Company Law

Topics: Stock market, Corporate finance, Corporation Pages: 11 (3683 words) Published: December 12, 2012
National Law Institute University,

A Project Of Law of Business Association-II On
Buy Back of Shares

Submitted to:-Submitted by:-
Asso. Prof. (Dr.) Kondaiah J.
Roll No. - 2009 B.A. LL.B.
Enrollment No. A-0
VIII Trimester
III Year


2Understanding the Concept3
2.1Conceptual Conundrum3
2.2Methods of ‘buy-back’3
3Law Governing Repurchase Of Shares In India4
3.2Rationale behind Section 774
3.3Objectives Of A Buy-back5
3.4Resources of Buy-back5
3.5Conditions of Buy-back6
3.6Sources from where the Shares can be purchased6
4Law Governing Repurchase Under English Law8
5Law governing Repurchase under U.S. Law8
6The Debate: Pros and Cons9

The issue of a company buying back its shares has moved beyond the realm of abstract discussion among academicians and into the real world of corporate controversies. The endeavour should be to provide one with an overview of the concept of ‘buy-back’ of shares, the ensuing debate and some recommendations. Understanding the Concept

In law, a company being a separate legal personality is capable of buying and holding property in its own name. a corollary to this privilege would be that a company could buy its own shares, shares being considered in all legal regimes as property. Conceptual Conundrum

It is clear that conceptually, repurchase of shares runs counter to the age-old concept of separate legal personality. A company’s incorporating gives it a legal personality distinct from its shareholders. So, traditionally it was thought that repurchase of its own shares would negate that very distinction since a company would then become its own shareholder. But, modern times have witnessed a structural change in the theme and philosophy of Company Law that, subject to the restrictions envisaged under it, a company may buy-back its own shares. Methods of ‘buy-back’

Two situations can result on a repurchase of shares. In the first situation, the shares repurchased will remain as assets of the company. The term commonly used for these shares is ‘treasury stock’. On the balance sheet, the share capital on the liabilities side will remain unaffected except that a part of share capital repurchased by the company would represent a liability owed by the company to itself. In the second situation, the repurchase of shares would be concomitant with the reduction of share capital to some extent. In this situation, there would be an extinguishment of the shares bought by the company. The shares repurchased thus do not remain as assets of the company. The crucial difference between the two situations is that while in the former case, the shares repurchased are held by the company as its property and can be resold later, in the latter case, the shares repurchased are extinguished and thus remain out of circulation. Law Governing Repurchase Of Shares In India

The provisions regulating buy-back of shares are contained in Section 77-A, 77-AA and 77-B 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 Securitites) 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(f) and (g) respectively. Section 77-A of the Companies Act, 1956 permits the companies to buy-back its own securities except in certain circumstances. Rationale behind Section 77

Section 77 is a crystallization of a catena of English decisions starting from the well-known decision of the House of Lords in Trevor v. Whitworth. A summary of this decision would suffice to understand the rationale behind section 77....
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