# Section 67 — Restriction on Purchase by Company of Its Own Shares

## The Underlying Principle: Conservation of Capital

The share capital of a company is the only security on which creditors rely. If a company were free to buy back its own shares, the fund available to pay creditors would shrink — adversely affecting them.

Hence the general rule: a company cannot buy its own shares. But this rule is not absolute — Section 68 and other provisions create exceptions.

## Sub-section (1) — Reduction Must Follow the Act

A company limited by shares or a company limited by guarantee having a share capital shall not buy its own shares unless the consequent reduction of share capital is effected under the provisions of the Act.

## Sub-section (2) — Restriction on Financial Assistance by Public Company

A public company shall not give any financial assistance:

Whether directly or indirectly;
Whether by means of a loan, guarantee, provision of security or otherwise;
For the purpose of, or in connection with, a purchase or subscription of shares;
In the company or in its holding company.

Note: This restriction targets public companies only.

## Sub-section (3) — Three Exceptions Where Financial Assistance is Permitted

### (a) Banking Companies in the Ordinary Course of Business

Lending by a banking company in the ordinary course of business is exempt.

The phrase 'ordinary course of business' is not defined.
Banks cannot supervise the end-use of every loan. So if a borrower uses bank loan money to buy the bank's shares, the bank and its officers are protected.
But — an English court has held that where money is given for the very purpose of purchasing the bank's shares, that is not lending in the ordinary course of business and the section is violated.

### (b) Employee Share Schemes (Trustees Buying for Employees)

A company may provide money for the purchase of fully paid shares in itself or its holding company, by trustees on behalf of employees, under a scheme:

Approved by special resolution;
Compliant with Rule 16 of the Companies (Share Capital and Debentures) Rules, 2014.

Conditions under Rule 16:

Listed Company	Unlisted Company
Purchase only through a recognized stock exchange (no private arrangements)	Valuation by a registered valuer

Aggregate value of shares purchased/subscribed shall not exceed 5% of (paid-up capital + free reserves).
Detailed disclosures on unexercised voting rights to be made in Board's report (names of employees, reasons, person exercising vote, number of shares, date of GM, resolutions, % voting power, whether for/against).

### (c) Loan to Employees to Buy Shares

A company may lend money to its employees (other than directors or KMP):

Not exceeding six months' salary of the employee;
To enable the employee to buy or subscribe fully paid shares in the company or its holding company;
To hold them by way of beneficial ownership.

## Sub-section (4) — Redemption of Preference Shares Permitted

Nothing in Section 67 affects a company's right to redeem preference shares under this Act or under any previous company law.

## Sub-section (5) — Punishment for Contravention

Liable	Punishment
Company	Fine: not less than ₹1 lakh, may extend to ₹25 lakh
Officer in default	Imprisonment up to 3 years, AND fine: not less than ₹1 lakh, may extend to ₹25 lakh

## Exemptions

### Private Companies & Specified IFSC Public Companies

Section 67 does not apply if all three conditions are fulfilled (and the private company has not defaulted in filing financial statements under Sec 137 or annual return under Sec 92):

1. No other body corporate has invested money in its share capital;

2. Borrowings from banks/FIs/body corporates are less than 2× paid-up capital or ₹50 crore, whichever is lower;

3. The company is not in default in repayment of such borrowings.

### Nidhi Companies

Section 67(1) does not apply when a Nidhi company purchases shares from a member on his ceasing to be a depositor/borrower — this is not treated as reduction of capital under Section 66. The Nidhi must ensure shareholders' interests are protected.

Worked example

### Example 1

Example 1 — Bank loan used to buy bank's shares:

A borrower obtains a general working capital loan from XYZ Bank and uses ₹5 lakh of it to purchase XYZ Bank's own shares. The bank had no knowledge of the end-use. The bank is protected — this is lending in the ordinary course of business. But if XYZ Bank specifically sanctioned the loan stating its purpose was to subscribe to its own shares, the bank would violate Section 67.

### Example 2

Example 2 — Employee share scheme threshold:

ABC Ltd has paid-up capital of ₹80 crore and free reserves of ₹20 crore (aggregate ₹100 crore). Under its employee share scheme via trustees, the aggregate value of shares purchased cannot exceed 5% of ₹100 crore = ₹5 crore.

### Example 3

Example 3 — Loan to employee:

Mr. R, a senior manager (not a director or KMP) at PQR Ltd, earns ₹2 lakh per month. PQR may lend Mr. R up to ₹12 lakh (six months' salary) to buy fully paid PQR shares. If Mr. R were the CFO (a KMP), no loan could be advanced for this purpose.

### Example 4

Example 4 — Private company exemption:

ABC Pvt Ltd has no corporate shareholders, has bank borrowings of ₹30 crore against paid-up capital of ₹20 crore (so borrowings = 1.5× paid-up capital = less than 2× and less than ₹50 crore), is not in default, and has filed all returns under Sec 92 and 137. Section 67 does not apply, so ABC Pvt Ltd can give financial assistance to purchase its own shares.

⚠️ Common exam mistakes

Assuming Section 67(2) restriction applies to private companies — it primarily targets public companies, and private companies fulfilling 3 conditions are wholly exempt.
Forgetting that the 5% cap for employee share schemes is on the aggregate of paid-up capital + free reserves, not on either alone.
Including directors and KMP in the 'loan to employees' exception under sub-section (3)(c) — they are expressly excluded.
Confusing the 'six months' salary' cap (loan to employees) with the 5% cap (employee trust schemes) — these apply to different sub-clauses.
Treating banking-company lending as a blanket exemption — if the loan is specifically tied to share purchase, the exemption is lost.
Forgetting that the exemption for private companies requires NO default in filing financial statements (Sec 137) and annual returns (Sec 92).

Bare-Act text Section 67 · Companies Act, 2013 · click to expand

Section 67(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. Section 67(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. Section 67(3): Nothing in sub-section (2) shall apply to — (a) lending of money by a banking company in the ordinary course of its business; (b) the provision of money by a company 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 subscription for, the shares held by trustees for the benefit of the employees or such shares held by the employee of the company; (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.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Section 67 - Restriction on Purchase by Company of Its Own Shares and Giving of Loans for Such Purchase

Worked example

⚠️ Common exam mistakes