inform him of their
decision.23

A member cannot evade a provision for pre-emption in the articles by contracting to sell his
shares to a third person or by executing an instrument of transfer to such a person, with the
intention that the purchaser shall not apply for registration as a member, but shall rest content
with the vendor holding the legal title to the shares as a bare trustee for him24. It has been
held that a pre-emption provision was complied with where one member sold to another
member even though the purchase price was paid by an outsider and the transferee was to
vote at the outsider’s discretion25. It is humbly submitted that the decision of the Court to
recognize this as a valid transfer and to hold it in compliance with the pre-emptive clause is
erroneous as the decision goes against the very objective of the pre-emptive clause ie. to
prevent outsiders and undesirable persons from gaining control of the company. In this case
although the pre-emptive provision was complied with in form it was violated in substance.
The court should have looked at the substance of the matter and not the form.

Transfers contravening pre-emptive clause

A company can reject a transfer contravening the provisions of the company’s articles, but
the company can waive its right and accept a contravening transfer and once it does so, it
loses the right to question the validity of the transfer. Hence, a transfer contravening the
articles is not a nullity or void abinitio26. In Tett v. Phoenix Property and Investment
Company Limited27 Justice Vinelott held that “despite the disregard of the preemptive
provisions there had occurred a complete and effective transfer between transferor and
transferee in terms of which the equitable title passed to the latter”. In this case the shares in
question were sold to an outsider and a transfer deed was executed in his favour in complete
disregard to the pre-emptive provisions. Some shareholders were interested in acquiring the

23
Supra note 15 at 75
24
Lyle and Scott Limited v. Scott’s Trustees, [1959]2 All ER 661.
25
Theakston v. London Trust Plc., (1984) BCLC 390.
26
Hunter v. Hunter, 1936 AC 222 HL.
27
(1984) BCLC 599.

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shares but not at the price which the outsider was willing to pay. The Court of Appeal held
that the transfer was in violation of the pre-emptive provisions and the company was not
compelled to accept it. The decision of the court is praiseworthy as it recognizes the true
objective of the pre-emptive clause and preserves the partnership principle in the private
company. The privacy of a close corporation is more important than the price offered by an
outsider, however great such a price may be. A different decision by the Court of Appeal
would have defeated the intention of the incorporators when they formed the company.

Valuation of Shares for Purpose of Pre-emptive Rights

The articles of a private company generally provide that the price payable for the shares sold
in exercise of a right of pre-emption shall be a fair price. If the pre-emption clause requires
the shares which a member wishes to transfer to be offered to the other members at a fair
value certified by the directors or the company’s auditor, the court cannot inquire into the
correctness of the valuation, unless there is evidence that it was not honestly made, or unless
the person who made it set out the reasons for his valuation, and those reasons show that he
did not apply the proper principles. There is scope for judicial interference even if the person
who made the valuation acted negligently by not taking relevant factors into account, by
giving undue emphasis to one of those factors, or by taking irrelevant factors into account,
and in that situation the transferor’s only remedy is to sue the person who made the valuation
for the difference between the valuation and the real value of the shares as damages in an
action for negligence. However if the error appears in the valuation itself, the fact that the
company’s articles provide that the valuation shall be final, binding and conclusive, or the
fact that the shares in question have already been registered by the company in the names of
the other members who have exercised their pre-emption rights on the basis of an erroneous
valuation, does not prevent the member whose shares are the subject of the valuation from
challenging its validity28. In Dean v. Prince29 it was held that where under a pre-emption
provision the price at which the shares must be offered to the other members is their fair
value, they should be valued on the assumption that the company’s business could be sold as
a going concern, but if the company is insolvent or has liabilities which has made an
immediate winding up or a sale of its undertaking imperative, the shares should be valued on
the assumption that the company’s assets will be sold piecemeal, and that nothing will be
received for its goodwill. There are certain grey areas with respect to valuation of shares for

28
Supra note 22 at 758.
29
[1954]1 All ER 749.

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the purpose of pre-emptive provisions. Uncertainty prevails over whether any addition should
be made to the value of the shares ascertained in the normal way when they carry controlling
voting rights at general meetings. The Courts have to clear the ambiguity in this regard as the
question can be answered both ways. On one hand the value of the control over the company
conferred by the shares is totally distinct and separate from the value of the shares ascertained
with reference to the company’s financial condition and thus no addition should be made to
the value of the shares. On the other hand, the power to control the company is inherent in a
share and thus value of the control over the company conferred by the share must form a
constituent element of the value of the share. This raises the complex question as to how
should the control conferred by a share be valued?

Power of the Board of Directors to Refuse to Register Transfer of Shares

The articles of a private company generally vest the Board of Directors with discretion with
regard to acceptance of a transfer of shares. This power vested in the Board is fiduciary in
nature ie. it must be exercised in good faith and for the benefit of the company and not for
some extraneous purpose30. The consequences and implications of the directors abusing this
power and the remedies available to the aggrieved persons have been dealt with in the next
section of this project.

