Introduction

The principle of capital maintenance is a cornerstone of corporate law. It is designed to ensure that a company’s capital, once subscribed by shareholders, remains available as a security for the payment of its debts and obligations. The concept rests on the idea that a company’s capital represents a fund contributed by shareholders that creditors are entitled to rely upon. Consequently, corporate law traditionally prohibits a company from purchasing its own shares or financing such purchases, except in specific circumstances authorised by statute.

The Companies Act, 2013 retains and refines this doctrine through three interrelated provisions — Sections 67, 68, and 70. Section 67 imposes restrictions on the purchase of a company’s own shares and on the giving of loans or financial assistance for such purchases. Section 68 authorises a company, subject to certain conditions, to buy back its own shares or securities. Section 70 enumerates the prohibitions and limitations under which such buy-back cannot take place. Together, these provisions maintain a delicate balance between the need for corporate flexibility in managing capital and the protection of shareholders, creditors, and public interest.

Part I – Restrictions on Purchase by a Company or Giving of Loans for Purchase of its Shares (Section 67)

Statutory Background and Rationale

Section 67 of the Companies Act, 2013, substantially derived from Section 77 of the Companies Act, 1956, lays down the general prohibition on a company purchasing its own shares and on the giving of financial assistance to any person for the purpose of acquiring shares in the company or its holding company. The rationale is rooted in the doctrine of capital maintenance, which dictates that the company’s capital must not be depleted by returning funds to shareholders outside the legally recognised mechanisms such as dividend distribution, reduction of capital, or buy-back authorised by law.

A company is an artificial legal entity distinct from its shareholders. When it purchases its own shares or finances such a purchase, the effect is to return capital to shareholders, thus diminishing the company’s asset base and reducing the security available to creditors. This may also create opportunities for manipulation of control or artificial inflation of share prices. Hence, the law strictly regulates such transactions.

Provisions of Section 67

Section 67(1) provides that no company limited by shares shall have the power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of the Act. This establishes the general rule of prohibition, subject only to the statutory mechanisms for reduction or buy-back.

Sub-section (2) of Section 67 extends this prohibition to financial assistance, stating that no public company shall give, directly or indirectly, by means of a loan, guarantee, 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 its holding company. The section thus captures both direct and indirect forms of assistance, recognising that companies might otherwise attempt to circumvent the rule through intermediaries or complex arrangements.

The purpose is to prevent transactions whereby a company’s funds are used to enable the purchase of its own shares, thereby amounting to an unlawful return of capital. The provision applies primarily to public companies, as private companies enjoy limited exemptions.

Exceptions and Exemptions

Section 67(3) carves out specific exceptions. First, the prohibition does not apply to lending of money by a banking company in the ordinary course of its business. Since providing loans is a bank’s legitimate business activity, the restriction would be inappropriate in that context.

Second, the restriction does not apply to a company providing loans to employees to enable them to purchase or subscribe for shares in the company or its holding company, provided such shares are held by trustees for the benefit of the employees or such scheme is approved by a special resolution and in accordance with prescribed rules. This exception recognises the legitimacy of employee stock ownership plans (ESOPs) and employee welfare schemes that foster a sense of ownership and motivation among employees.

Further, under Section 67(4), the Central Government may prescribe conditions for exempting private companies from the operation of sub-section (2). Under the Companies (Amendment) Act, 2017, and the relevant notifications, private companies are exempted if (a) no other body corporate has invested in their share capital; (b) their borrowings from banks, financial institutions, or body corporates are less than twice their paid-up share capital or fifty crore rupees, whichever is lower; and (c) such company has not defaulted in repayment of borrowings.

Judicial Interpretation

The Indian judiciary has emphasised the protective function of Section 67. In Trevor v. Whitworth (1887) 12 AC 409, a seminal English case that laid the foundation for this doctrine, the House of Lords held that a company cannot purchase its own shares unless expressly authorised by statute, as such purchase amounts to an unlawful reduction of capital. Indian courts have consistently followed this principle.

In Maharashtra State Financial Corporation v. Jaycee Drugs & Pharmaceuticals (P) Ltd. (1991 70 Comp Cas 389 Bom), the Bombay High Court held that the prohibition extends to indirect forms of assistance and that any arrangement, however structured, which results in a company’s funds being used to finance the purchase of its own shares, is void.

The objective, as reiterated in Ramesh B. Desai v. Bipin Vadilal Mehta (2006 5 SCC 638), is to prevent depletion of capital and to protect creditors and minority shareholders from manipulative control transactions.

Contemporary Relevance

With modern financial innovation and employee participation schemes, Section 67 has been refined to permit legitimate transactions such as ESOPs while retaining the prohibition against abusive self-financing. The provision ensures corporate discipline, prevents artificial inflation of share prices, and safeguards the long-term solvency of companies.

