The Companies Act,2013

SHARE CAPITAL AND

IV DEBENTURES

Introduction

Chapter IV Consists of sections 43 to 72 as well as the

Companies (Share
Capital and Debentures) Rules, 2014.

Finance, the lifeblood for running the affairs of a company, can be raised, inter-alia, by
issuing shares and debentures. In fact, shares and debentures are financial instruments
which help in arranging funds for the company.

Shares represent ownership interest in a company with entrepreneurial risks and rewards
whereas debentures depict lenders’ interest in the company with limited risks and returns.

Sometimes, after the issue of capital, a company may either alter or reduce the share
capital depending upon the exigencies of the situation. The company has to follow the
requisite provisions for alteration or reduction of share capital.

Both the shares and debentures are presented in the Balance Sheet on the liabilities side
of the issuer company and on the assets side of the investor and lender respectively.
Legal provisions relating to these instruments are covered under Chapter IV of the
Companies Act, 2013 (comprising sections 43 to 72) and the Companies (Share Capital &
Debentures) Rules, 2014 as amended from time to time along with endorsement in the
company formation documents or approved at the suitable company forum, wherever
necessary.

SHARE CAPITAL-TYPES

WHAT ARE SHARE AND STOCK?

Share – Definition & Description
Section 2(84) of the Act defines share as a share in the share capital of a company

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and includes stock.

Capital of a company is termed as share capital, which is divided into units; having
a certain face value. Each such unit is termed as share.

New London & Brazilian Bank v. Brockle Bank1

A share is not a sum of money..., but is an interest measured in a sum of money, and
made up of various rights, contained in the contract, including the right to a sum of
money of a more or less amount.
Around two decade later, J. Farwell in landmark case of Borland’s Trustee v Steel
Brothers & Co Ltd2 place his trust in the opinion stated above, and observe that share
is the interest of a shareholder in the company measured by a sum of money, for the
purpose of liability in the first place and of interest in the second, and also consists of
a series of mutual covenants entered into by all the shareholders inter se in accordance
with the provisions of the Companies Act and the Articles of Association.

Note: Company limited by share or those which having share capital has to quote in their
memorandum - The share capital of the capital is _ _ _ _ _ rupees, divided into _ _ _ _
_ shares of _ _ _ rupees each.

Stock - Description
The definition of ‘share’ states that the term ‘share’ includes ‘stock’. If a company undertakes
to aggregate the fully paid up shares of various members as per their requests and
merge those shares into one fund, then such fund is called ‘stock’. In more simple words
we can say that ‘stock’ is a collection or bundle of fully paidup shares.
Section 61 (1) (c) of the Act, empower a limited company having a share capital to
convert all or any of its fully paid-up shares into stock, and reconvert that stock into
fully paid-up shares of any denomination.

KINDS OF SHARE CAPITAL [SECTION 43]

Broadly, there are two kinds of share capital of a company limited by shares; Equity share
capital and Preference share capital. Equity Share capital can be further segregated into
two categories based upon rights. Following diagram depicts kinds of share capital;

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Kinds of share capital

Equity share capital Preference share capital

with voting rights with differential carries preferential right

rights as to w.r.t. payment of dividend
dividend, voting and repayment of capital
or otherwise at time of winding up

Preference Share Capital [section 43]

Preference share capital is that part of issued share capital of any company limited
by shares which carries preferential right in respect to;
a. Payment of dividend, may be absolute amount or at fixed rate (which may either be
free of or subject to income-tax); and
b. Repayment of capital, in the case of winding up or repayment of capital.
This preference exists only up to amount paid up or deemed to have been paid up
on the shares, unless there is an agreement in contrary to this.

Note:
1. Nothing contained in this Act shall affect the rights of the preference shareholders who
are entitled to participate in the proceeds of winding up before the commencement
of this Act.
2. Preference shareholders may also participate in equity pool post the preferential
entitlements.
But to find out their rights of participation we must look within the four corners of the
articles of association and the terms of the issue.
If the right to participate in the surplus is not specified in the terms of the issue, preference
shares are presumed to be not participating. This was affirmed by the House of Lords in
Scottish Insurance Corpn Ltd vs. Wilsons & Clyde Coal Co Ltd
3. Preference shares are always presumed to be cumulative and the accumulation of
dividend can be excluded only by a clear provision in the articles of association

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Illustration – Q&A
Can a company have only preference share capital?
Answer – It may be noted that while a company may have only equity share capital but it
cannot have only preference share capital. This is because preference shareholders have
certain ‘preferential rights’ over the equity shareholders.
Thus, in the absence of equity share capital, there cannot be preferential share capital

Equity Share Capital [Section 43(a) read with explanation I to section 43]

Shares capital which are not preference shares capital are termed as equity shares
capital. Equity share capital are further classified as;
a. Equity share with voting right (Plain vanilla, because equitable/same voting rights)
or
b. Equity share with differential rights with respect to dividend or voting rights or
otherwise in accordance with Rule

Equity shares are often referred as to ordinary share and sometime as common
share

Equity Shares with Differential Rights [Rule 4 of the Companies (Share capital and Debenture)
Rules, 2014]

I. Conditions to issue shares with differential rights

A company limited by shares may issue equity shares with differential rights as to
dividend, voting or otherwise, if it complies with the following conditions:
a. The articles of association of the company authorizes the issue of these shares.
b. Approval of the shareholders is obtained by passing of ordinary resolution at the
general meeting. A listed public company is required to pass the resolution through
postal ballot
c. The voting power in respect of shares with differential rights of the company shall
not exceed Seventy Four percent of total voting power at any point of time
d. The company has not defaulted in filing annual accounts and annual returns for the
3 financial years preceding the year in which it was decided to issue such shares
e. The company has not defaulted in the payment of declared dividend, interest, or
coupon; redemption of preference shares or debenture; or repayment of matured
deposits.
f. The company has not defaulted in the

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1. Payment of dividend on preference shares, or

2. Payment of interest or Repayment of any term loan from a Public
Financial Institution (PFI) or State-level Financial Institution (SFI) or Scheduled
Bank.
3. Repayment of any term loan from a PFI or SFI or Scheduled Bank.
4. Statutory dues relating to its employees
5. Crediting the amount in Investor Education and Protection Fund

Note:
A company may issue equity shares with differential rights upon expiry of five years from
the end of the financial year in which default mentioned in point f stated above, was
made good

g. the company has not been penalized by Court or Tribunal during the last three
years of any offence under
1. Reserve Bank of India Act, 19348,
2. Securities and Exchange Board of India Act, 19929,
3. Securities Contracts Regulation Act, 195610,
4. Foreign Exchange Management Act, 199911 or
5. Any other special Act, under which such companies being regulated by sectoral
regulators.

Note:
1. Equity shares with differential rights issued by any company under the provisions
of the Companies Act, 195612 and the rules made thereunder, shall continue to be
regulated under such provisions and rules.
2. Here it is also worth noting that; before the amendment made in year 2000, to the
Companies Act 195614, the shares with differential voting rights were not permitted
to be issued. Though such differential voting rights existed prior to the enactment of
the Companies Act 1956

II. Contents of Explanatory statement (annexed to notice)

The explanatory statement annexed to the notice of the general meeting or of a postal
ballot shall contains various matters like particulars of the issue including its size, details
of differential rights, etc.

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III. Prohibition on Conversion

Prohibit the conversion of existing equity share capital with voting rights into equity share
capital carrying differential voting rights and vice versa.

IV. Disclosure in the Board’s Report

Requires, the Board of Directors to disclose the specified particulars, in the Board’s Report
for the financial year in which the issue of equity shares with differential rights was
completed.

V. Rights to the holders of the equity shares with differential rights

States that subject to the differential rights, the holders of the equity shares with
differential rights shall enjoy all other rights such as bonus shares, rights shares, etc.,
which the holders of equity shares are entitled to.

VI. Particulars of shares to be maintained in the register of members

Provides that where a company issues equity shares with differential rights, the Register
of Members maintained under section 88 shall contain all the relevant particulars of the
shares so issued along with details of the shareholders.

Section 43 shall not apply to:

1. Specified IFSC Public Company, where memorandum of association or articles of
association of such company provides for it.
2. Private company, where memorandum or articles of association of the private
company so provides; however, this exemption shall be available to only that
private company which has not committed a default in filing its financial statements
under section 137 or annual return under section 92 with the Registrar.

CERTIFICATE OF SHARES [SECTION 46]

PRIMA FACIE EVIDENCE OF TITLE

Shares Issued and held in physical form
As per 46(1), a certificate specifying the shares held by any person, shall be prima facie
evidence of the title of the person to such shares if issued;
a. Under the common seal if any of the company or
b. Signed by two directors or

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c. Signed by a director and the Company Secretary, wherever the company has
appointed a Company Secretary

Note:
1. Since w.e.f. 29-05-2015 though Companies Amendment Act 2015, requirement to
have common seal is optional for companies, hence physical share certificate issued
under sign of two director or of one director along with company secretary is valid.
2. If the composition of the Board permits of it, at least one of the aforesaid two
directors shall be a person other than the managing or whole-time director
3. A director shall be deemed to have signed the share certificate if his signature is
printed thereon as a facsimile signature by means of any machine, equipment or
other mechanical means such as engraving in metal or lithography, or digitally
signed, but not by means of a rubber stamp, provided that the director shall be
personally responsible for permitting the affixation of his signature thus and the
safe custody of any machine, equipment or other material used for the purpose.

Shares held in Depository Form

As per Section 46(4), where a share is held in depository form, the record of the depository
is the prima facie evidence of the interest of the beneficial owner.

Students are advised to take note:

Requirement regarding securities issued in Dematerialised form, can be referred in Rule
9 and Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Rule 9A was inserted by the Companies (Prospectus and Allotment of Securities) Third
Amendment Rules, 2018, w.e.f. 2-10-2018 and requires every unlisted public company
to issue the securities only in dematerialised form and also facilitate dematerialisation
of all its existing securities.

ISSUE OF RENEWED/DUPLICATE SHARE CERTIFICATE [SUB-SECTION 2 READ WITH RULE 6

OF THE COMPANIES (SHARES AND DEBENTURES) RULES, 2014]
Issue of renewed certificate
A case wherein originally issued share certificate has been defaced, mutilated or torn,
a renewed share certificate in replacement shall be issued, in lieu of surrender of such
original certificate, to the company.

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Note:
1. A company may replace all the existing certificates by new certificates upon sub-
division or consolidation of shares or merger or demerger or any reconstitution
without requiring old certificates to be surrendered
2. On renewed certificate it shall be stated that it is “Issued in lieu of share certificate
No..... sub-divided/replaced/on consolidation”
3. Company may charge such a fee as board may think fit, but not exceeding ` 50
per certificate; and no fee shall be payable pursuant to scheme of arrangement
sanctioned by the High Court, Central Government or Tribunal

Issue of duplicate certificate

A case wherein share certificate originally issue has been lost or destroyed, a share
certificate in duplicate may be issued if board is consented for the same based upon
evidences produced.

Students are advised to take note;

1. Company may charge fees as the Board thinks fit, not exceeding rupees fifty per
certificate
2. On the face of duplicate certificate, it shall be stated prominently that it is
“duplicate issued in lieu of share certificate No......” and the word “duplicate” shall
be stamped or printed prominently
3. In case unlisted companies, the duplicate share certificates shall be issued within
a period of three months and in case of listed companies such certificate shall be
issued within fifteen days, from the date of submission of complete documents
with the company respectively.

Record of renewed and duplicate certificate to be maintained

Particulars of every renewed and duplicate share certificates maintained in from SH2
Such register shall be kept at registered officer or any other place where register of
members in custody of company secretary or such other person as may be authorised by
the Board.
All entries made in such register shall be authenticated by the company secretary or such
other person as may be authorised by the Board.

MANNER OF ISSUE OF CERTIFICATES/DUPLICATE CERTIFICATES

The issue of a certificate of shares or the duplicate thereof, the particulars to be entered

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in the register of members and other matters shall be in manner and form as prescribed
in rule

Rule 5 of the Companies (Shares and Debentures) Rules, 2014 applies, where shares are not in
demat form
Share certificate is in vogue in case of shares which are held in the physical form, not
in the demat form (under the depository mode). Hence provisions contained in rule 5
of the Companies (Shares and Debentures) Rules, 2014 pertaining to share certificate
applicable where shares are not in demat form.

Pre-requisites for issue of share certificate

Share Certificate shall be issued on surrender of letter of allotment or fractional coupons
of requisite value (save in cases of issues against letters of acceptance or of renunciation,
or in cases of issue of bonus shares); in pursuance of a resolution passed by the Board.

Form of share certificate

Certificate of share shall be in Form SH 1 or as near thereto as possible and shall specify;
a. The name(s) of the person(s) in whose favor the certificate is issued,
b. The shares to which it relates and
c. The amount paid-up thereon.

Recording of particulars stated in share certificate

The particulars of every share certificate issued in accordance with sub-rule (1) shall
be entered in the Register of Members maintained in accordance with the provisions of
section 88 along with the name(s) of person(s) to whom it has been issued, indicating the
date of issue.

Maintenance of share certificate forms and related books and documents (Rule 7 of the
Companies (Shares and Debentures) Rules, 2014)
All blank forms to be used for issue of share certificates shall be printed and the printing
shall be done only on the authority of a resolution of the Board and these shall be
consecutively machine-numbered. Such forms shall be kept in the custody of the secretary
or such other person as the Board may authorise for the purpose.
All books pertain to record of share certificates shall be preserved in good order not less
than thirty years and in case of disputed cases, shall be preserved permanently.
All certificates surrendered to a company shall immediately be defaced by stamping

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or printing the word “cancelled” in bold letters and may be destroyed after the expiry
of three years from the date on which they are surrendered, under the authority of a
resolution of the Board and in the presence of a person duly appointed by the Board in
this behalf.

Note:
1. Share Certificate is not a negotiable instrument.
2. Company shall issue only one share certificate in all those cases where shares are
held by more than one person jointly with others and delivery of share certificate to
any one of them will amount to delivery to all of them.

PUNISHMENT FOR ISSUING DUPLICATE CERTIFICATE OF SHARES WITH INTENT TO

DEFRAUD [Sub-section 5]
If a company with intent to defraud issues a duplicate certificate of shares, the punishment
shall be as specified in table;

Liable Minimum Fine Maximum Fine

Company Five times the face value Higher of: Ten times the face
of the shares involved value of such shares
or
Rupees ten crores
And
Every officer of the Liable for action under section 447
company who is in Note – Provisions of Section 447
default already explained as separate topic
under chapter 3 of this module.

VOTING RIGHTS [SECTION 47]

VOTING RIGHTS OF MEMBERS HOLDING EQUITY SHARE CAPITAL [SUBSECTION 1]

Subject to the provisions of section 43, section 50 (2) and section 188 (1)
a. Every member of a company limited by shares and holding equity share capital
therein, shall have a right to vote on every resolution placed before the company;
and
b. His voting right on a poll shall be in proportion to his share in the paid-up equity
share capital of the company. But in case of Nidhi Company, no member shall

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exercise voting rights on poll in excess of five per cent, of total voting rights of
equity shareholders

VOTING RIGHTS OF MEMBERS HOLDING PREFERENCE SHARE CAPITAL [SUB-SECTION 2]

Every member of a company limited by shares who is holding any preference share capital
shall, in respect of such capital, have a right to vote on resolution;
a. Which directly affect the rights attached to his preference shares, and
b. For the winding up of the company, or for the repayment or reduction of its equity
or preference share capital.

Summary of section 47

Voting Rights

Preference Shares (In

Equity Shares proportion of paid-up
capital)

On every resolution Dividend not Winding up Directly

placed before the paid for 2 affecting
company years or more interest

Normal Equity shares

having Differential
Rights

In proportion As defined
of paid-up in Articles/
capital Terms of issue

Section 47 shall not apply to;

1. A Specified IFSC Public Company, where memorandum of association or articles of
association of such company provides for it.19
2. A private company, where memorandum or articles of association of the private
company so provides, however, this exemption shall be avaible to only that private
company which has not committed a default in filing its financial statements under
section 137 or annual return under section 92 with the Registrar.20
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VARIATION OF SHAREHOLDERS’ RIGHTS [SECTION 48]

1. First - There should be a provision in the memorandum or articles of the company

entitling it to vary such class rights, in absence of same; the terms of issue of the
shares of that class not prohibiting such a variation.

2. Second - The holders of at-least 75% of the issued shares of that class must have
given their consent in writing or pass a special resolution sanctioning the variation
at a separate class meeting.

3. Proviso to sub-section 1, provides if variation by one class of shareholders affects

the rights of any other class of shareholders, the consent of three-fourths of such
other class of shareholders shall also be obtained and the provisions of this section
shall apply to such variation.

4. Third - The holders of at least 10 per cent of the shares of that class who did not
consent to or vote in favour of the resolution may apply to the Tribunal and then
variation shall not take effect unless and until it is confirmed by the Tribunal

5. Procedural Aspects for confirmation from tribunal

An application should be made within 21 days of the date of consent or resolution.
It can be made by one (or more of their number) as they may appoint in writing; on
behalf of the shareholders entitled to make the application.

6. The decision of the Tribunal have binding effect upon shareholders of the class.
Further sub-section 4 requires the company to file a copy of the order with the
Registrar within 30 days of the date of the order.

CALLS ON SHARE [SECTION 49 TO SECTION 51]

1. The liability of a shareholder to pay the full value of the shares held by him, which
is currently partly paid-up is enforced by making “calls” for payment.
2. It is worth noting here that every shareholder is under a statutory liability to pay
the full amount of his shares as Section 10(2) declares that “all money payable by
any member to the company under the memorandum or articles shall be a debt
due from him to the company”.

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3. But the liability to pay this debt arises only when a valid call has been made.
Section 49 lay down the principle of uniformity, whereas section 50 deals with calls
in advance and section 51 contains the provisions regarding dividend rights on
paidup amount.

CALL SHALL BE ON UNIFORM BASIS [SECTION 49]

1. Calls shall be made on a uniform basis on all shares that are falling under the same
class.
2. Usually share with same nominal value are considered as same class, but shares
of the same nominal value on which different sums have been paid shall not be
deemed, for this purpose, to fall under the same class.
3. A shareholder on whom a regular call for payment has been served may choose to
pay only a part of the sum due.
Here it is important to consider the debt (of calls made) is not an entire and indivisible
debt, therefore, the company may be bound to accept the amount tendered by the
shareholder
4. How much to call on partly-paid share?
This will be the decision of board, subject to clauses to Article and terms of issue.

CALLS-IN-ADVANCE [SECTION 50]

1. As per Section 50, a company may, if so authorised by its articles, accept from any
member the whole or a part of the amount remaining unpaid on any shares held by
him, although no part of that amount has been called up.
2. Such advance payment will not entitle the member to more voting rights as
compared with other members until all have been called upon to pay.
3. Interest can be paid on such advance, if permitted by article. Here it is worth
nothing that, where the rate of interest is permitted by the articles on such advance
payment, same could be varied by shareholders in general meeting. To illustrate; a
rate 6 percent may increase to 10% by shareholders.

