Share Capital and Debentures PDF

CHAPTER a 4 SHARE CAPITAL AND DEBENTURES LEARNING OUTCOMES At the end of this chapter, you will be able to:  Know about the Kinds of Share Capital  Explain the basic requirements for issue of Share...

CHAPTER a 4 SHARE CAPITAL AND DEBENTURES LEARNING OUTCOMES At the end of this chapter, you will be able to:  Know about the Kinds of Share Capital  Explain the basic requirements for issue of Share Certificates, Voting Rights and Variation of Shareholders’ Rights  Explain Calls on Unpaid Shares  Know about the Time Period permitted for delivery of Certificates of Securities  Understand the application of Securities Premium Amount  Identify prohibition on issue of Shares at a Discount  Understand the issue of Sweat Equity Shares, Issue and Redemption of Preference Shares and creation of Capital Redemption Reserve Account  Know about the Transfer and Transmission of Securities, Refusal to Register and Appeal against Refusal © The Institute of Chartered Accountants of India  a 4.2 CORPORATE AND OTHER LAWS  Explain the concepts relating to the Alteration of Share Capital and Notice to Registrar thereof  Understand the concept relating to Further issue of Share Capital  Know about the issue of Bonus Shares, Reduction of Share Capital, Buy-Back of Shares and applicable restrictions thereon  Know about issue of Debentures and creation of Debenture Redemption Reserve Account  Identify the Punishments and penalties for various offences including impersonation. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.3 a CHAPTER OVERVIEW W This chapter explains the provisions contained in Chapter IV (comprising Section 43 to 72) of the Companies Act 2013 (hereinafter referred to as the Act or this Act) regarding the ‘Share Capital and Debentures’, along with relevant procedural aspects explained in the Companies (Share Capital and Debentures) Rules, 2014. Share Capital and Debentures (Sections 43-72) Concepts relating to Shares Concepts relating to Debentures (Sections 43-70) (Section 71) 1. 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. Under the Companies Act, 2013, they are jointly referred to as “securities”. 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. © The Institute of Chartered Accountants of India  a 4.4 CORPORATE AND OTHER LAWS 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. 2. 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 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 Bank 1 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. 1 (1882) 21 Ch D 302 (F) 2 (1901) 1 Ch 279 © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.5 a Example 1 - Sun Bakers Limited has authorised share capital of ` 50.00 lakh. The face value of each unit of capital or ‘share’ is ` 10. In this case, it can be said that the company has 5.00 lakh shares of ` 10 each. When these shares (either in part or whole) are allotted to various persons, they, on the date of allotment, become shareholders of the company. 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 paid- up 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. Students are advised to take note of - What make stock different? Stock is stated in lump sum whereas a ‘share’ being the smallest unit is having face value. Originally shares are issued to the shareholders while in case of stock, the fully paid-up shares of the members are converted into ‘stock’ afterwards. Thus, ‘stock’ is not issued originally but is obtained by conversion of fully paid-up shares. 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; © The Institute of Chartered Accountants of India  a 4.6 CORPORATE AND OTHER LAWS Kinds of share capital Equity share capital Preference share capital with differential carries preferential right rights as to w.r.t. payment of dividend with voting rights and repayment of capital at dividend, voting or otherwise time of winding up Preference Share Capital [explanation II to 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. Example 2 – Ind-swift Pharma Labs Limited and Panacea Biotec Limited issued preference share. Ind-swift Pharma provides that the preferential dividend may be a fixed amount say ` 5,00,000 in one year, payable to preference shareholders before anything is paid to the ordinary shareholders. Whereas the Panacea Biotec provides that the amount payable as preferential dividend may be calculated at a fixed rate @ 8 percent of the nominal value of each share. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.7 a 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 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 4 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 capital5 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 4 of the Companies (Share capital and Debenture) Rules, 2014. 