Exercise of Power of Refusal

The directors must exercise their right to decline registration to a transfer of shares only by
passing a resolution to that effect; mere failure, due to a deadlock or something, to pass a
resolution is not a formal, active exercise of the right to decline and therefore the applicant
will be entitled to be registered as a member of the company. In Moodie v. W & F Shepherd
Limited31 the Board comprised of two directors one agreed to grant the transfer while the
other refused. It was held that the deadlock did not imply that the transfer had been declined
and therefore the Court directed that the applicant must be registered as a member of the
company.

30
Supra note 22 at 753.
31
[1949]2 All ER 1044. Similar views were expressed in Babulal Choukhani v. Western India Theatres Limited,
AIR 1957 Cal 709.

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Burden of Proof
The burden of proving that the Board of Directors have wrongfully approved or disapproved
transfers of shares rests on the person making that allegation. The Courts will always
presume bona fide on the part of the Board of Directors.32

Time Within Which The Directors Should Exercise The Power of Refusal to Register
Transfer of Shares

According to Section 111(1) of the Companies Act, 1956 the Board of Directors must
exercise their power of refusal within two months from the date of receiving the application.
The question that now arises is that if the directors do not exercise their power of refusal then
on the expiry of the two months does the company lose the right of rejection and the
transferee get a vested right to get himself registered? Section 111 is silent regarding this
question. When faced with this question the Bombay High Court33 did not agree that the
company would lose the right of rejection or the transferee would acquire a vested right to the
shares. It is felt that in such cases a court order would be necessary and the court should
decide the matter on merits. Judicial decisions have determined that the power of refusal must
be exercised within a reasonable time and the period of two months prescribed by Section
111 is reasonable. The transferee has to silently sit through the period of two months which is
given to the board to make their decision and the transferee cannot resort to any proceedings
until the two-month period has expired. A belated exercise of the power of refusal will
strengthen the position of the aggrieved transferee as delay in exercise of the power of refusal
will be looked at with suspicion and the delay on the part of the Board in making their
decision will be construed in favour of the transferee in a court of law.

 Abuse Of Power Of Board Of Directors To Refuse To Register Transfer Of

Shares- Remedies
Private companies are required by law to incorporate into their articles restrictions on the
transfer of shares. A common form of these restrictions is the power conferred on the Board
of Directors to refuse to register a transfer. Very often the articles of a private company may
vest absolute discretion in the directors to refuse to register transfer of shares. In Balwant
Transport Company v. Deshpande34 the Nagpur High Court felt that the Court would not be
justified in interfering with the discretion of the directors. The directors must exercise their

32
Supra note 15 at 80.
33
S.P Mehta v. Calico Dyeing and Printing Mills Ltd., (1990) 67 Comp Cas 533 Bom.
34
AIR 1956 Nag 20.

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discretion bona fide in what they consider-not what a court may consider-is in the interest of
the company. And if they have done that the court cannot substitute their judgment for
theirs.35
However the Board of Directors does not always exercise its powers of refusal in good faith
or bona fide. The Board knows that the Courts will not interfere with their decision if they act
bona fide and in the interests of the company. Thus in the name of acting in the interests of
the company the Board may abuse its power and refuse to register transfer of shares
according to their whims and fancies. In a private company the directors will be able to abuse
this power vested in them more easily as they are usually bound by close ties of kinship,
friendship etc. and thus may conspire to refuse to register a transfer for personal reasons such
as hostility towards the transferee and use the defence of acting in the interests of the
company as a shield. Such acts may prejudice the interests of genuine transferees and
shareholders and might also affect the interests of the company adversely.

Section 111 of the Companies Act, 1956 prevents the Board of Directors from abusing the
power of refusal to register transfer of shares granted to them by the articles of the company
and ensures that the interests of genuine and bona fide transferees and shareholders are not
prejudiced or harmed in any way.

Section 111 provides a right of appeal to the Company Law Board in respect of refusal to
register transfer/transmission of shares and Section 111A gives the right to petition the
Company Law Board for rectification of register of members.

Thus a right to appeal to the Company Law Board under Section 111 will usually lie on the
following grounds.36

When the Board of Directors acts mala fide

Where it is proved that the Board has not exercised its power of refusal to register transfer of
shares in good faith or for the benefit of the company an appeal may lie to the Company Law
Board. The power of declining a transfer is vested in the Board of Directors for the purpose
of protecting the interests of the company. Hence their refusal must appear to have proceeded
out of an honest and genuine desire to benefit the company. A mala fide refusal to register a
transfer will not be sustained. Thus if the if the Board exercises its power of refusal in order
to prevent the transferor from selling his shares at all, or because of their hostility towards

35
Smith and Fawcett Ltd. Re, [1942]1 All ER 542.
36
These grounds have developed in the light of judicial decisions and the views expresses by the Courts.

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him or because the Board of Directors wish to gain control of the company themselves and
they consider acquisition of the shares by the transferee may prevent them from doing so the
court will order the Board to register the transfer of shares37. InHarinagar Sugar
Mills v. Shyam Sunder38 the Supreme Court stated that while exercising its appellate
jurisdiction under Section 111 the Company Law Board has to decide whether in exercising
their power the directors are acting, oppressively, capriciously, or corruptly or in some way
mala fide.