PAYMENT OF DIVIDEND IN PROPORTION TO PAID-UP AMOUNT [SECTION 51]

The company if so authorised by article, may be permitted to pay dividends in proportion
to the amount paid-up on each share.

The Board of Directors of a company may decide to pay dividends on pro rata basis
if all the equity shares of the company are not equally paid-up. However, in the
case of preference shares, dividend is always paid at a fixed rate.
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PAYMENT OF DIVIDEND IN PROPORTION TO PAID-UP AMOUNT [SECTION 51]

ISSUE OF SHARES AT A PREMIUM & APPLICATION OF PREMIUM [SECTION 52]

1. Since there is no restriction imposed by the Act on the sale of shares at a premium,
hence if the market exists, a company may issue its shares at a price higher than
their face/nominal value.
2. The power to issue shares at premium need not be specifically provided by AOA.
3. SEBI guidelines have to be observed by listed entities, as regulations indicate when
an issue has to be at par and when premium is chargeable.
4. When a company issues shares at a price higher than their face value, the shares
are said to be issued at premium and the differential amount is termed as premium.

Transfer of premium to Securities Premium Account

principles that shall be observed in regards to premium;
a. Premium may be received in cash or in kind.
b. The amount of premium so received, whether in cash or kind, shall be carried to a
separate account to be known as the Securities Premium Account.
c. The amount to the credit of share premium account has to be maintained with the
same sanctity as paid-up share capital
d. It can be reduced only in the manner of paid-up share capital can be reduced under
this act. Liberty is, however, given to use the fund in the subsection 2 and 3.

Note:
1. The amount to the credit of the share premium account has to be shown as a
separate item in the Balance-sheet under Schedule III, Part B of the Act and if it
was disposed of either wholly or partly, then disclosure shall be made ‘how it was
disposed’?
2. The DCA was of opinion that the amount of premium can’t be treated as a free
reserve as it is in the nature of a capital reserve.
3. A reduction of the premium account was allowed under a scheme which experts
had approved as fair, just and proper.

Application of Premium received on Issue of Shares [sub-section 2 & 3]

The companies to apply securities premium account for;
a. Issue of fully paid bonus shares;
b. Writing off the preliminary expenses;

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c. Writing off the issue expenses (expenses including commission paid or discount
allowed on any issue of shares or debentures);
d. Premium payable on the redemption (of any preference shares or of any debentures);
or
e. Buy-back (purchase of its own shares or other securities under section 68).
Sub-section 3 has overriding effect over sub-section 1 and 2. It restricts the
application of Securities Premium Account in case of;
Such class of companies, as may be prescribed and whose financial statement
comply with the accounting standards prescribed for such class of companies under
Section 133
For the purpose of;
a. Issue of fully paid bonus shares;
b. Writing off the issue expenses (expenses including commission paid or discount
allowed on any issue of shares);
c. Buy-back (purchase of its own shares or other securities under section 68).

PROHIBITION ON ISSUE OF SHARES AT DISCOUNT [SECTION 53]

Where the issue price is lower than the face value of the shares, such issue of shares is
regarded as being issued at discount and the differential amount is known as discount.

Exception 
1. Can be issued at discount in case of sweet equity.
2. the company to issue shares at discount to its creditors as result of converting their
debt on company into shares as a result of;
a. Statutory resolution plan or
b. Debt restructuring scheme
In accordance with any guidelines or directions or regulations specified by the
Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking
(Regulation) Act, 1949.
Sub-section 3 provides the penalties that can be imposed where any company fails
to comply with the provisions of Section 53;

Liable Penalty
Every officer who Upto an amount equal to the amount raised through the
is in default issue of shares at a discount or five lakh rupees, whichever
is less

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Company Refund all monies received with interest at the rate of

twelve percent per annum from the date of issue of such
shares

ISSUE OF SWEAT EQUITY SHARES [SECTION 54]

MEANING OF ‘SWEAT EQUITY SHARES’ [SECTION 2(88)]

1. The term ‘sweat equity shares’ means such equity shares as are issued by a company
to its directors or employees at a discount or for consideration, other than cash
2. For providing their know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
3. Hence one can say, sweat equity shares are issued to keep the employees of a
company motivated by making them partner in the growth of the company.
4. Mind it, Sweat equity shares is a different concept from Employee stock option in
multiple ways.
5. Section 54 lists out the conditions that shall be fulfilled by company prior to issue
of sweat equity share apart from designates these at equal footing to equity shares.

STATUS OF SWEAT EQUITY SHARES AND HOLDER THEREOF [SECTION 54(2)]

a. The rights, limitations, restrictions and provisions as are for the time being applicable
to equity shares shall be applicable to the sweat equity shares issued under section
54 of the Act
b. The holders of sweat equity shares shall rank pari-passu with other equity
shareholders.

Pari-passu is a Latin phrase that means “on equal footing”

CONDITIONS FOR ISSUE OF SWEAT EQUITY SHARES [SECTION 54(1)]

According to Section 54 (1), a company may issue sweat equity shares if all of the
following conditions are fulfilled;
a. Share of that class must be already issued
b. Issue is authorised by a special resolution passed by the company;
c. Resolution specifies the details regarding the number of shares, the current market

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price, consideration, if any, and the class or classes of directors or employees to

whom such equity shares are to be issued;
d. The issue of sweat equity shares must be in accordance with regulations/rules as
state in table;

Company Applicable Provisions/Regulations

Listed on Recognised Stock Exchange Regulations made by the Securities and
Exchange Board in this behalf
Other than above Rule 8 of the Companies (Share and Debentures)
Rules, 2014

Imp. definition
Meaning of Employee
Employee means
a. a permanent employee of the company who has been working in India or outside
India; or
b. a director of the company, whether a whole-time director or not; or
c. an employee or a director as defined above, either of subsidiary or holding company
of concerned company; in India or outside India

Meaning of ‘Value additions (Explanation II to sub-rule 1)

The expression ‘Value additions’ means;
a. Actual or anticipated economic benefits derived or to be derived by the company
from an expert or a professional
b. For providing know-how or making available rights in the nature of intellectual
property rights,
c. By such person to whom sweat equity is being issued
d. 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).

Validity of Special Resolution (Sub-rule 3)

The special resolution authorising the issue of sweat equity shares shall be valid
for making the allotment within a period of not more than twelve months from the
date of passing.

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Limit on issue of Sweat Equity Shares (Sub-rule 4)

During a year, the maximum amount/limit for which sweat equity shares can be issued
is higher of;
a. Fifteen percent of the existing paid up equity share capital or
b. Shares of the issue value of rupees five crore.

The issuance of sweat equity shares (cumulative, including all previous issues, if any)
shall not exceed twenty five percent, of the paid-up equity capital of the Company at
any time. This limit for Startup companies is fifty percent of paid up capital upto ten
years from the date of its incorporation or registration.

Lock-in Period [Sub-rule 5]

Sweat equity shares issued to directors or employees shall be locked in/non- transferable
for a period of three years from the date of allotment.

Valuation of Sweat Equity Shares [Sub-rule 6]

Sweat equity shares to be issued shall be valued at a price determined by a registered
valuer as the fair price giving justification for such valuation.

Quoted market prices in an active market are the best evidence of fair value and should
be used, where they exist, to measure the financial instrument.

Valuation of IPR/know-how/value additions [Sub-rule 7]

The valuation of intellectual property rights or of know how or value additions for which
sweat equity shares are to be issued, shall be carried out by a registered valuer, who
shall provide a proper report addressed to the Board of directors with justification for
such valuation.

Treatment of non-cash consideration [Sub-rule 9]

Where the sweat equity shares are issued for a non-cash consideration on the basis of a
valuation report in respect thereof obtained from the registered valuer, such non- cash
consideration shall be treated in the following manner in the books of account of the
company:

Form of Non-cash consideration Treatment

Depreciable or amortizable asset Carried to the balance sheet
Other than above Shall be recorded as expense
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Disclosure in the Directors’ Report [Sub-rule 13]

The Board of Directors shall, inter alia, disclose in the Directors’ Report for the year in
which such shares are issued, the specified details of issue of sweat equity shares.

Maintenance of Register [Sub-rule 14]

The company shall maintain a Register of Sweat Equity Shares in Form No. SH. 3. It shall
be maintained at the registered office of the company or such other place as the Board
may decide.

ISSUE AND REDEMPTION OF PREFERENCE SHARES [SECTION 55]

Following diagram depicts the types of preference shares:

On the basis Cumulative

of payment of
dividend Non-cumulative

On the basis of Participatory

participation in
surplus Non-participatory
Types of
Preference Convertible
(mandatorily or optionally)
Shares On the basis of
(partially or fully)
conversion

Non-convertible

Redeemable
On the basis of
redemption
Irredeemable (cannot
be issued)

PROHIBITION ON ISSUE OF IRREDEEMABLE PREFERENCE SHARES

A company limited by shares shall not issue any preference shares which are irredeemable.

ISSUE AND REDEMPTION OF REDEEMABLE PREFERENCE SHARE

From the sub-section 1, it can be constructed reasonably that only redeemable preference

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shares can be issued by company limited by shares, sub-section 2 provides for conditions
as applicable to the issue and redemption of redeemable preference shares.

Authorised by Article of Association

A company limited by shares may issue redeemable preference shares only if so authorised
by its articles.

Maximum Tenor of redeemable Preference Shares and exception thereto

Sub-section 2 also provides preference shares shall be redeemed within a period not
exceeding twenty years from the date of their issue subject to such conditions.

Maximum Tenor of redeemable Preference Shares and exception thereto

Sub-section 2 also provides preference shares shall be redeemed within a period not
exceeding twenty years from the date of their issue subject to such conditions

These conditions are;

a. A special resolution in the general meeting of the company shall be passed
b. At the time of such issue of preference shares, the company should not have
subsisting default in the;
i. Redemption of preference shares or
ii. Payment of dividend due on any preference shares.
The matters to be specified in resolution and explanatory statement to be annexed to the
notice of such general meeting in which resolution has to be passed respectively.

A company that issues preference shares, to maintain a Register of Members under Section
88, which shall contain the particulars in respect of such preference shareholder(s).

If company wish to list its preference shares on a recognized stock exchange, shall issue
such shares in accordance with the regulations made by the SEBI in this behalf.

Exception to maximum tenor limit of twenty years

For infrastructure projects specified in schedule VI of this Act, a company may issue
preference shares for a period exceeding twenty years but not exceeding thirty years
subject to the redemption of at least 10% of such preference shares annually, beginning
from 21st year onwards or earlier, on proportionate basis, at the option of preferential
shareholders.

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Redemption of Preference Shares [Second proviso to section 55(2)]

provide conditions for redemption and payment of premium on redemption, if any
a. Preference shares shall be redeemed out of;
1. Profits of the company which would otherwise be available for dividend
or
2. Proceeds of a fresh issue of shares made for the purposes of such redemption.

b. Shares to be redeemed shall be fully paid.

c. Where such shares are proposed to be redeemed out of the profits of the company;
1. A sum equal to the nominal amount of the shares to be redeemed, out of such
profits (profit & free reserves, which otherwise is available for dividend), shall
be transferred to a reserve, called Capital Redemption Reserve
2. The amount to the credit of Capital Redemption Reserve has to be maintained
with the same sanctity as paid-up share capital
3. Capital Redemption Reserve can be reduced only in the manner of paid-up
share capital can be reduced under this Act.

d. Source of premium, if any; payable at redemption of preference shares

In case of such class of companies, as may be prescribed and whose financial
statement comply with the accounting standards prescribed for such class of
companies under section 133, the premium, if any, payable on redemption shall be
provided for out of the profits of the company, before the shares are redeemed.

Provided also that premium, if any, payable on redemption of any preference shares
issued on or before the commencement of this Act by any such company shall be
provided for out of the profits of the company or out of the company’s securities
premium account, before such shares are redeemed.

In a case not falling under above scenario, the premium, if any, payable on
redemption shall be provided for out of the profits of the company or out of the
company’s securities premium account, before such shares are redeemed.

Issue of further Redeemable Preference Shares (if a Company is unable to redeem existing
preference shares or pay dividend) [Sub-section 3]
Where a company is not in a position to redeem any preference shares or to pay dividend

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on such preference shares (called unredeemed preference shares) in accordance with

the terms of issue; then such company may issue further redeemable preference shares
to the holder of unredeemed preference shares; equal to the amount due, including
the dividend thereon; with the consent of the holders of three-fourth in value of such
unredeemed preference shares, and approval of the tribunal on a petition made by it in
this behalf.
In this way the unredeemed preference shares shall be deemed to have been redeemed.

Where a company is not in a position to redeem any preference

shares or to pay dividend on such preference shares (called
unredeemed preference shares) in accordance with the terms of
issue;

Then such company may issue further redeemable preference

shares to the holder of unredeemed preference shares;

Equal to the amount due, including the dividend thereon;

With the consent of the holders of three-fourth in value of such

unredeemed preference shares, and approval of the tribunal
on a petition made by it in this behalf.

In this way the unredeemed preference shares shall be deemed

to have been redeemed.

In regards to preference shares held by shareholder who have not consented to the
issue of further redeemable preference shares, the tribunal shall order the redemption
forthwith; while giving approval under section 55(3)

Utilisation of CRR Account

The capital redemption reserve account may be applied in paying up unissued shares of
the company to be issued to the members as fully paid bonus shares

TRANSFER AND TRANSMISSION OF SECURITIES AND THE ALLIED PROVISIONS

[SECTION 56 TO SECTION 59]

The procedures and formalities for the transfer of the securities as laid down by sections
56-59 are largely applicable to securities that are in other form than demat form.

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TRANSFER AND TRANSMISSION OF SECURITIES OR INTEREST OF MEMBER IN COMPANY

[SECTION 56]
4.17 Transfer of Shares (Section 56 to 58)
• Section 44 states that the shares or debentures 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 56 of the Companies Act, 2013 deals with
the transfer and transmission of securities or interest
of a member in the company.
• Meaning: Transfer of shares means the voluntary conveyance of the rights and
possibly, the duties of a member (as represented in a share in the company) from a
shareholder who wishes to cease to be a member to a person desirous of becoming
a member. Thus, shares in a company are transferable like any other moveable
property in the absence of express restrictions under the articles.
• Company delivering the certificate: Every company shall, unless prohibited by any
provision of law or any order of Court, Tribunal or other authority, deliver the
certificates of all securities allotted, transferred or transmitted:

Different conditions Period of the delivering the certificates

In the case of subscribers to the Within 2 months from the date of
memorandum; incorporation
In the case of any allotment of any of Within a period of two months from the
its shares date of allotment
In the case of a transfer or transmission Within a period of one month from the
of securities date of receipt by the company of the
instrument of transfer or the intimation
of transmission
In the case of any allotment of debenture Within a period of 6 months from the
date of allotment

• Procedure:
1. A proper instrument of transfer, in such form as may be prescribed, duly
stamped, dated and executed by or on behalf of the transferor and the
transferee (except where the shares are in Demat form), specifying the name,
address and occupation, if any, of the transferee, has been delivered to the

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company by the transferor or the transferee within a period of 60 days from

the date of execution,
(+)
The certificate relating to the securities, or if no such certificate is in existence,
along with the letter of allotment of securities.
2. In case a company has partly —paid shares and where the company has received
any instrument of transfer of such shares from transferor, the company shall
give a notice by registered post to the transferee and shall register the transfer
only when no objection is received from the transferee within 2 weeks from the
date of receipt of notice.
3. Where the instrument of transfer has been lost or the instrument of transfer
has not been delivered within the prescribed period, the company may register
the transfer on such terms as to indemnity as the Board may think fit.
4. What company will do?

Company may register the transfer Company may refuse to register the
↓ transfer
Company shall issue share certificate ↓
within 1 month of registering the Refusal of Registration (Section 58)
transfer

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Refusal of Registration (Section 58)

Private company refuses to register the Public company refuses to register the
transfer of shares transfer of shares
The Board of Directors of a private The shares or debentures and any interest
company can refuse to register transfer therein of a company shall be freely
of shares in favour of any person in terms transferable.
of the provisions of Articles of Association The Board of Directors and the concerned
of the Company. However while refusing depository has no discretion to refuse or
to transfer shares; the power must be withhold transfer of any security on any
exercised by the Board bona fide and in the ground, except on the ground of sufficient
best interests of the company. cause.
 Company shall within a period of  Company shall within a period of
30 days from the date on which the 30 days from the date on which the
instrument of transfer was delivered instrument of transfer was delivered
to the company, send notice of the to the company, send notice of the
refusal to the transferor and the refusal to the transferor and the
transferee or to the person giving transferee or to the person giving
intimation of such transmission, as intimation of such transmission, as
the case may be, giving reasons for the case may be, giving reasons for
such refusal. such refusal.
 Transferee may appeal to the NCLT  Transferee may appeal to the NCLT
against the refusal within a period of against the refusal within a period of
30 days from the date of receipt of 60 days from the date of receipt of
the refusal notice. In case no notice the refusal notice. In case no notice
has been sent by the company, then has been sent by the company, then
appeal may be made within a period appeal may be made within a period
of 60 days from the date on which of 90 days from the date on which
the instrument of transfer or the the instrument of transfer or the
intimation of transmission, as the intimation of transmission, as the
case may be, was delivered to the case may be, was delivered to the
company. company.
↓
Power of National Company Law Tribunal (NCLT):
The tribunal, while dealing with an appeal both in respect of private and public
company, may, after hearing the parties, either:

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OR
Dismiss the (a) Direct that the transfer or transmission shall be
appeal registered by the company and the company shall
comply with such order within a period of 10 days of
the receipt of the order; or
(b) Direct rectification of the register and also direct the
company to pay damages, if any, sustained by any
party aggrieved.

• Punishment for Impersonation of Shareholder [Section 57]: If any person deceitfully

personates as an owner of any security or interest in a company and thereby obtains
or attempts to obtain any such security or interest or receives or attempts to receive
any money due to any such owner, he shall be punishable with:
Imprisonment: Minimum 1 year upto 3 years
And
Fine: Minimum `1 lakh upto `5 lakhs.

Example: ‘A’ commits forgery and thereby obtains a certificate of transfer of shares
from a company and transfers the shares to ‘B’ for value acting in good faith.
Company refuses to transfer the shares to ‘B’. In this case company is right to refuse
to do the transfer of the shares in the name of the transferee B without any liability
as a forged transfer is a nullity in law and does not give the transferee concerned
any title to the shares. Whereas A incurs a criminal liability under the Indian Penal
Code punishable both by imprisonment and also being liable to compensate both
the Company and B for losses suffered by them.

4.18 Transmission of Shares

• Meaning: Transmission of shares takes place when a registered shareholder dies or
becomes lunatic or is adjudicated insolvent or if the shareholder, being a company,
goes into liquidation i.e., which is known as a transfer of shares by operation of law.
 On the death or lunacy of the original shareholder, his shares vest in his
legal representative and his estate remains liable for the unpaid amount.
His representative can sell the shares without being registered, subject to
-the provisions of the articles. He is also entitled to be put on the register of
members if he so desires.

