Share Capital – CA Inter Law Notes

Share Capital – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Share Capital – CA Inter Law Notes

Concept Of Capital
Meaning of Capital

• The term ‘Capital’ has variety of meanings.
• In Company Law, the ‘Capital’ is the share capital of a company.
• The term ‘Share Capital’ is used to mean the capital raised by the company through the issue of shares.

Types of Capital
Authorised Capital Section 2(8)

• Such capital as is authorised by the Memorandum of a company to be the maximum amount of share capital of the company.
• It is also known as ‘Nominal Capital’ or ‘Registered Capital’.

Issued Capital Section 2(50)

• That part of the authorised or nominal capital which the company issues for the time being for public subscription and allotment.
• This is computed at the face or nominal value.

Subscribed Capital Section 2(86)

• That portion of the issued capital, which has been subscribed for or taken up by the subscribers of shares in the company.
• Entire issued capital may or may not be subscribed.

Called up Capital Section 2(15)
That portion of the subscribed capital which has been called up for payment.

Paid up Capital Section 2(64)
That portion of the called up capital for which money is received in respect of shares issued.
However, it does not include any other amount received in respect of such shares, by whatever name called.

Details About Subscribed and Paid up Capital – Section 60
Where any notice, advertisement or other official publication or any business letter of company contains statement of amount of authorised capital, such document should also contain detail about subscribed and paid up capital.

Share
Definition – Section 2(84)
A share is a share in the share capital of a company, and includes stock.

Nature of Shares

• The shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the Articles of the company – Section 44
• Every share in physical form should be distinguished by its distinctive number – Section 45.
• Shares are treated as ‘goods’ under the Sale of Goods Act.

What does a Share Signifies?
A share signifies the following right or interest in company:

• the interest of a shareholder in the company
• the right to receive dividend; attend and vote at meeting, share in surplus assets in event of winding up
• the liability, of the shareholder in the company to pay calls on share until fully paid up
• the right of the shareholder to transfer the share as per AOA

Kinds of Shares – Section 43

• Shares can be divided into following categories: a Equity shares
• Equity shares with simple voting rights © Equity shares with differential voting rights a Preference shares

Important Note:

• Priyate company can issue any other type of shares other than equity and preference shares, if authorised by its AOA or MOA. – MCA notification dated 5-6-2015
• Section 43 is not applicable to specified IFSC public company where it’s Memorandum or Articles provides so.

Preference Shares

• It means those shares which have a preferential right with respect to:
  • payment of dividend; and
  • repayment of the capital
  • The dividend may consist of: m a fixed amount; or
  • an amount calculated at a fixed rate
• Preference shareholders can vote only on such resolutions which directly affect the rights attached to the preference shares.
• However, if the preference dividend is not paid fully for more than two years, the preference shareholders shall also get voting right on every resolution placed before the company.

Equity Shares

• The equity shares are those which are not preference shares.
• After satisfying the rights of preference shares, the equity shares shall be entitled to share in the remaining amount of distributable net profits of the company.
• The dividend on equity shares is not fixed and may vary from year to year depending upon the amount of profits available.
• The rate of dividend is decided by the Board of the company and approved by shareholders in the Annual General Meeting.
• Equity shareholders have a right to vote on every resolution placed in the meeting and the voting rights shall be in proportion to the paid-up equity capital.

Difference Between Equity Shares And Preference Shares

Particulars	Equity Shares	Preference Shares
Preference in Divdend Payment	The dividend on equity shares is paid only after the prefer­ence dividend has been paid.	Shareholders get a preference in dividend payment over eq­uity shareholders.
In Case of Wind­ing up	Shareholders get payment of capital after the payment of capital to preference share­holders.	Shareholders get preference in capital payment in winding up over equity shareholders.
Rate of Dividend	Depends upon the amount of profit available and the funds requirements of the company.	Entitled to a fixed rate of dividend.
Dividend Accumulation	Cannot be cumulative.	May be cumulative for cumu­lative preference shares.
Redemption	No redemption of equity shares except under a scheme involving reduction of capital	Redeemable preference shares may be redeemed by the company.
Bonus/rights Shares	A company may issue rights shares or bonus shares to the company’s existing equity shareholders.	No bonus shares or right shares are issued to preference shareholders.
Voting Rights	An equity shareholder can vote on all matters affecting the company.	A preference shareholder cannot vote on all resolution.
Voting on a Poll	Voting rights in proportion to his share in the paid up equity share capital of the company.	Voting in proportion to his share in the paid-up pref­erence share capital of the company.

Securities:
Definition
‘Securities’ means the securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956.

Securities as per SCRA – Section 2(h)

• ‘Securities’ include
  • Shares, scrip, stocks, bonds, debentures, debenture stock or other marketable securities of body corporate.
  • Derivative.
  • Units or instruments issued under collective investment scheme.
  • Security receipt as defined under the Securitisation Act, 2002. ‘
  • Units of mutual fund scheme.
  • Rights or interests in securities.
  • Government securities.
  • Mortgage debt.
  • Any other instrument declared by Central Government to be securities.
• Any unit linked insurance policy or unit which provide combined risk on life of person and investment is not security.

Allotment
What is an Allotment?

• When a public limited company issues a prospectus in viting public to subscribe to its share capital and people apply for them, this application is an offer to buy the shares and when such applications are accepted by the company, it is termed ‘allotment’.
• Allotment mean the appropriation by the Board of directors of the company out of the previously unappropriated capital of a company of a certain number of shares to persons who have made application for shares.

Rules for Allotment

• Allotment of securities are subject to following rules:
• General rules regarding allotment
• Statutory rules regarding allotment

General Rules Regarding Allotment
Following general principles should be observed for allotment of securities:

By proper Authority

• The allotment of securities must be made by proper authority and the proper authority is the Board of directors or its Committee.
• This authority may be delegated by the Board as per the provisions of Articles of the company.
• Any allotment of securities made by an improper authority will be void.

Within Reasonable Time

• The allotment must be made within a reasonable period of time. What is the reasonable time is a question of fact in each case.
• As per the Contract Act, offer must be accepted within a reasonable time.
• If the application for securities is not accepted within a reasonable time, then the applicant may refuse to take the securities.

Absolute & Un-conditional
The allotment of securities should be absolute and unconditional and must conform to the terms and conditions of the application, otherwise the applicant shall not be bound to accept them.

Ramanbhai vs. Ghasiram
Where a person applied for shares in the company on the condition that he would be appointed cashier of a new branch of the company, it was held that he was not bound by allotment unless he was so appointed.

Communicated

• The allotment, to be legally effective and binding, must be communicated to the applicant.
• Posting a properly addressed and stamped letter of allotment is a sufficient communication even if the letter is delayed or lost in transit.

Statutory Rules Regarding Allotment

• Statutory rules regarding allotment means provisions made under the Companies Act, 2013 for allotment of securities.
• Following statutory rules should be observed for allotment of securities:

Minimum Sub-scription – Section 39(1)

• Amount of minimum subscription must be received. If amount equal to minimum subscription is not received, application money should be refunded within 15 days from closure of issue.
• If money is not repaid in time limit, all directors are jointly liable to repay money with 15% interest per annum.

Minimum Appli-cation Money – Section 39(2)
The application money received on application should be at least 5% of the nominal value of securities or any other percentage prescribed by SEBI.

Separate Bank Account
Application money received should be kept in separate bank account. Money should not be utilized unless:

• For adjustment of allotment of securities; or
• For repayment to unsuccessful applicants.

Issue of Prospectus
Prospectus is to be filed with the Registrar.

Permission from Stock Exchange- Section 40(1)

• Whenever company wants to make public offer, it should apply to one or more Stock Exchange for listing of securities and obtain listing permission.
• If listing permission is not granted within time specified by Stock Exchange, the application money is required to be refunded. Failure will attract following punishment:
  • Fine of ₹ 5 to 50 lacs to company; and
  • Officer in default is liable for imprisonment upto 1 year or with fine of ₹ 50,000 to 1,00,000 or both.

Board Resolution
The Board of Directors should pass a resolution to allot shares and authorising the Company Secretary to issue letter of allotment.

Return of Allotment – Section 39(4)
After allotment of securities, Return of allotment shall be filed. (Explained in detail at later part of chapter)

Irregular Allotment
What is Irregular Allotment?

• Irregular allotment is not defined under the Companies Act, 2013.
• The allotment made in violation of provisions of Section 39 of Act is irregular allotment.

Examples:

• When allotment is made without receipt of minimum subscription.
• When allotment is made without receipt of at least 5% minimum application money.

Consequences of Irregular Allotment

• Irregular allotment is not void but it attracts penalty.
• Irregular allotment is voidable.
• Further, class action can be initiated under section 245, if it is established that the action of management was prejudicial to interest of company or its members.

Return Of Allotment – Section 39
What is Return of Allotment?
Return of Allotment is return which contains information about securities allotted.

When Return of Allotment Re-quired?

• Return of Allotment is required to be filed when company allots any securities. (Le., shares or debenture etc.)
• Return of Allotment is not required to be filed in case of :
• Reissue of surrendered shares
• Reissue of forfeited shares

Provisions for Filing Return of Allotment
Time
It should be filed within 30 days from date of allotment.

Form
It is filed in Form PAS-3.

Particulars or In-formation Provided In all cases

• The Return of Allotment must contain the following particulars:
• The number and nominal amount of shares allotted.
• The names, addresses and occupations of the allottees.
• The amount paid or due and payable on each share.

When bonus shares are issued
In the case of allotment of bonus shares, the company must file with the Registrar a return within 30 days of allotment in the prescribed Form PAS-3 stating the number and nominal amount of such shares together with the names, addresses and occupations of the allottees and a copy of the resolution authorizing the issue of such shares.

When securities issued in kind

• In the case of securities allotted as fully or partly paid-up for consideration other than cash, copy of contract duly stamped together with any contract of sale relating to property or asset or contract of service should be attached.
• Report of Registered valuer (Independent Merchant Banker) shall be attached with the contract.

Penalty
Company and its officer who is in default shall be liable to: Penalty of ₹ 1,000 per day till default continues; or ₹ 1,00,000, whichever is less.

Underwriting – Section 40(6):
What is Under-writing Commission?
Underwriting commission is the remuneration that an un-derwriter receives for placing a new issue with investors.

Conditions
Company can pay underwriting commission if:

• Its Articles of association authorise it; and
• Shares or debentures are offered to public at large.