Part II – Power of Company to Purchase Its Own Securities (Section 68)

Evolution and Concept of Buy-Back

While Section 67 prohibits self-purchase of shares in general, Section 68 provides an exception by empowering a company to buy back its own shares or specified securities, subject to strict conditions. The concept of buy-back was first introduced in Indian law through the Companies (Amendment) Act, 1999, following global trends in corporate finance that recognised buy-backs as legitimate tools for capital restructuring.

Buy-back refers to the process by which a company repurchases its shares or securities from existing shareholders, thereby reducing the number of outstanding shares in the market. It serves multiple purposes: optimising capital structure, increasing earnings per share, providing an exit route for investors, or utilising surplus cash efficiently. However, because it involves a return of funds to shareholders, it must be carefully regulated to avoid abuse.

Statutory Framework of Section 68

Section 68(1) authorises a company to purchase its own shares or other specified securities out of (a) its free reserves, (b) the securities premium account, or (c) the proceeds of any shares or other specified securities, except that no buy-back can be made out of the proceeds of an earlier issue of the same kind of shares or securities.

The section mandates that the articles of association of the company must authorise the buy-back. If not, the company must first alter its articles under Section 14. The buy-back must be approved either by a special resolution passed at a general meeting or, where the buy-back is 10% or less of the total paid-up equity capital and free reserves, by a resolution of the Board of Directors.

The total buy-back in any financial year cannot exceed 25% of the aggregate of paid-up capital and free reserves. In the case of equity shares, the buy-back limit of 25% applies to the total paid-up equity capital.

The ratio of the aggregate of secured and unsecured debts owed by the company after the buy-back cannot exceed twice the paid-up capital and its free reserves, unless a higher ratio is prescribed by the Central Government for a class of companies.

Procedure for Buy-Back

Section 68(5) read with the Companies (Share Capital and Debentures) Rules, 2014 prescribes a detailed procedure. The company must issue a notice of meeting containing an explanatory statement disclosing full particulars of the buy-back, including the necessity for the buy-back, class of shares, amount to be invested, time limit, and expected impact on financials.

After passing the resolution, the company must file the declaration of solvency with the Registrar and, in the case of a listed company, with SEBI. This declaration, signed by at least two directors (including the managing director), affirms that the company is capable of meeting its liabilities and will not be rendered insolvent within one year of the buy-back.

The buy-back must be completed within twelve months of the resolution’s passage. The shares or securities purchased must be extinguished and physically destroyed within seven days of the completion of buy-back.

A register of bought-back shares must be maintained, and after the completion of the buy-back, a return must be filed with the Registrar and SEBI within thirty days.

Modes of Buy-Back

Buy-back may be effected from existing shareholders on a proportionate basis, from the open market, from odd-lot holders, or by purchasing securities issued to employees under stock option schemes. Listed companies must comply with SEBI (Buy-Back of Securities) Regulations, 2018, which govern the procedural and disclosure requirements for market-based and tender offer buy-backs.

Judicial Interpretation and Case Law

The judiciary has recognised buy-back as a legitimate method of capital restructuring when done in compliance with the law. In Securities and Exchange Board of India v. Sterlite Industries (India) Ltd. (2003 113 Comp Cas 273 Bom), the Bombay High Court upheld the legality of buy-back procedures under the SEBI regulations, emphasising that the purpose of such transactions is financial reorganisation and not manipulation.

In IndusInd Bank Ltd. v. NSE (2019 SCC OnLine SAT 24), the Securities Appellate Tribunal reiterated that compliance with disclosure norms and solvency requirements is mandatory, as buy-backs can influence market prices and investor confidence.

Buy-backs have also been examined from the standpoint of minority protection. Courts have underscored that buy-backs should not be used as instruments for oppression or to eliminate dissenting shareholders unfairly.

Economic and Policy Significance

Buy-backs allow companies to return excess cash to shareholders in a tax-efficient manner, stabilise share prices, and adjust capital structures to enhance shareholder value. However, unchecked buy-backs could erode capital, manipulate market valuations, or favour controlling shareholders. Hence, Section 68 imposes strict limits and procedural safeguards, ensuring that only solvent, well-governed companies engage in such transactions.

Part III – Prohibition for Buy-Back in Certain Circumstances (Section 70)

Scope and Purpose

Section 70 of the Companies Act, 2013 sets out explicit prohibitions on buy-back to prevent misuse or abuse of the power conferred under Section 68. It ensures that buy-backs are undertaken only by solvent and compliant companies and not as a means of concealing financial distress, evading creditors, or manipulating shareholding patterns.

This section is an essential safeguard reinforcing the integrity of the capital maintenance doctrine by limiting the circumstances in which companies may buy back their own securities.

