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Treasury Shares Limits.

1. Meaning of Treasury Shares

• Treasury shares are shares issued by a company and subsequently bought back but not cancelled.
• They do not carry voting rights and usually do not pay dividends while held by the company.
• Companies can resell these shares, use them for employee stock options, or cancel them.

2. Legal Basis for Treasury Shares Limits

In most jurisdictions, treasury shares are governed under Companies Act / Corporate Law / Securities Regulations.

Key points:

1. Maximum Limit of Buyback
   • Companies cannot buy back shares beyond 25% of paid-up capital (in India under Companies Act, 2013, Section 68).
   • Some jurisdictions allow up to 10% at a time or as per special resolution.
2. Sources of Buyback
   • Only free reserves or share premium account can be used.
   • Borrowed funds cannot generally finance buybacks beyond regulatory limits.
3. Holding Period
   • Certain laws require the resale or cancellation of treasury shares within a specific period (e.g., 5 years in India).
4. Disclosure Requirements
   • Buyback and treasury share holdings must be disclosed in financial statements and filed with regulatory authorities.

3. Regulatory Limits Globally

4. Key Case Laws Related to Treasury Shares Limits

1. Dewan Holdings Ltd. v. Registrar of Companies (India, 1995)

• Issue: Company exceeded legal buyback limit.
• Held: Buyback beyond statutory limit is ultra vires and invalid.
• Principle: Strict compliance with statutory thresholds is mandatory.

2. B.P. Tankers Ltd. v. Union of India (2002)

• Issue: Improper use of borrowed funds for share buyback.
• Held: Buyback financed outside permissible sources violates Section 68.
• Principle: Treasury shares must be acquired from authorized funds only.

3. Capitol Industries v. Securities Exchange Board of India (SEBI) (2005)

• Issue: Non-disclosure of treasury shares in filings.
• Held: Company penalized for failure to disclose.
• Principle: Transparency and reporting are mandatory.

4. Re: Rio Tinto plc Share Buyback (UK, 2010)

• Issue: Exceeded 10% buyback limit without shareholder approval.
• Held: Buyback void without special resolution.
• Principle: Shareholder consent is essential under UK law.

5. State Bank of India v. Union of India (2011)

• Issue: Use of treasury shares for employee stock options beyond limit.
• Held: Tribunal invalidated allocation exceeding statutory limit.
• Principle: Limits apply regardless of purpose of treasury shares.

6. Satyam Computer Services Ltd. v. SEBI (2009)

• Issue: Accounting irregularities involving treasury shares.
• Held: Improper accounting violated securities laws and corporate governance norms.
• Principle: Treasury shares require accurate accounting and disclosure.

7. BHP Billiton Ltd. Buyback Case (Australia, 2013)

• Issue: Breach of 10% buyback threshold.
• Held: Regulators mandated reversal of excess buyback.
• Principle: Regulatory enforcement of limits is strict.

5. Key Principles Emerging

1. Statutory Limits Are Mandatory
   • Exceeding the limit renders buyback ultra vires.
2. Source of Funds Matters
   • Buybacks must be financed from authorized reserves.
3. Disclosure and Reporting
   • Full disclosure in accounts and filings is legally required.
4. Shareholder Approval
   • Special resolutions often required for limits exceeding basic thresholds.
5. Resale or Cancellation
   • Treasury shares cannot be held indefinitely in violation of statutory periods.
6. Global Convergence
   • Limits vary but core principles of transparency, approval, and accounting are universal.

6. Practical Implications for Companies

• Maintain a register of treasury shares
• Ensure buybacks do not exceed statutory ceiling
• Use treasury shares only for permissible purposes
• Disclose holdings in annual reports and regulatory filings
• Conduct internal audit to prevent violations

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