3 1949 AC 462 HL 4 Staples v Eastman Photographic Materials Co (1896) 5 Bihar State Financial Corporation vs. CIT Bihar (1976) © The Institute of Chartered Accountants of India  a 4.8 CORPORATE AND OTHER LAWS 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 As per sub-rule 1, 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 6 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 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 6 W.e.f. 16th August 2019 through G.S.R. 574(E) (Note - Earlier limit was 26%) © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.9 a 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 good7 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, 1934 8, 2. Securities and Exchange Board of India Act, 1992 9, 3. Securities Contracts Regulation Act, 1956 10, 4. Foreign Exchange Management Act, 1999 11 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, 1956 12 and the rules made thereunder, shall continue to be regulated under such provisions and rules. 13 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 15. II. Contents of Explanatory statement (annexed to notice) Sub-Rule 2 provides the explanatory statement annexed to the notice of the general meeting or of a postal ballot shall contains various matters like particulars 7 Inserted w.e.f. 19th July 2016 though G.S.R. 704(E) - Companies (Share Capital and Debentures) Third Amendment Rules, 2016 8 Act 2 of 1934 9 Act 15 of 1992 10 Act 42 of 1956 11 Act 42 of 1999 12 Act 1 of 1956 13 W.e.f 18th June 2014, inserted though G.S.R. 413.(E). - Companies (Share Capital and Debentures) Amendment Rules, 2014 after Rule 4(6). 14 Supra note 15 15 ibid © The Institute of Chartered Accountants of India  a 4.10 CORPORATE AND OTHER LAWS of the issue including its size, details of differential rights, etc. III. Prohibition on Conversion Sub-Rule 3 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 Sub-Rule 4 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 Sub-rule 5 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 Sub-rule 6 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. 16 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.17 16 GSR 8 (E), dated 4th January, 2017 17 GSR 464 (E), dated 5th June, 2015 as amended by GSR 583 (E), dated 13 th June, 2017 © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.11 a 3. CERTIFICATE OF SHARES [SECTION 46] PRIMA FACIE EVIDENCE OF TITLE Shares Issued and held in physical form As per sub-section 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 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 sub-section 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. © The Institute of Chartered Accountants of India  a 4.12 CORPORATE AND OTHER LAWS 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. 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 or Central Government. 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. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.13 a 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 Form SH 2 with cross reference to register of members, in shape of register. 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 Sub-section 3 overrule the articles of a company, and say the issue of a certificate of shares or the duplicate thereof, the particulars to be entered in the register of members and other matters shall be in manner and form as prescribed in rule 5, 6, and 7 of the Companies (Shares and Debentures) Rules, 2014. 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. © The Institute of Chartered Accountants of India  a 4.14 CORPORATE AND OTHER LAWS 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 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. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.15 a 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 Higher of: Five times the face Ten times the face Company value of the shares value of such shares involved or Rupees ten crores And Liable for action under section 447 Every officer of the Note – Provisions of Section 447 already company who is in default explained as separate topic under chapter 3 of this module. Example 3 – 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. 4. VOTING RIGHTS [SECTION 47] VOTING RIGHTS OF MEMBERS HOLDING EQUITY SHARE CAPITAL [SUB- SECTION 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 © The Institute of Chartered Accountants of India  a 4.16 CORPORATE AND OTHER LAWS 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 exercise voting rights on poll in excess of five per cent, of total voting rights of equity shareholders. 18 Note: 1. As per section 2(93) Voting right means the right of a member of a company to vote in any meeting of the company or by means of postal ballot. 2. Section 106 specify provisions regarding restriction on voting rights. 3. Section 43 has overriding effect on section 47, hence holders of equity share capital with differential rights will exercise voting right as per clauses of article of association or terms of issue; rather on proportional basis. 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. Placed before the company 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. Note: Voting right of preference share holder, on a poll shall be in proportion to his share in the paid-up preference share capital of the company. Second Proviso to section 47 (2) empowers preference shareholder with right to vote on all the resolutions placed before the company, in case where the dividend in respect of his class of preference shares has not been paid for a period of two years or more. First Proviso to section 47 (2), provides that in case of resolutions wherein both equity shareholders and preference shareholders are entitled to vote, the proportion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares. 18 Notification No. GSR 465 (E), dated 5th June, 2015. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.17 a Summary of section 47 Voting Rights Preference Shares (In Equity Shares proportion of paid-up capital) On every resolution Dividend not Directly placed before the paid for 2 years Winding up affecting company or more interest Equity shares Normal having Differential Rights In proportion As defined in of paid-up Articles/ Terms capital of issue Example 4 – Indswift Pharma Labs Limited raised the capital of 300 crore through issue of single series of 8% preference share apart from 1200 crore ordinary shares. Indswift last paid dividend to such preference share holder, for 2019-20. Preference shareholder w.e.f 1 st April 2022 assume the right to vote on any resolution placed before company. But till 31 st March 2022 they can vote only on that resolution which directly affect the rights attached to his preference shares or involve matter of the winding up of the company, or for the repayment or reduction of its equity or preference share capital. The proportion of voting right of equity shareholders to the voting rights of the preference shareholders shall be 4:1. © The Institute of Chartered Accountants of India  a 4.18 CORPORATE AND OTHER LAWS 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 5. VARIATION OF SHAREHOLDERS’ RIGHTS [SECTION 48] A shareholder who was given the right to purchase the shares of the company on a pre-emptive basis was held to constitute a special class distinguishing him from other shareholders who did not have any such right, and consequently, his right was not permitted to be taken away without his consent.21 If it is proposed to change the rights of any class, certain procedure has to be followed. Section 48 allows the variation, if three conditions (First two stated by sub-section 1, while third and last one by sub-section 2) has been met. 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. 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. 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. 19 GSR 8 (E), dated 4th January, 2017 20 GSR 464 (E), dated 5th June, 2015 as amended by GSR 583 (E), dated 13 th June, 2017 21 Cumbrian Newspapers Group Ltd v Cumberland Sf Westmorland Herald Newspaper & Printing Co Ltd (1987) 2 Comp LJ39. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.19 a 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. 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 Sub-section 3 provides, 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. Example 5 – A resolution sanctioning the variation has been moved on 1 st November 2022, the application with tribunal shall be filled by 22nd November 2022. Further if tribunal pass its order on 4 th January 2023, then copy of order shall be filed with registrar by 6 th March 2023. Illustration - MCQ 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 Answer – c. (Refer section 48(1) 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. Mind it is 75% of issued shares’ holders not 75% of holders. © The Institute of Chartered Accountants of India  a 4.20 CORPORATE AND OTHER LAWS Crux of some of landmark judgements – to better understand the ‘variation’ New issue of preference shares ranking pari-passu with the existing shares does not amount to variation so as to require the consent of preference shareholders.22 Cancellation of shares and reduction of capital also do not amount to variation of class rights.23 6. CALLS ON SHARE [SECTION 49 TO SECTION 51] 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. 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". 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 paid- up amount. CALL SHALL BE ON UNIFORM BASIS [SECTION 49] Calls shall be made on a uniform basis on all shares that are falling under the same class. Note: 1. 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. 2. A shareholder on whom a regular call for payment has been served may choose to pay only a part of the sum due. 22 White v Bristol Aeroplane Co Ltd (1953) 2 WLR 144. 23 Essar Steel Ltd, re, (2005) 59 SCL457 (Guj) © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.21 a 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 3. How much to call on partly-paid share? This will be the decision of board, subject to clauses to Article and terms of issue. Example 6 – Prism Glass Limited issued three series of equity shares, all carry the nominal value of ` 100, and the paid-up value for each series is 100, 80 and 55 respectively. All will be considered as different class of shares. Since for first class share is fully paid- up, no call can be made, whereas in case of remaining two classes call can be made. Illustration – Q&A Where a shareholder paid the first two calls after a great delay and neglected to pay the third call and the directors, being annoyed, and called upon him to pay the whole amount due. In your opinion is call valid? Answer - A call can’t be made on some of the members only, unless they constitute a separate class of shareholders, hence such a call shall be invalid. 24 CALLS-IN-ADVANCE [SECTION 50] 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. Note 1. 