Inadequacy of Reasons
Earlier, Courts usually did not ask the Board of Directors to furnish reasons for their refusal
to register transfer of shares. Only if the Board voluntarily disclosed its reasons the court had
the power to look into them and if they did not seem to be sufficient to justify their decision
the court might set it aside. However now, by virtue of the 1988 Amendment, the Board of
Directors is bound by law to disclose its reasons for refusing to register a transfer of shares.
This gives an opportunity to the Company Law Board to examine the relevancy of the
reasons and make its decision in a more judicious fashion. It is also in keeping with the
principles of natural justice.

Irrelevant Considerations
Lord Greene MR in Smith and Fawcett Ltd., Re39 stated that “The directors (in refusing a
transfer) must have regard to those considerations and those considerations only which the
articles on their true construction permit them to take into consideration”.
The power of refusal by the directors should be exercised strictly on the grounds specified in
the articles. No other ground can be imported into the matter. A refusal is liable to be struck
down if it proceeds on grounds extraneous to the articles. In Master Silk Mills Private
Limited v. D.H Mehta40 the Board of Directors refused to accept a transfer in favour of a
company whereas the articles empowered them to exclude only undesirable persons. Thus the
Calcutta High Court held that such blanket ban on admission of companies was beyond the
authority vested in the Board of Directors by the articles. The Court stated “Approval of the
transferee means approval of the transferee personally as distinguished from laying down a
general rule that no corporate body would be allowed to join the company as a shareholder”.
The reasoning of the Calcutta High Court is extremely well analysed and reasoned and
37
Supra note 22 at 753-754.
38
AIR 1961 SC 1669
39
AIR 1961 SC 1669
40
(1980) 50 Comp Cas 365 Guj.

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clearly lays down the principle that if the directors exceed the power of refusal granted to
them by the articles the court will strike down their order refusing to register transfer of
shares. Thus under no circumstance should the Board exceed its powers and refuse to register
a transfer on grounds which are outside the purview of the articles.
It is thus seen that the Companies Act, 1956 has provided adequate remedies and safeguards
to the aggrieved transferee and shareholder in the case of wrongful refusal to register transfer
of shares by the Board of Directors. The Company Law Board has been vested with the
appropriate judicial teeth in order to mete out justice and remedy wrongful refusals by the
Board. The Courts too have implemented the law zealously and interpreted the legislative
provisions in their true spirit in order to see that justice is not denied and rights of the
Company, shareholder and the injured transferee are not affected adversely.

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 BUYBACK

Doctrine of Maintenance of Capital

English Company law recognizes the proposition that there is a price to be paid for limited
liability in the form of restrictions on the use of the companys capital. Both David Gower and
Paul L. Davies believe that the capital maintenance doctrine was borne out of a concern for
the position of creditors in the wake of the development of the concept of limited liability.
Creditors were, in effect, prevented from having recourse to the shareholders in the event that
the company could not pay its own debts. As a result, creditors were forced to rely on the
assets the capital of the company for repayment. Hence, it was necessary to ensure that a
company operated with an appropriate level of assets, which consequently increased the
chances that the claims of the creditors would be met. One of the leading English Cases
on the point is that of Trevor v. Whitworth in which Lord Macnaghten stated that a company
had no power under the Companies Acts to purchase its own shares, even so if authorized by
its articles of association. Such purchases were held to be ultra vires and invalid by the court
which opined that any such repurchase transaction was against the fundamental principle of
company law that share capital should always be available for the purpose of meeting
companys obligations as far as its creditors were concerned. Acquisition of its own shares by
a company implies, in effect, reduction of its capital. Essentially the principle was that
protection of the interest of the creditors of the company requires strict conformity with the
statutory procedure prescribed for reduction in capital and any contravention will violate the
doctrine of maintenance of capital. Then, it is to be noted that instances of a company
providing assistance for buying its own shares have also been treated in the same generic
group of a buy-back, as the effect of the transaction is almost the same as company re-
purchasing its own shares. This rule is incorporated in Section 77 of the Companies Act,
1956. It is submitted that the desirability of allowing a company to purchase its own
shares essentially rests on the acceptability of the Capital Maintenance doctrine itself in this
contemporary situation.

Section 77 of the Companies Act, 1956

According to Section 13(4) of the Companies Act, a company needs to have a specified
amount of share capital. Section 76(2) then stipulates that no company can allot shares at a

17 | P a g e
discount in consideration for subscribing or procuring subscribers. Additionally, Section 205
which says that dividends are to be paid only out of profits. The above mentioned provisions
are indicative of the principle stated in Section 77 about the bar on any other form of
distribution of capital to shareholders. Further, it must be noted that under Section 100 there
is a specific and formal procedure provided for the reduction of capital which is subject to
certain safeguards and to confirmation by a tribunal. Before the introduction of Section 77-A,
the only manner in which a company could have bought back its shares was by following the
procedure set out under Sections 100-104 and Section 391 of the Companies Act which
required the calling of separate meeting for each class of shareholders and creditors as well as
(if required by the court) the drawing up of a list of creditors of the company and obtaining
their consent to the scheme for reduction. It is submitted that Section 77-A was introduced to
provide an alternative method by which a company may buy-back up to 25% of its total paid
up equity capital in any financial year subject to compliance with sub-sections (2), (3) and
(4). Section 77 essentially states that 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. Section 77(2) then furthers the objective of Section 77 (1) by providing
that a company cannot give financial assistance for the purchase of its shares. This is to
ensure, at least, that those who buy shares in companies do so from their own resources and
not from those of the company.

