INTRODUCTION

“It is not competent for a limited company to invest its money in the purchase of its own shares.”

-Lord Watson, Trevor v. Whitworth (1887) 12 App Cas 409

Holding shares in itself is a position that the Indian jurisprudence has not always favoured, and this is the condition that arises upon the consummation of a scheme of amalgamation, when the transferee company may, as an incidental consequence, find itself holding shares in itself. These shares, commonly referred to as treasury shares, arise in various ways, one of which is where the transferor company held an equity stake in the transferee company before the merger, and vest automatically in the transferee upon the scheme taking effect.

To address this issue the legislature recently introduced the Corporate Laws (Amendment) Bill, 2026 which addresses this by adding a new Section i.e., Section 233A, which targets certain pre-2013 treasury shares held in the company’s own name or through a trust and requires them to be dealt with within three years, failing which they are cancelled and extinguished and deemed to be a reduction of share capital. The issue is that Section 66 of the Companies Act, 2013 still governs reduction of share capital through a Tribunal-led process involving notice, safeguards, and confirmation. The real issue arises whether Section 233A creates a true statutory exception for legacy clean-up, or whether it preserves the old procedure in silence and only changes the outcome.

WHAT ARE TREASURY SHARES AND THEIR FOUNDATIONAL CONCEPT

The term treasury shares has not been explicitly defined in the Indian legal jurisprudence, but in general parlance they can be understood as shares that a company buys back and keeps as its own securities. These are not the same as the traditional shares since traditional shares provide an external control over the company, while the treasury shares are held by the company as security, which at the same time also remain unextinguished. Thus, to put it simply, treasury shares can be understood as ones that are still legally issued but not outstanding. Treasury shares can be generated in different ways, either by way of buyback from the public market, or they can be bought at a premium rate from the shareholders, which can be either a fixed price or dutch auction. Apart from buying the shares, another way that they can arise is by merger or acquisition of cross-holding companies wherein companies that have shares in each other, when they merge, get shares of each other as well.

Treasury shares can be used by a company for a variety of reasons, which include increasing their financial ratios or even as employee compensation by reissuing these shares. Another reason that companies hold treasury shares is to prevent a hostile takeover and also to help them increase their stock price by reducing the shares outstanding in the market.

Treasury shares are not devoid of any conditions. A Company which holds treasury shares neither gets any voting rights on them nor they are entitled to be paid a dividend. In addition to all this, they are also excluded from the Earnings Per Share (EPS) calculations, which thus reduces the total number of shares. But these shares come with an advantage in the form of the flexibility they provide to the company to either hold them, sell them back to the market, or cancel them.

COMPARISON TO OTHER JURISDICTIONS

The issue posed by treasury shares is not unique to India, but other jurisdictions also face the same, which they address through express statutory machinery rather than by implication. The United Kingdom’s Companies Act 2006 contains a specific treasury-shares framework, including rules on acquisition, holding, rights, and cancellation. Singapore likewise provides a dedicated treasury-shares regime under its Companies Act, regulating the status and disposal of such shares. Hong Kong follows a similar approach under its Companies Ordinance, expressly dealing with treasury shares and their cancellation, sale, or transfer. These jurisdictions reflect a clear legislative preference for certainty, where treasury shares are contemplated, the statute itself identifies both the consequence and the procedure. That comparative position is especially useful for the Indian debate because proposed Section 233A(2) speaks clearly on the result but remains largely silent on the mechanism, particularly on its relationship with Section 66.

THE ROAD MAP TO THE NEW SECTION

The transition of treasury shares gained importance in Indian jurisprudence with the change in statutory law by the introduction of the Companies Act, 2013. As per the 1956 Act, there was no explicit prohibition on the treasury shares, and thus a company exploited these lacunae to bypass the technicality of a company not being a member of itself.

To resolve this issue, the 2013 Act was introduced, which contained section 67, 68 and a provision in section 232(3)(b) which prohibited this practice. However the issue that remained was that many groups that underwent amalgamations under the 1956 Act were still holding cross-holding or treasury shares that were never cancelled and they sit on the balance sheet as investments or are parked in group trusts and even the 2013 act was not able to tackle it as it was interpreted to apply prospectively and thus a lot of treasury shares before 2013 remained in the grey area.

Thus, to tackle this issue, the legislature introduced the Corporate Law Amendment Act, 2026, which contains section 233A to tackle this issue. The legislature introduced this provision to resolve the grey area that still persisted and avoid misuse of any voting rights by the company.

