This section restricts companies from buying their own shares or giving loans to purchase their shares, with some exceptions, and sets penalties for non-compliance.
What the section says
In plain terms
(1)No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of this Act.
A company limited by shares or by guarantee with a share capital can only buy its own shares if the reduction in share capital is done according to this Act.
(2)No public company shall give, whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company.
A public company cannot give financial assistance for the purchase of its own shares or those of its holding company, whether directly or indirectly.
(3)Nothing in sub-section (2) shall apply to—
Exceptions to the rule in sub-section (2) include lending by banking companies, employee share purchase schemes approved by special resolution, and loans to employees for share purchases not exceeding six months' salary or wages.
(3)(a)the lending of money by a banking company in the ordinary course of its business;
(3)(b)the provision by a company of money in accordance with any scheme approved by company through special resolution and in accordance with such requirements as may be prescribed, for the purchase of, or subscription for, fully paid-up shares in the company or its holding company, if the purchase of, or the subscription for, the shares held by trustees for the benefit of the employees or such shares held by the employee of the company;
(3)(c)the giving of loans by a company to persons in the employment of the company other than its directors or key managerial personnel, for an amount not exceeding their salary or wages for a period of six months with a view to enabling them to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership:
provisoProvided that disclosures in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates shall be made in the Board's report in such manner as may be prescribed.
(4)Nothing in this section shall affect the right of a company to redeem any preference shares issued by it under this Act or under any previous company law.
This section does not prevent a company from redeeming its preference shares issued under this Act or previous company law.
(5)If a company contravenes the provisions of this section, it shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
If a company breaks the rules in this section, it can be fined between one lakh rupees and twenty-five lakh rupees, and defaulting officers can be imprisoned for up to three years and fined between one lakh rupees and twenty-five lakh rupees.
The right-hand column is written from the section text, not quoted from it, and it has no legal force. Where the two differ, the left-hand column is the law.
Reproduced from the official India Code print for reference. Check the current text on India Code before you rely on it, and read the section alongside its Rules. Nothing here is legal advice.