The proviso to Section 77(2) carves out certain exceptions to this general rule. These include
employee share schemes and also the protection of banks which have to make loans in the
ordinary course of their business. Sub-section (5) then exempts a company which had to
redeem any shares issued under Section 80. Furthermore, a purchase under a scheme of
arrangement or amalgamation under Sections 391-394 (provided that the provisions of
Section 100-104 have been complied with) and a purchase under an order of Company Law
Board to purchase shares of minority shareholders under Section 402 (b) fall within the
exceptions to the rule. It is submitted that Section 77(1) prohibits the purchase of own
shares and is applicable to all companies- public and private. But Section 77(2) only prohibits
public and private companies which are their subsidiaries from giving financial assistance to
persons purchasing their shares. Section 77 is now subject to the provisions of sections 77A,
77AA and 77B which allow companies to buy back their own securities subject to certain
specified safeguards and conditions to ensure that such a power is not abused.

18 | P a g e
Reduction of Capital Section 77-A

The Companies Act, 1956 was amended to allow companies to buy-back their own shares,
and thus primarily to give a boost to the Indian capital market. Though many may disagree,
there are many arguments in support of a buy-back power. Firstly, when a company
buys back its shares it is possible that surplus cash is being returned to its shareholders that
the company is unable to invest in projects that will generate a return greater than its cost of
capital. Secondly, a company may be able to improve its share price as the number of shares
available for trading in the markets will get reduced as a result of buy-back. Thirdly, a buy-
back can be a very effective tool for blocking hostile takeover bids.

This power is also capable of being abused as it serves as a tool for the management to
interfere with the ownership of the company. Section 77-A begins with a non-obstante clause
and allows companies to repurchase their shares, notwithstanding any other provisions
contained in the Act. The Section then provides for an elaborate framework to ensure that a
companys right to buy-back its own shares is not abused. There is a clear demarcation of the
fund from which a buy-back van be financed. Then, a buy-back exercise can be carried out
only up to an amount up to 25% of the paid up capital of the company and the debt to free
reserves ratio should not go beyond 2:1 after such an exercise. The shares to be bought back
should be fully paid. There should be authorization in the articles of the company, a
declaration of solvency and finally the whole process has to be authorized by a special
resolution of a company at its general meetings so as to ensure shareholder protection. The
buy-back should also be in accordance with SEBI guidelines which include daily
advertisements, disclosure of purchases daily, declaration by promoters of the upfront pre and
post buy-back holding in order to prevent manipulation, etc. Furthermore, Section 77-AA
says that when a purchase is made out of free reserves, then a sum equal to the nominal value
of the share purchased has to be transferred to the capital redemption reserve account. Section
77-B then prohibits a buy-back through any subsidiary company or investment companies.
Also, a company which is in default of payment of deposits, redemption of debentures or
preference shares or repayment of a term loan to any financial institution is prohibited from
undertaking a buy-back exercise.

The need for a repurchase power came to be felt as a result of having lost sight of the
essential terms of the bargain between shareholders and creditors, which allow for limited
liability. Also, this capital can be frittered away in the course of trading and the same is

19 | P a g e
evidence of the ineffectuality of the capital maintenance doctrine. The limited liability
bargain requires that at least an attempt be made to do whatever can be done to protect the
security of creditors, regardless of the chances of success/failure of those attempts. One may
argue that buy-backs are inherently subversive of creditors interests. On the other hand, there
is also an argument to the effect that with increased integration of global financial markets, a
share buy-back power will facilitate increased capital mobility as individual shareholders will
have the option to make personal judgments as to where to invest the capital which is
returned. Furthermore, the ability to repurchase shares adds to the flexibility of the company
to exercise greater control over its equity and its continued prohibition may serve to
discourage portfolio investments. Lastly, it is submitted that though any conclusion in support
of a share buy-back power will necessarily be diminished by the jurisprudential establishment
and standing of the doctrine of capital maintenance, however, there are no two opinions about
the fact that a repurchase offers considerable benefits to shareholders in terms of a viable exit
option and increased earnings per share. Provided all the safeguards mention in Section 77
and those mentioned in the SEBI guidelines are followed, the entire buy-back process is an
informed one and voluntary for the shareholders and offers considerable benefits to them. It
would have been against the long term interests of corporate sector growth to continue with
the prohibition on a repurchase power. For capital markets to be efficient in putting money to
best use, companies need flexibility not merely in raising capital but also in returning the
same. One should allow free market forces to operate and accordingly support a buy-back
power for companies.