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 On the insolvency of a shareholder, his shares vest in the Official Assignee or

Receiver, who may get himself registered as holder of these shares, or dispose
them of. He can also disclaim partly — paid shares or fully — paid shares which
are subject to mortgage or other encumbrance.
 No formal instrument of transfer is required since the owner is not capable of
executing the same as transferor. Moreover, there is no consideration involved
and no stamp duty etc. is required for registration of transmission of shares.

• Procedure for Transmission of Shares: While transfer of shares is between living

persons or between or with corporate bodies, transmission of shares is the process
by which the title over shares is passed on from one person to another by the
operation of law. In such cases, there is no need for an instrument of transfer. The
articles of association of a company contain the procedure, which the company will
follow for transmission of shares.
Generally, the following documents are required for transmission of shares:
(i) An application for transmission of shares;
(ii) A letter of indemnity;
(iii) A probate (attested copy of will) or letter of administration;
(iv) No-objection certificate, in case of more than one claimants

• Refusal of Registration
Same as transfer of shares

• Distinction between Transfer and Transmission

(1) Transfer is a voluntary act of a member while transmission is by operation of
law.
(2) There is always consideration involved in transfer whereas in transmission,
there is no question of consideration, hence no stamp duty, etc.
(3) Transfer is affected as transfer of property when a member intends to sell it
whereas transmission takes place only on the death, bankruptcy and lunacy of
the member.
(4) In case of transfer, the member has to execute a valid instrument of transfer
whereas in case of transmission, it is not so possible.

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4.19 Rectification of Register of Members on transfer of Securities (Section

59)
This provides the procedure for the rectification of register of members after the transfer
of securities. The provision states that-
• If the name of any person is, without sufficient cause, entered in the register of
members of a company, or
• after having been entered in the register, is, omitted there from, or
• if a default is made, or unnecessary delay takes place in entering in the register, the
fact of any person having become or ceased to be a member,
the person aggrieved, or any member of the company, or the company may appeal in
such form as may be prescribed, to the Tribunal, or to a competent court outside India,
specified by the Central Government by notification, in respect of foreign members or
debenture holders residing outside India, for rectification of the register.
↓
The Tribunal may, after hearing the parties to the appeal by order, either dismiss the
appeal or direct that the transfer or transmission shall be registered by the company
within a period of ten days of the receipt of the order, or direct rectification of the records of
the depository or the register and in the latter case, direct the company to pay damages,
if any, sustained by the party aggrieved.
The provisions of this section shall not restrict the right of a holder of securities, to
transfer such securities and any person acquiring such securities shall be entitled to
voting rights unless the voting rights have been suspended by an order of the Tribunal.

Transmission (vis-à-vis transfer).

The word ‘transmission’ means devolution of title to securities otherwise than by transfer,
for example, devolution by death, succession, inheritance, bankruptcy, marriage, etc.
On registration of the transmission of securities, the person entitled to transmission of
securities becomes the holder and is entitled to all rights and subject to all liabilities
arising therefrom.
While transfer of shares is brought about by delivery of a proper instrument of transfer (viz,
transfer deed) duly stamped and executed, transmission of shares is done by forwarding
the necessary documents (such as a notarised copy of death certificate) to the company.

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Few cases of transmission for better understanding - In the following cases

(mind it this list is not exhaustive, only illustrative), transmission of shares shall take
place;
1. Death: When a shareholder expires, his shares need to be transmitted to his legal
representative.
2. Insolvency: When a shareholder becomes insolvent, his shares are to be transmitted
to his Official Receiver.
3. Lunacy: When a shareholder becomes lunatic, his shares are to be transmitted to
his administrator appointed by the Court.

Transfer of Security of the Deceased Person by his Legal Representative [Sub- section 5]

The transfer of any security (or other interest in company) made by legal representative
of a deceased person, shall be valid as if such legal representative is holder at the time
of the execution of the instrument of transfer; even if, in actual such legal representative
is not a registered holder.

This sub-section is basically bringing ease to legal heir with deeming effect of being
holder of security or other interest in company of a deceased person.

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Example 14 - Richa Daniel, after having obtained succession certificate, succeeded

to 7,000 shares of ` 100 each allotted to her late father Alexender Daniel by Speed
Software Limited. To pay off the debt of her cousin Stesley, she wants to transfer whole
of the 7,000 shares to her on the basis of a duly stamped instrument of transfer which
has been signed by her as well as Stesley. Accordingly, she has delivered the required
documents to the company for transfer of shares.
In terms of Section 56 (5), the company, on receipt of duly stamped instrument of
transfer along with requisite share certificates and succession certificate, shall transfer
the shares in favour of Stesley. Thus, even though Richa Daniel, the legal representative
of Alexender Daniel, is not a holder of 7,000 shares as per the Register of Members
of the company, the transfer effected by her in favour of her cousin Stesley is a valid
transfer as if she had been the holder of securities at the time of executing the transfer
deed.
Note - As an alternative, Richa Daniel may choose to get herself registered as holder
of the 7,000 shares in which case, she will make an application to Speed Software
Limited. Such application shall be accompanied with share certificates and succession
certificate. There is no need to submit instrument of transfer or transfer deed in such a
case of transmission. This is so because transfer deed cannot be signed by the deceased
person as transferor.
On receipt of these documents, the company will scrutinize them and if found in
order, it shall proceed to enter the name of Richa Daniel in the Register of Members.
Consequently, the name of the deceased person i.e. Alexender Daniel shall be deleted.
Further, new share certificates will be issued in the name of Richa Daniel, the legal
representative of Alexender Daniel.

Time Period for Delivery of certificates

Every company shall, unless prohibited by any provision of law or any order of Court,
Tribunal or other authority, deliver the certificates of all securities allotted, transferred or
transmitted;

Particulars Time Period for delivering the Certificates

In the case of subscribers to the Within a period of two months from the date of
memorandum. incorporation.
In the case of any allotment of any Within a period of two months from the date of
of its shares by a company. allotment.

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In the case of a transfer of securities. Within a period of one month from the date
of receipt of the instrument of transfer by the
company
In the case of a transmission of Within a period of one month from the date of
securities. receipt of the intimation of transmission by the
company
In the case of any allotment of Within a period of six months from the date of
debenture. allotment.
In the case of all securities by specified Within a period of sixty days after
IFSC public and private company incorporation, allotment, transfer or
transmission. days

Note:
In case where the securities are dealt with in a depository, the company shall intimate the
details of allotment of securities to depository immediately on allotment of such securities

Penalty

Liable Default Penalty

Company and every officer In complying with the
of the company who is in provisions of sub-sections ` 50,000
default (1) to (5) to section 56

Liability of Depository
Where any depository or depository participant, with an intention to defraud a person, has
transferred shares, it shall be liable under Section 447 along with the liability mentioned
under the Depositories Act, 1996.

Note:
1. With the dematerialisation process becoming a necessity in case of unlisted public
companies i.e. they are required to dematerialise all of their securities as per Rule 9A
of the Companies (Prospectus and Allotment of Securities) Rules, 2014 , the chances
of forgery are very thin or almost negligible.
2. The provisions contained in Section 447 which describe ‘punishment for fraud’ are
stated in the earlier Chapter 3 relating to ‘Prospectus and Allotment of Securities’.

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PUNISHMENT FOR PERSONATION OF SHAREHOLDER [SECTION 57]

If any person deceitfully personates;
a. as an owner of any security or
b. interest in a company, or
c. as an owner of any share warrant or coupon issued in pursuance of this Act,
And, thereby obtains or attempts to obtain any such security or interest or any such share
warrant or coupon, or receives or attempts to receive any money due to any such owner,
Such person shall be punishable with;
a. Imprisonment for a term which shall not be less than one year but which may extend
to three years and
b. Fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees.

Penalty Minimum Maximum up to

Imprisonment One year Three years
And
Fine One Lakh Five lakh

Note:
Personation for acquisition of securities is offence under section 38 punishable under
section 447. Mind it section 447 is general provision.
Gravity of offence committed by personation under section 38 and section 57 may be
considered while imposing penalty out of range provided.
It is worth noting, offence of cheating by personation under section 416 of Indian Penal
Code, 1860 is punishable under section 419 of code, with punishment of either description
which may extend upto three year or with fine or with both.
Student may refer section 38 and section 447, both covered under chapter 3 of this module.

Additional Reading on Forged Transfer

A forged transfer is a ‘nullity’ and is not legally binding. Forged transfer takes place
when a company effects transfer of shares on the basis of an instrument of transfer
containing forged signatures of transferor. Is it possible for a transferee of ‘forged
transfer’ to acquire ownership of shares contained in the instrument of transfer? The
answer is ‘NO’. At the same time, the transferor who is the real owner continues to be

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the shareholder and accordingly, the company can be forced by him to delete the name
of the transferee and to restore his name as owner of shares in the Register of Members.
What will happen if the transferee of ‘forged transfer’ transfers the shares to another
buyer who does not know about the forgery and the company also registers the transfer
in the name of new buyer and endorses the share certificates. In fact, the company
cannot deny the ownership rights of new genuine buyer but it can also not deny the
ownership rights of original shareholder because ‘forged transfer’ is void ab-initio and
therefore, the company has to restore his name. While restoring the name of the original
shareholder, the company may be asked to compensate the new genuine buyer who
exercised good faith in purchasing the shares. As a remedy, the company may get itself
indemnified by the first transferee who used the forged instrument of transfer to get the
shares transferred in his name.

REFUSAL OF REGISTRATION AND APPEAL AGAINST REFUSAL [SECTION 58]

Shares are movable property, hence can be transferred by the shareholders in the manner
prescribed by the Articles. The right to transfer shares is absolute in nature and inherently
vested with the ownership of the shares. In no case Articles can take away the rights of
members to transfer shares in absolute, by making shares nontransferable.
Shares of a public company are freely transferable, whereas a private company is
required under section 2(68)(i) to restrict the right of the members to transfer the shares.
The articles of association of private companies contain certain kind of restrictions on the
transferability of shares. Generally, the restriction put by a private company is that of
pre-emption whereby the members are required to offer their shares first to the existing
members of the company before offering them to the outsiders.
Section 58 contains the procedure which needs to be followed by a company while
refusing to register the transfer of securities. It also contains process of filing appeal
against such refusal.

Order of Tribunal [Sub-section 5]

The Tribunal, while dealing with an appeal may, after hearing the parties, either
dismiss the appeal, or by order direct;
a. Transfer or transmission shall be registered by the company and the company shall
comply with such order within a period of ten days of the receipt of the order; or
b. Direct rectification of the register and also direct the company to pay damages, if
any, sustained by any party aggrieved.

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Contravention of the Order of the Tribunal [Sub-section 6]

If a person contravenes the order of the Tribunal, he shall be punishable with imprisonment
for a term not less than one year but may extend to three years and with fine not less
than one lakh rupees which may extend to five lakh rupees.

Summary of penalty

Penalty Minimum Maximum up to

Imprisonment One year Three years
And
Fine One Lakh Five lakh

Summary of section 58

Refusal to transfer

Private company Public company

Send notice of refusal Can’t refuse without

with reasons sufficient cause

Appeal to Tribunal in Appeal to Tribunal in

30/60 days 60/90 days

Tribunal will either dismiss appeal or order:

1. Transfer within 10 days
2. Rectification of Register

In case of contravention of order:

Fine and impriosnment

RECTIFICATION OF REGISTER OF MEMBERS [SECTION 59]

It is the duty of the company to keep the register up to date so as to give at all times
the accurate and correct position as to particulars of shareholding, because If a person’s
name appears in the register of members, he is presumed to be the shareholder or
member, even if, in fact, he is not so. Contrarily, if a person’s name is absent from the
register, apparently he is not a member, although he may have done everything to entitle
him to become one.

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Section 59 entrust right to appeal with aggrieved person, apart from vesting power in
tribunal to order for rectification of register of members.

Appeal by Aggrieved Person [Sub-section 1]

An aggrieved person, member of company or company may appeal to tribunal or to a
competent court (outside India, specified by the Central Government by notification, in
respect of foreign members or debenture holders residing outside India), for rectification
of the register if without sufficient cause,
a. the name of any person is entered in the register of members of a company, or
b. the name of any person is omitted, after having been entered in the register, or
c. if a default is made, or unnecessary delay takes place in entering in the register, the
fact of any person having become or ceased to be a member.

Note:
The words “unnecessary delay” have not been defined in the Act and, therefore, it
becomes a question of evidence to be decided on the facts of each case. A failure to
register a transfer within one month of the application, which was contrary to the listing
agreement, was held to be an unreasonable delay.
Every shareholder has an interest in the proper maintenance of the company’s register of
members. Any member can make an application without showing any injury or prejudice
to him. Personal grievance is not necessary for locus standi.

Order of the Tribunal [Sub-section 2]

Tribunal may, after hearing the parties to the appeal either dismiss the appeal or by
order;
a. Direct that the transfer or transmission shall be registered by the company within
a period of ten days of the receipt of the order, or
b. Direct rectification of the records of the depository or the register and in the latter
case, direct the company to pay damages, if any, sustained by the party aggrieved.
Rights of holder is protected
Act 3 protects the right of a holder of securities, to transfer such securities. Further,
any person acquiring such securities shall be entitled to voting rights unless the voting
rights have been suspended by an order of the Tribunal.

Transfer of Securities contravenes certain Acts and Direction of Tribunal

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Tribunal may, on an application (made by the depository, depository participant, company,

the holder of the securities or the Securities and Exchange Board), direct any company or
a depository to set right the contravention and rectify its register or records concerned,
where the transfer of securities is in contravention of any of the provisions of the;
a. The Securities Contracts (Regulation) Act, 1956
b. The Securities and Exchange Board of India Act, 1992
c. The Companies Act, 2013 or
d. Any other law for the time being in force

ALTERATION OF SHARE CAPITAL [SECTIONS 61-70]

Bonus Issue
(section 63)
Rights Issue Reduction
(section 62) (section 66)

Power to limited
Alteration of Buy back
companies
Share Capital (Section 68)
(section 61)

POWER OF LIMITED COMPANY TO ALTER ITS SHARE CAPITAL [SECTION 61]

A limited company with a share capital can alter the capital clause of its memorandum
of association in any of the following ways, provided authority to alter is given by the
articles.
a. It may increase its authorised capital by such amount as it thinks expedient.
b. Consolidate and divide the whole or any part of its share capital into shares of larger
amount.
c. Convert all and any of its fully paid up shares into stock or vice-versa into any
denomination.
d. Sub-divide the whole or any part of its share capital into shares of smaller amount.
The proportion between the amount paid and unpaid (if any) on each reduced share
shall be the same as it was in the case of the share from which the reduced share is
derived.

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e. Cancel those shares which have not been taken up and reduce its capital accordingly.
f. Any of the above things can be done by the company by passing a resolution at a
general meeting.
g. Approval of the National Company Law Tribunal requires only in the case wherein
consolidation and division [suggested in point (b)] results in changes in the voting
percentage of shareholders.
h. Within 30 days of alteration, a notice must be given in Form SH-7 to the Registrar
who will record the same and make necessary alteration in the company’s
memorandum. (Section 64 read with Rule 15 of the Companies (Share Capital and
Debentures) Rules, 2014).
i. Further sub-section 2 provides that the cancellation of shares shall not be deemed
to be a reduction of share capital. Mind it, reduction of capital covered under section
66 of the Act.

FURTHER ISSUE OF SHARE CAPITAL – RIGHTS ISSUE; PREFERENTIAL ALLOTMENT

[SECTION 62]
A rights issue involves pre-emptive subscription rights to buy additional securities
in a company offered to the company’s existing security holders. It is a non-dilutive
prorata way to raise capital.

Class of companies Power to Right Issue Applicable Provisions

Listed companies or Provisions of the Securities
companies intended to get and Exchange Board of India
its securities listed 23(1)(c) Act, 1992 and the rules and
regulations made thereunder
Public companies not Provisions of this Act and rules
covered above made thereunder
Private companies not 23(2)(a)
covered above

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Offering of issue of further Shares [Sub-section 1]

Issue of Further
Shares

To existing equity To employees To any person

shareholders Employee Stock For cash or non-
Right Issue u/s 62(1) Option cash considerations
(a) u/s 62(1)(b) u/s 62(1)(c)
(Special Resolution + (Special Resolution) (Special Resolution)
Offer through notice)

Whenever a company having a share capital, proposes to increase its subscribed capital
by the issue of further shares, such shares shall be offered;
a. To persons who are holders of equity shares (existing on date of such offer),
1. in proportion to the paid-up capital on those shares held by them;
2. by sending a letter of offer in form of notice, such notice shall specify;
i. Specify the number of shares to be offered
ii. Specify the time period within which the offer must be accepted. The time
period should not be less than 15 days or such lesser number of days as
may be prescribed but not exceeding 30 days from the date of the offer

Note – Rule 12A inserted in the Companies (Share Capital and Debentures) Rules, 2014,
that provides the time period within which the offer shall be made for acceptance shall
be not less than seven days from the date of offer
iii. Specify, if the offer is not accepted within the specified time, it shall be
deemed to have been declined.
iv. Confirm the right to renounce all or any of shares to existing holders, in
favour of some other person; unless article otherwise provided.

Note:
1. If offer declined by existing holder, then at intimation of such decline or after expiry
of the specified time given to him for exercise the right, the Board of Directors may

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dispose of them (such shares, in regard to which offer is declined) in such manner
which is not dis-advantageous to the shareholders and the company.
2. While determining/checking proportion, then as nearly as the circumstances admits
shall be acceptable.
3. In case of a Private Company and Specified IFSC Public Company, any shorter time
periods to accept the offer may be provided, if ninety percent of the members have
given their consent in writing or in electronic mode for such shorter period

b. To employees under a scheme of employees’ stock option, subject to:

1. Special resolution passed by company, and
2. Conditions as may be prescribed in Rule 12 of the Companies (Share Capital
and Debentures) Rules, 2014.

Note:
1. The term ‘employees’ stock option’ means the 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 (Section 2(37)
2. Instead of special resolution, ordinary resolution will be sufficient, in following
cases;
a. Private company which has not defaulted in filing its financial statements
under Section 137 or Annual Return under Section 92.
b. Specified IFSC Public Company.
3. In case of a listed company, conditions prescribed by SEBI (Share Based Employee
Benefits) Regulations, 2014 shall be observed.

c. To any persons, if so authorised by a special resolution even if they are not within
the two categories mentioned above.

Note:
1. Where further shares are offered through manner specified in point iii above, then
such offer can be for cash or for a consideration other than cash.
2. Further, in case of non-cash consideration, price to be determined by valuation
report of a registered valuer subject to such conditions as may be prescribed in Rule

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13 of the Companies (Share Capital and Debentures) Rules, 2014.

Example 21 - A company, listed at Bombay Stock Exchange, intends to offer its further
shares to the non-members. The existing members of the company consider such offer
as invalid in view of the provisions contained in Section 62 (1) (a). However, the company
is not prohibited in absolute terms while offering new shares to the non-members. It
can do so after passing a special resolution as required in Section 62 (1) (c). Thus, new
shares of a company limited by shares may be issued to non-members under certain
circumstances.

