Companies Act Section 67

Companies Act Section 67: Restrictions on the Purchase of Shares by Companies and Provision of Financial Assistance

Purpose and Scope of Section 67

Section 67 of the Companies Act outlines significant restrictions on a company’s ability to purchase its own shares or to provide financial assistance, whether directly or indirectly, to anyone for the acquisition of shares in that company or in its holding company. These restrictions are intended to protect shareholder interests and maintain the integrity of the company’s share capital. Additionally, this section stipulates penalties for non-compliance, ensuring that companies adhere to these rules to prevent market manipulation or undue influence over share prices.

Key Provisions under Section 67

1. Restriction on Companies Purchasing Their Own Shares

Companies that are limited by shares or limited by guarantee with a share capital are generally prohibited from purchasing their own shares unless this purchase results in a reduction of the company’s share capital. Such a reduction must be carried out strictly in accordance with the provisions of the Companies Act.

The objective here is to ensure that any repurchase of shares that reduces share capital is fully compliant with legal requirements, including any requirements for confirmation by the Tribunal and shareholder approvals, as outlined in other sections of the Act.

2. Prohibition on Financial Assistance by Public Companies

Restriction on Loans and Guarantees:

Public companies are prohibited from providing financial assistance for the purchase of their own shares or shares of their holding company. This restriction covers both direct and indirect forms of financial support, which could include:

Loans to individuals or entities to purchase shares,

Guarantees provided to secure financing for the purchase of shares,

Security or collateral offered to facilitate the acquisition of shares, or

Any other type of financial aid intended to assist with the purchase or subscription of shares in the company or its holding company.

This prohibition is designed to prevent public companies from artificially inflating their share prices or providing undue assistance that could undermine the fair valuation of shares.

3. Exceptions to the Financial Assistance Restriction

Section 67 does provide certain exemptions, allowing financial assistance in specific cases, as follows:

Banking Companies:

The restriction on financial assistance does not apply to banking companies that provide loans as part of their ordinary course of business. Banking companies are permitted to lend money for share purchases, provided that such lending follows established banking regulations and does not constitute an undue influence over the shares.

Employee Benefit Schemes Approved by Special Resolution:

Companies may provide funds for share purchase or subscription under employee benefit schemes. However, these schemes must meet the following conditions:

They must be approved by a special resolution passed by the shareholders, and

They must comply with prescribed regulations.

The shares acquired through such schemes must either be held in trust for the benefit of employees or be owned by the employees themselves.

Loans to Employees (Excluding Directors and Key Managerial Personnel):

Companies can offer loans to their employees (other than directors or key managerial personnel) under the following conditions:

The loan amount must not exceed the employee’s salary or wages for a period of six months.

The loan is intended to enable employees to purchase or subscribe to fully paid-up shares in the company or its holding company for beneficial ownership purposes.

Disclosure Requirements:

The company must disclose any voting rights not directly exercised by employees for shares related to the employee scheme in the Board’s report in a manner as prescribed by the Act. This transparency ensures that shareholders understand the scope of employee-held shares under such schemes and any associated voting power.

4. Right to Redeem Preference Shares

Section 67 clarifies that these restrictions do not impact a company’s right to redeem preference shares issued under the Companies Act or any previous company law. 

Redemption of preference shares is a distinct financial activity governed by other sections of the Act and does not fall under the prohibitions set forth in Section 67.

Penalties for Non-Compliance with Section 67

In cases where a company fails to comply with the provisions of Section 67, both the company and any officer in default are subject to strict penalties:

Penalties for the Company:

The company itself may face a fine ranging from a minimum of one lakh rupees to a maximum of twenty-five lakh rupees.   

Penalties for Officers in Default:

Any officer responsible for the violation may be subject to both fines and imprisonment. Specifically:

A fine ranging from a minimum of one lakh rupees to a maximum of twenty-five lakh rupees, and

Imprisonment for a term that may extend up to three years.   

These penalties underscore the importance of strict compliance with Section 67, as they hold both the corporate entity and individual officers accountable for unauthorized transactions or financial assistance relating to the purchase of the company’s own shares or shares of its holding company.