The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of
the Companies Act,1956. These were inserted by the Companies (Amendment) Act,1999.
The Securities and Exchange Board of India (SEBI) framed the SEBI(Buy Back of
Securities) Regulations,1999 and the Department of Company Affairs framed the Private
Limited Company and Unlisted Public company (Buy Back of Securities) rules,1999
pursuant to Section 77A(2)(f) and (g) respectively.

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Objectives of Buy Back: Shares may be bought back by the company on account of one or
more of the following reasons
i. To increase promoters holding
ii. Increase earning per share
iii. Rationalise the capital structure by writing off capital not represented by available assets.
iv. Support share value
v. To thwart takeover bid
vi. To pay surplus cash not required by business
Infact the best strategy to maintain the share price in a bear run is to buy back the shares from
the open market at a premium over the prevailing market price.

Resources of Buy Back

A Company can purchase its own shares from
(i) free reserves; 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 and details of such transfer shall be disclosed in the balance-sheet or
(ii) securities premium account; or
(iii) proceeds of any shares or other specified securities. A Company cannot buyback its
shares or other specified securities out of the proceeds of an earlier issue of the same kind of
shares or specified securities.

Conditions of Buy Back

(a) The buy-back is authorised by the Articles of association of the Company;

(b) A special resolution has been passed in the general meeting of the company authorising
the buy-back. In the case of a listed company, this approval is required by means of a postal
ballot. Also, the shares for buy back should be free from lock in period/non transferability.
The buy back can be made by a Board resolution If the quantity of buyback is or less than ten
percent of the paid up capital and free reserves;

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

21 | P a g e
(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;

(e) There has been no default in any of the following

i. in repayment of deposit or interest payable thereon,
ii. redemption of debentures, or preference shares or
iii. payment of dividend, if declared, to all shareholders within the stipulated time of 30 days
from the date of declaration of dividend or
iv. repayment of any term loan or interest payable thereon to any financial institution or bank;

(f) There has been no default in complying with the provisions of filing of Annual Return,
Payment of Dividend, and form and contents of Annual Accounts;

(g) All the shares or other specified securities for buy-back are fully paid-up;

(h) The buy-back of the shares or other specified securities listed on any recognised stock
exchange shall be in accordance with the regulations made by the Securities and Exchange
Board of India in this behalf; and

(i) The buy-back in respect of shares or other specified securities of private and closely held
companies is in accordance with the guidelines as may be prescribed.

Disclosures in the explanatory statement

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

Sources from where the shares will be purchased

The securities can be bought back from
(a) existing security-holders on a proportionate basis;
Buyback of shares may be made by a tender offer through a letter of offer from the holders of
shares of the company or

22 | P a g e
(b) the open market through
(i). book building process;
(ii) stock exchanges or
(c) odd lots, that is to say, where the lot of securities of a public company, whose shares are
listed on a recognized stock exchange, is smaller than such marketable lot, as may be
specified by the stock exchange; or
(d) purchasing the securities issued to employees of the company pursuant to a scheme of
stock option or sweat equity.

Filing of Declaration of solvency

After the passing of resolution but before making buy-back, file with the Registrar and the
Securities and Exchange Board of India a declaration of solvency in form 4A. The
declaration must be 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:
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 recognized stock exchange.

Register of securities bought back

After completion of buyback, a company shall maintain a register of the securities/shares so
bought and enter therein the following particulars
a. the consideration paid for the securities bought-back,
b. the date of cancellation of securities,
c. the date of extinguishing and physically destroying of securities and
d. such other particulars as may be prescribed
Where a company buys-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.

Issue of further shares after Buy back

Every buy-back shall be completed within twelve months from the date of passing the special
resolution or Board resolution as the case may be.
A company which has bought back any security cannot make any issue of the same kind of

23 | P a g e
securities in any manner whether by way of public issue, rights issue up to six months from
the date of completion of buy back.

Filing of return with the Regulator

A Company shall, after the completion of the buy-back file with the Registrar and the
Securities and Exchange Board of India, a return in form 4 C containing such particulars
relating to the buy-back within thirty days of such completion.
No return shall be filed with the Securities and Exchange Board of India by an unlisted
company.

Prohibition of Buy Back

A company shall not 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

Procedure for buy back

a. Where a company proposes to buy back its shares, it shall, after passing of the
special/Board resolution make a public announcement at least one English National Daily,
one Hindi National daily and Regional Language Daily at the place where the registered
office of the company is situated.
b. The public announcement shall specify a date, which shall be "specified date" for the
purpose of determining the names of shareholders to whom the letter of offer has to be sent.
c. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI
regulations.
d. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of
offer shall then be dispatched to the members of the company.
e. A copy of the Board resolution authorising the buy back shall be filed with the SEBI and
stock exchanges.
f. The date of opening of the offer shall not be earlier than seven days or later than 30 days
after the specified date
g. The buy back offer shall remain open for a period of not less than 15 days and not more
than 30 days.
h. A company opting for buy back through the public offer or tender offer shall open an
escrow Account.
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Essential legal provisions for buy back of shares or specified securities:

For listed and unlisted companies:

(i) The Memorandum Articles of Association and Articles of Association of the Company

(ii) The Companies Act 1956 : sections 77A, 77AA and 77B (Section 80 for buy back of
preference shares) and the Private Limited Company and Unlisted Public Limited Company
(Buy-back of Securities) Rules, 1999 ('the Rules').