Maximum Com-mission

• Rate of commission cannot be more than 5% of price at which shares are offered.
• It should not be more than 2.5% of price at which debentures are issued.

Provisions

• Copy of underwriting agreement shall be attached with prospectus filed with Registrar.
• Following details regarding underwriting commission shall be published in prospectus:
  • Name and address of underwriter
  • Rate of underwriting commission
  • Number of shares or debentures agreed under under-writing contract

Brokerage
What is Broker-age?
A commission payable to brokers who induce their clients to subscribe for the shares is termed as ‘brokerage’.

Provisions

• Brokerage is different from underwriting commission.
• A broker does not undertake to subscribe for shares if they are not taken up by the public.
• Broker is professional person who is registered with any recognized stock exchange.
• Brokerage cannot be paid to any person who applied for shares.
• Rate of brokerage is not prescribed under Companies Act, 2013.

Difference Between Underwriting and Brokerage
Underwriting

• Underwriting is paid for shares which are offered to public at large.
• Companies Act, 2013 contains provision on underwriting.
• Maximum rate of underwriting commission is prescribed under Companies Act, 2013.
• Articles must authorise to pay underwriting commission.
• Underwriter is required to purchase shares which are un-derwritten but not subscribed by public.

Brokerage

• Brokerage is paid for inducing investor to purchase shares
• Companies Act, 2013 does not contain provision on brokerage.
• Companies Act, 2013 does not contain any rate of brokerage.
• No authority needed in Articles to pay brokerage.
• Broker is not required to purchase shares if required number of shares offered to public is not purchased.

Issue Of Securities
Company can issue securities either:

• At par; or
• At premium
• Company cannot issue securities at discount except sweat equity. – Section 53

Issue of Securities at Par

• It means issue of shares at face value or nominal value.
• Company can issue shares at par.

Issue of Securities at Premium – Section 52
Meaning :

• The issue of securities at premium means the issue of securities at a price higher than the nominal value of the share.
• A company can issue shares at premium at any time.

As per SEBI guidelines
Any offer of shares made to public at premium by way of prospectus shall be made in accordance with SEB! guidelines.

Powers by Articles
It is not necessary that for issuing shares at premium powers must be given by the Articles of Association.

Share Premium to be transferred to Securities Premium Account’
When a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a ‘Securities Premium Account’.

Utilisation of Se-curities Premium

• The amount of Securities Premium Account can be utilized for the following purposes a to issue fully paid bonus shares to the members of the company to write off the preliminary expenses
  • to write off commission paid or the expenses incurred on issue of shares or debentures of the company
  • to provide for the premium payable on the redemption of preference shares or debentures of the company H for buy back of shares
• Its use for any other purpose shall be deemed as reduction of capital.
• The Securities Premium Amount should not be treated as free reserves of the company, they are in the nature of capital reserve.

Differential Premium
Company can issue securities at differential premium. – CIT vs. Standard Vacuum Oil Company

Issue of Securities at Discount – Section 53
Prohibition

• Issue of securities at discount means the issue of shares at a price less than the nominal value of the share.
• Company cannot issue shares at a discount except sweat equity.

However, company can issue shares at discount to its creditors when its debt is converted into shares in pursuance of insolvency resolution plan or debt restructuring scheme in accordance with guidelines of RBI.

Contravention

• Any share issued by a company at a discounted price shall be void.
• Company is punishable with fine of ₹ 1 Lakh to ₹ 5 lakhs
• Officer in default is punishable for imprisonment for upto 6 months or fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 5 lakh.

Share Certificate – Section 46
What is Share Certificate?

• A share certificate is a document which specifies the number of shares held by member and amount paid on each share.
• It is issued by the company under its common seal. Common seal is required to be affixed only when company has common seal. (Now, common seal is optional)

Significance or Importance

• This document is prima facie evidence of the title of the member to the shares mentioned therein.
• Every person whose name appears in the Register of members is entitled to receive the share certificate from the company.
• It gives prima facie marketable title to the shares.

Important Note:

• Share certificate is not official publication.
• It is not negotiable instrument.

Provisions for Issue of Share Certificate
Company can issue share certificate as per following provisions given under Rule 5 of Companies (Share Capital and Debentures) Rules, 2014:

Board Resolution

• Company should pass Board resolution to issue share certificate.
• Letter of Allotment shall be surrendered to company.

Format
Share certificate is issued in Form SH 1 or as near thereto.

Signature

• Share certificate should be signed by:
• Two directors; or
• Director and Company Secretary, if company secretary is appointed
• In case of OPC, it shall be signed by director and Company Secretary (if appointed). It shall be signed by authorised person if Company Secretary is not appointed.

Contents

• A share certificate usually has the following contents:
  • name of the company,
  • serial number of the certificate,
  • name and address of the shareholder,
  • number of shares held by him,
  • amount paid up on shares,
  • distinctive number of shares,
  • class of shares,
  • revenue stamp
• Above details are required to be given in share certificate when shares are held in physical form.

Time of issue of Certificates of Securities
In case of issue of certificate to sub-scriber of MO A
Share certificate shall be issued within period of 2 months to subscriber of MO A.

Allotment of shares
Share certificate shall be issued within period of 2 months from date of allotment of shares.

In case of transfer or transmission in physical mode
Share certificate shall be issued within period of 1 month from date of receipt of transfer form or an application for transmission.

Allotment of debenture
Debenture certificate shall be issued within period of 6 months from date of allotment.

Important note:

• Above time limit is not applicable when shares or securities are held in Demat form.
• Specified IFSC public and IFSC private company shall deliver certificate of all securities to subscribers after incorporation, allotment, transfer or transmission within period of 60 days.

Register of Members
Particulars of every share certificate issued should be entered in to Register of members.

Implication of a Share Certificate Estoppel as to title
Company cannot deny the fact that the person is not shareholder of the company.

Estoppel as to payment
Company cannot deny the fact that the shares are not paid up, if in share certificate the shares are fully paid up.

Duplicate Share Certificate – Section 46 Ahd Rule 6 Of Companies (Share Capital And Debentures) Rules, 2014
When Duplicate Share Certificate be Issued? -Section 46(2)
A certificate may be renewed or duplicate of a certificate may be issued, if such certificate:

• is proved to have been lost or destroyed, or
• having been defaced, mutilated or torn is surrender to the company.

Procedure for Issue of Renewed or Duplicate Share Certificate
Following is the procedure for the issue of renewed or duplicate share certificates:

• In case of loss or destruction of certificate, the Board has given its consent.
• In case of mutilation or being torn, the certificate in lieu of which it is being issued should be surrendered to the company for cancellation.
• Company may charge fee for duplicate share certificate as the Board decides but not exceeding ₹ 50 per certificate.
• In case of lost or stolen certificates, there should be proper evidence of loss as well as indemnity.
• Fact about duplicate certificate must be clearly shown on stub of it by way of rubber stamp.
• Necessary particulars must be recorded in the Register of members.
• Mutilated, defaced or tom certificates surrendered to the company must immediately be defaced by a ‘cancellation mark’ and may be destroyed after three years on the authority of a Board resolution.

Time Limit for Issue of Duplicate Share Certificate Unlisted Company
Unlisted company should issue duplicate share certificates in 3 months.

Listed Company
Listed company should issue duplicate share certificate within 15 days.

Register of Re-newed and Duplicate Share Certificate
Format
The particulars of renewed and duplicate share certificate to be entered in Form SH.2

Place
The register to be kept at registered office of the company.

Authentication
All entries in the Register of renewed and duplicate share certificate shall be authenticated by Company Secretary or other person authorised by Board.

Punishment for Fraudulent Issue of Duplicate Share Certificate
Company
The company shall be punishable with fine which shall not be less than five times the face value of shares involved which may extend to ten times.

Officer in Default
Officer in default shall be liable under Section 447.

Split Certificate
What is Split Certificate?
A split certificate means a separate certificate claimed by a shareholder for a portion of his holding.

Procedure to Split Shares

• When shares are held in joint names, any one of joint holder may apply to company to split the shares.
• All joint holders shall sign the transfer deed or form and submit original share certificate to company.
• Company shall issue share certificate to each such holder for their portion of shares and make necessary entries into Register of members.

Calls On Shares – Sections 49-50
Meaning of Call on Shares

• It means demand by a company on its shareholders to pay the whole or part of the balance remaining unpaid on each share.
• When shares are issued to the public, a part of the amount is paid with application and a part on the allotment of shares. The amount paid on application and allotment is not calls unless the Articles expressly recognises them as call.
• The unpaid amount on each share is called by the company in one or two instalments. These instalments are known as calls.

Requisite of Valid Call
Articles of Asso-ciation
Call must be made in accordance with the provisions of the Companies Act, 2013 and Articles of the company.

Board Resolution

• A resolution must be passed by the Board of Directors at a meeting of the directors.
• The resolution must specify the amount of call as well as the date and place of payment.

Bona fide
The power to make calls must be exercised bona fide for the benefit of the company.

Uniform Basis
The call must be made on a uniform basis on all shares falling under the same class. – Section 49

Important Note:
Shares of same nominal value on which different amounts have been paid up are not shares of same class.

Notice

• A proper notice of call must be given to shareholders.
• Notice shall specify time and amount to be payable.

Provisions of Table F for Call – Regulation 13-18

• For each call at least 14 days’ notice must be given to members.
• An interval of 30 days is required between two calls and not more than 25 percent of the nominal value of shares can be called up at a time. However, a company may raise this limit.
• Call may be revoked or postponed at the discretion of Board.
• Joint holders of shares shall be jointly and severally liable to pay all calls.

Calls in Arrear Meaning
When members fail to pay the call money in time, the amount unpaid on calls is known as ‘calls in arrear’.

Interest payable
As per Regulation 16 of Table F, for delayed payment of call, interest at rate of 10% p.a. or such lower rate as decided by Board is payable.

Effect of Non-payment of Call Forfeiture

• Board may forfeit the shares for non-payment of call.
• Alternatively, company can file civil suit for recovery of call money.

Suspension of voting
♦ Articles of company may provide that member who has not paid call on shares shall not exercise voting rights.

Director disqualify
Non-payment of call by director for 6 months will disqualify him from holding office of directors of company.

Calls in Advance
What is calls in Advance?
Sometimes members may pay amount of calls in advance, Le. even before amount is called. It is known as calls in advance.

