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loan taken & purchased of shares


Can a Holding company take loan from its subsidiary Company and Buy shares from open market, of THAT subsidiary company using same money?

is such arrangment invalid under Companies Act, 1956 or any supporting case law ?

 
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Ms. Waghmare, before giving a definitive answer to your question, it shall be necessary to get more facts about the situation, more specifically about the reason for which holding company is purchasing the share and nature of the holding company. However, the answer is yes only and only if the answer to any of the following questions is yes:

1.      - Is the holding company a private company and the subsidiary company also a private company?

2.      -  Is the holding company purchasing shares as a trustee for the benefit of employees?

If any of the above conditions are not satisfied, then the answer to the case situation is no. Section 77 of Companies Act lays down the law on the subject

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-Holding company & subsidiary company are listed entities.

-The holding company is purchasing shares from open market.

-the money used  by holding company for above purchase is taken from subsidiary as loan.

 
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no,the holding company is not purchasing shares as a trustee for the benefit of employees.

Reason for purchase is to normal course, increasing their holding in such company.

 
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The fact situation, therefore, falls within the four corners of prohibition contained in Section 77 of Companies Act. Hence, I am afraid that such a course of action is not permitted by Companies Act.

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Corporate Lawyer

@ Smita,

While purchasing shares, there is always a disclosure stating that shares are purchased out on own funds and not loan funds. If the Holding company does so shall be accounted for non-compliances as per Company Law as it is a listed entity. Further more a subsidiary company cannot lend to holding company immeidately if Holding company has invested in subsidiary company. Theres a time gap after which it can be done. Also if listed, there is a maximum no of shares they SEBI approval too needed. Sec 77 shall come into play as well.


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