A public company is considering an acquisition of its shares by a promoter, employee, investor or another person. The buyer will make the purchase, but the company is being asked to provide the money, guarantee the buyer's borrowing, or give security to the lender. That is the point at which Section 67 of the Companies Act, 2013 needs to be tested.
The rule is wider than a simple ban on a company giving a cash loan. Under the Companies Act text published on India Code, Section 67(2) says that a public company must not give financial assistance, directly or indirectly, by loan, guarantee, security or otherwise, for the purpose of or in connection with a purchase or subscription by any person of shares in that company or in its holding company.
Start with the transaction the company is actually supporting
The useful question is not only, “Is the company lending money?” Ask instead: Is company value being used to help someone buy or subscribe for the relevant shares?
A direct loan is the clearest case. But the wording also names a guarantee and the provision of security. So a structure does not fall outside Section 67(2) merely because the cash comes from a bank rather than from the company. If the public company guarantees the acquisition loan or charges its assets to support that borrowing, the transaction still needs the Section 67 analysis.
The words “directly or indirectly” and “in connection with” also make substance important. A payment labelled as a different commercial arrangement should not be assumed to be safe if its real purpose is to finance the share acquisition.
The restriction covers shares in the company and in its holding company
Section 67(2) is not limited to a person buying shares directly from the public company. It covers a purchase or subscription made or to be made by any person of shares in the public company or in its holding company.
That means the review should identify the target shares before the funding documents are approved. In a group transaction, it is possible to look only at the company providing the assistance and miss that the financed acquisition is of shares in its holding company.
Three statutory exceptions can change the answer
Section 67(3) contains specific exceptions to the subsection (2) prohibition. They should be tested by their actual conditions rather than treated as broad labels.
- Ordinary-course banking: lending money by a banking company in the ordinary course of its business is outside subsection (2).
- Employee-benefit scheme: a company may provide money under a scheme approved by special resolution and meeting the prescribed requirements for the purchase or subscription of fully paid-up shares in the company or its holding company, where the shares are held by trustees for employees or by employees.
- Limited employee loans: a company may lend to an employee other than a director or key managerial personnel, up to an amount not exceeding six months' salary or wages, to enable that employee to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by the employee as beneficial owner.
The employee-loan exception is therefore not a general management-financing route. Directors and key managerial personnel are expressly excluded from that clause, the amount is capped by the six-month salary or wage measure, and the shares must be fully paid-up and beneficially held by the employee.
The employee-trust route has its own Rule 16 conditions
The special-resolution exception in Section 67(3)(b) is tied to prescribed requirements. Rule 16 of the Companies (Share Capital and Debentures) Rules, 2014 supplies those conditions for money provided for employee or employee-trust share purchases.
Among the core conditions, the scheme must be approved by members through a special resolution. If the company's shares are listed, the purchase is to be made only through a recognised stock exchange rather than private offers or arrangements. For unlisted shares, the purchase valuation must be made by a registered valuer. The rule also caps the aggregate value of shares to be purchased or subscribed together with the money provided by the company at five per cent of the company's aggregate paid-up capital and free reserves.
Rule 16 also requires detailed disclosures in the explanatory statement and restricts who may act as trustee. So an employee-benefit purpose alone is not enough; the scheme has to satisfy the statutory and rule-based route.
A simple acquisition-finance example
Assume ABC Limited is a public company. A promoter wants to purchase shares of ABC Limited from an existing shareholder. A bank is willing to lend the purchase price, but it asks ABC Limited to guarantee the promoter's loan and create security over a company asset.
The buyer, not ABC Limited, is acquiring the shares. Even so, the proposal squarely raises Section 67(2) because the public company would be providing a guarantee and security in connection with another person's purchase of shares in the company. If none of the statutory exceptions applies, changing the funding source from company cash to bank debt does not remove the problem.
Now change the facts. Suppose the borrower is an ordinary employee, not a director or key managerial personnel, and the company proposes a loan equal to four months' salary so the employee can subscribe for fully paid-up shares and hold them beneficially. That transaction may fit the employee-loan exception, but the actual employment status, amount, purpose and share terms still need to be documented before relying on it.
This is different from a company buying back its own shares
Section 67 addresses two related but distinct ideas. Subsection (1) restricts a company with share capital from buying its own shares unless the consequent reduction is effected under the Act. Separately, Section 68 creates the statutory buy-back route for a company purchasing its own shares or other specified securities, subject to its own funding, approval, solvency, limit and filing requirements.
Section 67(2), by contrast, is about a public company financially assisting another person to purchase or subscribe for shares in the company or its holding company. Keeping those transactions separate avoids a common error: treating acquisition finance for someone else as though it were simply another form of buy-back.
If the share terminology itself is causing confusion, first separate authorised, issued, subscribed and paid-up share capital from the transaction being financed. Section 67 is concerned with the purchase or subscription event and the company assistance connected with it, not merely the accounting label attached to the funds.
Private companies need a separate status check
The text of Section 67(2) begins with “No public company”. Private companies also have a separate exemption history under Section 462. The MCA's 5 June 2015 private-company notification states that Section 67 shall not apply to a private company satisfying three conditions: no other body corporate has invested money in its share capital; its specified borrowings are below twice its paid-up share capital or ₹50 crore, whichever is lower; and it is not in default in repayment of those borrowings at the time of the transaction.
A 13 June 2017 amendment to the private-company notification added a further eligibility condition for the notification's exceptions, modifications and adaptations: the private company must not have committed a default in filing its financial statements under Section 137 or annual return under Section 92 with the Registrar.
Because Section 67(2) itself is drafted for public companies while the notification speaks to Section 67 more broadly, a private-company transaction should not be decided by copying a public-company checklist or by relying on the notification conditions in isolation. Check the exact subsection engaged, the notification eligibility and any other applicable provisions for the proposed funding.
What to check before approving the funding
- Identify the company providing assistance. Confirm whether it is public, private, banking or another specially regulated category.
- Identify the shares being acquired. Are they shares of the company providing assistance or its holding company?
- Trace the company support. Look beyond cash loans to guarantees, security and indirect arrangements connected with the acquisition.
- Test the purpose. Record why the money, guarantee or security is being provided and whether the share purchase or subscription is a purpose of or connected with it.
- Test any claimed exception precisely. For an employee route, check the person's status, six-month pay cap where relevant, fully paid-up shares, beneficial ownership and Rule 16 conditions for a scheme or trust.
- Run the other company-law checks. Section 67 does not replace the analysis under other provisions that may apply to loans, guarantees, related parties, share issues or approvals.
- Keep the approval file evidence-based. Board papers should show the flow of funds, parties, target shares, security package, purpose and the legal basis relied on.
Contravention is not only a documentation issue
Section 67(5) provides a fine for the company from ₹1 lakh to ₹25 lakh. An officer of the company who is in default may face imprisonment for up to three years and a fine from ₹1 lakh to ₹25 lakh. That makes the Section 67 check something to complete before the financing documents are signed, not after the acquisition has already been funded.
For a public-company transaction, the practical test is straightforward: map who is acquiring which shares, then trace every loan, guarantee, security or other company support connected with that acquisition. If the company is helping another person acquire its shares or its holding company's shares, assume Section 67 needs a real analysis and rely on an exception only after every stated condition has been verified.