Authority in AOA
Section 50 of Companies Act, 2013 provides that company can accept such advance amount, if Articles so provide.

No Voting Right

• For call paid in advance, member is not entitled to voting rights in respect of such calls in advance.
• He will get voting rights only when amount is called and becomes due.

Table F provisions on Calls in Advance – Regulation 18

• Regulation 18(a) of Model Articles in Table F provides that Board can accept such calls in advance, if it thinks fit.
• Regulation 18(h) provides that Board can pay interest on such advance at rate not exceeding 12%, as consented by General Meeting.
• No dividend is payable on calls in advance.

Effects

• Amount paid in advance by shareholder is appropriated towards share capital, when the call is actually issued and is due. This is done by passing Journal Entry in books of account.
• If company goes in winding up, the calls paid in advance will be treated as amount payable to unsecured creditors and will be treated accordingly.
• Amount paid as calls in advance is non-refundable.

Sweat Equity Shares – Section 54
Definition of Sweat Equity – Section 2(88)
It means equity’ shares issued by company’ to its directors or employees at discount or in kind for providing knowhow or transferring intellectual property rights or value additions to company.

Who is ‘Employee’ for Sweat Equity?

• As per Rule 8 of Companies (Share Capital and Debentures) Rules, 2014 defines ‘Employee’ as:
• a permanent employee of the company who has been working
• in India or outside India,
• for at least last one year; or
• a director of the company, whether a whole time director or not, or
• an employee or a director
• of a subsidiary, in India or outside India, or
• of a holding company of the company

What is ‘Value Additions’ for Sweat Equity?

• ‘Value addition’ means anticipated economic benefits derived by the enterprise from expert or professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is issued for which the consideration is not paid or included in:
• the normal remuneration payable under the contract of employment, in the case of an employee; or monetary consideration payable under any other contract, in the case of non-employee
• Section 54 permits issue of such equity shares to employees or directors in recognition of their contribution for providing know-how etc.
• As the contribution made by employees or directors results in increased profits to the company for a number of years, sweat equity shares, provide a new form of adequate return.

Conditions for Issue of Sweat Equity

• Class of shares which have been already issued only can be issued as Sweat Equity Shares.
• Issue of sweat equity must be authorised by Special Resolution.
• Resolution shall specify number of shares, consideration, current market price and class of employee to whom shares are offered.
• It can be issued only one year after company was entitled to commence business. (This condition is not applicable to specified IFSC public and IFSC private company)
• Listed company should follow SEBI Guidelines.
• Unlisted company should comply with rules made by Central Government on this behalf (ie. Rule 8 of Companies (Share Capital and Debentures) Rules, 2014).

Status of Sweat Equity shares
Holders of Sweat Equity Shares (SES) shall rank pari passu with other equity shareholders.

Provisions in Case of Unlisted Company
An unlisted company can issue sweat equity shares by complying with following provisions of Rule 8 of Companies (Share Capital and Debentures) Rules, 2014:

Special Resolution

• Special Resolution passed is valid for 12 months.
• The explanatory statement should con tain specified particulars.

Limits on issue
In one year, the company can issue SES upto the amount of 15% of the existing paid up equity share capital or shares of the issue value of ₹ 5 Crores, whichever is higher.

• Total SES cannot exceed 25% of the paid up equity capital of the Company at any time.
• Startup company can issue SES upto 50% of its paid up capital within 5 years from date of its incorporation.

Lock-in period

• The SES issued to directors or employees shall be locked-in period of 3 years from the date of allotment.
  As a part of man-agerial remuneration
• The SES shall be treated as part of managerial remuneration, if issued to director or manager and the consideration does not form part of assets of the company in balance sheet.
• Thus, if SES are issued to director or manager for technical know’-how or intellectual property rights which can be capitalised in books of company, these will not form part of the remuneration.

Disclosure in Board’s Report
Directors ’ Report shall contain specified disclosure on SES.

Register of Sweat Equity
Form
The company shall maintain a Register of Sweat Equity Shares in Form SH.3.

Place
At the Registered Office of the company or such other place as the Board may decide.

Authentication

• The entries in the Register shall be authenticated by:
• the Company Secretary of the company; or
• by any other person authorized by the Board

Shares With Differential Voting Right (Dvpv Shares) – Section 43
What is ‘Shares With Differential Voting Right’ (DVR shares)?
Shares with Differential Voting Rights (DVR) are like ordinary equity shares but with differential voting rights.

Eligibility or Con-ditions for Issue of DVR Shares
As per Rule 4 of Companies (Share Capital and Debentures) Rules, 2014, shares with Differential Voting Rights can be issued subject to follows conditions:

• Articles of company shall authorize issue of such shares.
• Company should pass Ordinary Resolution at General Meeting. In case of company having more than 200 members, this resolution shall be passed by postal ballot. Explanatory statement to notice shall contain specified details,
• Company should have consistent track record of distributable profits for last 3 years.
• Company has not defaulted in filing of financial statements and annual accounts for last 3 financial years.
• Company has not failed to repay deposit or interest thereon.
• Company has not defaulted in investors’ grievances procedure.
• Company has not defaulted in payment of dividend, preference dividend, loan to bank and PFI, statutory dues to employees or credit to IEPF. Company may issue DVR upon expiry of 5 years from the end of financial years in which default was made good.
• Company has not been penalized by Court or Tribunal during last 3 years under RBI Act, SEBI Act, SCRA, FEMA or any other Special Act under which company is being regulated.
• Proportion of shares with differential voting rights shall not exceed 26% of total share capital issued.

Conversion of Existing Equity Shares into DVT
The company cannot convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.

Rights of DVR Shareholders – Rule 4(5)
The DVR shareholders shall enjoy all other rights such as:

• bonus shares, rights shares etc.
• subject to the differential rights with which such shares have been issued.

Register of Members – Rule 4(6)
The Register of Members maintained under section 88 shall contain all the relevant particulars of shares so issued along with details of the other shareholders.

Report of Board of Directors
The Board shall disclosed following details in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed:

• Shares allotted
• Details of voting rights
• Price at which shares allotted
• Change in control, if any a Diluted EPS

Preference Shares – Section 55
Types of Preference Shares or Kind of Preference Shares
Preference shares can be classified as: a Cumulative or non-cumulative a Participating or non-participating a Convertible or non-convertible a Redeemable or non-redeemable

Cumulative Preference Shares

• In the case of cumulative preference shares, if in a particular year profits are not available to pay the dividend, amount of dividend shall accumulate and must be paid out of the profits of succeeding years.
• All preference shares are assumed to be cumulative unless the contrary is stated in the Articles of the company.

Non-cumulative Preference Shares
In the case of non-cumulative preference shares, the unpaid preference dividends do not accumulate but lapse, i.e., the unpaid dividends are not carried forward.

Participating Preference Shares

• The participating preference shares are those which, in addition to their preferential dividend, are also entitled to participate in the surplus profits which remain after paying dividend to equity shareholder.
• If the Articles are silent, all preference shares are deemed to be non-participating.

Non-Participating Preference Shares
The non-participating preference shares are those, which are not entitled to participate in the surplus profits or surplus assets.

Convertible Preference Shares
Convertible preference shares are converted into equity shares after specified time as decided by terms of issue.

Redeemable Preference Shares
A company limited by shares, if authorized by its Articles, may issue preference shares which are to be repaid after a certain fixed period.

Irredeemable Preference shares
Such shares are not redeemable except on the winding up of the company. But, now issue of irredeemable preference shares are prohibited.

Issue of Preference Shares

• Company can issue preference shares if:
• Articles authorises; and
• It has passed special resolution at General Meeting

Redemption of Preference Shares

• Preference shares the amount of which can be refunded to the holders of shares are termed as redeemable preference shares.
• The paying back of capital is called redemption.
• A company limited by shares may, if so authorized by its Articles, issue preference shares which are, or at the option of the company are, to be liable to be redeemed.
• A company may issue redeemable preference shares subject to the following conditions:
• No such shares can be redeemed unless they are fully paid up.
• Articles of Association shall authorize issue of such shares.
• Such shares can be redeemed only out of the following amounts:
• The profits of the company which are available for dividend
• The proceeds of fresh issue of shares which are issued for this purpose only
• If any premium is payable on redemption, it must be paid out of the profits or out of the company’s securities premium account.
• If such shares are redeemed out of profits, then the amount equal to the amount paid on redemption must be transferred to a reserve fund to be called ‘capital redemption reserve account’.
• Notice of redemption of preference shares shall be filed with Registrar in Form SH-7.
• Redemption of preference shares shall not be taken as reducing the amount of its authorized capital.
• No company shall issue any preference shares, which are irredeemable or redeemable after the expiry of 20 years. However, company which is engaged in infrastructure proj ect can issue redeemable preference shares for 30 years.
• If a company is not in a position to redeem any preference shares within the prescribed period, then it may, with the consent of the N.C.L.T., issue further redeemable preference shares equal to the amounts due in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed shares shall be deemed to have been redeemed.

Rules under Companies (Share Capital & Debentures) Rules, 2014 with Regard to Issue and Redemption of Preference Shares
Conditions – Rule 9(1)

• The issue has been authorized by passing a Special Resolution in the General Meeting of the company
• The company, at the time of such issue has no subsisting default in the redemption of preference shares issued earlier; or in payment of dividend due on any preference shares

Resolution – Rule 9(2)
The resolution set out to issue preference shares shall contain:

• priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares
• participation in surplus fund
• participation in surplus assets and profits, on winding-up
• dividend on cumulative or non-cumu- lative basis
• conversion of preference shares into equity shares
• voting rights
• redemption of preference shares

Register of Members – Rule 9(4)
Register of Members maintained under section 88 shall contain the particulars in respect of preference shareholders.