Prohibitions Enumerated under Section 70

Sub-section (1) of Section 70 provides that no company shall directly or indirectly purchase its own shares or other specified securities (a) through any subsidiary company, including its own subsidiary, or (b) through any investment company or group of investment companies. The rationale is that such indirect purchases would defeat the transparency objectives of the statute and allow companies to bypass the safeguards of Section 68 by using controlled entities to fund buy-backs.

Sub-section (2) states that no company shall buy back its shares or other specified securities if it has defaulted in repayment of deposits, interest payment thereon, redemption of debentures or preference shares, or repayment of term loans or interest payable thereon to any financial institution or bank. This prohibition remains in force until such default is remedied and three years have passed thereafter.

Sub-section (3) further provides that no company shall buy back its securities in violation of the Companies Act, 2013 or any rules or regulations made thereunder. Listed companies must comply with SEBI regulations; any contravention attracts penal consequences under Section 447 of the Act and the SEBI Act, 1992.

Judicial and Regulatory Interpretation

The National Company Law Tribunal and SEBI have consistently applied Section 70 to enforce discipline in buy-back transactions. In SEBI v. Larsen & Toubro Ltd. (2019), SEBI disallowed a proposed buy-back as it would have caused the post-buy-back debt-equity ratio to exceed the permissible limit, thereby breaching Section 68(2)(d). This decision underscored that compliance with both Section 68 and Section 70 is mandatory and that financial prudence and creditor protection must remain paramount.

In Kalyani Investment Company Ltd. (2020 SAT decision), it was reaffirmed that indirect buy-backs through subsidiaries or investment companies constitute a violation of Section 70(1).

These cases illustrate that the prohibitions are preventive in nature and seek to uphold market integrity, protect investors, and ensure that capital restructuring measures are undertaken transparently and within statutory bounds.

Part IV – Interrelationship and Policy Rationale

The triad of Sections 67, 68, and 70 operates as a coherent legal framework governing self-purchase and buy-back of shares. Section 67 embodies the fundamental prohibition rooted in the doctrine of capital maintenance; Section 68 creates a controlled exception allowing buy-backs as legitimate financial strategies; and Section 70 enforces prudential restrictions ensuring that only solvent and compliant companies can engage in such transactions.

This legislative architecture balances flexibility with prudence. It acknowledges that while corporate finance requires dynamic tools for capital management, such tools must not endanger the security of creditors or public confidence in the capital market.

The statutory requirement of solvency declarations, debt-equity limits, shareholder approval, and mandatory destruction of bought-back shares collectively prevent misuse. Equally, the prohibition on buy-backs by defaulting companies ensures that financially distressed entities cannot use capital reduction mechanisms to mislead investors or evade obligations.

Part V – Contemporary Challenges and Case-Based Insights

In the evolving landscape of Indian corporate governance, buy-back provisions have increasingly been tested against issues of market manipulation, shareholder fairness, and regulatory oversight. SEBI’s scrutiny of buy-backs by listed entities has heightened since 2018, particularly in cases where buy-backs are used as instruments to support share prices or consolidate control.

For example, SEBI’s rejection of Larsen & Toubro’s buy-back proposal in 2019 was a landmark decision highlighting the importance of compliance with the debt-equity ratio rule. Similarly, the Emami Ltd. buy-back case (2021) reaffirmed that the Board must justify the buy-back’s necessity, financial basis, and impact on minority shareholders.

Another notable aspect concerns the interplay between buy-backs and taxation. While buy-backs can be more tax-efficient than dividends, excessive reliance on this mechanism may lead to erosion of reserves and compromise long-term growth. Therefore, regulators encourage prudent use aligned with transparent corporate governance principles.

Part VI – Conclusion

The statutory scheme governing a company’s purchase of its own shares, its power to buy back securities, and the associated prohibitions represents a sophisticated balance between corporate autonomy and financial prudence. Section 67 maintains the classical prohibition against unauthorised self-purchase and self-financing, safeguarding the capital base that underpins creditor security. Section 68, while recognising modern financial realities, allows buy-backs within carefully crafted procedural and quantitative limits, thereby granting companies flexibility in capital management without compromising solvency. Section 70 serves as a regulatory shield, ensuring that such powers are not exercised by defaulting or financially distressed companies, or through indirect means that would undermine the legislative purpose.

Collectively, these provisions embody the continuing vitality of the capital maintenance doctrine within contemporary Indian corporate law. They reinforce the principle that shareholder value and market stability depend on transparency, solvency, and legal compliance. Judicial interpretation, supported by SEBI’s regulatory vigilance, ensures that buy-backs and self-purchase mechanisms are used responsibly, fostering long-term corporate governance and investor protection.

In essence, while modern corporate finance demands flexibility in managing capital structures, the Companies Act, 2013 rightly insists that such flexibility must coexist with accountability. The framework of Sections 67, 68, and 70 thus stands as a testament to the law’s enduring commitment to balancing enterprise freedom with the imperatives of financial integrity and public trust.