Alternative to buy-back can be by following procedure under the Companies Act for either
(a) reduction of share capital (section 100) or (b) under a scheme of arrangement (Sections
391/394).

(iii) the Income Tax Act 1961: Capital Gains in hands of investors/shareholders. In case of
non-resident shareholders, TDS may required to be deducted and may be at special rate.
Reference to Double Taxation Avoidance Agreement may also be required.

(iv) the Foreign Exchange Management Act 1999

(v) For securities in demat form, Procedure of Depositories, namely CDSL and NSDL in co-
ordination with Share Transfer Agent.

For listed companies:

(i) The Securities Exchange Board of India (SEBI): the SEBI (Buy-back of Securities)
Regulations, 1998 ('the Regulations').

(ii) The listing agreement – particularly clauses 19(a), 20(c), 40A(vi) (to ensure minimum
public shareholding)

(iii) the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 – if buy
back results into increase in shareholding beyond various limits prescribed under takeover
regulations.

(iv) the SEBI (Prohibition of Insider Trading) Regulations 1992 - Any person or an insider
shall not deal in securities of the company on the basis of unpublished information relating to
buy-back of shares or other specified securities of the company.

25 | P a g e
Prohibition on buy back of securities:

A company shall not 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 investments companies

Listed companies shall not buy-back its shares or other specified securities so as to delist its
shares or other specified securities from the stock exchange.

Funds represented by which accounting head can be utilised for buy back of
shares/securities:

A company can purchase its own securities from:-

(i) free reserves: Free reserves have the same meaning as under clause (b) of section 372A of
the Companies Act. Where a company purchases its own shares (equity/preference) out of
free reserves, then a sum equal to the nominal value of the shares so purchased shall be
transferred to the capital redemption reserve and details of such transfer shall be disclosed in
the balance-sheet; or

(ii) securities premium account; or

(iii) proceeds of any shares or other specified securities: However, a company cannot buy-
back its shares or other specified securities out of the proceeds of an earlier issue of the same
kind of shares or other specified securities.

In case of unlisted companies, the company shall not utilise any money borrowed from
Banks/Financial Institutions for the purpose of buy back its shares/securities.

26 | P a g e
Buy back of shares/securities can be by a letter of offer or from open market:

The shares/securities can be bought back by a company from:

(a) existing share/security holders, on a proportionate basis.

Buy-back of shares/securities may be made by a tender offer through a letter of offer to the
holders of shares of the company, or

(b) through a book building process of stock exchanges, or

from open stock exchanges; or

-from holders of odd lot shares.

In case of unlisted companies, only option (a) is available.

Conditions of buy back of securities:

(a) The buy-back is authorised by the Articles of Association of a company.

(b) With consent of shareholders by way of a special resolution in the general meeting of a
company authorising the buy-back.

In the case of a listed company, (a) this approval is required by means of a postal ballot; and
(b) the securities for buy-back should be free from lock in period/non transferability.

Alternatively, buy-back can also be made by obtaining consent of the Board of Directors, if
the quantity of buy-back is or less than 10% of paid-up share capital and free reserves. If buy
back is made by authority of board resolution, then company cannot make further offer of
buy-back for next 365 days.

The resolutions passed for buy back are only an enabling one and a company is under no
obligation to buyback its securities even when the required resolutions have been duly
passed. However in case of unlisted companies, the company shall not withdraw the offer
once the draft letter of offer has been filed with the Registrar of Companies. And in case of
listed comapnies, buy back offer cannot be withdrawn once the draft letter of offer is filed
with the SEBI or public announcement of the offer to buy-back is made.

27 | P a g e
(c) The buy-back is or less than 25% of total paid-up capital and free reserves of the company
and that the buy-back of equity shares in any financial year shall not exceed 25% of the total
paid-up equity capital in that financial year.

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

(e) There has been no default in any of the following:

-in repayment of deposit or interest payable thereon

-redemption of debentures, or preference shares

-payment of dividend, if declared to all the shareholders within the stipulated time of 30 days
from the date of declaration of dividend

-repayment of any term loan or interest payable thereon to any Financial Institution or Bank

(f) There has been no default in complying with the provisions of filing Annual return,
Payment of Dividend, form and contents of Annual accounts

(g) All the shares or other specified securities for buy-back are fully paid-up

(h) The buy-back or other specified securities listed on any recognised stock exchange shall
be in accordance with the regulations made by SEBI.

Issue of further shares after buy back:

Every buy-back shall be completed within 12 months from the date of passing the special
resolution or Board resolution as the case maybe.

A company which has bought back any security cannot make any issue of the same kind of
securities in any manner whether by way of public issue, rights issue, ESOP (though option
can be granted) up to six months from the date of completion of buy-back.

