legality of treasury stocks
What exactly is treasury stocks? I just want to know what's the legality of holding treasury stocks in the new Companies Act, 2013. Also, what is the legality of this in other foreign jurisdictions?
Treasury shares are those that a company holds in itself and could be created as a result of buy-backs from the open market or mergers. Since companies cannot hold their own stock, they hold it through a trust ostensibly for the benefit of shareholders.
Now, this could be better understood through an illustration. For example Company X and Y are going to merge such that one company i.e. Company Y would seize to exist and all the shareholders of Y would be shareholders of Company X. Company X already has shares in the erstwhile Company Y before the merger took place. While implementing the scheme of amalgamation if Company X decides to use a method of share swap by which Company X will be issuing its shares to buy the shares of Company Y. Now, what does Company X do about the shares it held in erstwhile Company Y which has become Company X? Company X cannot hold shares in itself. Now, in such a scenario, the Company X may transfer the shares to a special purpose entity (SPE), usually a Trust. Therefore, by this method a company is able to hold its own shares. This provision has been provided in the proviso of the Section 77 of the OLD Companies Act, 1956.
Now, the new Companies Act, 2013 has sought to put an end to this practice. Section 233 (10) of the Companies Act, 2013 specifically states that a transferee company on merger or amalgamation, would not hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.
The process of issuing treasury shares is prevalent globally but unlike in India, these don’t have voting rights in countries such as Singapore, UK, USA, China etc. Majority of these countries have specific legislations governing treasury stock. Treasury shares in the UK are governed by a new statutory instrument called the Companies (Acquisition of Own Shares) (Treasury Shares) Regulation 2003 which has amended the U.K. Companies Act, 1985 to allow companies to buy back shares and keep them in a Treasury Share account. In the USA, under the laws of some states, including Delaware and New York, a company that repurchases its own shares has two main options either to hold them as treasury shares (i.e., shares that have been authorised and issued but generally are not considered outstanding), or by retiring the re-purchased shares.
When the company reaquires or repurchases its own stocks from the exisiting shareholders , such repurchased shares are called treasury stocks. These stocks can be created by mergers or amalgamation or buy backs. Treasury stocks does not carry any voting rights , dividends or earnings per share. Companies Act 1956 provides for buy-back of shares but there is no statutory provision that permits company to hold treasury stock. New Companies Act 2013 bans the concept of treasury stocks created on account of mergers and amalgamation.
Countries like US, UK, China have specific legislations for treasury stocks. In UK Companies regulation 2003 allows to buy back shares and also to hold them in treasury share account. In US companies can hold the treasury shares .But Company Act 2013 has abolished treasury stocks completely.
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