Redemption of preference shares – Rule 9(5)
A company may redeem its preference shares:

• only on the terms on which they were issued; or
• as varied after due approval of preference shareholders under section 48 of the Act

The preference shares may be redeemed:

• at a fixed time or on the happening of a particular event; or
• any time at the company’s option; or
• any time at the shareholder’s option

Right Shares Or Further issue Of Shares-Section 62
Further Issue of Shares = Rights Issue
Whenever at anytime, a company having a share capital proposes to increase its subscribed capital by the issue of further shares,

• such shares shall be offered to the existing holders of equity shares,
• in proportion to the paid-up share capital on their shares,
• at the time of further issue by sending a letter of offer

Listed Companies

• Listed companies shall follow SEBI Guideline for Right issue.
• Listed companies shall send following information to the concerned Stock Exchange:
  • the quantum of such issue; and
  • the proportion in which rights shall be offered

Procedure for Right issue – Section 62

• The company must give notice to each of the equity shareholders, giving option to take the shares offered to him by the company.
• Shareholders must be informed about number of shares offered to him.
• 15 to 30 days’ time should be given to shareholders to take decision.
• Notice to all existing shareholders should be despatched at least 3 days before the opening of the issue:
  • through registered post; or
  • speed post; or
  • Through electronic mode; or
  • Courier; or
  • Any other mode having proof of delivery
• Non-communication from shareholders will be considered as decline of offer.
• Unless the Articles provide otherwise, the shareholders should be allowed to renounce their right in whole or in part, in favour of some other person.
• The Board of directors may dispose of the shares which are declined by existing shareholders in such manner which is not disadvantageous to the shareholders and the company.

Further Issue Under ESOS Scheme – Section 62(1 )(b)
Further issue of shares can be done through Employee Stock Option Scheme (ESOS), if Special Resolution is passed by the company. (Procedure for ESOS is explained in detail in later part)

Further Issue to Persons Other than Existing Shareholders – Section 62(1 )(c)
A company can issue further shares to persons other than existing shareholders either for cash or for a consideration other than cash, if

• A Special Resolution is passed in General Meeting to this effect; and
• The price of such shares is determined by the valuation report of a registered valuer as per applicable provisions of public offer and other prescribed conditions.

Applicability
The provisions of section 62 are applicable to all types of companies.

Non-applicability of Restrictions
Further shares (i.e. right shares) are not required to be offered to existing shareholders in following situations:

• When shareholders have passed Special Resolution.
• When shares are issued due to conversion of convertible debentures or loans as per terms of loan or debenture. These terms should be approved by Special Resolution. – Section 62(3)
• When shares are issued due to conversion of part or whole of debentures issued to the Government or loan issued to the Government as per direction of the Government in public interest. – Section 62(4)
• If the terms and conditions of such conversion are not acceptable to the company, it may, within 60 days from the date of communication of such order, appeal to the Tribunal. – Section 62(5)
• In determining the terms and conditions of conversion.
  • the Government shall have due regard to:
  • the financial position of the company
  • the terms of issue of debentures or loans
  • the rate of interest payable on such debentures or loans
  • such other matters as it may consider necessary

Bonus Shares – Section 63:
What is Bonus Shares?
When large amount of reserves are accumulated with the company and the company decides to distribute these past undistributed profits among the shareholders, it may decide to issue shares free of cost to its existing shareholders. Such shares are known as ‘Bonus shares’.

Sources for Bonus Shares
Company can issue fully paid up bonus shares out of:

• Free reserves
• Securities premium account
• Capital redemption reserve account

Important Note:
Company cannot issue bonus shares out of revaluation reserve.

Conditions for Issue of Bonus Shares

• Company can issue bonus shares, if:
• It is authorised by its AOA.
• Proposal for bonus shares should be passed by the Board and it should be approved by shareholders by way of ordinary resolution in their General Meeting.
• If it is listed company, it shall comply with SEBI guidelines.
• Partly paid up shares, if any outstanding on the date of allotment, are made fully paid up.
• It has not defaulted in:
  • Payment of interest or principal amount in respect of matured fixed deposit or debt securities
  • Payment of statutory dues to its employees
  • Holding the general body meeting and get the resolution for issue of bonus shares passed by the members
• The bonus shares shall not be issued in lieu of dividend.

Company cannot Withdraw Bonus
As per Rule 14 of Companies (Share Capital and Debentures) Rules, 2014, company which has declared its bonus issue after passing of Board cannot withdraw same.

Employee Stock Option Scheme (Esos)
What is Employ-ee’Stock Option Scheme?
Section 2(37) defines ‘Employee Stock Options (ESOP)’ as option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.

Who is Employee for ESOS? – Section 62(1 )(&)
Following are considered as employees for ESOS:

• a permanent employee of the company working in India or outside India
• any type of director of the company
• an employee of subsidiary company, holding company or an associate company
• Independent Director is not eligible for stock option.

Following persons are not included as employee for ESOS:

• a promoter or a person belonging to the promoter group
• director who either himself or through his relative or through any Body Corporate, holds more than 10% equity shares of the company (This restriction is not applicable to start-up company)

Procedure or Conditions for Issue of ESOS

• ESOPs can be issued only after approval of shareholders by passing a Special Resolution.
• Listed company will have to follow the SEBI ESOS guidelines.

Granting Options to Employees of Holding/Subsidiary Companies Rule 12(4)

• Company shall pass separate resolution for granting an option to:
• Employee of holding company or subsidiary company; or
• Identified employees equal to or exceeding 1 % issued capital of company

Provisions or Conditions
Pricing – Rule 12(3)
Companies have the freedom to determine the exercise price of ESOPs.

Vesting period – Rule 12(6)(a)
There shall be a minimum period of one year between the grant of options and vesting of options.

Lock-in period – Rule 12(6)(6)
The company has the freedom to specify the lock-in period for the shares issued for exercise of options.

Dividend or voting-Ruie 12(6)(c)
The employees will not enjoy rights of dividend, voting, bonus or other benefits until the exercise of options and issue of shares to them.

Forfeiture or re-fund Rule 12(7)
At the time of grant of options, the amount payable to the employees can be:

• forfeited by the company, if the options are not exercised by the employees within the exercise period; or
• refunded to the employees, if the options are not vested due to non-fulfilment of conditions as per ESOS

Death-disqualification or resignation – Rule 12(8)

• Death of employee while in employment- All the options granted to him till such date shall vest in the legal heirs or nominees.
• If employee suffers a permanent incapacity while in employment- All the options granted to him as on the date of permanent incapacitation, shall vest in him on that day.
• Resignation or termination of employment- All options not vested in the employee as on that day shall expire.
• The employee can exercise the vested options within specified period, subject to conditions of scheme and Board approval.

Disclosure of Board’s Report Rule 12(9)
The Directors’ Report will disclose the following details:

• options granted
• options vested
• options exercised
• total number of shares after exercise of option
• options lapsed
• the exercise price
• variation of terms of options
• money realized by exercise of options
• total number of options in force
• employee wise details of options granted to:
  • key managerial personnel
  • any other employee receiving 5% or more options granted in a year
  • Identified employees with a grant of options equal to or exceeding 1% issued capital of company

Register of Em-ployee Stock Options – Rule 12(10)

• The company shall maintain a Register of Employee Stock Options in Form SH.6.
• The Register shall be maintained at the registered office of the company or such other place as the Board may decide.
• Authentication of the entries is required to be done by the Company Secretary or person authorised by Board.

Transfer, Pledge or Mortgaged of Option – Rule 12(8)

• The option granted is non-transferable to any other person.
• The option granted cannot be pledged, hypothecated, mortgaged or encumbered.
• No person other than the employees to whom the option is granted is entitled to exercise the option.

Changing the Terms of ESOS – Rule 12(5)(a)

• The company may by Special Resolution, vary the terms of ESOS not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders.
• The notice for passing special resolution shall disclose:
  • details of the variation,
  • the rationale therefor, and the details of the employees who are beneficiaries of such variation

Benefits of ESOP

• Employees share in the company’s capital growth and reward earned for the skills and talent.
• Enhances job satisfaction due to ownership incentive.
• The shares offered to the employees under ESOPs are comparatively lower in cost as compared to the market value of the shares.
• Employees becomes shareholder of the company and re¬ceive high dividend.
• Employees can raise their voice in the General Meeting.

Issue Of Shares On Preferential Basis – Section 62
What is ‘Prefer-ential Offer’?

• ‘Preferential Offer’ means an issue of shares, by a company to any selected person or group of persons on a preferential basis.
• Preferential Offer does not include shares offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities

Price
Price is determined based on valuation report by the valuer.

Preferential Offer by Companies
Issue of shares on preferential basis can be made by:

• Listed Company as per SEBI guidelines and provisions of the Companies Act
• Unlisted Company as per provisions of the Companies Act and Rules.

Conditions for Issue of Shares on Preferential Basis

• The issue is authorized by its Articles of Association.
• At the time of allotment, securities are made fully paid up.
• The issue has been authorized by a Special Resolution of the members.
• Explanatory statement to notice of General Meeting to be included.
• The allotment of securities is required to be completed within a period of 12 months from the date of passing of the special resolution.
• If the allotment of securities is not completed within 12 months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete the allotment.
• The price of the securities, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered valuer.
• For convertible securities, the price of the resultant shares shall be determined upfront on the basis of a valuation report of registered valuer or on the basis of valuation report at the time of conversion of a registered valuer.
• Treatment of non-cash consideration in the books of accounts will be as follows:
  • If consideration takes form of depreciable or amortizable asset – it should be carried to the balance sheet of the company.
  • In other cases, it shall be expensed.

Forfeiture of Shares
What is Forfeiture of Shares?

• Forfeiture of shares means penalty for breach of contract of allotment.
• It means taking shares back from shareholder for non-payment of call money.
• It is punishment whereby membership is terminated for default in payment of call money.

Conditions or Requirement for Forfeiture As per AOA
The Articles of Association must empower the company to forfeit the shares.

• As per Regulation 28 of ‘Table F’, shares can be forfeited only for non-payment of calls.
• The Articles of the company may, however, lawfully incorporate any other grounds for forfeiture. But, it cannot be for the non-payment of the other debts.

Resolution
If the defaulting shareholder does not pay the amount within the specified time as required by the notice, the directors may pass a resolution forfeiting the shares. -Article 30 of Table F

Proper notice

• Regulation 29 of Table F provides that a notice requiring payment of the amount due together with any interest accrued must be served mentioning a further day (not less than 14 days from the date of service of the notice) on or before which the payment is to be made.
• The notice must also mention that in the event of non-payment, the shares will be liable to be forfeited.
• The object of the notice is to give the shareholder an opportunity for payment of the call money, interest and expenses.
• Where a notice for the forfeiture was sent by Registered AD post and was returned unserved, the forfeiture was held invalid.
• However, the accidental non-receipt of notice of forfeiture by the defaulter is not aground for relief against forfeiture.