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Disclosures in Explanatory Statement to notice for buy back:

Where buy-back of securities is proposed after obtaining consent of shareholders, the notice
of the general meeting at which special resolution is proposed to be passed shall be
accompanied by an explanatory statement stating-

(i) a full and complete disclosure of all the material facts

(ii) the necessity for the buy-back

(iv) the class of security intended to be purchased under buy-back

(v) the amount to be invested in buy-back

(vi) Time- limit for completion of buy-back

In case of unlisted companies, an explanatory statement shall contain, amongst other things,
disclosures specified under Schedule I to the Rules and in case of listed companies,
disclosures specified under Schedule I to the Regulations. Further in case of listed companies,
if buy back is through tender offer, additional disclosures as specified in Regulation 7 shall be
made.

After resolution and before making buy-back, file declaration of Solvency:

After the passing of resolution but before making buy-back, company is required to file with
the Registrar of Companies and in case of a listed company, also with the SEBI, a declaration
of solvency in the prescribed form 4A [prescribed under the Companies (Central
Government's) General Rules and Forms, 1956]. The declaration must be verified by an
affidavit to the effect that the Board of Directors of the company have made a full enquiry
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 MD, if any.

29 | P a g e
File return after completion of buy back of securities:

After the completion of buy-back of securities, the company shall file with the Registrar of
Companies and in case of a listed company, also with the SEBI a return in the prescribed
form 4C [prescribed under the Companies (Central Government's) General Rules and Forms,
1956] containing such particulars relating to buy-back within 30 days of such completion.

Register of Securities Bought Back:

After completion of buy back, a company shall maintain a register of the securities/shares so
bought and enter therein the following particulars:

(a) the consideration paid for the securities bought back

(b) the date of cancellation of securities

(c) the date of extinguishing and physically destroying of securities

(d) such other particulars as may be prescribed

Where a company buy-backs its own securities, it shall extinguish and physically destroy
securities so bought back within seven days of the last date of completion of buy-back.

The company should extinguish and physically destroy the share certificates so bought-back
in the presence of Company Secretary in Practice within seven days from the date of
acceptance of the shares. [Rule 10 (1)].

Penalty on violation of law:

For violation of provisions of the Companies Act:

If a company makes default in complying with the provisions, 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 a fine which may extend to Rs. 50, 000, or with both. The
offences are compoundable under section 621A of the Act.

For violation of provisions of the Listing Agreement:

30 | P a g e
For non compliance of clause 19 of listing agreement, person contravening the provision is
liable u/s.23(1)(c) of SCRA to fine upto Rs.25,00,00,000/- or imprisonment upto 10 years or
both; for non compliance of clause 40A of listing agreement, company is liable u/s. 23E, to
fine upto Rs.25,00,00,000/- and for non compliance of clause 20 of listing agreement, person
contravening the provision is liable u/s.23H of SCRA to fine upto Rs.1,00,00,000/-.

For violation of provisions of the SEBI Act and regulations made thereunder:

Liability may vary. For instance, for not filing with SEBI, any return or document or
information within prescribed time or not maintianing records or failure to redess investors
grievance, penalty (u/Ss.15A and 15C) could be Rs100,000/- per day of Rs.100,00,000/-
whichever is less. For defaults under insider trading regulations or under the takeover
regulations, penalty (u/Ss.15G and 15H) could be upto Rs.25,00,00,000/- or 3 times of profit
made, whichever is higher. Further SEBI may issue directions thereby prohibiting access to
securities market, disgorgement of ill gotten gains, prohibition from dealing in securities.
And criminal prosecution under section 24 of SEBI Act.

Buyback within 1 year U/S 77A (4)

Every Buyback shall be completed within 12 months

from the date of passing the special regulation.

Methods of Buyback U/S 77A (5)

The Buyback may be made :

a) From the existing share holders on a proportionate basis

b) From the open market

c) From odd lots

d) By purchasing the securities issued to the employees of the company under ESOS

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Declaration of solvency U/S 77A(6)

Company has passed a special regulation to Buyback its own shares or other securities, it
shall, before making such Buyback,

a. File a declaration of solvency :

With Registrar

The SEBI in the prescribed form

b. Submit an affidavit (signed by at least 2 directors) to the effect that the board has made a
full enquiry into the affairs of the company

Note: No declaration of solvency shall be filed with SEBI by a company whose shares are not
listed on any recognized stock exchange.

Physical destruction of securities U/S 77 A(7)

A company should extinguish and physically destroy the securities so bought back with in 7
days of the last date of completion of buyback.

No fresh issue with in 24 months U/S 77A(8)

A company cannot make fresh issue of the same kind of securities within period of 24 months
except :-

a) by way of bonus issue

b) conversion of warrants

c) stock option scheme

d) sweat equity

e) conversion of preference shares or debentures into

equity shares

32 | P a g e
No Buyback allowed U/S 77B

a)through any subsidiary co including its own subsidiary companies

b)through any investment company

c)if default is made in repayment of interest or dividend or loan or deposit etc.

TRANSFER TO CRR U/S77B

Where company purchases its own shares out of free reserves, then a company is required to
transfer a sum equal to the nominal value of the shares so bought to CAPITAL
REDEMPION RESERVE ACCOUNT from free reserves.