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. 2. 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.25 24 Galloway v Halle Concerts Society, (1915) 2 Ch 233 25 CIT v Manipal Industries Ltd, (1997) 12 SCL 15 (ITAT). © The Institute of Chartered Accountants of India  a 4.22 CORPORATE AND OTHER LAWS Example 7 - Coriander Masale Limited has issued 10,00,000 equity shares of ` 10 each on which ` 6 per share has been called till allotment and the first and final call of ` 4 is yet to be made. Reena holds 10,000 shares on which she has paid whole of ` 10 per share. In the upcoming extra-ordinary general meeting of the company she wants to exercise her voting rights as the owner of fully paid-up shares. However, the company cannot permit her as she does not have voting right in respect of the ‘advance amount’ paid by her in respect of first and final call. The restriction will continue till the amount is duly called up by the company. Illustration – Q&A Moon Star Machineries Limited is authorised by its articles to accept the whole or any part of the amount of remaining unpaid calls from any member even if no part of that amount has been called up by it. ‘Anand’, a shareholder, deposits in advance the remaining amount due on his partly paid-up shares without any calls being made by the company. Advise the company about the validity of accepting money in advance. Answer - In view of the authorisation given by the Articles, Moon Star Machineries Limited is permitted to accept the advance amount received on unpaid calls from Anand. In other words, this is a valid transaction. 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. 7. ISSUE OF SHARES AT A PREMIUM OR DISCOUNT [SECTION 52 & SECTION 53] ISSUE OF SHARES AT A PREMIUM & APPLICATION OF PREMIUM [SECTION 52] 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. But the Act does regulate the disbursement of the amount collected as premium through section 52. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.23 a Note: 1. The power to issue shares at premium need not be specifically provided by AOA. 2. 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. 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. Example 8 - A share having face value of ` 10 is issued at a price of ` 14. The amount over and above the face value of ` 10 i.e. ` 4 is called premium. Practical Insight Lloyds Luxuries IPO opens on Sep 28, 2022, and closes on Sep 30, 2022. The date of listing on NSE SME was October 11, 2022 (Tuesday). Fixed issue price against the Face Value of ₹ 10 per share is ₹ 40 per share. Hence, premium charges is ₹30 per share. Transfer of premium to Securities Premium Account [Sub-section1] Sub-section 1 lay-down following 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 sub- section 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’? © The Institute of Chartered Accountants of India  a 4.24 CORPORATE AND OTHER LAWS 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. 26 3. A reduction of the premium account was allowed under a scheme which experts had approved as fair, just and proper.27 Application of Premium received on Issue of Shares [sub-section 2 & 3] Sub-section 2 allow the companies to apply securities premium account for; a. Issue of fully paid bonus shares; b. Writing off the preliminary expenses; 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. 26 Circular No 3/77 of 15-4-1977 27 Zee Tele Films Ltd, re, (2005) 124 Comp Cas 102 (Bom). © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.25 a Example 9 - A share having face value of ` 100 is issued at a lower price of ` 95. The differential amount of ` 5 is known as discount which is being allowed by the company. Though title of section used the word prohibited, but indeed issue of share at discount is not fully prohibited, it is only restricted especially after the enactment of the Companies (Amendment) Act, 2017 (effective from 09th February 2018). Sub-section 1, except the issue of ‘Sweat Equity Shares’ under section 54 of this Act, a company shall not issue shares at discount. Further, sub-section 2, provides any share issued at discount by company is void. Sub-section 2A, is overriding provision (to sub-section 1 and 2) inserted though Companies (Amendment) Act, 2017 empowers 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 is Upto an amount equal to the amount raised through the in default issue of shares at a discount or five lakh rupees, whichever is less Company Refund all monies received with interest at the rate of twelve percent per annum from the date of issue of such shares Note: It is to be noted that the restrictions mentioned in Sections 52 and 53 shall apply only in respect of issue of shares (either equity or preference shares) but not to the issue of any debt related products like bonds or debentures whose pricing is mostly governed by YTM (yield to maturity) considerations. © The Institute of Chartered Accountants of India  a 4.26 CORPORATE AND OTHER LAWS 8. ISSUE OF SWEAT EQUITY SHARES [SECTION 54] MEANING OF ‘SWEAT EQUITY SHARES’ [SECTION 2(88)] 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, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. 