The new section proposes that where a transferee company holds shares in its own name, or in the name of any trust (on its behalf or on behalf of subsidiaries/ associates), as a result of a pre-2013 Act scheme of compromise or arrangement, those shares must be disposed of within 3 years of this amendment. A daily penalty of INR 10,000 has been prescribed for continued non-compliance.

However, one of the main issues lies in sub-section 2, which provides for deemed cancellation of shares if a company fails to dispose within a period of 3 years. Moreover, such reduction shall also be deemed to be a reduction of share capital of the company, which thus in a way passes the traditional rigor of share reduction.

THE LACUNAE PRESENT AND THEIR POTENTIAL SOLUTIONS

While the new section 233A is a step in the right direction to resolve a previously existing governance gap, it still cannot be said to be totally free from lacunae. These issues, if they remain unaddressed, might hamper the good intention with which this section has been introduced while even hampering its practical operation.

1. Procedural override and Section 66 bypass – By prescribing the automatic cancellation of shares once not disposed of within three years, the section, in a way, bypasses the procedural architecture that has been mentioned under Section 66, especially since it leads to capital reduction. The bill also fails to clarify whether this cancellation applies only to involuntary cancellation or equally to voluntary cancellation as well. The Joint Parliamentary Committee thus should take a step to clarify this point and tell whether the Section 66 exemption applies exclusively to automatic cancellations, wherein the voluntary cancellations still have to follow the Section 66 route. Moreover, it will also be better if, even for involuntary cancellation, a mandatory period should be provided to provide a notification to the Registrar of Companies and creditors, which will make such practice consistent with the other jurisprudence, such as Japan.
2. Tax and Stamp Duty Ambiguity – Another concern that persists is the Bill’s silence on the tax and stamp duty consequences of deemed cancellation. The question is whether automatic cancellation under the section constitutes a transfer under section 2(47) of the Income Tax Act, and if it does, then capital gain tax shall arise at cancellation whose consideration needs to be determined. This issue is further deepened by the ruling in Escorts and Welfare Trust v ITO wherein the ITAT held that trustees are assessed as representative assessee mirroring their beneficiary’s tax position, but where the beneficiary is the company itself, the cancellation may in fact constitute a zero-consideration self-transfer generating no economic reality.[1] A similar position persists in the case of stamp duty since no stamp duty recognises a deemed capital reduction, thus bypassing court confirmation. Thus, to resolve it, there is a need for MCA and CBDT to issue a notification clarifying the position as it exists under the Anglo-Irish law where cancelled treasury shares attract no allowable loss and reissues are treated as fresh shares.
3. SEBI LODR and Takeover Triggers – Another issue lies especially for listed companies. Disposal of treasury shares either through open market sale, transfer or buyback will trigger SEBI’s LODR disclosure obligations and may even attract the Takeover Code, which shall require a public announcement, which is an outcome that is totally unintended by a provision which is designated to resolve legacy structures. To resolve this issue, SEBI needs to issue a circular confirming that the disposal under the amended section does not constitute an acquisition under the Takeover regulations, which shall make it consistent with the established practice of exempting statute-mandated restructurings from open offer obligations.
4. The Voting rights Loophole – At the end, the current draft, in a way, preserves the very governance harm it was enacted to eliminate throughout the three-year window, as the treasury shares may still continue exercising voting rights till their disposal. In this aspect, reference can be made to Section 726 of the UK Companies Act, 2006, which provides a corrective model, as any exercise of rights attached to such shares, which include voting rights, is void from the moment of acquisition. Thus, the JPC should either provide clarity on this aspect or change the language in a way so that immediately post-commencement of the amendment act the voting rights are suspended and thus the governance objective is realised from day one rather than three years of potential misuse.

CONCLUSION

Section 233A of the Corporate Laws (Amendment) Bill, 2026, is a critical legislative intervention designed to extinguish the anomaly of legacy treasury shares in Indian corporate jurisprudence. However, its reliance on a deemed capital reduction without explicit procedural harmonization creates acute regulatory friction. By bypassing the established safeguards of Section 66 and remaining silent on corresponding tax, stamp duty, and SEBI implications, the amendment risks substituting a governance loophole with compliance uncertainty. To secure its legislative intent, allied regulators and the Joint Parliamentary Committee must promptly delineate these procedural intersections and mandate the immediate suspension of associated voting rights upon enactment. Only by resolving the lacunae that persist can the real intention behind introducing this legislation be totally realised.