Public Passenger Services Ltd. vs. M.A. Khader
A proper notice is a condition precedent to the forfeiture, and even the slightest defect in the notice will invalidate the forfeiture.

Bona fide

• Power of forfeiture must be exercised bona fide and in good faith.
• Power cannot be used at the request of the shareholder to relieve him of liability. Such a forfeiture amounts fraud on other shareholders. If shares are forfeited for this reason, the forfeiture is void and the shareholder continues to be responsible for the unpaid part of the issue price.

Effects of Forfeiture
Cessation of Membership
The original shareholder ceases to be a member of the company and his name must be removed from the Register of members

Cessation of Li-ability

• The original shareholder become free from all liability for past calls.
• The name of the original shareholder shall be put on the ‘B’ list (Past members)in the event of company going into liquidation within one year of the forfeiture.

Possible to Re-issue
On forfeiture, company can re-issue shares.

Cancellation of Forfeiture

• Board may cancel the forfeiture on request of shareholder.
• Directors cancelling forfeiture shall act in bona fide.
• On cancellation of forfeiture, the former holder is required to pay all calls due with interest and his name is restored in the Register of members.
• Forfeited shares may either be cancelled or reissued. But the reissue of such shares is done by a Board’s resolution.
• The person to whom the forfeited shares are reissued, becomes the member of the company and his name must be entered on the Register of members.
• Reissue of forfeited shares are not allotment of shares.
• At the time of reissue of forfeited shares, listed company shall comply listing agreement.

Surrender of Shares
Meaning
Surrender of shares means voluntary return of shares to company for cancellation.

Provisions for Surrender of Shares
Authority in AOA

• There is no provision for the surrender of shares either in the Companies Act or in Table F, but the Articles of some companies may allow it as a shortcut to the long procedure of forfeiture.
• Surrender of shares is valid only when Articles of the company authorises.

Forfeiture is justified
Surrender of shares shall be valid only where the forfeiture is otherwise justified.

Board Resolution
For valid surrender, Board shall pass resolution.

Re-issue
Surrendered shares may be reissued in the same way as forfeited shares.

Difference Between Forfeiture Of Shares And Surrender of Shares

Matter	Forfeiture of Shares	Surrender of Shares
Who initiate	In the case of forfeiture, the company takes the initiative.	In the case of surrender, mem­ber takes initiative.
Reason	Generally, shares can be for­feited for non-payment of call money.	Member may surrender shares for reason like; exchange of shares for new shares or where allotment is voidable.
Objective	The objective of forfeiture of shares is to penalise member.	The objective of surrender of shares is to withdraw from membership contract.

Lien On Shares
Meaning

• Lien means a right to retain something belonging to another until the claims of the person in possession of the things are satisfied or discharged.
• The lien on shares means company’s right over the shares until the debts due to it by the shareholder are paid.

Provisions

• Companies Act, 2013 does not contain any specific provision on lien.
• Right of lien can be exercised if it is authorised by Articles of the company.
• Regulation 9 of Table F provides for lien on shares which are not fully paid up. Thus, a shareholder cannot transfer his shares unless he pays his debts to the company.
• The Articles also authorize the company to sell such shares if the outstanding dues are not paid. Shares can be sold by giving notice to the member. The sale proceeds should be applied towards the payment of outstanding dues, and if there is any surplus, it must be paid to the member.
• The company may also have the lien on the dividends payable on shares. The Articles may provide for a lien on fully paid shares for any debt due from the member. But stock exchange regulations generally prohibit the exercise of right of lien on fully paid listed shares.
• Where a shareholder pledges his shares to a third party as security for a loan before he incurs any debt to the company and the company has notice of such pledge, then the pledge shall have priority over the lien of the company. Also when the company registers the transfer of shares which were subject to lien, the company’s lien is lost.

Effect on death
The death of a shareholder does not terminate the right of lien and it can be exercised against executors also.

Difference Between Lien And Forfeiture

Matter	Lien	Forfeiture
Which Amount?	Lien can be exercised in re­spect of amount due on shares and amount due on other accounts.	Forfeiture can be exercised for amount due on shares only.
Nature	Lien is kind of security for a debt and to be retained until the payment of debt in full.	Forfeiture is penalty to enforce payment of money due on shares in time.
Enforcement	Lien is enforced by sale of shares to adjust the outstand­ing dues.	Forfeiture is act of depriving membership right by forfeit­ing shares.
Surplus	Any surplus arising due to sale of shares under lien is returned to member.	In the event of forfeiture of shares, member cannot claim any surplus.
Reduction of cap­ita!	Lien does not result into reduc­tion of capital because shares are sold to recover amount.	In case of forfeiture, it may result in reduction of capital if shares are not sold or re-is­sued.

Global Depository Receipts (GDRs)
Meaning
Global Depository Receipt means any instrument in the form of a depository receipt or certificate created by the overseas depository bank outside India and issued to non-resident investors against issue of ordinary shares of issuing Indian Company.

Conditions
Section 41 of Companies Act, 2013 read along with the Companies (Issue of Global Depository Receipts) Rules, 2014 provide following conditions to issue GDRs:

Approval of shareholders
Company shall take prior approval of shareholders by Special Resolution to issue depository receipts.

DR issued by Overseas Bank
Depository receipts (DR) shall be issued by an overseas depository bank appointed by the company and the underlying shares shall be kept in the custody of domestic custodian bank.

Compliance with rules, regulation etc.
Company shall comply with all applicable provisions, rules, regulations or guidelines issued by RBI.

Compliance report

• Company shall appoint a merchant banker or practicing CA or CS or Cost Accountant to ensure all compliances relating to issue of depository receipts.
• Company shall obtain compliance report and place before Board.

Manner of Issue of DR

• DR can be issued by way of public offer or by private placement and may be listed or traded in an overseas listing or trading platform.
• DR may be issued against issue of new shares or in exchange of shares held by shareholders of company.
• Underlying shares shall be allotted in the name of overseas depository bank and against such shares, the depository receipts shall be issued by the overseas depository bank , abroad.

Important Note:

• Offer document prepared for issue of Global Depository Receipt is not treated as prospectus,
• Provisions of Act and rules related to public issue of shares of debenture are not applicable to issue of depository receipt abroad.

Alteration of Share Capital
What is Alteration?
Alteration in reference to capital means change, adjustment, modification, variation or increase in capital.

Methods or Means of Alteration of Share Capital
Company can alter its share capital by any one of the following methods:

• Increase its share capital by issuing new shares.
• Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. (Specified IFSC public company can undertake consolidate and division of shares by Ordinary Resolution)
• Convert all or any of its fully paid-up shares of any de-nomination.
• Sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum.
• Cancel the shares which have not been taken up by any person and thereby diminish the amount of its share capital.

Requirements or Procedure for Alteration of Share Capital

• Alteration of capital is allowed only if Articles of Association authorises company.
• To alter capital, company should take following steps:
  • Convey General Meeting and pass Ordinary Resolution,
  • Notice of alteration is given to the Registrar of Companies within 30 days of the alteration,
  • The Registrar shall then record the notice, and make the necessary alterations in the Memorandum or Articles or both. – Section 64

Important Note:
Company shall file notice of alteration with Registrar in Form SH-7 in following circumstances :

• Alteration, increase or redemption of share capita
• Increase in number of members by company not having share capital

Stock
What is Stock?

• The term ‘Stock’ may be defined as the aggregate of fully paid-up shares of a member merged into one fund of equal value.
• Shares can be converted in to stock.
• Stock is expressed in terms of money and is transferable in units of money.

Conversion of Shares into Stock

• Company cannot directly issue stock.
• Company at first instance issue shares. These shares are converted into stock.
• If shares are fully paid up, it can be converted into stock.
• On conversion of shares in to stock, shareholder is known as stockholder.
• Notice should be given to Registrar within period of 30 days from conversion of shares into stock.

Reconversion of Stock into Shares
Stock can be reconverted into shares by following same procedure.

Distinguish Between Shares and Stock

Shares	Stock
Shares in physical form have distinctive number.	Stock do not have distinctive number.
Share may or may not be fully paid up.	Stock is always fully paid up.
Share has nominal value.	Stock has no nominal value.
All shares are of equal denom­ination.	Domination of stock varies.
Share cannot be transferred in fraction.	Stock can be transferred in fraction.
Company can issue shares directly.	Company cannot issue stock directly. It has to issue shares first and shares can be con­verted into stock.

Reduction Of Capital – Section 66
Methods of Capital Reduction

• Company, if authorized by its Articles, reduce its share capital in any one of the following ways:
• By extinguishing or reducing the liability on any of its shares in respect of share capital not paid up

Example:

• ₹ 100 share on which ₹ 75 is paid up reduce to ₹ 75 as fully paid up. Shareholder is relieved from payment of ₹ 25.
• By cancelling any part of the paid-up capital which is lost or unrepresented by available assets
• By paying off any part of the paid-up capital which is in excess of the need of the company

Example:
Out of fully paid up shares of ₹ 100, ₹ 25 per share may be refunded. This can be done with or without reducing liability on any of its shares.

Provisions or Procedure for Capital Reduction Special Resolution
The company must pass a Special Resolution for reduction of capital.

Application to Tribunal

• After resolution, an application shall be made to the Tribunal for its confirmation.
• Application shall be made in Form RSC-1. Following documents shall be attached with application:
  • List of creditors certified by Managing Director or by two directors where there is no Managing Director. It should not be earlier than 15 days prior to date of filing application.
  • List of creditors shall be certified by auditor.
  • Declaration bv directors that company is not in arrears of repayment of deposits or interest thereon at the time of filing application. It should he certified by auditor.
  • Certificate from auditor that accounting treatment for reduction of capital is in conformity w’ith accounting standards.

Issue of Notice & Direction by NCLT

• Notice is given within 15 days from filing application seeking objection from:
• The Central Government and ROC in all cases in Form RSC-2.
• The SEE1 in case of listed company in Form RSC-2.
• The creditors in all cases in Form RSC-3.
• The Tribunal shall give direction within 7 days to publish notice in one English and one Vernacular newspaper in Form No. RSC-4.
• Objection shall be raised within period of 3 months from date of publication and copy of same shall be served on company.
• Company shall file affidavit in Form No. RSC-5 confirming the dispatch and publication of notice within 7 days from dispatch of notice.
• The Tribunal may dispense with giving notice to creditors or its publication or both, if it is satisfied that:
• Debt of creditor is satisfied or secured; or
• Consent of creditors is obtained.