Illustration– Q&A
What shall be length of period specified by notice of offer of further issue for giving
acceptance?
Answer – Notice of offer of further shares shall specify the time period within which the
offer must be accepted. The time period should not be less than 15 days or such lesser
number of days as may be prescribed but not exceeding 30 days from the date of the
offer

Note – Rule 12A inserted in the Companies (Share Capital and Debentures) Rules, 2014,
provides the time period within which the offer shall be made for acceptance shall be not
less than seven days from the date of offer.

Dispatch of Notice to the existing Shareholders [sub-section 2]

Notice referred in sub-section (1) shall be dispatched through registered post or speed
post or through electronic mode or courier or any other mode having proof of delivery to
all the existing shareholders at least three days before the opening of the issue.

In case of a Private Company any shorter length (less than 3 days) of notice period shall
also be acceptable, if ninety percent of the members have given their consent in writing
or in electronic mode for such shorter period.

Exception – Section 62 shall not be applicable on conversion of debenture or loan into equity
shares [Sub-section 3]
Conversion of debenture (pursuant to conditions of issue) or loan (pursuant to conditions of
grant of loan) into equity shares leads to increase in the subscribed capital of a company.

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Sub-section 3 states section 62 shall not be applicable to such increase in subscribed

capital provided;
a. Those terms and conditions under which such conversion took place,
b. Must be approved by company in general meeting through special resolution,
c. Prior to issue of debenture and grant of loan.

Compulsorily conversion of Debentures/Loan from government into Shares

Sub-section 4 empowers the government to direct by order;

a. Conversion of debentures (issued to government) or loans (issued by government) to
company, either full or in part thereof into shares of such company,
b. If that Government considers it necessary in the public interest so to do,
c. on such terms and conditions as appear to the Government to be reasonable in the
circumstances of the case,
d. even if terms of the issue of such debentures or the raising of such loans do not
providing for an option for such conversion.

Proviso to sub-section 4 provides remedy to company against hostile conversion.

Where the terms and conditions of such conversion are not acceptable to the company,
it may appeal to the Tribunal, within sixty days from the date of communication of such
order.
Tribunal after hearing the company and the Government shall pass such order as it
deems fit.

Sub-section 5 requires, government shall consider following while determining the terms
and conditions of conversion;
a. the financial position of the company,
b. the terms of issue of debentures or loans, as the case may be,
c. the rate of interest payable on such debentures or loans, and
d. such other matters as it may consider necessary.
Sub-section 6 states pursuant to order of government for conversion of debenture and
loan into equity shares, under sub-section 4, the authorised share capital of such company
shall stand increased by an amount equal to the amount of the value of shares which
such debentures or loans or part thereof has been converted into and memorandum
shall stand altered.

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Section 62 shall not apply to Nidhi Company. While complying with such exception, the
Nidhi Companies shall ensure that the interests of their shareholders are protected.

ISSUE OF BONUS SHARES [SECTION 63]

The term bonus share is not defined anywhere in the Companies Act 2013. However,
the characteristics of bonus shares along with condition and manner of issue of fully
paid-up bonus share by a company to its member highlighted by section 63.
In commercial parlance, the bonus shares are shares issued proportionately by a company
to its current shareholders as fully paid-up shares free of cost.

Example 23 – If a company decided to issue bonus share in ratio of 1:2 (one for
every two shares held), then the holder of 100 shares of a company will get 50
bonus share without making any payment. There his holding of shares will now be
150 instead of 100.

Status of Bonus Shares from lens of the Judiciary

Hon’ble Supreme Court in case of Standard Chartered Bank v Custodian
Bonus share is an accretion. A bonus share is issued when the company capitalises its
profits by transferring an amount equal to the face value of the share from its reserve
to the nominal capital.
In other words, the undistributed profit of the company is retained by the company
under the head of capital against the issue of further shares to its shareholders. Bonus
shares have, therefore, been described as a distribution of capitalised undivided profit.
In the case of issue of bonus share there is an increase in the capital of the company by
transferring of an amount from its reserve to the capital account and thereby resulting
in additional shares being issued to the shareholders.
A bonus share is a property which comes into existence with an identity and value of its
own and capable of being bought and sold as such.

Sources for issue of Bonus Share [Sub-section 1]

A company may issue fully paid-up bonus shares to its members out of;
a. its free reserves (other than revaluation reserve);
b. the securities premium account; or
c. the capital redemption reserve account.

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Bonus shares shall not be issued by capitalising reserves created by the revaluation
of assets [Proviso to section 63(1)]

Bonus shares may be issued from Bonus shares shall not be issued from
Free Reserves Revaluation Reserve
Securities Premium Reserve
Capital Redemption Reserve

Pre-requisites for issue of bonus shares [Sub-section 2]

No company may capitalise its profits or reserves for the purpose of issuing fully paid-up
bonus shares, if;
a. it is authorised by its Articles,
b. it has on the recommendation of the Board, been authorised in the general meeting
of the company;
c. it has not defaulted in payment of interest or principal in respect of fixed deposits
or debt securities issued by it;
d. it has not defaulted in respect of the payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus;
e. the partly paid-up shares, if any outstanding on the date of allotment, are made
fully paid-up;
f. it complies with such conditions as prescribed by Rule 14 of the Companies (Share
capital and debenture) Rules, 2014, that a company which has once announced the
decision of its Board recommending a bonus issue, shall not subsequently withdraw
the same.
g The bonus shares shall not be issued in lieu of dividend (Sub-section 3 to section 63)
h. Proviso to sub-section 5 to section 123 of this act carries confirmatory provisions to
those contained in section 63.
i. According to the proviso to Section 123(5) of the Act, it is permissible for a company
to capitalise its profits or reserves for the purpose of issuing fully paid up bonus
shares or paying up any amount for the time being unpaid on any shares held by
the members of the company.

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NOTICE TO BE GIVEN TO REGISTRAR FOR ALTERATION OF SHARE CAPITAL [SECTION 64]

As and when, there is an alteration (including increase and decrease) of share capital, the
company concerned shall notify the registrar. The provisions in this respect are contained
in Section 64.

Filing of Prescribed Notice [sub-section 1]

Company shall file a notice in the Form No. SH-7 as per Rule 15 of the Companies
(Share Capital and Debentures) Rules, 2014 with the Registrar, along with an altered
memorandum; within thirty days of alteration (including increase or decrease) to its
capital in case of;
a. Alternation of capital in manner specified in section 61 (1),
b. Order made by the Government under section 62(4) read with 62(6) has the effect of
increasing authorised capital of a company; or
c. Redemption of any redeemable preference shares,

Penalty for Default in Filing of Notice [Sub-section 2]

Where any company fails to file notice as manner prescribed in sub-section 1 then such
company and every officer who is in default shall be liable to a penalty of five hundred
rupees for each day during which such default continues, subject to a maximum of five
lakh rupees in case of a company and one lakh rupees in case of an officer who is in
default.

Summary of penalty

Liable Penalty
Company Five hundred rupees for each day during which such default
continues, subject to a maximum of five lakh rupees
Every officer who is in Five hundred rupees for each day during which such default
default continues, subject to a maximum of one lakh rupees

REDUCTION OF SHARE CAPITAL [SECTION 66]

Conservation of capital is one of the main principles of company law, because any
reduction of capital diminishes the fund; out of which creditor and other debt holders are
to be paid, therefore it adversely impact them. But sometimes it may become necessary
for the company to bring about a reduction in its capital.
Therefore, closely fenced power is given by Section 66.

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Reduction of Share Capital by Special Resolution to be confirmed by Tribunal

A company being ‘company limited by shares’ or ‘company limited by guarantee and
having a share capital’ may reduce the share capital in any manner and in particular
manners as state below -
a. Extinguish or reduce the liability on any of its shares in respect of the share capital
not paid-up; or
b. Cancel any paid-up share capital which is lost or is unrepresented by any available
assets; or
c. Pay off any paid-up share capital which is in excess of the wants of the company
a. Subject to Passing a special resolution; and
b. Alter its memorandum by reducing the amount of its share capital and of its
shares accordingly; and
c. Repayment of any deposits accepted by it, either before or after the
commencement of this Act, or the interest payable thereon shall not be in
arrear.

Issue of Notice by the Tribunal [Sub-section 2]

The Tribunal shall give notice of every application made to it;
a. to the Central Government (power delegated to Regional Directors)
b. to the Registrar and
c. to the Securities and Exchange Board, in the case of listed companies, and
d. the creditors of the company
Tribunal shall consider the representations (if any) made by them within a period of three
months from the date of receipt of the notice.

Note:
1. Where no representation has been received within the said period of three months,
it shall be presumed that they have no objection to the reduction.
2. Considering representations is statutorily required, not admitting it in full.

Order of Tribunal [Sub-section 3]

The Tribunal may make an order confirming the reduction of share capital on such terms
and conditions as it deems fit only if it is satisfied that -
a. The debt or claim of every creditor of the company has been either
i. Discharged or
ii. Determined or

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iii. Has been secured or

iv. His consent is obtained.

b. The accounting treatment, proposed by the company for such reduction is in

conformity with the accounting standards specified in Section 133 or any other
provision of this Act.

How tribunal determine that, ‘whether accounting treatment, proposed by the

company for such reduction is in conformity with the accounting standards
specified in Section 133 or not’?
While making an application, a certificate to that effect by the company’s auditor
has been filed with the Tribunal.

Publication of Order of Confirmation of Tribunal

The order of confirmation of the reduction of share capital by the Tribunal shall be
published by the company in such manner as the Tribunal may direct.

Delivery of Certified Copy of Order of Tribunal to Registrar

Within thirty days of the receipt of the copy of the order, the company shall deliver;
to the Registrar, a certified copy of the tribunal order and minutes (containing special
resolution) approved by the Tribunal showing;
a. the amount of share capital;
b. the number of shares into which it is to be divided;
c. the amount of each share; and
d. the amount, if any, at the date of registration deemed to be paid-up on each share,
Registrar on receipt, shall register the same and issue a certificate to that effect.

Exemption to Buy-Back
Nothing in this section shall apply to buy-back of its own securities by a company under
Section 68.
No Liability of Members
A member (whether in past or present) shall be liable to pay the amount (call or
contribution) maximum upto difference (if any) between the amount deemed to have
been paid on his shares and the nominal value of the reduced shares.

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Deemed to have been paid’ here signify reduced amount against the amount that have
been actually paid on the share.

In case where Creditor is entitled to object but was not included in the list of Creditors
If a reduction of share capital took place; and where a creditor is entitled to object to a
reduction of share capital, but his name and interest (his debt or claim on company) not
entered on the list of creditors, either because of:
a. His ignorance of the proceedings for reduction or
b. Nature of his interest (debt or claim)
Then in respect of his interest, company commits a default, within the meaning of section
6 of the Insolvency and Bankruptcy Code, 2016.

Action to make claim of creditor good (Remedy available to such unpaid creditor)
If company is running its operation
a. Every person, who was a member of the company on the date of the registration of
the order for reduction by the Registrar,
b. Shall be liable to contribute to the payment of such debt or claim,
c. But not exceeding the amount which he would have been liable to contribute if the
company had commenced winding up on the day immediately before the said date.

If company is wound up
The Tribunal may, on the application of any such creditor and proof of his ignorance as
aforesaid, if it thinks fit,
a. Settle a list of persons so liable to contribute, and
b. Make and enforce calls and orders on the contributories settled on the list, as if they
were ordinary contributories in a winding up.

Note:
Period of limitation is a maximum period set by statute within which a legal action can be
brought or a right enforced. The Limitation Act 1963 governing the provisions regarding
period of limitation.

Rights of Contributories not affected

Sub-section 9 is overriding provision that prevent the rights of contributories inter-se.
Nothing in sub-section 8 shall affect the rights of the contributories among themselves.

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Liability of Officers
Officer of the company shall be liable for punishment under section 447, if he:
a. Knowingly conceals the name of any creditor entitled to object to the reduction or
abets or is privy to any such concealment; or
b. Knowingly misrepresents the nature or amount of the debt or claim of any creditor
or abets or is privy to any such misrepresentation

Note:
1. Abet means to encourage or incite another to commit a crime
2. Privy signify a coparticipant; one who has an interest in a matter
3. The provisions contained in Section 447 which describe ‘punishment for fraud’ are
stated in the earlier Chapter 3 relating to ‘Prospectus and Allotment of Securities’.

RESTRICTION ON PURCHASE BY COMPANY OR GIVING OF LOANS BY IT FOR PURCHASE OF

ITS SHARES [SECTION 67]
Conservation of capital is one of the main principles of company law, because the share
capital of a company is the only security on which the creditors rely.
Therefore, a company cannot buy its own shares because reduction of capital, results in
diminishing of the fund out of which creditor are to be paid; hence adversely affect the
creditors. However, this restriction is not absolute.

Reduction according to the applicable Provisions [Sub-section 1]

‘Company limited by shares’ or ‘company by guarantee that having a share capital’ shall
not buy its own shares unless the consequent reduction of share capital is effected under
the provisions of this Act.

Restriction on giving Loan, Guarantee or provision of Security, etc. [Sub-section 2]

Public company shall not give any financial assistance;
a. Whether directly or indirectly and whether by means of a loan, guarantee, the
provision of security or otherwise
b. For the purpose of, or in connection with, a purchase or subscription made or to be
made, by any person of or for any shares in the company or in its holding company.

Exceptions [Sub-section 3]
Company may provide the financial assistance, in following case;
a. Lending of money by a banking company in the ordinary course of its business;

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Note:
1. The words “lending in the ordinary course of business” are not defined
2. Banks have to make loans in the ordinary course of their business and they can
hardly supervise the purpose for which the borrower uses the loan money. Hence if
a borrower from a bank uses the money for purchasing the bank’s shares, the bank
and its officers will be protected from liability.
3. An English court held that where money is given for the very purpose of purchasing
the bank’s shares that would not be lending in the ordinary course of business, then
the provision would said to be violated.

b. The provision of money for the purchase of fully paid shares in the company or
its holding company by trustees for and on behalf of the company’s employees
in accordance with any scheme (Employee share schemes) approved by company
through special resolution with such requirements as may be prescribed in Rule 16
of the Companies (Share Capital and Debentures) Rules, 2014,

Note:
1. In case the shares of the company are listed - Such purchase of shares shall be
made only through a recognized stock exchange and not by way of private offers or
arrangements.
2. Where shares of a company are not listed - the valuation at which shares are to be
purchased shall be made by a registered valuer.
3. The value of shares to be purchased or subscribed in the aggregate shall not exceed
five percent of the aggregate of paid up capital and free reserves of the company;
4. Disclosures in respect of voting rights not exercised directly by the employees in
respect of shares to which the scheme relates shall be made in the Board’s report
for the relevant financial year, namely:
(a) Names of the employees who have not exercised the voting rights directly;
(b) Reasons for not voting directly;
(c) Name of the person who is exercising such voting rights;
(d) Number of shares held by or in favour of, such employees and the percentage
of such shares to the total paid up share capital of the company;
(e) Date of the general meeting in which such voting power was exercised;
(f) Resolutions on which votes have been cast by persons holding such voting
power;
(g) Percentage of such voting power to the total voting power on each resolution;

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(h) Whether the votes were cast in favour of or against the resolution.

c. Lending money by a company to its employees (other than its directors or key
managerial personnel), not exceeding six month salary of the employees to enable
them to buy or subscribe fully paid shares in the company or its holding company
and to hold them by way of beneficial ownership.

Redemption of Preference Shares Permitted [Sub-section 4]

Nothing in Section 67 shall affect the right of a company to redeem any preference
shares issued under this Act or under any previous company law.

Punishment for Contravention [Sub-section 5]

If a company contravenes the provisions of this section, the punishment shall be;

Liable Penalty
Company Fine which shall not be less than one lakh rupees but may extend
to twenty-five lakh rupees
Every officer of the Imprisonment for a and Fine which shall not
company who is in term which may be less than one lakh
default extend to three years rupees but may extend to
twenty-five lakh rupees.

1. Section 67 shall not apply to private companies (if not defaulted in filing
its financial statements under Section 137 and Annual Return under Section
92) and Specified IFSC Public Company in whose case all of following 3
condition fulfilled;
a. in whose share capital no other body corporate has invested any money;
b. if the borrowings of such a company from banks or financial institutions or
anybody corporate is less than twice its paid-up share capital or fifty crore
rupees, whichever is lower; and
c. such a company is not in default in repayment of such borrowings subsisting
at the time of making transactions under this section.

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2. Section 67 (1) shall not apply to Nidhi Companies, when shares are purchased by the
company from a member on his ceasing to be a depositor or borrower and it shall
not be considered as reduction of capital under Section 66 of the Companies Act,
2013. While complying with such exception, the Nidhi Companies shall ensure that the
interests of their shareholders are protected.

POWER OF COMPANY TO PURCHASE ITS OWN SECURITIES [SECTION 68] - BUY BACK OF
SECURITIES
Buy back is the re-acquisition by a company of its own securities. It is a way of returning
money to its investors. Section 68 contains provisions which describe the power of a
company to purchase its own securities subject to the applicable conditions. Recently
L&T announced Buyback of securities.

Sources of Funds for Buy-Back of Shares [Sub-section 1]

A company may purchase its own shares or other specified securities. The purchase
should be made out of its:
a. Free reserves; or
b. Securities premium account; or
c. Proceeds of the issue of any shares or other specified securities.
However, buy-back of shares or other specified securities cannot be made out of the
proceeds of earlier issued shares or other specified securities of same kind.

Specified securities includes employees’ stock option or other securities as may be

notified by the Central Government from time to time

Conditions for Buy-Back

A company may purchase its own shares or other specified securities, if met with
following conditions, namely;
a. The buy-back is authorised by its articles;
b. A special resolution authorising the buy-back is passed in general meeting of the
company;

A special resolution is not necessary where:

1. The buy-back is, not exceeding ten percent of the total paid-up equity capital and
free reserves of the company; and
2. Such buy-back has been authorised by the Board resolution passed at its meeting;

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c. The amount involved in buy-back should not be more 25% of the aggregate of
paid-up capital and free reserves of the company; further in case of buyback of
equity shares, the maximum limit is 25% of its total paid-up equity capital in any
financial year.
d. After the buyback, the ratio between the debts (secured and unsecured) owed by the
company should not be more than twice the paid-up capital and free resources of
the company (Central Government may prescribe a higher ratio for a class or classes
of companies). (ie. - 2:1)
e. Shares or other specified securities for buy-back shall be fully paid-up;
f. The buy-back should be in accordance with the Rule 17 of the Companies (Share
Capital and Debentures), Rules, 2014; but in case of listed shares or other specified
securities should be in accordance with regulations made by the Securities and
Exchange Board of India in this behalf.

No offer of buy-back shall be made within one year reckoned from the date of the
closure of the preceding offer of buy back [Proviso to section 68(2)]
Free reserves includes securities premium account (Explanation II to section 68)

Procedure before Buy-Back

The notice of the meeting at which special resolution is proposed to be passed shall be
accompanied by an explanatory statement stating -
a. a full and complete disclosure of all the material facts;
b. the necessity for the buy-back;
c. the class of shares or securities intended to be purchased under the buy back;
d. the amount to be invested under the buy-back; and
e. the time limit for completion of buy-back.
Rule 17(1) of the Companies (Share Capital and Debentures), Rules, 2014 specify list of
14 matters, regarding which particulars shall be stated in explanatory statement.

