Interpreting Section 67(2): Does “Or Otherwise” Prohibit Investments in Own Shares?

The Core Constraint: Protecting Company Capital

Section 67(2) of the Companies Act, 2013, establishes a critical principle: the prohibition on a public company (other than an IFSC company) providing financial assistance for the purchase of its own shares or those of its holding company.

The statutory language is broad, prohibiting assistance “whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise.”

The Advisory Question

Given the general term “or otherwise,” does this prohibition extend beyond explicit lending (loan, guarantee, security) to cover genuine investments made by the company in another entity, where that entity may subsequently invest in the company’s shares?

Legal Analysis: The Intent Behind the Provision

To determine the scope of “or otherwise,” we rely on fundamental principles of statutory interpretation:

1. Assistance from the Section Heading

The heading of Section 67 is explicitly titled: “Restrictions on Purchase by Company or Giving of Loans by it for Purchase of its Shares.”

• Interpretation: The heading, which serves as a guide to legislative intent, clearly directs the focus towards restricting the grant of loans, not the making of bona fide investments. If the legislature intended to restrict investments, the heading would likely reflect this broader scope.

2. Application of Ejusdem Generis to “Or Otherwise”

The principle of ejusdem generis (“of the same kind”) is directly applicable here. As articulated by the Hon’ble NCLT Kolkata Bench in the matter of MODERN HI-RISE PRIVATE LIMITED: when general words follow an enumeration of specific words, the general words must be interpreted to belong to the same class or genus as the specific words.

• The Specific Class: The enumerated words are “loan, guarantee, [provision of] security.” The common genus of these terms is lending funds or creating a financial obligation that requires repayment. They relate to debt financing and contingent liabilities.

• The Interpretation: Applying ejusdem generis, the general words “or otherwise” must be read to cover similar types of debt-based or refundable financial assistance (e.g., an indirect loan, a deferred payment arrangement, etc.).

• Conclusion: This principle strongly suggests that the scope of “or otherwise” should not be extended to cover a pure, non-refundable equity investment, as an investment does not fall within the debt/security genus.

 PKPK & Partners’ Conclusion

Section 67(2) is rooted in the common law principle of capital maintenance—protecting a company’s capital for the benefit of its creditors.

• Debt vs. Investment: A loan, guarantee, or security directly poses a risk of siphoning off funds that must be repaid (impairing capital). A genuine investment, however, is an asset acquired for commercial returns, and while it carries risk, it is fundamentally different from providing financial support for debt.

• Our Advisory Position: Based on the assistance from the section heading and the strict application of the ejusdem generis rule, we conclude that Section 67(2) prohibits financial assistance of a debt, security, or contingent liability nature, but it does not restrict a public company from making legitimate, bona fide equity investments in a third party, even if that party may subsequently choose to purchase the company’s shares.

Public companies must, however, ensure any such investment is carried out strictly on commercial terms and does not constitute an indirect, camouflaged loan or security transaction.