Order by Tribunal

• The Tribunal must also look after the interest of shareholders.
• After hearing their objections, if the tribunal is satisfied that every creditor entitled to object has given his consent to the reduction or his debt has been discharged or secured, it may confirm the reduction on such terms and con-ditions as it thinks fit.
• The order confirming scheme of reduction and approving the minute shall be in Form RSC-6.

File order of Tribunal
Company is required to hie a certified copy of the Tribunal order confirming the reduction of capital with the Registrar of companies in Form RSC-7.

Diminution Of Capital
What is Diminution?
Diminution means a cancellation of unsubscribed part of the issued capital.

Provision or Procedure

• Articles of company shall authorise diminution of capital.
• Company shall pass Ordinary Resolution.

Methods
Diminution of share capital takes place in the following cases:

• When the company cancels shares which have not been taken or agreed to be taken.
• When redeemable preference shares are redeemed.
• When there is a surrender of shares.
• When some shares are forfeited for non-payment of calls.
• When company buy back shares.

Distinguish between Diminution of Capital and Reduction of Capital

Diminution of Capital	Reduction of Capital
Diminution denotes a cancel­lation of that portion of the issued capital which has been subscribed.	Reduction of capital may be reduction in subscribed or paid up capital.
Diminution of capital can be effected by Ordinary Reso­lution.	Reduction of Capital can be effected by Special Resolution.
Diminution of capital does not require permission of Tribunal.	Reduction of capital requires confirmation of Tribunal.
No need to add the words ‘and reduced’ after name of company.	Tribunal may order to add words ‘and reduced’ after name of company for some time.

Buyback of Shares Or Securities – Sections 68-70
Meaning of Buy-back

• Buy back means company purchases its own shares or specified securities.
• Specified security includes employees stock option or other securities specified by Central Government.

Purpose of Buy Back
Companies Act does not explain purpose or benefit of buy back. Buy back may be for one or more of following reasons:

• Increase in EPS
• To adjust capital base
• To prevent hostile take over
• To return surplus cash to investors
• To reduce number of members

Sources of Buyback

• Company to buy its own shares out of:
  • Its free reserves; or
  • The securities premium account; or
  • The proceeds of any other shares or specified securities.
• However, no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Limit on buy-back With Board Resolution

• A company can buy-back upto 10% of its paid-up equity capital and free reserves of the company by passing Board Resolution in financial year.
• This Board Resolution cannot be passed by circular resolution but it can be passed by video conference.

With consent of Shareholders

• If company wants to buy-back more than 10% but up to 25% of its paid up equity capital and free reserve, it is allowed by passing Special Resolution at General Meeting.
• However, the buy-back of equity shares in any financial year must not exceeds 25% of its paid-up equity capital and free reserve.
• The notice of the meeting which Special Resolution is proposed to be passed shall be accompanied by an explanatory statement stating:
  • A full and complete disclosure of all material facts
  • The necessity for the buy-back
  • The class of security intended to be purchased under the buy-back
  • The amount to be invested under the buy-back
  • The time limit for completion of buy-back
  • The price at which buy-back of shares shall be made.

Important Note:
In case of company having more than 200 members, the resolution to buy back shares (more than 10% and upto 25%) is required to be passed through postal ballot.

Conditions for Buyback or Other Requirements
Authority in AOA

• Articles of company shall authorise buyback.
• Regulation 41 of Table F has provision for buy back.

Fully paid up
All the shares or other specified securities are fully paid-up.

Time gap between two buy back
Another offer for buyback should not be made within one year from closure of preceding buyback offer.

Debt equity ratio

• The post debt equity ratio of the company is not more than twice the capital and its free reserves after such buy-back.
• Central Government may by notific ation specify higher debt equity ratio for class of companies.
• At present, Central Government has prescribed debt equity ratio 6:1 for Government Company which carry on NBFC and housing finance activities.

Order dated 10-3-2016
Declaration of Solvency

• Company shall file with Registrar and SEBI, a declaration of solvency when shares of company proposed to buy back is listed.
• Declaration of solvency should be in Form SH-9.
• Declaration of solvency is made before buyback.
• Declaration shall be adopted by the Board. It shall be signed by two directors, one of whom shall be Managing Director, if any.
• It should be in the form prescribed, verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration.

Listed company
The buy-back of listed securities is in accordance with the regulations made by the SEBI in this behalf.

Time limit for completion
Every buy back should be completed within period of 1 year from date of passing of Board or Special Resolution, as the case may be.

Restriction of new Issue
Company cannot issue same kind of new shares or specified securities with in period of 6 months from completion of buy back except by way of :

• Bonus shares; or
• Issue of shares to discharge subsisting obligation; or
• Stock option scheme; or
• Sweat equity; or
• Conversion of preference shares or debenture into equity which become due for conversion

Transfer to CRR- Section 69

• In case shares are bought back out of free reserves or out of security premium account, then equal to the nominal value of shares bought back shall be, transferred to a reserve account to be called the ‘Capital Redemption Reserve Account’.
• The details of such transfer shall be disclosed in the balance sheet.

Mode or Method of Buyback

• Company may buy back shares: n From the existing shareholders a From open market
• By purchasing the securities issued to employees of the company under stock option or sweat equity

Procedure for Buyback
Company should take following steps to buy back its shares or securities:

Resolution

• Pass Board Resolution or Special Resolution, as the case may be.
• Declaration of Solvency is given and approved.

Letter of Offer

• Draft letter of offer containing disclosure in Form SH-8.
• Letter of offer contains pre and post debt equity ratio.
• Letter of offer shall be dispatched to all shareholders within 21 days from its filing with ROC.
• Offer should be open for at least 15 days, but not more than 30 days from dispatch of offer.

Opening of Separate Account
Immediately after date of closure of offer, company shall open special bank account and deposit therein entire sum as required to be payable on buy back.

Verification and Acceptance of offer
The verification of offer shall be completed within 15 days from the date of closure of the offer.

Destruction of Shares and payment

• Company shall physically destroy or ex-tinguish share certificate within period of 7 days from completion of buy back.
• Payment shall be made within 7 days after verification of offers to those shareholders whose offers are accepted.

Register of shares bought up

• Register of buy-back shall be maintained with following details:
  • Securities bought back
  • Consideration paid
• Date of cancellation of securities
• Register of buy back shall be maintained in Form SH-1 0

Return of Buy back

• A company shall file return of buy-back with ROC and SEBI within 30 days from completion of buy-back.
• However, no return is required to be filed with SEBI when shares of company is not listed.
• Return of buy back should be in Form SH-11

Prohibition for Buy back in Certain Circumstances – Section 70

• Company shall not directly or indirectly, purchase its own shares or other specified securities:
  • Through any subsidiary company; or
  • Through any investment company; or
  • If a default, in repayment of deposit or interest thereon, redemption of debentures or preference shares or payment of dividend or repayment of a term loan or interest thereon to any financial institution or bank is subsisting. This prohibition is not applicable, if default cease to subsist and period of 3 years has elapsed.
• If default is made in filing annual return, declaration of dividend or punishment for failure to distribute dividend and financial statement.

Practice Questions

Question 1.
Teji Pvt. Ltd., received a cheque of ? 10 lakh towards the share application money from Vinod on 31st March 2005. On the same day, the Board of directors allotted the shares, filed necessary returns and issued the share certificate. The cheque was subsequently deposited with the bank which bounced. Advise the company.
Answer:
It was held in case of SBI vs. Kunwar Sarder Singh that the allotment of the shares should have been made only after realisation of application and allotment money. Directors of company are liable to the company for losses incurred by it. However, company cannot dispute the amount mentioned on the certificate as already paid up.

Question 2.
A public limited company forfeited 80 equity shares and reissued the same which resulted in earning a surplus of 2,000. The company did not file return of allotment with the Registrar of Companies in respect of reissued shares. Explain whether the company has contravened any provision of the Companies Act, 2013 by non-filing of the return.
Answer:
Reissue of forfeited shares are not allotment and therefore, company is not required to file Return of allotment. Company has not contravened any provision of the Act.

Question 3.
Dinesh, one of the joint holders of shares of a company, sent a requisition to the company to split the shares equally amongst him and the other joint holders, by issuing fresh share certificates. State whether the company is bound to comply with this requisition.
Answer:
The company is not bound to issue split certificate unless duly signed transfer deed by all joint shareholders are submitted with company along with original share certificate. In given case, request to issue split certificate is signed by one of the joint holders. Company is not bound to comply it.

Question 4.
A company has forfeited shares of a defaulting shareholder for non-payment of call money. However, the defaulting shareholder approaches the Board after forfeiture of shares to cancel the said forfeiture. What should the Board do? Give your advice?
Answer:
Board may cancel forfeiture of shares. To cancel decision of forfeiture, Board should pass resolution. Defaulting shareholder is required to pay call money along with interest.

Question 5.
In the case where the shares of a company are held in joint names of two persons Arpit and Rakshit and one of these joint holders requests the company to split the shares equally between them by issuing fresh share certificates, what should the company do?
Answer:
Company should follow procedure to issue split certificate.

Question 6.
Well-done Ltd. wants to make a first call of ₹ 30 on equity share of nominal value of ₹ 100 each on 16th October 2011. Can it do so? Further, if the company proposes to make second call on 7th November 2011. Will it be permitted to do so?
Answer:
As per Table F, company cannot make call in excess of 25% of nominal value of shares. At the same time, there must be time gap of one month between two calls. Therefore, company cannot make first call of ? 30 (being more than 25%). Company cannot make second call on 7th November 2011 (one month gap required).

Question 7.
Distinguish between ‘Reserve Capital’ and ‘Capital Reserve’
Or
‘Reserve Capital’ and ‘Capital Reserve’ are one and the same. Comment
Answer:

Sweat equity	Issue of capital on preferential basis
Section 54 deals with provisions relating to Sweat equity.	Section 62(1 )(c) deals with provi­sions relating to issue of shares on preferential basis.
It is issued to employees or director of company.	It is issued to persons other than existing shareholders of company.
It is issued for providing know how or intellectual property to company.	It is issued for any consideration.
It is issued for discount or for con­sideration, other than cash.	It is issued either for cash or for consideration other than cash.
There is no requirement of determi­nation of price by valuation.	Price of shares issued on preferential basis is determined by valuation report of registered valuer.