Securities to be purchased under ‘Buy-Back’ [Sub-section 5]

Question : buy-back may be from;?
Ans :
a. the existing shareholders or security holders on a proportionate basis; or
b. the open market; or
c. the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.

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Declaration of Solvency (SH-9)

Declaration of solvency has to be on a Form SH-9 and verified by an affidavit, stating that
the Board of directors has made a full inquiry into the affairs of the company and have
found that it is capable of meeting all its liabilities and will not be rendered insolvent for
a period of 12 months from the date of the declaration.
It has to be signed by at least two directors of the company, one of whom should be the
managing director, if any

Time limit for Completion of Buy-Back [Sub-section 4]

Every buy-back shall be completed within twelve months from the date of passing the
special resolution or board resolution authorising the buy-back.

With in 21 Min 15 15 days

21 days
BB Dispatch
deemed
SH-8 the letter of Max 30 BB closure Verification approved
offer
within 7
days (make
payment

Extinguishment of Securities
Where a company buy’s back its own securities or other specified securities, it shall
extinguish and physically destroy the shares or securities so bought-back within seven
days of the last date of completion of buy-back.

Cooling Period – No fresh Issue

Where a company completes a buy-back of its shares or other specified securities, it
shall not make further issue of same kind of shares or other specified securities within a
period of six months.
It may, however, make a bonus issue and discharge its existing obligations such as
conversion of warrants, stock option schemes, sweat equity or conversion of preference
shares or debentures into equity shares.

Note: This restriction applies only to the type of securities bought back. The company is
free to issue other types of security.
Register of Buy Back

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 The Companies Act,2013

The company, shall maintain a register of shares or other securities which have been
bought-back in Form No. SH.10 containing details of;
a. Shares or securities so bought,
b. Consideration paid for the shares or securities bought-back,
c. Date of cancellation of shares or securities,
d. Date of extinguishing and physically destroying the shares or securities and
e. Such other particulars as may be prescribed.

Note:
1. This register shall be maintained at the registered office in the custody of the
secretary of the company or any other person authorized by the board in this behalf.
2. The entries in the register shall be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose.

Filing of Return of Buy-back [Sub-section 10]

A return of buy-back in Form No. SH.11 along with the fee shall be filled with;
a. The Registrar and also SEBI, if shares of company are listed on any recognised stock
exchange
b. Containing such particulars relating to the buy-back
c. Within thirty days of such completion.
d. Along with return, a certificate in Form No. SH.15 signed by two directors of the
company including the managing director, if any, certifying that the buy-back of
securities has been made in compliance with the provisions of the Act and the rules
made thereunder

Penalty for Default [Sub-section 11]

If a company makes default in complying with the provisions of this section or any
regulations made by Securities Exchange Board of India specified for the purposes of
section 68(2)(f), the company shall be punishable with fine which shall not be less than
one lakh rupees but which may extend to three lakh rupees and every officer of the
company who is in default shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to three lakh rupees.

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 The Companies Act,2013

Summary of punishment

Liable Minimum Fine Maximum Fine

Company One lakh rupee Upto three lakh rupee
Every officer of the company who is in
default

TRANSFER OF CERTAIN SUMS TO CAPITAL REDEMPTION RESERVE ACCOUNT [SECTION 69]

Section 69 requires certain amount to be transferred to the capital redemption reserve
(CRR) account in case a company buys back its own shares.

Amount to be transferred to CRR Account [Sub-section 1]

Where a company purchases its own shares out of free reserves or securities premium
account, then;
a. Sum equal to the nominal value of the share so purchased shall be transferred to
the capital redemption reserve account; and
b. Details of such transfer shall be disclosed in the balance sheet.

Application of CRR Account [Section 2]

The capital redemption reserve account may be applied by the company, in paying up
unissued shares of the company to be issued to members of the company as fully paid
bonus shares.

Similar use of CRR is also specified under-section 55(4) of this Act, that created when
preference shares redeemed out of profit, as provided under section 55(2)(c).

Illustration – True/False
CRR can be used to issue partly paid bonus shares or finance discount portion of sweat
equity shares.
Answer - False, the capital redemption reserve account may be applied by the company,
in paying up unissued shares of the company to be issued to members of the company
as fully paid bonus shares.

PROHIBITION FOR BUY-BACK IN CERTAIN CIRCUMSTANCES [SECTION 70]

states no company shall directly or indirectly purchase its own shares or other specified
securities;
a. Through any subsidiary company including its own subsidiary companies; or

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 The Companies Act,2013

b. Through any investment company or group of investment companies; or

c. If a default, is made by the company, in
i. repayment of deposits or interest thereon, or
ii. redemption of debentures, or
iii. redemption of preference shares or
iv. payment of dividend to any shareholder or
v. repayment of any term loan or interest thereon to any financial institutions or
banking company

Note:
1. Specified securities includes employees’ stock option or other securities as may be
notified by the Central Government from time to time (Explanation I to section 68)
2. Where the default is remedied and a period of three years has lapsed after such
default ceased to subsist, such buy-back is not prohibited.

Further prohibit the company from directly or indirectly to purchase its own shares or
other specified securities in case such company has not complied with provisions of
a. Section 92 (Annual Report),
b. Section 123 (Declaration and Payment of Dividend),
c. Section 127 (Punishment for failure to distribute dividends), and
d. Section 129 (Financial Statement).

DEBENTURE [SECTIONS 71]

DEFINITION AND FEATURES OF DEBENTURE

Definition [Section 2(30)]

Debenture includes debenture stock, bonds or any other instrument of a company

evidencing a debt, whether constituting a charge on the assets of the company or not
Provided that following shall not be treated as debenture
a. the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934;
and
b. such other instrument, as may be prescribed by the Central Government in
consultation with the Reserve Bank of India, issued by a company,

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 The Companies Act,2013

Debenture Includes Debenture Excludes

Debenture stock Instruments referred to in Chapter

Bonds III-D of the Reserve Bank of India Act,
Any other instrument of a company 1934
evidencing a debt and
Such other instrument, as may be
Whether constituting a charge on prescribed by the Central Government
the assets of the company or not

Features of Debentures
a. A debenture is the smallest unit of a sizeable amount of loan.
b. When debentures are issued, the applicants are given certificates representing the
money they have lent to the company.
c. A debenture certificate is issued by the company under its common seal, if any, or
under the signatures of two directors or a director and the company secretary, if he
has been appointed.
d. The company pays periodic interest on the amount raised by issuing debentures till
they are fully redeemed.
e. A debenture is generally pre-fixed with the rate of interest which the company
intends to pay.
f. Voting rights are not available in case of debentures as section 71 (2) of the Act,
clearly states that no company shall issue any debentures carrying any voting
rights.
g. As per section 44 of the Act, a debenture is in the nature of movable property which
is transferable as per the provisions contained in the Articles of the company issuing
the debentures.
h. A debenture may be secured or unsecured. In case of secured debentures, a charge
is created on the assets of the company in favour of debenture trustee.
i. As per the terms of the issue of debentures, they may be redeemed (i.e. repaid) at
the end of full term or in installments, say yearly or bi-yearly or any other period
like in two installments.
j. The terms of issue may also provide for conversion of debentures at maturity into
equity shares at the option of the debenture holders.

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 The Companies Act,2013

k. The debenture certificates are required to be delivered within a period of six months
under section 56(4)(d) of the Act, from the date of allotment of debentures, unless
the company is prohibited by any provision of law or any order of Court, Tribunal or
any other authority.

In other words, ‘issue of debentures’ is the most convenient way of borrowing large sums
of money and at the same time the debenture holders do not exert any influence over
the ownership and working of the company unless their interest is jeopardized by certain
decisions

Type of Debentures

On the basis of On the basis of On the basis of

security convertibility to redeemability
shares

Convertible
Secured (mandatorily Redeemable
or optionally;
partially or fully)

Un-secured Irredeemable
Non-convertible

MANNER OF ISSUE OF DEBENTURES AND APPLICABLE [SECTION 71]

Issue of Debentures with an Option to Convert

A company if authorised by passing special resolution at general meeting, then it may
issue debentures with an option to convert such debentures into shares, either wholly or
partly at the time of redemption
1. Issue of debentures with an option to convert: A company may issue debentures with
an option to convert such debentures into shares, either wholly or partly at the time
of redemption. Provided that the issue of debentures with an option to convert such
debentures into shares, wholly or partly, shall be approved by a special resolution
passed at a general meeting.

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 The Companies Act,2013

2. Unsecured/Naked Debentures: Where they are not secured by any mortgage or

charge on any property of the company, they are said to be naked or unsecured.
3. Secured Debentures: Where debentures are secured by a mortgage or a charge
on the property of the company. They are called secured debentures. The Central
Government may prescribe the procedure, for securing the issue of debentures, the
form of debenture trust deed, the procedure for the debenture-holders to inspect
the trust deed and to obtain copies thereof, quantum of debenture redemption
reserve required to be created and such other matters.

No Voting Rights [Sub-section 2]

No company shall issue any debentures carrying any voting rights.

Issue of Secured Debentures [Sub-Section 3]

Secured debentures may be issued by a company subject to such terms and conditions as
are prescribed in Rule 18 (1) of the Companies (Share Capital and Debentures) Rules, 2014;
which are explained below;
a. Maximum Period of Secured Debenture
The tenor of secured debenture shall not be more than 10 years from the date of issue,
except in following cases where tenor can be upto 30 years
i. Companies engaged in setting up of infrastructure projects;
ii. Infrastructure Finance Companies as defined in clause (viia) of sub direction
(1) of direction 2 of Non-Banking Financial (Non-deposit accepting or holding)
Companies Prudential Norms (Reserve Bank) Directions, 2007;
iii. Infrastructure Debt Fund NBFCs’ as defined in clause (b) of direction 3 of Infrastructure
Debt Fund Non-Banking Financial Companies (Reserve Bank) Directions, 2011;
iv. Companies permitted by a Ministry or Department of the Central Government or by
Reserve Bank of India or by the National Housing Bank or by any other statutory
authority to issue debentures for a period exceeding ten years.

b. Appointment of Debenture Trustee

Debenture trustee shall be appointed by company before the issue of prospectus or letter
of offer for subscription of its debentures.

c. Security by Creation of Charge

Security for the debenture can be provided by way of creating a charge or mortgage in
favour of debenture trustee, on;

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 The Companies Act,2013

i. Specified movable of the company or its subsidiaries or its holding company or its
associates companies, or
ii. Specified immovable properties wherever situate, or any interest therein.

Note:
1. Value of such assets or properties upon which charge is created shall be sufficient
for the due repayment of the amount of debentures and interest thereon.
2. In case of NBFCs, the charge or mortgage may be created on any movable property.
3. In case of any issue of debentures by a Government company which is fully secured
by the guarantee, given by the Central Government or one or more State Government or
by both, as per the requirement for creation of charge under rule 18(1) of the Companies
(Share Capital and Debentures) Rules, 2014 shall not apply.

d. Debenture Trust Deed

Debenture trust deed shall be executed in Form SH-12 to protect the interest of the
debenture holders, within three months of closure of the issue or offer.

Creation of Debenture Redemption Reserve (DRR) Account [Sub-section 4 read with Rule 18 (7)
of the Companies (Share Capital and Debentures) Rules, 2014]
Company shall create a debenture redemption reserve (DRR) account out of the profits of
the company available for payment of dividend.
The amount credited to such DRR account shall not be utilised by the company except for
the redemption of debentures.

a. Requirement of DRR

Category Publicly placed debenture Privately places debenture

All India Financial Exempted Exempted
Institutions (regulated by
RBI)
Banking Companies Exempted Exempted
Listed companies (other Exempted except Exempted except
than All India Financial NBFCs not registered NBFCs not registered
Institutions and Banking

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 The Companies Act,2013

Companies covered above) with RBI u/s 45IA of RBI with RBI u/s 45IA of RBI Act,
Act, and for House Fi n a n ce House Finance companies
companies not registered not registered with National
with National Housing bank Housing bank
Unlisted Companies (other DRR equal to 10% of DRR equal to 10% of
than All India Financial Outstanding Debenture Outstanding Debenture
Institutions and Banking Except NBFCs r e g i s t e r e d
Companies covered above) with RBI u/s 45IA of RBI
House Finance Companies
registered with National
Housing bank

Note:
1. The main purpose of these relaxations was introduced by the MCA for the reduction
of the cost of borrowings incurred by companies.
2. Other Financial Institution covered under 2(72) of the Companies Act 2013 for
purpose of creating and maintaining DRR shall be dealt in manner as Non– Banking
Finance Companies registered with Reserve Bank of India
3. In case of partly convertible debentures, Debenture Redemption Reserve shall be
created in respect of non-convertible portion of debenture

b. Amount and methods of Investment or deposits for debentures maturing during the fiscal
By 30th April of each year, the in case of;

Company In case of
Listed Company, other than All India Publicly placed debenture
Financial Institutions and Banking
Companies
Unlisted companies, other than All Publicly placed debenture &
India Financial Institutions, Banking Privately placed debenture (other than
Companies those by NBFCs registered with RBI u/s
45IA of RBI and House Finance companies
registered with National Housing bank)

An amount equal to 15% of its debentures maturing during the financial year, ending on
the 31st day of March of the next year, shall be invested or deposited in any of following
methods of deposits or investments, namely;

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 The Companies Act,2013

a. Deposits with any scheduled bank, free from any charge or lien;
b. Unencumbered securities of the Central Government or any State Government;
c. Unencumbered securities mentioned in sub-clause (a) to (d) and (ee) of section 20
or unencumbered bonds issued by any other company which is notified under sub-
clause (f) of section 20 of the Indian Trusts Act, 1882

The amount remaining invested or deposited, as the case may be, shall not any time fall
below fifteen percent of the amount of the debentures maturing during the year ending
on 31st day of March of that year. Meaning thereby that amount shall be invested or
deposited by 30th April and maintained there after till end of financial year (or till
maturity if fall earlier).

Restrictions on the Issue of Prospectus/Offer/Invitation to the public [Sub- section 5]

Prior to issue a prospectus or make an offer or invitation to the public or to its members
exceeding five hundred for the subscription of its debentures, the company shall appoint
one or more debenture trustees. Except in case of public offer of debenture, in all other
cases appointment and removal of debenture trustee governed by provisions prescribed
in Rule 18 (2) of the Companies (Share Capital and Debentures) Rules, 2014; namely;

a. Name and Consent of Denture Trustee

The names of the debenture trustees shall be stated in offer related letters and notices
or subsequent thereto.

Written consent before the appointment of debenture trustee must be obtain and
statement to that effect shall appear in the letter of offer.

b. Who can be denture trustee?

Following persons shall not be appointed as a debenture trustee,
i. A beneficiary holders of shares in the company;
ii. A promoter, director or key managerial personnel or any other officer or an employee
of the company or its holding, subsidiary or associate company;
iii. Relative of any promoter, director or key managerial personnel of the company;
iv. A beneficiary entitled to moneys which are to be paid by the company otherwise
than as remuneration payable to the debenture trustee;

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 Questions & Answers

IV SHARE CAPITAL AND

DEBENTURES

QUESTIONS

1. Mr. ‘Y’, the transferee, acquired 250 equity shares of BRS Limited from Mr. ‘X’, the
transferor. But the signature of Mr. ‘X’, the transferor, on the transfer deed was
forged. Mr. ‘Y’ after getting the shares registered by the company in his name, sold
150 equity shares to Mr. ‘Z’ on the basis of the share certificate issued by BRS Limited.
Mr. ‘X’ and ‘Z’ were not aware of the forgery. State the rights of Mr. ‘X’, ‘Y’ and ‘Z’
against the company with reference to the aforesaid shares.
(ICAI Module, May’20 Mock Test, Nov’21 RTP)

2. OLAF Limited, a subsidiary of PQR Limited, decides to give a loan of `4,00,000

to the Human Resource Manager, who is not a Key Managerial Personnel of OLAF
Limited, drawing salary of `30,000 per month, to buy 500 partly paid-up Equity
Shares of `1000 each in OLAF Limited. Examine the validity of company’s decision
under the provisions of the Companies Act, 2013.
(ICAI Module, May’20 RTP, Nov’20 Mock Test, Jan’21- 2 Marks, May’21 Mock Test)

3. “The offer of buy-back of its own shares by a company shall not be made within a
period of six months from the date of the closure of the preceding offer of buy-back,
if any and cooling period to make further issue of same kind of shares including
allotment of further shares shall be a period of one year from the completion of
buy back subject to certain exceptions.” Examine the validity of this statement by
explaining the provisions of the Companies Act, 2013 in this regard.
(ICAI Module, May’2022 Mock Test)

4. What are provisions of the Companies Act, 2013 relating to the appointment of
‘Debenture Trustee’ by a company? Whether the following can be appointed as
‘Debenture Trustee’?
(i) A shareholder of the company who has shares of ` 10,000.
(ii) A creditor whom the company owes ` 999 only.

