Updated On:
28/06/2014
Please take note that Final Rules has just been released. This article will be updated by the new rules by 5th April 2014
In the international context, treasury stocks get created when there is a buyback of shares. In India, The Companies Act, 1956 require shares bought back to be extinguished at the time of time back, and so it cannot be used for treasury operations. So, in India, treasury stocks are created only when companies with cross holdings merge. These treasury stocks are to be held in a separate trust.
Currently, no specific law in India explicitly allows or disallows creation of trust shares or treasury stocks. Hence many schemes of mergers/amalgamations between holding-subsidiaries or group companies provides for transfer of cross holding of shares to a trust created for the benefit of the transferee company. These shares are kept alive and the Board of Directors may sell them to raise funds when required.
The basic advantage of transferring shares to a trust is that these shares remain a part of the paid-up capital of the company and funds can be raised by selling these shares in the open market or through private arrangement without following the process for issue of further capital. Listed companies found this useful as the process for issue of further capital is complicated. Several big companies have used this method in case of group mergers. A few examples include Reliance Petroleum merger into Reliance Industries, merger of group companies with Jaiprakash Associates Limited, Spice Televenture (holding company) into Spice Mobility (subsidiary), Mahindra & Mahindra, BPCL, IOC, United Spirits etc. Treasury stocks were created when ICICI and ICICI Bank merged. ICICI Bank has sold all such treasury stock in 2003.