Question 8.
GCL Ltd., a listed company, wants to increase its paid-up capital through private placement basis. Before placing the proposal to the Board of directors, for formal approval, the Managing Director of the company would like to understand the legal provisions pertaining to the following issues:
i. Restrictions on the quantum of preferential allotment.
ii. Criteria for pricing of the proposed issue.
iii. Restriction on currency of instrument.
iv. Financial commitment necessary from the promoters/financial institutions, etc.
As a company secretary of the GCL Ltd., write a brief note to the Managing Director focusing on the above issues.
Answer:

Question 9.
Comment on the following: Bonus issue may be viewed as a ‘rights issue’ except that money is paid by the company on behalf of the investing shareholders from its reserves.
Answer:
Statement is correct. In the case of bonus shares, money is not required to be paid while in case of right issue, money is paid.

Question 10.
Distinguish between the following: ‘Sweat equity’ and ‘Issue of capital on preferential basis’.
Answer:

Sweat equity	Issue of capital on preferential basis
Section 54 deals with provisions relating to Sweat equity.	Section 62(1 )(c) deals with provi­sions relating to issue of shares on preferential basis.
It is issued to employees or director of company.	It is issued to persons other than existing shareholders of company.
It is issued for providing know how or intellectual property to company.	It is issued for any consideration.
It is issued for discount or for con­sideration, other than cash.	It is issued either for cash or for consideration other than cash.
There is no requirement of determi­nation of price by valuation.	Price of shares issued on preferential basis is determined by valuation report of registered valuer.

Question 11.
Distinguish between the following: Nominal capital’ and ‘Subscribed capital’
Answer:

Nominal Capita!	Subscribed Capital
It is sum stated in the Memorandum as capital of the company with which it is to be registered.	It is the part of issued capital for which applications have been re­ceived from public.
Nominal capital is disclosed in Memorandum.	Subscribed capital is not disclosed in Memorandum.
Stamp duty is payable on the basis of authorised or nominal capital.	No stamp duty is payable.
It is basis for determining registra­tion fees.	It is not basis for determining reg­istration fees.
Any change in nominal capital amount as alteration of Memoran­dum.	Any change in subscribed capital does not amount as alteration to Memorandum.
It can exceed subscribed capital.	It cannot exceed nominal capital.

Question 12.
Distinguish between the following: ‘Rights issue’ and ‘Bonus issue’.
Answer:

Right Issue	Bonus Issue
As per section 62 of Companies Act, 2013, at any time, a company having share capital proposes to increase its subscribed capital by issue of further shares, such shares shall be offered to the existing equity shareholders in proportion of paid up capital.	Bonus shares are issued to capi­talise its profit.
To issue right shares company should issue letter of offer.	No such letter of offer is required to issue bonus shares.
No authority in Articles is re­quired to issue right shares.	Articles of company must au­thorise company to issue bonus shares.
Right to renounce is available to shareholders.	Right of renounce is not available to shareholders.
Shares issued under right shares may be partly or fully paid up.	Shares issued under bonus issue are fully paid up.
Price is payable to subscribe right shares.	Bonus shares are issued without price.
Listed company shall follow SEBI Guidelines for right shares.	Listed company shall follow SEBI Guideline for bonus shares.

Question 13.
Distinguish between the following: ‘Sweat Equity’ and ‘Employees’ Stock Purchase Scheme’.
Answer:

Sweat equity	Employees Stock Purchase Scheme (ESPS)
It is issued to employees or directors for providing known how or intel­lectual property rights to company.	There is no such consideration in case of ESPS.
Lock-in period of 3 years applicable to sw!eat equity.	Lock-in period of 1 year is applicable.
Sweat equity can be issued to pro­moters.	ESPS cannot be issued to promoters.

Question 14.
Comment on the following: Preference share are non-cumulative unless expressly stated to be cumulative.
Answer:
Statement is correct. Whether a preference share is cumulative or non-cumulative depends upon the terms of the issue and the provisions in Articles of company. In absence of any provision, preference shares are deemed to be non-cumulative. – Foster vs. Coles, Foster & Sons Ltd.

Question 15.
The Board of directors of Aakash Ltd., a listed company, at its meeting held on 1st April, 2011 announced a proposal for issue of bonus shareholder of the company at 1:1 ratio. On 1st May, 2011, the directors at another meeting passed a resolution to reserve the proposal of bonus issue announced on 1st April, 2011. Discuss the validity of the proposal and the reversal?
Answer:
Once bonus issue proposal is approved by Board, it shall be implemented within 2 months from date of approval as per SEBI Guidelines. Company is also required to obtained shareholders’ approval. Once decision of bonus issue is made, the issue cannot be withdrawn.
In view of the above provisions, the proposal to announce the bonus issue is valid but its reversal (ie., withdrawal) is not valid.

Question 16.
The Board of directors of Nav Avtar Ltd. passed a resolution for issue of rights shares. However, certain shareholders of the company raised an objection as to whether the company needed additional. Discuss the validity of the countermove taken by the shareholders and resolution passed by the Board?
Answer:
Shareholders have right to ask question or raise objection in the matter of increase of capital by company w^hen their shareholding are diluted. At the same time, Board shall exercise its powers for benefit of company and not for the benefit of any director. If directors pass any resolution for person benefit and ignoring benefit of company as whole, the NCLT can interfere in the actions of company. Therefore, the counter move by shareholders is valid.

Question 17.
Every employee of a company shall be eligible to participate in Employee stock option scheme (ESOS)?
Answer:
Statement is correct. Every employee is eligible to participate in ESOS.
However, an employee who is promoter or belongs to promoter group shall not be eligible to participate in the ESOS. Director, who either by himself or through his relative or through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company shall not be eligible to participate into ESOS.

Question 18.
Whether equity shares already issued can be converted into redeemable preference shares? Discuss.
Answer:
The equity shares already issued cannot be converted into redeemable preference shares even by means of scheme of arrangement.

Question 19.
In no circumstances a company can issue redeemable preference shares with a redemption period beyond 20 years. Comment
Answer:
Statement is partly correct. Company engaged in infrastructure project can issue redeemable preference shares for 30 years.

Question 20.
A limited company made public offer of shares. It had applied to three stock exchanges for listing permission and out of it only two stock exchange has granted permission. Can the company proceed for allotment of shares?
Answer:
Company cannot proceed for allotment of shares.

Question 21.
The Board of Directors of M/s Reckless Investments Ltd. have allotted shares to the investors of the company without filing a prospectus with the Registrar of Companies, Mumbai. Explain the remedies available to the investors in this regard.
Answer:
Company cannot allot shares without filing prospectus with Registrar. If company allot shares without filing prospectus with Registrar, it is irregular allotment. In case of irregular allotment, allottee can avoid contract of allotment. In the given case, investors have right to avoid contract. They can return shares and claim refund.

Question 22.
What is difference between ESOP and sweat equity shares?
Answer:
Sweat Equity Shares are the shares given to the employee or directors at a discount or for consideration other than cash, for their providing know-how or intellectual property rights. These are governed under section 54, read with Rule 8 of Chapter IV of the Companies Act, 2013.
ESOPs are the options granted to employees by the employer, which can be converted into Equity Shares on a future date, at a pre-determined price. These are governed by section 62(1)( b), read with rule 12 of Chapter IV of the Companies Act, 2013.

Question 23.
Distinguish between the following: ‘Nominal capital’ and ‘Issued capital’
Answer:

Nominal Capital	Issued Capital
It refers to that amount which is stated in the Memorandum of Association as the share capital of company.	It refers to that part of authorised capital which is issued for sub­scription.
Nominal capital is disclosed in Memorandum.	Issued capital is not disclosed in Memorandum.
Stamp duty is payable on the basis of authorised or nominal capital.	No stamp duty is payable.
It is basis for determining registra­tion fees.	It is not basis for determining reg­istration fees.
Any change in nominal capital amount as alteration of Memoran­dum.	Any change in issued capital does not amount as alteration to Mem­orandum.
It can exceed than issued capital.	It cannot exceed than nominal capital.

Question 24.
Piyush Ltd. decided to buy-back its shares with the approval of the Board of directors. As the Company Secretary of the company, advise the Board of directors the conditions and limitation in this regard?
Answer:

Question 25.
Following information is available from the audited Balance Sheet of Short Cut Ltd. as at 31st March, 2004:

Paid-up share capital	₹ 500 lakh
Share premium account	₹ 100 lakh
General reserves	₹ 800 lakh
Secured loans	₹ 500 lakh
Unsecured loans	₹ 400 lakh

The company plans to buy-back its shares. Compute the maximum limit up to which the company can buy-back its shares.
Answer:
Company can buy back its own shares to the extent of 2596 of the paid up capital and free reserve. In the given case, company can buy back maximum up to ₹ 350 lakh. However, after buy back, debt equity ratio shall not be more than 2:1. Company has total debt of ₹ 900 lakh. Accordingly, company should have paid up equity capital of ₹ 450 lakh. Considering this provision, company can buy back only ₹ 50 lakh.

Question 26.
Money Ltd. desires to reduce its paid up capital by purchasing from some selected shareholders holding shares constituting 20% of its paid up capital. Can it do so? Discuss.
Answer:
Company can purchase its shares from shareholders by following procedure of buy back.

Question 27.
Board of directors of Pious Ltd. gives you the following information extracted from the company’s financial statements as at 31st March, 2015:

Authorised equity share capital….	10 crore (1 crore shares of 10 each)
Paid-up equity share capital….	5 crore
General reserve….	5 crore
Debenture redemption reserve….	2 crore

Board of directors by a resolution passed at its meeting decides to go for buy-back of shares to the extent of 20% of the company’s paid-up share capital and free reserves. Examine the validity of the Board’s resolution with reference to the provisions of the Companies Act, 2013.
Answer:
Board Resolution is not valid. Company cannot buy back its shares more than 10% by resolution passed at Board Meeting. Company is required to get consent of its member at General Meeting.

