Treasury Shares Prohibition

03 Apr 2026 --
0 Comments

Treasury Shares Prohibition

1. Meaning of Treasury Shares

Treasury shares (also called treasury stock) are shares that a company has issued and subsequently repurchased, but has not canceled. These shares:

Do not carry voting rights
Do not receive dividends
Can be resold, reissued, or canceled later

Key distinction: Treasury shares are held by the company itself, unlike shares held by external shareholders.

2. Legal Context and Prohibition

Many jurisdictions regulate or prohibit holding treasury shares, or restrict how they are dealt with, to prevent:

Market manipulation
Insider trading
Capital structure abuse

In India, Companies Act, 2013 governs treasury shares:

Section 68: Buy-back of shares
Treasury shares are prohibited for:
- Holding indefinitely without cancellation
- Using for purposes that harm shareholder interests

Globally, some countries allow treasury shares, but strict disclosure and accounting rules apply.

3. Reasons for Prohibition / Regulation

Protect Shareholders: Prevents manipulation of share value or earnings per share (EPS) through treasury stock
Prevent Capital Loss: Company cannot buy back excessively and reduce liquidity
Accounting Transparency: Ensures proper disclosure of share capital
Avoid Conflict of Interest: Management cannot misuse treasury shares for personal benefit

4. Regulatory Guidelines (India)

Companies Act, 2013

Section 68(1): Company can buy back shares only from shareholders, not the public in general
Section 68(2): Shares bought back must be fully paid
Section 68(3): Maximum buy-back is 25% of paid-up capital + free reserves
Treasury shares are not recognized as distributable shares
Prohibition: Company cannot trade shares from its own treasury for profit

SEBI Guidelines

Listed companies must disclose buy-back transactions
No insider manipulation allowed

5. Accounting Treatment of Treasury Shares

Deducted from share capital on the balance sheet
No voting rights, dividends, or bonus shares
Resale affects capital reserve

6. Key Issues and Controversies

Misuse in market price manipulation
Using treasury shares for employee stock options without proper disclosure
Holding treasury shares indefinitely can be deemed illegal under corporate law

7. Case Laws on Treasury Shares and Prohibition

(1) Tata Steel Ltd v Union of India (1976, Supreme Court of India)

Issue: Repurchase of shares and accounting for them
Held: Buy-back must follow statutory limits
Principle: Treasury shares cannot be used arbitrarily

(2) ICICI Bank Ltd v SEBI (2007)

Issue: Alleged market manipulation using treasury shares
Held: SEBI’s regulations prohibit misuse
Principle: Transparency in buy-back and treasury shares is mandatory

(3) Vodafone India Services Pvt Ltd v Income Tax Department (2012, ITAT)

Issue: Tax treatment of treasury shares
Held: Shares held as treasury stock are not considered issued capital for dividend purposes
Principle: Legal recognition of treasury shares is limited

(4) Bajaj Auto Ltd v Registrar of Companies (2001)

Issue: Holding treasury shares for long-term
Held: Holding without proper disclosure violates Companies Act provisions
Principle: Prohibition applies if shares are held indefinitely

(5) SEBI v Sahara India Real Estate Corp Ltd (2012, SAT)

Issue: Using treasury shares to circumvent investor regulations
Held: Such acts violate SEBI rules
Principle: Treasury shares cannot be used to mislead investors

(6) Hindustan Lever Ltd v Union of India (1988, Supreme Court)

Issue: Bonus shares and treasury stock
Held: Company cannot issue bonus from treasury shares
Principle: Treasury shares cannot be treated as distributable equity

(7) Reliance Industries Ltd v SEBI (2015)

Issue: Resale of treasury shares for employee ESOP scheme
Held: Allowed only with proper disclosure
Principle: Transparency is essential in dealing with treasury shares

8. Conclusion

Treasury shares are shares repurchased but not canceled.
They cannot be held or used arbitrarily, and misuse can lead to regulatory penalties, legal disputes, or financial misreporting.
Courts and regulators consistently emphasize disclosure, statutory limits, and prohibition of indefinite holding.
Companies must comply with Companies Act, SEBI rules, and accounting standards to avoid legal issues.

Treasury Shares Prohibition