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 Questions & Answers

(iii) A person who has given a guarantee for repayment of amount of debentures
issued by the company.
(Nov’21 4 Marks, Nov’22 RTP)

5. It is observed that Golden Apple Transport Limited issued share certificates in

duplicate with intend to defraud. The total shares in regard to which such certificates
are issued are nearly 12,00,000. Face value of each share is ` 10.
The maximum fine that can be imposed on company shall be ` 12,00,00,000.
(MTP May’23)

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 Questions & Answers

MULTIPLE CHOICE QUESTION (HOMEWORK)

1. The subscribed capital of a company is :

(a) never more than the issued capital
(b) never less than the issued capital
(c) always equal to the issued capital
(d) prescribed percentage of the issued capital (ICAI Module)

2. A company may convert all or any of its fully paid up shares into stock :
(a) by passing a special resolution
(b) by passing a ordinary resolution
(c) with the approval of the Tribunal
(d) All of the above (ICAI Module)

3. Part of the capital for which application have been received from the public and
shares allotted to them :
(a) Nominal capital
(b) Issued capital
(c) Subscribed capital
(d) Called up capital (ICAI Module, Nov’19 Mock Test)

4. Shares which are issued by a company to its directors or employees at a discount or

for a consideration :
(a) Equity Shares
(b) Preference Shares
(c) Sweat Equity Shares
(d) Redeemable preference shares (ICAI Module, Nov’21 RTP)

5. A company issued 10% dividend shares with right to participate in surplus profit
every year. Though these shares does not have preference of repayment of capital
but they have preference of payment of arrear of dividend at the time of winding up.
These shares are:
(a) Equity shares
(b) Preference Shares
(c) DVR
(d) None of the above (ICAI Module)

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 Questions & Answers

6. A general meeting of the company is to held on 30th April; 2020. The company
has not paid dividend for the financial year ending 2019; also it has not yet paid
dividend for the year ending; 2020. Articles does not specifies any last date for
payment of dividend. In this case preference shareholders:
(a) will not have the right to vote because the dividend for only last one year has
not been paid
(b) will have the right to vote because dividend for last two years have not been paid
(c) will not have the right to vote because only equity shareholders can vote in
general meetings
(d) will have right to vote because preference shareholder have the right to vote in
general meetings (ICAI Module)

7. If change of right of one class also affect right of other class then:
(a) A resolution should be passed in general meeting in this case
(b) company need not to do anything else
(c) Consent of three fourth majority of that other class should also be obtained
(d) a resolution in combined meeting of both class should be passed (ICAI Module)

8. Identify the false statement with respect to issue of sweat equity shares by a
company:
(a) company should pass a special resolution
(b) There is not limit as to maximum rate of discount
(c) company should seek approval of Central Government
(d) sweat equity shares means the equity shares issued by the company to the
directors or employees at a discount or for consideration other than cash
(ICAI Module)

9. Rajesh infrastructure limited wants to issue preference shares for a period of more
than 20 years for its infrastructure project. On the basis of which statement company
can do so?
(a) yes; company can issue irredeemable preference shares by passing special
resolution
(b) yes; company can issue preference shares for a period of more than 20 years
with the prior approval of Central Government
(c) yes; company can issue irredeemable preference shares for infrastructure
project

64
 Questions & Answers

(d) yes; company can issue preference shares for infrastructure project for a period
upto 30 years. (ICAI Module)

10. If a company have authorised share capital of `6,00,000; paid up share capital of
`5,00,000; and a Loan from government of `2,00,000. Government ordered the
company to convert its loan into shares. In this case; such order has the effect of
increasing -
(a) the subscribed share capital of the company
(b) the paid up share capital of the company
(c) the authorised share capital of the company
(d) all of the above (ICAI Module)

11. A company bought back 10% of its equity shares in March 2020; it wants to buy
back further 10% equity shares in April; 2020.
(a) it can; subject to fulfilment of other conditions; because maximum buyback in
a financial year can be 25%
(b) It can’t; because there must be time gap of 12 months between two buybacks
(c) It can; but it will have to pass special resolution in place of board resolution
(d) It can’t; because other conditions might not have fulfilled (ICAI Module)

12. For debenture redemption reserve which of the following statements is least likely
to be true:
(a) NBFCs should make DRR equal to 25% for any allotment of debentures
(b) A company should make DRR equal to 25% for any allotment of debentures
(c) DRR should be created out of profits freely available for distribution of dividend
only
(d) All of the above are true (ICAI Module)

13. A Company limited by shares can issue equity shares with differential voting rights.
Which of the following is not a necessary condition to be fulfilled before issue of
such shares:
(a) The articles of association of the company shall authorize issue of shares with
differential rights;
(b) The issue of shares shall be authorized by an ordinary resolution passed at a
general meeting of the shareholders;
(c) The issue of shares shall be authorized by special resolution passed at a

65
 Questions & Answers

general meeting of the shareholders;

(d) The company shall have consistent track record of distributable profits for the
last three years; (May’19 RTP)

14. Corrupt Limited has received a request from Mr. Suresh for transfer of 100 partly
paid equity shares, to Mr. Ramesh. However, Mr. Ramesh expired in the meantime,
but no intimation of the same has been received by the company. In the given
circumstances, advise as per the provisions of the Companies Act, 2013:
(a) Corrupt Limited will not register the transfer the shares in the name of Mr.
Ramesh, without verification from Mr. Suresh
(b) Corrupt Limited can register the shares in the name of Mr. Ramesh as it is not
aware of the untoward incident.
(c) Corrupt Limited will not register the transfer the shares in the name of Mr.
Ramesh, without verification from Mr. Ramesh
(d) Corrupt Limited will give the shares back to Mr. Suresh (May’19 Mock Test)

15. The Authorised share capital clause of LMN & Co. ltd. consisted of Preference share
capital and Equity share capital both. With regard to equity share capital, the article
of association of the company has given authorisation to issue differential equity
shares. Apart from authorisation by the Articles, from the following strike out the
condition, which is not mandatory to comply with—
(a) Such issue of shares must be authorised by an ordinary resolution passed at a
general meeting of the shareholders or by postal ballot, as the case may be
(b) The company must have consistent track record of distributable profit for the
last five years.
(c) The company has no subsisting default in the payment of the declared dividend
to its shareholders.
(d) The company has not defaulted in filing financial statements and annual
returns for three financial years immediately preceding the financial year in
which it is decided to issue such shares (May’19 Mock Test)

16. Delight Sports Garments Limited is contemplating to raise funds through issue of
prospectus in which, according to the directors, a sum of `50 crores should be stated
as the minimum amount that needs to be subscribed by the prospective subscribers.
The funds shall be raised in four instalments consisting of application, allotment,
first call and second & final call. Advise the company by which instalment it should

66
 Questions & Answers

receive the minimum subscription stated in the prospectus.

(a) Along with amount subscribed as application money.
(b) Along with amount subscribed as final call money.
(c) Along with amount subscribed as first call money.
(d) Along with amount subscribed as second and final call money. (Nov’19 RTP)

17. ABC Ltd. wants to issue redeemable preference shares for a period of 35 years.
Advise whether it can do so.
(a) Yes, ABC Ltd. can issue redeemable preference shares
(b) Yes, ABC Ltd. can issue redeemable preference shares but for only 30 years
(c) Instead of issuing of shares for 35 years, ABC Ltd. should issue irredeemable
preference shares.
(d) Yes, ABC Ltd. can issue redeemable preference shares for a period not extending
20 years. (ICAI Sample Question)

18. Mr. X is a shareholder of Mark Pvt Ltd. He transferred his shares to his daughter Ms. D,
in the month of February. Registration of such instrument of transfer is still pending
by the Company. In this scenario, Companies Act, 2013 state certain provisions which
have to be kept in mind by the Company. Which provision mentioned below in this
regard is correct?
(a) Company has to transfer the dividend in relation to such shares to the Unpaid
Dividend Account;
(b) Company has to transfer the dividend in relation to such shares in the name of transferee;
(c) Company has to issue fully paid-up bonus shares in the name of transformer;
(d) Company has to issue fully paid-up bonus shares in the name of transferee
(ICAI Sample Question)

19. A Company limited by shares can issue equity shares with differential voting rights.
Which of the following is not a necessary condition to be fulfilled before issue of
such shares:
(a) The articles of association of the company shall authorize issue of shares with
differential rights;
(b) The issue of shares shall be authorized by an ordinary resolution passed at a
general meeting of the shareholders;
(c) The issue of shares shall be authorized by special resolution passed at a
general meeting of the shareholders;

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 Questions & Answers

(d) The company shall have consistent track record of distributable profits for the
last three years (ICAI Sample Question)

20. When an unlisted public company issues shares at a premium, amount of the
premium received on those shares is transferred to a “securities premium account”.
For which purpose amount lying in securities premium account shall be used?
(a) In writing off preliminary expenses of the company;
(b) In writing off pre-incorporation expenses of the company;
(c) For purchase of immovable assets;
(d) For paying managerial remuneration (ICAI Sample Question)

21. A Private Company can issue preference shares which are liable to be redeemed
within particular period, only if articles authorizes such issue. Within how much
such preference shares have to be redeemed?
(a) Within a period not exceeding 10 years;
(b) Within a period not exceeding 15 years;
(c) Within a period not exceeding 20 years;
(d) Within a period not exceeding 25 years; (ICAI Sample Question)
22. Prithvi Cements Limited is desirous of issuing debentures carrying voting rights.
Which of the following options is best suited in such a situation:
(a) Prithvi Cements Limited can issue debentures carrying voting rights if an
ordinary resolution is passed permitting such issue.
(b) Prithvi Cements Limited can issue debentures carrying voting rights if a special
resolution is passed permitting such issue.
(c) Prithvi Cements Limited can issue debentures carrying voting rights if it
mortgages land and buildings worth two times the amount of such debentures.
(d) Prithvi Cements Limited cannot issue debentures carrying voting rights.
(Nov’20 Mock Test, May’21 Mock Testx)

23. Shares issued by a company to its directors or employees at a discount or for a

consideration other than cash for their providing know-how or making available
rights in the nature of intellectual property rights or value additions, by whatever
name called are known as:
(a) Equity Shares (b) Preference Shares
(c) Sweat Equity Shares (d) Redeemable preference shares
(ICAI Module, May’2022 Mock Test)

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 Questions & Answers

24. Goals Limited, a listed company has authorised share capital of ` 25,00,000 (issued,
subscribed and paid up capital of ` 20,00,000). The company has planned to buy
back shares worth ` 10,00,000. What is the maximum amount of equity shares that
the company is allowed to buy back based on the total amount of equity shares?
(a) ` 2,00,000 (b) ` 5,00,000
(c) ` 6,25,000 (d) ` 8,00,000
(ICAI Module, May’2022 Mock Test)

25. Raman, the original allottee of 2000 equity shares in ABC Limited has transferred
the same to Ruchi. The instrument of transfer dated 21st August, 2020, duly
stamped and signed by Raman was handed over to Ruchi. Advise Ruchi regarding
the latest date by which the instrument of transfer along with share certificates
must be delivered to the company, to register the transfer in its register of members.
(a) 21st August, 2020. (b) 20th September, 2020
(c) 20th October, 2020. (d) 19th November, 2020
(RTP MAY 22

26. Where a share capital of the company is divided into different classes of shares, the
rights attached to the shares of any class may be varied with the consent in writing
of the holders of not less than ------------ of the issued shares of that class or
by means of a special resolution passed at a separate meeting of the holders of the
issued shares of that class:
(a) One-fourth
(b) 50%
(c) Three-fourths
(d) 75% (Nov’22 RTP)

27. DBS Chemicals Limited issue ordinary share of different classes. DBS planned to
vary rights of one the class wherein there were only 105 holders. 100 out of 105
holders own 0.5% shares of that class, whereas each of remaining 5 holders hold
10% shares of that class. Presuming 100 holder who own 0.5% shares already
signed/authorised the consent letter sanctioning the variation, how many holders
out of such 5 need to authorise the said letter to approve the variation.
Options;
a. 0 b. 1
c. 3 d. 5 (MTP May’23)

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 Questions & Answers

28. Sarvodhaya Urban Nidhi Limited has ` 14 Crore and ` 6 Crore as paid-up equity
and preference share capital respectively. Balance in retain earnings account is `
2.4 Crore. Equity share capital having face value of ` 10 each, while preference
share has face value of 100 each. Mr. Surya and Mr. Chandan own 11,20,000 and
5,60,000 shares respectively. In context of resolution placed before the company
which directly affect the rights attached to his preference shares, the voting right of
Mr. Surya and Mr. Chandan in percentage term shall be:
(a) 8% and 4% respectively
(b) 5.6% and 2.8% respectively
(c) 5% and 2.8% respectively
(d) 5% and 2.5% respectively (MTP May’23)

29. In a litigation regarding title of shares, a share certificate issued in physical form by
Modern Furniture Limited, an unlisted private company that doesn’t have a common
seal submitted as evidence of the title. The same shall be clear and convincing
evidence of title, if signed by;
i. two directors
ii. two directors, out of which one shall be managing director
iii. two directors and the Company Secretary, wherever the company has appointed
a Company Secretary
iv. a director and the Company Secretary, wherever the company has appointed a
Company Secretary
(a) By i or iii only (b) By i or iv only
(c) By ii or iii only (d) By ii or iv only (MTP May’23)

30. Mr. Bahu has received a notice from Mahishmati Private Limited on 2nd March,
2023 intimating that Mr. Bali has submitted a transfer deed duly signed by him
for transfer of 1000 partly paid shares (` 8 paid-up out of Face Value of ` 10 per
share) in his (Mr. Bahu) name. Mr. Bahu as transferee must raise his objection to the
proposed transfer of partly paid shares latest by
(a) 9th March, 2023 (b) 16th March, 2023
(c) 17th March, 2023 (d) 31st March, 2023 (MTP May’23)

31. Section 67 of the Companies Act, 2013 impose a restriction on public company from
giving any financial assistance whether directly or indirectly and whether by means

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 Questions & Answers

of a loan, guarantee, the provision of security or otherwise for the purpose of, or
in connection with, a purchase or subscription made or to be made, by any person
of or for any shares in the company or in its holding company. Star Engineering
Limited which is not covered by any of exemptions specified under said section,
contravene the restrictive provisions stated above. Every officer of the company who
is in default shall be liable for;
(a) Fine which shall not be less than one lakh rupees but may extend to twenty-
five lakh rupees
(b) Fine which shall not be less than one lakh rupees but may extend to twenty-
five lakh rupees or Imprisonment for a term which may extend to three years
or both
(c) Fine which may extend to twenty-five lakh rupees or Imprisonment for a term
which may extend to three years or both
(d) Fine which shall not be less than one lakh rupees but may extend to twenty-
five lakh rupees and Imprisonment for a term which may extend to three years
(MTP May’23)

32. Modern Furniture an unlisted company receive a request for issue of duplicate share
certificate. Complete documents in this regards submitted with the company on
30th December 2022. Modern furniture shall issue the duplicate share certificates
by:
(a) 29th January 2023
(b) 13th February 2023
(c) 28th February 2023
(d) 29th March 2023
(MTP May’23)

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 Questions & Answers

ANSWERS

1: According to Section 46(1) of the Companies Act, 2013, a share certificate once
issued under the common seal, if any, of the company or signed by two directors or
by a director and the Company Secretary, wherever the company has appointed a
Company Secretary, specifying the shares held by any person, shall be prima facie
evidence of the title of the person to such shares. Therefore, in the normal course
the person named in the share certificate is for all practical purposes the legal
owner of the shares therein and the company cannot deny his title to the shares.
However, a forged transfer is a nullity. It does not give the transferee (Y) any title to
the shares. Similarly, any transfer made by Y (to Z) will also not give a good title to
the shares as the title of the buyer is only as good as that of the seller.
Therefore, if the company acts on a forged transfer and removes the name of the
real owner (X) from the Register of Members, then the company is bound to restore
the name of X as the holder of the shares and to pay him any dividends which he
ought to have received.
In the above case, ‘therefore, X has the right against the company to get the shares
recorded in his name. However, neither Y nor Z have any rights against the company
even though they are bona fide purchasers. But as Z acted on the faith of share
certificate issued by company, he can demand compensation.
However, since Y seems to be the perpetrator of the forgery, he will be liable both
criminally and for compensation to X , Z and the company.

2: Restrictions on purchase by company or giving of loans by it for purchase of its

share: As per section 67 (3) of the Companies Act, 2013 a company is allowed to
give a loan to its employees subject to the following limitations:
(a) The employee must not be a Key Managerial Personnel;
(b) The amount of such loan shall not exceed an amount equal to six months’
salary of the employee.
(c) The shares to be subscribed must be fully paid shares
In the given instance, Human Resource Manager is not a KMP of the OLAF Ltd. He
is drawing salary of `30,000 per month and loan taken to buy 500 partly paid up
equity shares of `1000 each in OLAF Ltd.
Keeping the above provisions of law in mind, the company’s (OLAF Ltd.) decision is
invalid due to two reasons:
i. The amount of loan being more than 6 months’ salary of the HR Manager,

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 Questions & Answers

which should have restricted the loan to `1.8 Lakhs.

ii. The shares subscribed are partly paid shares whereas the benefit is available
only for subscribing fully paid shares.

3: According to proviso to section 68(2) of the Companies Act, 2013, no offer of buy-
back, shall be made within a period of one year from the date of the closure of the
preceding offer of buy-back, if any.
Section 68 (8) casts an obligation that where a company completes a buy-back of
its shares or other specified securities under this section, it shall not make further
issue of same kind of shares including allotment of further shares under section
62 (1) (a) or other specified securities within a period of six months except by way
of bonus issue or in the discharge of subsisting obligations such as conversion of
warrants, stock option schemes, sweat equity or conversion of preference shares or
debentures into equity shares.
Keeping in view of the above provisions, the statement “the offer of buy-back of
its own shares by a company shall not be made within a period of six months from
the date of the closure of the preceding offer of buy back, if any and cooling period
to make further issue of same kind of shares including allotment of further shares
shall be a period of one year from the completion of buy back subject to certain
exceptions” is not valid. (ICAI Module, May’2022 Mock Test)

4. Appointment of Debenture Trustee: Under section 71 (5) of the Companies Act, 2013,
no company shall issue a prospectus or make an offer or invitation to the public or
to its members exceeding five hundred for the subscription of its debentures, unless
the company has, before such issue or offer, appointed one or more debenture
trustees and the conditions governing the appointment of such trustees shall be
such as may be prescribed.
Rule 18 (2) of the Companies (Share Capital and Debentures) Rules, 2014, framed
under the Companies Act for the issue of secured debentures provide that before the
appointment of debenture trustee or trustees, a written consent shall be obtained
from such debenture trustee or trustees proposed to be appointed and a statement
to that effect shall appear in the letter of offer issued for inviting the subscription
of the debentures.
Further according to the provided rules inter-alia, no person shall be appointed as
a debenture trustee, if he-
(1) beneficially holds shares in the company;

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 Questions & Answers

(2) is beneficially entitled to moneys which are to be paid by the company otherwise
than as remuneration payable to the debenture trustee;
(3) has furnished any guarantee in respect of the principal debts secured by the
debentures or interest thereon;
Thus, based on the above provisions answers to the given questions are as follows:
(i) A shareholder who has holds shares of ` 10,000, cannot be appointed as a
debenture trustee.
(ii) A creditor whom company owes ` 999 cannot be appointed as a debenture
trustee. The amount owed is immaterial.
(iii) A person who has given guarantee for repayment of principal and interest
thereon in respect of debentures also cannot be appointed as a debenture
trustee.
(Nov’21 4 Marks)

ANSWER TO MCQs

1 A 2 B 3 C 4 C 5 A
6 B 7 C 8 C 9 D 10 D
11 B 12 A 13 C 14 B 15 B
16 A 17 D 18 A 19 C 20 A
21 C 22 D 23 C 24 B 25 C
26 C 27 C 28 C 29 B 30 C
31 D 32 D

Calculation For MCQ 24:

20,00,000 x 25%
= 500,000.