Past Examination Questions

Question 1.
The Board of Directors of a company decided to pay 5% of issue price as underwriting commission to underwriters. The Articles of Association of the company permit only 3% commission. The Board of Directors further decide to pay the commission out of proceeds of the capital. Are the decisions taken by the Board of Directors valid under the provisions of the Companies Act, 2013? (CA May 2003)
Or
Articles of Association of MSW Ltd. contained a provision that upto 4% of issue price of the shares may be paid as underwriting commission to the underwriters. The BOD decided to pay 5% underwriting commission. Can the BOD do so? State the provisions of law in this regard. (CA November 2008)
Or
Unique Builders Limited decides to pay 2.5 % of the value of debentures as underwriting to the underwriters but the Articles of the company authorize only 2 % underwriting commission on debentures. The company further decides to pay the underwriting commission in the form of flats. Examine the validity of the above arrangements under the provisions of the Companies Act, 2013. (CA November 2010)
Or
Examine the validity of the following referring to the provisions of the Companies Act, 2013 and or Rules:
‘The Articles of Association of X Ltd. contained a provision that upto 4% of issue price of the shares may be paid as underwriting commission to the underwriters. The Board of Directors of X Ltd. decided to pay 5% ‘ underwriting commission.’ (CA November 2015)
Answer:
Company can pay maximum 5% of price of shares as underwriting commission in the case of public issue of shares. Articles of company may authorise company to pay less underwriting commission. If it is so, company cannot pay underwriting commission in excess of percentage fixed by Articles.
In the given case, Articles of company authorise it to pay maximum 3% commission. Decision to pay excess commission by Board is not valid. Underwriting commission can be paid in cash or in kind but it should not beyond the limit specified by Act.

Question 2.
Whether the Company can buy-back its own shares? Explain in brief the provisions of Companies Act, 2013 relating to the sources of funds and conditions for buy-back its own shares by the company. (CA November 2004)
Answer:

Question 3.
On receipt of 80% of the minimum subscription stated in the prospectus, a company allotted 100 shares to Naman. The company deposited the said amount in a bank but withdrew 50% of amount before finalisation of assets for the purchase of certain asset. Naman, refuses to accept the allotment of shares on the ground that the allotment is in violation of the provisions of the Companies Act, 2013. Comment.(CA May 2005)
Answer:
Shares cannot be allotted to public unless company has received the minimum subscription stated in prospectus has been subscribed and minimum application money is received.
In the given case, it is stated that company has received the minimum subscription as stated in prospectus. Therefore, contention of Mr. Naman is not valid.

Question 4.
Mars India limited owned to sunil ? 1000. When this debt become payable, the company offered sunil 10 shares of ? 100 each in full settlement of debt. The said shares were fully paid were allotted to sunil. Examine the validity of allotment in the light of the provisions of the Companies Act, 2013. (CA May 2006)
Answer:
As per section 39 of Companies Act, 2013, company may allot shares to person in cash or in kind. Cash does not necessarily mean currency or cheque. It means ‘such transaction as would in an action at law for calls, support a plea of payment.

Question 5.
Distinguish between ‘Reduction of Share Capital’ and ‘Diminution of Share Capital’. (CA November 2006)
Or
‘Diminution of capital does not constitute reduction within the meaning of Companies Act, 2013.’ State in which respects they differ from each other. (CA November 2015)
Answer:

Question 6.
DIA Company Limited is holding 40% of total equity shares in MR Company Limited. The Board of Directors of MR Company Limited (incorporated on 1-1-1988) decided to raise the paid-up equity shares capital by issuing further shares and also decided not to offer any shares to DIA Company Limited on the ground that it was already holding a high percentage of shares in MR Company Limited. Articles of Association of MR Company Limited provide that the new shares be offered to all the shareholders excepting DIA Company Limited. Referring to the provisions of Companies Act, 2013, examine the validity of decisions of the Board of Directors of MR Company Limited of not offering any further shares to DIA Company Limited. (CA May 2007)
Answer:
The decision of Board is not valid. Issue of further shares by MR Co. Ltd. attract provision of section 62 of Companies Act, 2013. As per section 62, MR Co. Ltd. shall offer further shares to all existing shareholders according in their proportionate holding. It cannot refuse to offer further shares to DJA Co. Ltd. on the ground that it is already holding high percentage of shares.

Question 7.
Explain in brief ‘Equity share capital’ and ‘Preferential share capital’. (CA May 2007)
Answer:

Question 8.
State whether the following statements are true or false: A public company cannot issue equity shares with differential rights as to dividend. (CA November 2007)
Answer:
Statement is false. As per section 43, public company can issue equity shares with differential rights as to dividend provided it comply with all conditions prescribed.

Question 9.
What are the conditions for the company for the buy-back of its own shares? Whether there is any time limit for the completion of buy-back of its shares? (CA November 2008)
Or
Whether a company can buy-back its own shares? Discuss the legal provisions as regard to the conditions for buy-back contained in the Companies Act, 2013. (CA November 2013)
Answer:

Question 10.
Star Limited forfeited 80 equity shares and re-issued the same at a premium of ₹ 2000 resulting a surplus earning of ₹ 2000. The company did not file the return of allotment with the Registrar of Companies in respect of re-issued shares. Explain, with reason, whether the company has contravened the provisions of the Companies Act, 2013. (CA June 2009)
Answer:
Return of allotment is required to be fifed on allotment of securities. Re-issue of forfeited shares are not allotment and hence return of allotment is not required. Company has not contravened any provisions of Companies Act, 2013.

Question 11.
Gold limited invited applications for 5,00,000 equity shares of X 10 each through a public issue. As per the prospectus, applicants were required to pay only 12 on application. ‘A’ applies for 500 shares and deposits ₹ 5000 to the company because he did not properly go through the offer. Later, he applies to the company seeking refund of the excess amount paid by him. Refreshing provisions of the Companies Act, 2013, decide whether the company is bound the excess money to A? (CA June 2009)
Answer:
Mr. A cannot claim refund. Company if authorised by its Articles of Association accept from any member calls in advance. Mr. A has made excess payment of ₹ 4,000. It cannot be treated as calls in advance because as on the date of payment of ₹ 4,000, he was not a member of company. Calls in advance provisions is applicable to shares held by members.

Question 12.
What is the law and procedure for issuing a duplicate share certificate under the provisions of the Companies Act, 2013 in case the original share certificates is lost or destroyed? (CA November 2011)
Answer:

Question 13.
Can a company limited by shares or guarantee and having share capital reduce its share capital? (CA May 2013)
Answer:
Yes. Provisions are equally applicable to the guarantee company having share capital.

Question 14.
What is meant by minimum subscription? State the provisions of the Companies Act, 2013 regarding the refund and deposit of minimum subscription. (CA November 2013)
Answer:

Question 15.
What is ‘Return of Allotment’? List the documents which have to be enclosed when shares are allotted on discount. (CA May 2014)
Answer:

Question 16.
Define the term underwriting and state the circumstances in which underwriting commission can be paid as per provisions of section 40 of the Companies Act, 2013. (CA November 2014)
Answer:

Question 17.
Elucidate the circumstances in which a company cannot buy back its own shares as per the provisions of the Companies Act, 2013. M/s. Growmore Pharma Limited is planning to buy-back of its shares during the current year but the company has defaulted in the payment of term loan and interest thereon to its bankers. The company seeks your advise as to how and when the company can buy back its share under these circumstances as per the provisions of the Companies Act, 2013. (CA November 2014)
Answer:
To understand provisions as to which company cannot buy-back shares. If company has defaulted in repayment of term loan or interest thereon of any financial institution or bank, it cannot buy-back its shares. This prohibition is lifted if default is remedied and period of 3 years has elapsed.

Question 18.
Explain the conditions and the manner in which a company may issue depository receipts in a foreign country under the Companies (Issue of Global Depository Receipts) Rules, 2014. (CA May 2015)
Answer:

Question 19.
Deferred shares also called founder’s shares. Comment (CA May 2015)
Answer:
Statement is correct. Deferred shares are issued to promoter or founder members of company to exercise control over company. It is also known as golden shares. It is share that is issued to company founders that restricts their receipt of dividends until dividends have been distributed to all other classes of shareholder.

Question 20.
When is an allotment of shares treated as an irregular allotment? Briefly state the effects of an irregular allotment. (CA November 2015)
Answer:

Question 21.
XYZ Company Limited at a General Meeting of members of the company pass an ordinarily resolution to buy-back 30% of its Equity Shares Capital. The Articles of the Company empower the company for buy-back of shares. The company further decides that the payment for buy-back be made out of the proceeds of the company’s earlier issue of equity shares. Explaining the provisions of the Companies Act, 2013, and stating the sources through which the buy-back of companies own shares be executed, Examine, (i) Whether company’s proposal is in order? (ii) Would your answer be still the same in case the company instead of 30% decide to buy-back only 20% of its Equity Share Capital? (CA November 2016)
Answer:

1. Company’s proposal is not in order for following reasons:
   • Buy back is not allowed for more than 25% of its paid up capital and free reserve.
   • Buy back for more than 10% but not more than 25% of its paid up capital and free reserve is allowed by passing Special Resolution.
   • Company cannot buy back its shares out of proceed of same kind of shares.
2. Answer would remain same.

Question 22.
ABC Company Ltd. is holding 46% of total equity shares in SVS Company Ltd. The Board of Directors of SVS Company Ltd. (incorporated on January 1st, 2014) decided to raise the share capital by issuing further equity shares. The Board of Directors resolved not to offer any shares to ABC Company Ltd. on the ground that it was already holding a high percentage of the total number of shares already issued in SVS Company Ltd. The Articles of Association of SVS Company Ltd. provides that the new shares be offered to the existing shareholders of the company. On March 1st, 2014 new shares were offered to all the shareholders except ABC Company Ltd. Referring to the provisions of the Companies Act, 2013 examine the validity of the decision of the Board of Directors of SVS Company Limited of not offering any further shares to ABC Company Limited. (CA May 2017)
Answer:
Question is based on section 62 of Companies Act, 2013. As per section 62, further shares shall be issued by company to existing shareholders in proportion to their existing holding. Further offer of shares to existing shareholders shall be made by sending offer letter.
In the case of Gas Meter Ltd. vs. Diaphragm & General Leather Co. Ltd., Articles of company provided that new shares should first be issued to existing shareholders. The company offered new shares to all shareholders except Gas Co. Ltd., which held controlling shares. It was held that action of not offering new shares to Gas Co. Ltd. is not proper on the ground of controlling interest. Based on above judgement, it can be said that action of SVS Co. Ltd. is not proper.

Question 23.
State whether the following statements are correct or incorrect: Right shares are those shares which are issued by newly formed company. (CA May 2017)
Answer:
Statement is incorrect. Right shares are those shares which are offered to the existing shareholders in proportionate to their existing holding.