Treasury stock is stock that is created by mergers and amalgamations or a buy back. However the question of treasury stock created by a buy back is not relevant in the Indian context since as per the SEBI (Buy-Back of Securities) Regulations, 1998 and Companies Act, 2013 the shares so created have to be extinguished within seven days of such a buy back.
In case of a merger and amalgamation it is created on account of the ‘cross holding’ between the acquiring company and the target. For example, Company A and B are going to merge such that one company i.e. Company B would seize to exist and all the shareholders of B would be shareholders of Company A. Company A already has shares in the erstwhile Company B i.e. before the merger took place. While implementing the scheme of amalgamation if Company A decides to use a method of share swap by which Company A will be issuing its shares to buy the shares of Company B. What does Company A do about the shares it held in erstwhile Company B which is now Company A? Company A cannot hold shares in itself. There are two alternatives. Company A may cancel the shares that it holds in Company B which may not be the most pragmatic solution to the problem. Alternatively, it may transfer the shares to a Special Purpose Entity (SPE), usually a Trust. This would facilitate a company to hold its own shares.
At present there is no specific provision governing treasury stock in India but Section 233(10) of the Companies Act, 2013,(yet to be notified) specifically prohibits the creation of treasury stock in Merger and Amalgamation. The text of the said section is as below:
"A transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation."
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