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 Questions & Answers

HOMEWORK QUESTIONS AND ANSWER

1. VRS Company Ltd. is holding 45% of total equity shares in SV Company Ltd. The
Board of Directors of SV Company Ltd. (incorporated on January 1, 2017) decided
to raise the share capital by issuing further Equity shares. The Board of Directors
resolved not to offer any shares to VRS Company Ltd, on the ground that it was
already holding a high percentage of the total number of shares already issued,
in SV Company Ltd. The Articles of Association of SV Company Ltd. provides that
the new shares be offered to the existing shareholders of the company. On March
1, 2017 new shares were offered to all the shareholders except VRS Company Ltd.
Referring to the provisions of the Companies Act, 2013 examine the validity of the
decision of the Board of Directors of SV Company Limited of not offering any further
shares to VRS Company Limited. (ICAI Module)

2. The Directors of Mars India Ltd. desire to alter capital clause of Memorandum of
Association of their company. Advise them, under the provisions of the Companies
Act, 2013 about the ways in which the said clause may be altered. (ICAI Module)

3. Ramesh, who is a resident of New Delhi, sent a transfer deed, for registration of
transfer of shares to the company at the address of its Registered Office in Mumbai.
He did not receive the shares certificates even after the expiry of four months from
the date of dispatch of transfer deed. He lodged a criminal complaint in the Court
at New Delhi. Decide, under the provisions of the Companies Act, 2013, whether the
Court at New Delhi is competent to take action in the said matter? (ICAI Module)

4. Data Limited (listed on Stock Exchange) was incorporated on 1st October, 2018
with a paid- up share capital of `200 crores. Within this small time of 4 months it
has earned huge profits and has topped the charts for its high employee friendly
environment. The company wants to issue sweat equity to its employees. A friend
of the CEO of the company has told him that they cannot issue sweat equity shares
as 2 years have not elapsed since the time company has commenced its business.
The CEO of the company has approached you to advise them about the essential
conditions to fulfill before the issue of sweat equity shares especially since their
company is just a few months old.
(ICAI Module, May’19 RTP, May’19 Mock Test, May’20 Mock Test)

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 Questions & Answers

5. Walnut Limited has an authorized share capital of 1,00,000 equity shares of ` 100
per share and an amount of `3 crores in its Share Premium Account as on 31-
3-2018. The Board of Directors seeks your advice about the application of share
premium account for its business purposes. Please give your advice.
(ICAI Module, May’19 RTP, Jan’21- 5 Marks)

6. Mars India Ltd. owed to Sunil `1,000. On becoming this debt payable, the company
offered Sunil 10 shares of `100 each in full settlement of the debt. The said shares
were fully paid and were allotted to Sunil. Examine the validity of this allotment in
the light of the provisions of the Companies Act, 2013 (ICAI Module)

7. What are the provisions of the Companies Act, 2013 relating to the appointment
of ‘Debenture Trustee’ by a company? Whether the following can be appointed as
‘Debenture Trustee’:
(i) A shareholder who has no beneficial interest.
(ii) A creditor whom the company owes Rs.499 only.
(iii) A person who has given a guarantee for repayment of amount of debentures
issued by the company? (ICAI Module)

8. Mr Nilesh has transferred 1000 shares of Perfect Ltd. to Ms. Mukta. The company
has refused to register transfer of shares and does not even send a notice of refusal
to Mr. Nilesh or Ms. Mukta respectively within the prescribed period. Discuss as per
the provisions of the Companies Act, 2013, whether aggrieved party has any right(s)
against the company for such refusal?
(ICAI Module, May’18 RTP, May’19 Mock Test, Nov’19 Mock Test)

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 Questions & Answers

9. Following is the extract of the Balance sheet Beltex Ltd. as on 31st March, 2020:

Particulars Amount (`)

1) Shareholder’s Fund
(a) Share Capital:
Authorized Capital:
10,000, 12% Preference Shares of ` 10 each
1,00,000 equity shares of ` 10 each 1,00,000
Issued & Subscribed Capital: 10,00,000 11,00,000
8000,12% Preference Shares of ` 10 each
fully paid up
90,000 equity shares of ` 10 each, ` 8 paid
up
(b) Reserve and Surplus 1,20,000
General Reserve 75,000
Capital Reserve 25,000
Securities Premium 2,00,000
Surplus in statement of P& L 4,20,000
(2) Non-Current Liabilities:
(a) Long-term borrowings:
Secured Loan: 12% partly convertible 5,00,000
Debenture @ ` 100 each
On 1st April, 2020 the company has made final call at ` 2 each on 90,000 Equity
Shares. The call money was received by 25th April, 2020. Thereafter, the company
decided to capitalize it’s reserves by way of bonus @ 1 share for every 4 shares to
existing shareholders.
Answer the following questions according to the Companies Act, 2013, in above
case:
(A) Which of the above-mentioned sources can be used by company to issue bonus
shares?
(B) Calculate the amount to be capitalized from free reserves to issue bonus
shares?
(C) If the company did not ask for the final call on April 1st, 2020. Can it still issue
bonus shares to its members?
(Nov’21 3 Marks, Nov’22 Mock Test)

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 Questions & Answers

10. Shree Ltd. is engaged in the manufacture of consumer goods and has got a good
brand value. Over the years, it has built a good reputation and its Balance Sheet as
at March 31, 2017 shows the following position:
Authorized Share Capital (25,00,000 equity shares of face value of `10/- each) :
`2,50,00,000
Issued, subscribed and paid-up capital (10,00,000 equity shares of face value of
`10/- each, fully paid-up) `1,00,00,000
Free Reserves `3,00,00,000
The Board of Directors are proposing to declare a bonus issue of 1 share for every 2
shares held by the existing shareholders. The Board wants to know the conditions
and the manner of issuing bonus shares under the provisions of the Companies Act,
2013. Discuss. (ICAI Module, Nov’20 RTP, May’21 RTP)

11. Kavish Ltd., desirous of buying back of all its equity shares from the existing
shareholders of the company, seeks your advice. Examining the provisions of the
Companies Act, 2013 discuss whether the above buy back of equity shares by the
company is possible. Also, state the sources out of which buy back of shares can be
financed? (May’18 RTP)

12. Earth Ltd., a Public Company offer the new shares (further issue of shares) to
persons other than the existing shareholders of the Company. Explain the conditions
when shares can be issued to persons other than existing shareholders. Discuss
whether these shares can be offered to the Preference Shareholders? (Nov’18 RTP)

13. Growmore Limited’s share capital is divided into different classes. Now, Growmore
Limited intends to vary the rights attached to a particular class of shares. Explain
the provisions of the Companies Act, 2013 to Growmore Limited as to obtaining
consent from the shareholders in relation to variation of rights. (Nov’18 RTP)

14. Heavy Metals Limited wants to provide financial assistance to its employees, to
enable them to subscribe for certain number of fully paid shares. Considering the
provision of the Companies Act, 2013, what advice would you give to the company
in this regard? (Nov’18 RTP)

15. Harsh purchased 1000 shares of Singhania Ltd. from Pratik and sent those shares to
the company for transfer in his name. The company neither transferred the shares

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 Questions & Answers

nor sent any notice of refusal of transfer to any party within the period stipulated in
the Companies Act, 2013. What is the time frame in which the company is supposed
to reply to transferee? Does Harsh, the transferee have any remedies against the
company for not sending any intimation in relation to transfer of shares to him?
(May’18-4 Marks)

16. Xgen Limited has a paid-up equity capital and free reserves to the extent
of ` 50,00,000. The company is planning to buy-back shares to the extent of
`4,50,000. The company approaches you for advice with regard to the following
(i) Is special resolution required to be passed?
(ii) What is the time limit for completion of buy-back?
(iii) What should be ratio of aggregate debts to the paid-up capital-and free
reserves after buy-back? (May’18- 3 Marks)

17. Can equity share with differential voting rights be issued? If yes, state the conditions
under which such shares may be issued. (May’18-6 Marks)

18. ABC Ltd. has following balances in their Balance Sheet as on 31st March, 2018:
Equity shares capital (3.00 lakhs equity shares of `10 each) 30.00 lacs
Free reserves 5.00 lacs
Securities Premium Account 3.00 lacs
Capital redemption reserve account 4.00 lacs
Revaluation Reserve 3.00 lacs
Directors of the company seek your advice in following cases:
(i) Whether company can give bonus shares in the ratio of 1:3?
(ii) What if company decide to give bonus shares in the ratio of 1:2?
(Nov’18-2 Marks)

19. Which fund may be utilized by a public limited company for purchasing (buy back)
its own shares? Also explain the provisions of the Companies Act, 2013 regarding
the circumstances in which a company is prohibited to buy back its own shares.
(May’19- 5 Marks)

20. X Ltd. issued a notice on 1st Feb, 2018 to its existing shares holders offering to
purchase one extra share for every five shares held by them. The last date to accept
the offer was 15th Feb, 2018 only. Mr. Kavi has given an application to renounce

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 Questions & Answers

the shares offered to him in favour of Mr. Ravi, who is not a shareholder of the
company. Examine the validity of application of Mr. Kavi under the provisions of
the Companies Act, 2013. Would your answer differ if Mr. Kavi is a shareholder of X
Ltd.? (Nov’19- 5 Marks)

21. XYZ unlisted company passed a special resolution in a general meeting on January
5th, 2019 to buy back 30% of its own equity shares. The Articles of Association
empowers the company to buy back its own shares. Earlier the company has also
passed a special resolution to buy back its own shares on January 15th, 2018.
The company further decided that the payment for buyback be made out of the
proceeds of the company’s earlier issue of equity share. In the light of the provisions
of the Companies Act, 2013,
(i) Decide, whether the company’s proposal is in order.
(ii) What will be your answer if buyback offer date is revised from January 5th,
2019 to January 25th 2019 and percentage of buyback is reduced from 30% to
25% keeping the source of purchase as above?
(Nov’19-5 Marks, similar question in Jan’21- 3 Marks)

22. Due to insufficient profits, Silver Robotics Limited is unable to redeem its existing
preference shares amounting to ` 10,00,000 (10,000 preference shares of ` 100 each)
though as per the terms of issue they need to be redeemed within next two months.
It did not, however, default in payment of dividend as and when it became due.
What is the remedy available to the company in respect of outstanding preference
shares as per the Companies Act, 2013? (ICAI Module)

23. State the legal provisions in respect of ‘Declaration of Solvency’, which an unlisted
public company needs to adhere to while taking steps to buy-back its own shares.
(ICAI Module)

24. ABC Limited is a public company incorporated in New Delhi. The Board of Directors
(BOD) of the company wants to bring a public issue of 100000 equity shares of
` 10 each. The BOD has appointed an underwriter for this issue for ensuring the
minimum subscription of the issue. The underwriter advised the BOD that due to
current economic situation of the Country it would be better if the company offers
these shares at a discount of ` 1 per share to ensure full subscription of this public
issue. The Board of Directors agreed to the suggestion of underwriter and offered

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 Questions & Answers

the shares at a discount of ` 1 per share. The issue was fully subscribed and the
shares were allotted to the applicants in due course. Decide whether the issue of
shares as mentioned above is valid or not as per Section 53 of Companies Act 2013.
What would be your answer in the above case if the shares are issued to employees
as Sweat equity shares? (Nov’20 - 3 Marks, Nov’22 Mock Test)

25. Yellow Pvt Ltd. is an unlisted company incorporated in the year 2012. The company
have share capital of rupees fifty crores. The company has decided to issue sweat
equity share s to its directors and employees. The company decided to issue 10%
sweat equity shares (which in total will add up to 30% of its paid up equity shares),
with a locking period of five years, as it is a start-up company. How would you
justify these facts in relation to the provision for issue of sweat equity shares by
a start-up company, with reference to the provision of the Company Act, 2013.
Explain? (Nov’21 RTP)

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 Questions & Answers

ANSWERS

1: The legal issue in the presented problem in the question is covered under Section 62
(1) of the Companies Act, 2013.
Section 62 (1) (a) of the Companies Act, 2013 provides that if, at any time, a company
having a share capital proposes to increase its subscribed capital by the issue of
further shares, such shares should be offered to the existing equity shareholders of
the company as at the date of the offer, in proportion to the paid up capital on those
shares. Hence, the company cannot ignore a section of the existing shareholders
and must offer the shares to the existing equity shareholders in proportion to their
holdings.
As per facts of the case, the articles of SV company Ltd. provided that the new
shares should first be offered to the existing shareholders. However, the company
offered new shares to all shareholders excepting VRS company Ltd., which held a
major portion of its shares. Also, under the Companies Act, SV company Ltd. had no
legal authority to do so.
Therefore, in the given case, SV Ltd.’s decision not to offer any further shares to
VRS Co. Ltd on the ground that VRS Co. Ltd already held a high percentage of
shareholding in SV Co. Ltd. is not valid for the reason that it is violation of the
provisions of Section 62 (1) (a).

2: Alteration of Capital: Under section 61 (1) a limited company having a share capital
may, if authorized by its Articles, alter its Memorandum in its general meeting to:
(i) increase its authorized share capital by such amount as it thinks expedient;
(ii) consolidate and divide all or any of its share capital into shares of a larger
amount than its existing shares
However, no consolidation and division which results in changes in the voting
percentage of shareholders shall take effect unless it is approved by the
Tribunal on an application made in the prescribed manner.
(iii) convert all or any of its paid- up shares into stock and reconvert that stock
into fully paid shares of any denomination
(iv) sub-divide the whole or any part of its shares into shares of smaller amount
than is fixed by the Memorandum
(v) cancel shares which, at the date of the passing of the resolution in that behalf,
have not been taken or agreed to be taken by any person, and diminish the
amount of its share capital by the amount of the shares so cancelled.

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 Questions & Answers

Further, under section 64 where a company alters its share capital in any of the
above mentioned ways, the company shall file a notice in the prescribed form
with the Registrar within a period of thirty days of such alteration or increase
or redemption, as the case may be, along with an altered memorandum. The
memorandum shall be altered by a special resolution and in compliance with
other relevant provisions of section 13 of the Companies Act, 2013.

3: Jurisdiction of Court, now Tribunal, the Companies Act, 2013: According to Section 56
(4) of the Companies Act, 2013 every company, unless prohibited by any provision of
law or of any order of court, Tribunal or other authority, shall deliver the certificates
of all shares transferred within a period of one month from the date of receipt by
the company of the instrument of transfer.
Further under section 56 (6), where any default is made in complying with the
provisions of sub-sections (1) to (5) of section 56 (which deals with transfer and
transmission of shares), the company shall be punishable with fine which shall not
be less than 25,000 rupees but which may extend to 5 lakh rupees and every officer
of the company who is in default shall be punishable with fine which shall not be
less than 10,000 rupees but which may extend to one lakh rupees.
The jurisdiction binding on the company is that of the state in which the registered
office of the company is situated. Hence, in the given case the Delhi court is not
competent to take action in the matter.

4: Sweat equity shares of a class of shares already issued.

According to section 54 of the Companies Act, 2013, a company may issue sweat
equity shares of a class of shares already issued, if the following conditions are
fulfilled, namely—
(i) the issue is authorised by a special resolution passed by the company;
(ii) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to
whom such equity shares are to be issued;
(iii) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the regulations
made by the Securities and Exchange Board in this behalf and if they are not
so listed, the sweat equity shares are issued in accordance with such rules as
prescribed under Rule 8 of the Companies (Share and Debentures) Rules, 2014,
The rights, limitations, restrictions and provisions as are for the time being

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 Questions & Answers

applicable to equity shares shall be applicable to the sweat equity shares

issued under this section and the holders of such shares shall rank pari passu
with other equity shareholders.
Data Limited can issue Sweat equity shares by following the conditions as mentioned
above. It does not make a difference that the company is just a few months old
because no such time limit of 2 years is specified under section 54.

5: According to section 52 of the Companies Act, 2013, where 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” and the provisions of this Act relating to reduction of share capital of a
company shall, except as provided in this section, apply as if the securities premium
account were the paid-up share capital of the company.
The securities premium account may be applied by the company—
(a) towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on,
any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68
The securities premium account may be applied by such class of companies, as may
be prescribed and whose financial statement comply with the accounting standards
prescribed for such class of companies under section 133,—
(a) in paying up unissued equity shares of the company to be issued to members
of the company as fully paid bonus shares; or
(b) in writing off the expenses of or the commission paid or discount allowed on
any issue of equity shares of the company; or
(c) for the purchase of its own shares or other securities under section 68.

6: Under section 62 (1) (c) of the Companies Act, 2013 where at any time, a company
having a share capital proposes to increase its subscribed capital by the issue of
further shares, either for cash or for a consideration other than cash, such shares
may be offered to any persons, if it is authorised by a special resolution and if the
price of such shares is determined by a valuation report of a registered valuer,

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 Questions & Answers

subject to the compliance with the applicable provisions of Chapter III and any other
conditions as may be prescribed.
In the present case, Mars India Ltd is empowered to allot the shares to Sunil in
settlement of its debt to him. The issue will be classified as issue for consideration
other than cash must be approved by the members by a special resolution.
Further, the valuation of the shares must be done by a registered valuer, subject to
the compliance with the applicable provisions of Chapter III and any other conditions
as may be prescribed.

7: Appointment of Debenture Trustee: Under section 71 (5) of the Companies Act, 2013,
no company shall issue a prospectus or make an offer or invitation to the public or
to its members exceeding five hundred for the subscription of its debentures, unless
the company has, before such issue or offer, appointed one or more debenture
trustees and the conditions governing the appointment of such trustees shall be
such as may be prescribed.
The rules framed under the Companies Act for the issue of secured debentures
provide that before the appointment of debenture trustee or trustees, a written
consent shall be obtained from such debenture trustee or trustees proposed to be
appointed and a statement to that effect shall appear in the letter of offer issued
for inviting the subscription of the debentures.
Further according to the rules, no person shall be appointed as a debenture trustee,
if he-
(i) Beneficially holds shares in the company;
(ii) Is a promoter, director or key managerial personnel or any other officer or an
employee of the company or its holding, subsidiary or associate company;
(iii) Is beneficially entitled to moneys which are to be paid by the company otherwise
than as remuneration payable to the debenture trustee;
(iv) Is indebted to the company, or its subsidiary or its holding or associate company
or a subsidiary of such holding company;
(v) Has furnished any guarantee in respect of the principal debts secured by the
debentures or interest thereon;
(vi) Has any pecuniary relationship with the company amounting to two percent.
or more of its gross turnover or total income or fifty lakh rupees or such higher
amount as may be prescribed, whichever is lower, during the two immediately
preceding financial years or during the current financial year;
(vii) is a relative of any promoter or any person who is in the employment of the

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company as a director or key managerial personnel;

Thus, based on the above provisions answers to the given questions are:
(i) A shareholder who has no beneficial interest, can be appointed as a debenture
trustee.
(ii) A creditor whom company owes Rs.499 cannot be so appointed. The amount
owed is immaterial.
(iii) A person who has given guarantee for repayment of principal and interest
thereon in respect of debentures also cannot be appointed as a debenture
trustee.

8: The problem as asked in the question is governed by Section 58 of the Companies

Act, 2013 dealing with the refusal to register transfer and appeal against refusal.
In the present case the company has committed the wrongful act of not sending the
notice of refusal of registering the transfer of shares.
Under section 58 (4), if a public company without sufficient cause refuses to register
the transfer of securities within a period of thirty days from the date on which the
instrument of transfer is delivered to the company, the transferee may, within a
period of sixty days of such refusal or where no intimation has been received from
the company, within ninety days of the delivery of the instrument of transfer, appeal
to the Tribunal.
Section 58 (5) further provides that the Tribunal, while dealing with an appeal made
under sub-section (4), may, after hearing the parties, either dismiss the appeal, or
by order—
(a) direct that the transfer or transmission shall be registered by the company and
the company shall comply with such order within a period of ten days of the
receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages,
if any, sustained by any party aggrieved;
In the present case Ms. Mukta can make an appeal before the tribunal and claim
damages.

9. Issue of Bonus Shares

(1) According to section 63 (1) of the Companies Act, 2013, a company may issue fully
paid-up bonus shares to its members, in any manner whatsoever, out of—
(i) its free reserves;
(ii) the securities premium account; or

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(iii) the capital redemption reserve account.

However, no issue of bonus shares shall be made by capitalising reserves created by
the revaluation of assets.
(2) Section 63 (2) provides that the company can issue bonus shares only when the
partly paid-up shares, if any outstanding on the date of allotment, are made fully
paid-up.