SEBI GUIDELINES

Company is required to make Public announcement in

One NATIONAL English Daily

One Hindi National Daily

One Regional Language Daily

Public announcement should specify

Specified Date i.e. the date of dispatch of the offer letter not later than 30 days but not later
than 42 days

Company should inform SEBI within 7 days

Offer shall remain open at least for 15 days

Company shall complete verification with in 15 days from the date of closure

Buyback is permitted through six routes, namely the tender route, open offer route, reverse
book building, odd-lot share purchase, reverse rights and purchase of employee stock option.

33 | P a g e
ADVANTAGES OF BUYBACK OF SHARES

-Helps company in reducing its share capital

-Results in lower capital base

-Company has advantage of servicing reduced capital base with higher dividend yield

-It is a good check on companies having poor liquidity position

-Provides capital appreciation to investors

-Gives signal to market that shares are undervalued

-Helps promotors to formulate an effective defense strategy against hostile takeover bids

DISADVANTAGES OF BUYBACK OF SHARES

Buyback implies under valuation of companies stock

There exists less or no scope for further expansion

Clever way for managers to invest cheaply in a company they know

It does not make difference to shareholders, whether the company returns cash in the form
of increased dividend or by way of repurchase.

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 Conclusion

The core issue with respect to transfer of shares in private companies is the restrictions on
transfer of shares which a private company must incorporate into its articles. Section
3(1)(iii)(a) of the Companies Act, 1956 requires every private company to incorporate
restrictions on the transfer of shares in its articles. It must be noted that the Section does not
specify as to what these restrictions should be. It is thus open to the framers of the articles as
to how many restrictions there should be and what should be their scope and extent. The
framers of the articles can make the restrictions as lenient or as strict as they desire. The law
merely requires that these restrictions on the transfer of shares should be present in the
articles of association of a private company.

Having restrictions on the rights of its members to transfer their shares is one of the main
characteristics of a private company and is considered something intrinsic to a private
company.

A private company is based on the partnership principle. In fact it is said that the partnership
principle is the soul of a private company. A private company is usually an association of
persons bound together by close ties of kinship, friendship and sharing a camaraderie and
trust which cannot be easily shared with another person. These restrictions on the transfer of
shares in a private company help to preserve this close knit relationship amongst the members
of a private company. The restrictions on transfer of shares enable the members of a private
company to prevent admission of members who may be undesirable or hostile to the existing
members and also prevent dilution of control of the company. The importance and relevance
of these restrictions on the transfer of shares cannot be further emphasized. They virtually
preserve the soul of the private company and enabler the private company to achieve its aims
and objectives. The Courts have proved to be the guardians of these restrictions and have
upheld restrictions on transfer of shares in private companies in order to preserve the
partnership principle in private companies.

On another level these restrictions also preserve the distinction between private and public
companies. It is debatable as to whether how far this distinction should be continued or
maintained but that is not a relevant issue to the matter under discussion.

35 | P a g e
These restrictions create some areas of ambiguity which create problems in company law and
affairs. For example there is ambiguity with respect to valuation of shares in the case of
exercise of pre-emption rights.

Moreover care must be taken to see that these restrictions do not exceed their scope and
extent as prescribed by the articles because if that happens then the interests and rights of the
shareholders, transferees and the company may be adversely affected. The power vested in
the Board of Directors to refuse to register a transfer is a common restriction found in the
articles of a private company. The Board often abuses this power. The 1988 amendment
which requires the Board to give reasons for its refusal has helped to check the abuse of this
power. However more concrete steps need to be taken to prevent such abuse. The remedies
available in case of abuse of this power are adequately provided for by Section 111 of the
Companies Act. The Courts too have done their best to check abuse of this power and ensure
that no injustice or prejudice is caused to the aggrieved person.

Restrictions on the transfer of shares in private companies are thus undoubtedly extremely
important and relevant. However in order to avoid the problems and ambiguities that they
may create it is essential that these restrictions should be extremely well drafted with utmost
care, caution and foresight. For example the scope of abuse of the power to refuse to register
a transfer by the Board of Directors would be considerably reduced if proper guidelines were
incorporated into the articles with respect to how the discretion and power should be
exercised by the Board. Concrete steps must be taken to rectify abuse and to clear the
ambiguous areas created by these restrictions on the transfer of shares in private companies.
It is essential for the smooth working and success of the private company.

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 Bibliography
N.Vijia Kumar, “Transfer of Shares” SEBI and Corporate Laws Vol. 35 (2002)

.K Sen Gupta, Company Law (New Delhi: Eastern Law House, 1990)

A.K Majumdar and Dr. G.K Kapoor, Company Law and Practice (New Delhi: Taxmann
Publications Limited, 2000)

A. Ramaiya, Guide to the Companies Act Part I 14th ed. (New Delhi: Wadhwa and Company
Law Publishers, 1998)

Richard W. Jennings and Richard M. Buxbaum, Corporations- Cases and Materials (

Minnesota: West Publishing Company, 1979)

Paul L. Davies, Gower’s Principles of Modern Company Law (London: Sweet and Maxwell
Limited, 1997)

http://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListDept=yes&deptId=17

http://www.legalserviceindia.com/articles/shares.htm

http://www.caclubindia.com/articles/transfer-of-shares-procedural-analysis-4692.asp

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