(A) The following sources can be used by the company to issue bonus shares:
1. General Reserve
2. Securities Premium
3. Surplus in statement of P&L

(B) Amount of bonus shares to be issued = 90,000 shares x 1/4

= 22,500 shares
Amount that ought to be capitalized for issue of bonus shares
= 22,500 x ` 10 per share
= ` 2,25,000
Total amount available to be capitalized from free reserves to issue bonus shares
= 1,20,000+25,000+2,00,000
= ` 3,45,000
Hence, the amount to be capitalized from free reserves to issue bonus shares will be
` 2,25,000.

(C) A company can issue bonus shares on only fully paid shares. Hence, if the company
did not ask for the final call on 1st April, 2020, it cannot issue bonus shares to its
members.
(Nov’21 3 Marks)

10: According to Section 63 of the Companies Act, 2013, a company may issue fully
paid-up bonus shares to its members, in any manner whatsoever, out of -
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account.
Provided that no issue of bonus shares shall be made by capitalising reserves created
by the revaluation of assets.
Conditions for issue of Bonus Shares: No company shall capitalise its profits or

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reserves for the purpose of issuing fully paid-up bonus shares, unless—
(i) it is authorised by its Articles;
(ii) it has, on the recommendation of the Board, been authorised in the general
meeting of the company;
(iii) it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
(iv) it has not defaulted in respect of payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus;
(v) the partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up;
(vi) it complies with such conditions as may be prescribed.
But the company has to ensure that the bonus shares shall not be issued in lieu of
dividend.
To issue bonus shares company will need reserves of Rs.50,00,000 (half of
Rs.1,00,00,000), which is available with the company. Hence, after following the
above compliances on issuing bonus shares under the Companies Act, 2013, Shree
Ltd. may proceed for a bonus issue of 1 share for every 2 shares held by the existing
shareholders.

11: In terms of section 68 (2) (c) of the Companies Act, 2013 a company is allowed
to buy back a maximum of 25% of the aggregate of its paid- up capital and free
reserves. Hence, the company in the given case is not allowed to buy back its entire
equity shares.
Section 68 (1) of the Companies Act, 2013 specifies the sources of funding buy back
of its shares and other specified securities as under:
(a) Free reserves or
(b) Security Premium account or
(c) Proceeds of the issue of any shares or other specified securities
However, under the proviso to section 68 (1) no buy back of shares or any specified
securities can be made out of the proceeds of an earlier issue of the same kind of
shares or same kind of specified securities.

12: Issue of Further Shares: Section 62 (1) (a) of the Companies Act, 2013 provides that
if, at any time, a company having a share capital proposes to increase its subscribed
capital by the issue of further shares, such shares should be offered to the existing
equity shareholders of the company as at the date of the offer, in proportion to the

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capital paid up on those shares.

However, certain exceptions have been provided in the Companies Act, 2013 when
such further shares of a company may-be offered to other persons as well. These
are as under-
(a) Under section 62 (1) (b) issue of further shares may be offered to employees
under a scheme of employees’ stock option subject to a special resolution
passed by the company and subject to such conditions as may be prescribed.
(b) Under section 62 (1) (c) such shares may be offered to any persons, if it is
authorised by a special resolution, either for cash or for a consideration other
than cash, if the price of such shares is determined by the valuation report of
a registered valuer, subject to the compliance with the applicable provisions of
Chapter III and any other conditions as may be prescribed.
(c) If any equity shareholder to whom the shares are offered in terms of section
62(1) as described above, declines such offer, the Board of Directors may dispose
of the shares in such manner as is not disadvantageous to the shareholders or
to the company.
Preference Shareholders: From the wordings of Section 62 (1) (c), it is quite clear that
these shares can be issued to any persons who may be preference shareholders as
well provided such issue is authorized by a special resolution of the company and
are issued on such conditions as may be prescribed.

13: According to section 48 of the Companies Act,2013-

(1) Variation in rights of shareholders with consent: Where a share capital of the
company is divided into different classes of shares, the rights attached to the
shares of any class may be varied with the consent in writing of the holders of
not less than three-fourths of the issued shares of that class or by means of
a special resolution passed at a separate meeting of the holders of the issued
shares of that class,—
(a) if provision with respect to such variation is contained in the memorandum
or articles of the company; or
(b) in the absence of any such provision in the memorandum or articles, if
such variation is not prohibited by the terms of issue of the shares of that
class:
Provided that if variation by one class of shareholders affects the rights of any
other class of shareholders, the consent of three-fourths of such other class
of shareholders shall also be obtained and the provisions of this section shall

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apply to such variation.

(2) No consent for variation: Where the holders of not less than ten per cent of the
issued shares of a class did not consent to such variation or vote in favour of
the special resolution for the variation, they may apply to the Tribunal to have
the variation cancelled, and where any such application is made, the variation
shall not have effect unless and until it is confirmed by the Tribunal:
Provided that an application under this section shall be made within twenty-
one days after the date on which the consent was given or the resolution was
passed, as the case may be, and may be made on behalf of the shareholders
entitled to make the application by such one or more of their number as they
may appoint in writing for the purpose.

14: Under section 67 (2) of the Companies Act, 2013 no public company is allowed to
give, directly or indirectly and whether by means of a loan, guarantee, or security,
any financial assistance for the purpose of, or in connection with, a purchase or
subscription, by any person of any shares in it or in its holding company.
However, section 67 (3) makes an exception by allowing companies to give loans
to their employees other than its directors or key managerial personnel, for an
amount not exceeding their salary or wages for a period of six months with a view
to enabling them to purchase or subscribe for fully paid-up shares in the company
or its holding company to be held by them by way of beneficial ownership.
It is further provided that disclosures in respect of voting rights not exercised directly
by the employees in respect of shares to which the scheme relates shall be made in
the Board’s report in such manner as may be prescribed.
Hence, Heavy Metals Ltd can provide financial assistance upto the specified limit to
its employees to enable them to subscribe for the shares in the company provided
the shares are purchased by the employees to be held for beneficial ownership by
them.
However, the directors or key managerial personnel will not be eligible for such
assistance.

15: Refusal for Registration of transferred/transmitted securities: According to Section

58 (4) of the Companies Act, 2013, if a public company without sufficient cause
refuses to register the transfer of securities within a period of thirty days from the
date on which the instrument of transfer is delivered to the company, the transferee
may, within a period of sixty days of such refusal or where no intimation has been

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received from the company within ninety days of the delivery of the instrument of
transfer, appeal to the Tribunal.
Remedies available to the Transferee against the company: Section 58 (5) of the
Companies Act, 2013, provides that the Tribunal, while dealing with an appeal
may, after hearing the parties, either dismiss the appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the company and
the company shall comply with such order within a period of ten days of the
receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages,
if any, sustained by any party aggrieved;
In the instant case, Harsh, can make an appeal before the tribunal for remedies that
the company shall be ordered to register transfer /transmission of securities within
10 days of the receipt of order, or rectify register and pay damages.

16: Section 68(2) of the Companies Act, 2013 deals with the Conditions required for
buy-back of shares.
As per the Act, the company shall not purchase its own shares or other specified
securities unless-
(a) The buy-back is authorized by its articles;
(b) A special resolution has been passed at a general meeting of the company
authorizing the buy-back: except where—
(1) the buy-back is, ten per cent or less of the total paid-up equity capital
and free reserves of the company; and
(2) such buy-back has been authorised by the Board by means of a resolution
passed at its meeting;
Time limit for Completion of Buy Back: As per section 68(4), every buy-back shall
be completed within a period of one year from the date of passing of the special
resolution, or as the case may be, the resolution passed by the Board under sub-
section (2).
Ratio of aggregate debts: Provision also specifies that ratio of the aggregate debts
(secured and unsecured) owed by the company after buy back is not more than
twice the paid up capital and its free reserves. However, Central Government may
prescribe higher ratio of the debt for a class or classes of companies.
As per the stated facts, Xgen Ltd. has a paid up equity capital and free reserves to
the extent of `50,00,000. The company planned to buy back shares to the extent of
`4,50,000.

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 Questions & Answers

Referring to the above provisions, the answers will be as follows:

1. No, special resolution will not be required as the buyback is less than 10%
of the total paid-up equity capital and free reserves (50,00,000x10/100=
5,00,000) of the company, but such buy back must be authorized by the Board
by means of a resolution passed at its meeting.
2. Time limit for completion of buy back will be- within a period of one year from
the date of passing of the resolution by the Board.
3. The ratio of the aggregate debts (secured and unsecured) owed by the company
after buy back should not be more than twice the paid up capital and its free
reserves.
The above buy-back is possible when backed by the authorization by the articles of
the company.

17: Conditions for the issue of equity shares with differential rights (Rule 4 of the
Companies (Share capital and Debenture) Rules, 2014): No company limited by
shares shall issue equity shares with differential rights as to dividend, voting or
otherwise, unless it complies with the following conditions, namely:-
(1) the articles of association of the company authorizes the issue of shares with
differential rights;
(2) the issue of shares is authorized by an ordinary resolution passed at a general
meeting of the shareholders.
(3) However, where the equity shares of a company are listed on a recognized
stock exchange, the issue of such shares shall be approved by the shareholders
through postal ballot;
(4) the shares with differential rights shall not exceed seventy-four percent of
the total post-issue paid up equity share capital including equity shares with
differential rights issued at any point of time;
(5) the company has not defaulted in filing financial statements and annual
returns for three financial years immediately preceding the financial year in
which it is decided to issue such shares;
(6) the company has no subsisting default in the payment of a declared dividend
to its shareholders or repayment of its matured deposits or redemption of
its preference shares or debentures that have become due for redemption or
payment of interest on such deposits or debentures or payment of dividend;
(7) the company has not defaulted in payment of the dividend on preference
shares or repayment of any term loan from a public financial institution or

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State level financial institution or Scheduled Bank that has become repayable
or interest payable thereon or dues with respect to statutory payments
relating to its employees to any authority or default in crediting the amount in
Investor Education and Protection Fund to the Central Government;
(8) However, a company may issue equity shares with differential rights upon
expiry of five years from the end of the financial Year in which such default
was made good.
(9) the company has not been penalized by Court or Tribunal during the last three
years of any offence under the Reserve Bank of India Act, 1934, the Securities
and Exchange Board of India Act, 1992, the Securities Contracts Regulation
Act, 1956, the Foreign Exchange Management Act, 1999 or any other special
Act, under which such companies being regulated by sectoral regulators.

18: Issue of bonus shares [Section 63]: As per Section 63 of the Companies Act, 2013,
a company may issue fully paid-up bonus shares to its members, in any manner
whatsoever, out of—
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves created
by the revaluation of assets.
As per the given facts, ABC Ltd. has total eligible amount of `12 lakhs (i.e.
5.00+3.00+4.00) out of which bonus shares can be issued and the total share capital
is `30.00 lakhs.
Accordingly:
(i) For issue of 1:3 bonus shares, there will be a requirement of `10 lakhs (i.e., 1/3
x 30.00 lakh) which is well within the limit of available amount of `12 lakhs.
So, ABC Limited can go ahead with the bonus issue in the ratio of 1:3.
(ii) In case ABC Limited intends to issue bonus shares in the ratio of 1:2, there
will be a requirement of `15 lakhs (i.e., ½ x 30.00 lakh). Here in this case, the
company cannot go ahead with the issue of bonus shares in the ratio of 1:2,
since the requirement of `15 Lakhs is exceeding the available eligible amount
of `12 lakhs.

19: Funds utilized for purchase of its own securities: Section 68 of the Companies Act,
2013 states that a company may purchase its own securities out of:

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(i) its free reserves; or

(ii) the securities premium account; or
(iii) the proceeds of the issue of any shares or other specified securities.
However, buy-back of any kind of shares or other specified securities cannot be
made out of the proceeds of an earlier issue of the same kind of shares or same kind
of other specified securities
Prohibition for buy-back in certain circumstances [Section 70]
(1) The provision says that no company shall directly or indirectly purchase its
own shares or other specified securities-
(a) through any subsidiary company including its own subsidiary companies;
or
(b) through any investment company or group of investment companies; or
(c) if a default is made by the company in repayment of deposits or interest
payment thereon, redemption of debentures or preference shares or
payment of dividend to any shareholder or repayment of any term loan
or interest payable thereon, to any financial institutions or banking
company;
But where the default is remedied and a period of three years has lapsed
after such default ceased to subsist, then such buy-back is not prohibited.
(2) No company shall directly or indirectly purchase its own shares or other
specified securities in case such company has not complied with provisions of
Sections 92 (Annual Report), 123 (Declaration of dividend), 127 (Punishment
for failure to distribute dividends), and section 129 (Financial Statements).

20: According to section 62 of the Companies Act, 2013, where at any time, a company
having a share capital proposes to increase its subscribed capital by the issue of
further shares, such shares shall be offered—
(a) to persons who, at the date of the offer, are holders of equity shares of the
company in proportion, as nearly as circumstances admit, to the paid-up share
capital on those shares by sending a letter of offer subject to the following
conditions, namely:-
(i) the offer shall be made by notice specifying the number of shares offered
and limiting a time not being less than fifteen days and not exceeding
thirty days from the date of the offer within which the offer, if not accepted,
shall be deemed to have been declined;
(ii) unless the articles of the company otherwise provide, the offer aforesaid

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shall be deemed to include a right exercisable by the person concerned to

renounce the shares offered to him or any of them in favour of any other
person; and the notice referred to in clause (i) shall contain a statement
of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt
of earlier intimation from the person to whom such notice is given that he
declines to accept the shares offered, the Board of Directors may dispose
of them in such manner which is not dis-advantageous to the shareholders
and the company.
In the instant case, X Ltd. issued a notice on 1st Feb, 2018 to its existing shares
holders offering to purchase one extra share for every five shares held by them.
The last date to accept the offer was 15th Feb, 2018 only. Mr. Kavi has given an
application to renounce the shares offered to him in favour of Mr. Ravi, who is not a
shareholder of the company.
As nothing is specified related to the Articles of the company, it is assumed offer
shall be deemed to include a right of renunciation. Hence, Mr. Kavi can renounce the
shares offered to him in favour of Mr. Ravi, who is not a shareholder of the company.
In the second part of the question, even if Mr. Ravi is a shareholder of X Ltd. then
also it does not affect the right of renunciation of shares of Mr. Kavi to Mr. Ravi.

21:
(i) In the instant case, the company’s proposal is not in order due to the following
reasons:
(A) Though XYZ unlisted company passed a special resolution but it proposed
to buy back 30% of its own equity shares. But as per section 68(2)(c) of the
Companies Act, 2013, buy-back of equity shares in any financial year shall not
exceed 25% of its total paid up equity capital in that financial year.
(B) The Articles of Association empowers the company to buy back its own shares.
This condition is in order as per section 68(2)(a).
(C) Earlier the company has also passed a special resolution to buy back its own
shares on January 15th, 2018, now the company passed a special resolution
on January 5th, 2019 to buy back its own shares. This is not valid as no offer
of buy-back, shall be made within a period of one year from the date of the
closure of the preceding offer of buy-back, if any. [proviso to section 68(2)]
(D) The company further decided that the payment for buy back be made out
of the proceeds of the company’s earlier issue of equity share. This is not in

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order as according to proviso to section 68(1), buy-back of any kind of shares

or other specified securities cannot be made out of the proceeds of an earlier
issue of the same kind of shares or same kind of other specified securities.
(ii) If buyback offer date is revised from 5th January 2019 to January 25th 2019 and
percentage of buy back is reduced from 30% to 25% keeping the source of purchase
as above, then also the company’s proposal is not in order as buy-back of any kind
of shares or other specified securities cannot be made out of the proceeds of an
earlier issue of the same kind of shares or same kind of other specified securities.

22. According to Section 55(3) of the Companies Act, 2013, where a company is not
in a position to redeem any preference shares or to pay dividend, if any, on such
shares in accordance with the terms of issue (such shares hereinafter referred to as
unredeemed preference shares), it may, with the consent of the holders of three-
fourths in value of such preference shares, and with the approval of the Tribunal on
a petition made by it in this behalf, issue further redeemable preference shares equal
to the amount due, including the dividend thereon, in respect of the unredeemed
preference shares, and on the issue of such further redeemable preference shares,
the unredeemed preference shares shall be deemed to have been redeemed.
Provided that the Tribunal shall, while giving approval under this sub-section, order
the redemption forthwith of preference shares held by such persons who have not
consented to the issue of further redeemable preference shares.
In view of the provisions of Section 55 (3), Silver Robotics Limited can initiate steps
for the issue of further redeemable preference shares equal to the amount due i.e.
` 10,00,000. For this purpose, it shall obtain the consent of the holders of three-
fourths in value of such preference shares and also seek approval of the Tribunal by
making a petition. In case, there are certain preference shareholders who have not
accorded their consent for the proposal of issuing further redeemable preference
shares, the Tribunal may order the company to redeem forthwith such preference
shares. Accordingly, Silver Robotics Limited must be ready with sufficient funds for
the redemption of preference shares held by those who have not consented. On the
issue of such further redeemable preference shares by the company, the unredeemed
preference shares shall be deemed to have been redeemed.

23. According to Section 68 (6), where an unlisted public company has passed a special
resolution under Section 68 (2) (b) or the Board has passed a resolution under item

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(ii) of the proviso to Section 68 (2) (b) to buy-back its own shares, it shall, before
making such buy-back, file with the Registrar a ‘Declaration of Solvency’ in Form
SH-9. The declaration shall be 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 they
have formed an opinion that it is capable of meeting its liabilities and will not
be rendered insolvent within a period of one year from the date of declaration of
solvency adopted by the Board. The declaration shall be signed by at least two
directors of the company, one of whom shall be the managing director, if any.

24. As per the provisions of sub-section (1) of section 53 read with section 54 of the
Companies Act, 2013, a company shall not issue shares at a discount, except in the
case of an issue of sweat equity shares. As per the provisions of sub-section (2) of
section 53 of the Companies Act, 2013, any share issued by a company at a discount
shall be void. In terms of the above provisions, issue of shares by ABC Limited at
a discount of ` 1 per share is not valid. In case the above shares have been issued
to employees as Sweat equity shares , then the issue of shares at discount is valid.
[Section 54(1) of the Companies Act, 2013

25. Sweat Equity Shares is governed by Section 54 of the Companies Act, 2013 and Rule
8 of Companies (Share capital and debentures) Rules, 2014. According to Section 54
the company can issue sweat equity shares to its director and permanent employees
of the company.
According to rule 8 (4) proviso, states that a start up company, is defined in a
notification number Ministry of Commerce and industry Government of India, may
issue sweat equity share not exceeding 50% of its paid up share capital up to 10
years from the date of its in incorporation or registration.
According to Rule 8(5), the sweat equity shares issued to directors or employees
shall be locked in/ non-transferable for a period of three years from the date of
allotment and the fact that the share certificates are under lock-in too.
Hence, in the above case the company can issue sweat equity shares by passing
special resolution at its general meeting. The company as a startup company is
right in issue of 10% sweat equity share as it is overall within the limit of 50% of
its paid up share capital. But the lock in period of the shares is limited to maximum
three years period from the date of allotment.

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