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. Mind it, Sweat equity shares is a different concept from Employee stock option in multiple ways. 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)] Sub-section 2 provides; 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 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; © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.27 a Company Applicable Provisions/Regulations Listed on Recognised Stock Regulations made by the Securities and Exchange Exchange Board in this behalf Rule 8 of the Companies (Share and Debentures) Other than above Rules, 2014 Illustration – T&F A company that incorporated and commenced the business on 9th Nov 2022, can issue sweat equity share only after 8 th Nov 2023. Answer - False. Currently there is no condition prescribed by section 54 (1) regarding age of company. Students are advised to take note; Clause c to section 54(1) omitted by the Companies (Amendment) Act, 2017 w.e.f 7th May 2018 “not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business”. SOME OF THE IMPORTANT PROVISIONS CONTAINED IN RULE 8 OF THE COMPANIES (SHARE AND DEBENTURES) RULES, 2014 Meaning of Employee (Explanation I to sub-rule 1) 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 © The Institute of Chartered Accountants of India  a 4.28 CORPORATE AND OTHER LAWS 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. 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. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.29 a 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 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. © The Institute of Chartered Accountants of India  a 4.30 CORPORATE AND OTHER LAWS 9. ISSUE AND REDEMPTION OF PREFERENCE SHARES [SECTION 55] Following diagram depicts the types of preference shares: On the basis of Cumulative payment of dividend Non-cumulative On the basis of Participatory participation in surplus Non-participatory Types of Convertible Preference Shares (mandatorily or optionally) On the basis of conversion (partially or fully) Non-convertible Redeemable On the basis of redemption Irredeemable (cannot be issued) PROHIBITION ON ISSUE OF IRREDEEMABLE PREFERENCE SHARES [SUB- SECTION 1] A company limited by shares shall not issue any preference shares which are irredeemable. It worth noting that the amendment of 1988 to the Companies Act 1956, abolished the category of irredeemable preference shares. ISSUE AND REDEMPTION OF REDEEMABLE PREFERENCE SHARE [SUB- SECTION 2] From the sub-section 1, it can be constructed reasonably that only redeemable preference shares can be issued by company limited by shares, sub-section 2 © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.31 a 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. Example 10 – Medanta Healthcare Limited is planning to raise the capital through issue of preference share. It article is silent about this. Board of Directors are of opinion that redeemable share can be issued. Since in the given case article is silent, not authorise the issue of preference shares expressly, hence Medanta Healthcare Limited can’t issue preference share. They may alter the article of association. 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 as are prescribed in Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014. These conditions laid-down by sub-rule 1 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. Sub-rule 2 and 3 enumerates 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. Sub-rule 4 requires 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). Further sub-rule 5 provides that 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. © The Institute of Chartered Accountants of India  a 4.32 CORPORATE AND OTHER LAWS Exception to maximum tenor limit of twenty years (First proviso to section 55(2) read with explanation to section 55 and Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014). 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. Redemption of Preference Shares [Second proviso to section 55(2)] 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. For the purpose of this section 1. Redemption of preference shares is not taken as reduction of the company's authorised share capital. 2. The company may issue new shares up to the nominal amount of the shares redeemed and the capital shall not be deemed to have been increased. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.33 a Example 11 - During the current financial year, the Board of Directors of Vintee Lifestyles Garments Limited is to undertake redemption of 20,000 preference shares of ` 100 each at a premium of ` 20 per share. It is made out by the Accounts Department that the profits are sufficient to meet the ensuing liability arising out of redemption of preference shares at premium. In this case, the amount that needs to be transferred to Capital Redemption Reserve account out of profits which are otherwise available for dividend, is ` 20,00,000 being the sum equal to the nominal amount of the preference shares to be redeemed. There is no need to transfer to CRR account any amount paid towards premium. 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. Summary of above provisions are tabled below; Category Source Timing (Shall be provided) Such class of companies, Out of the profits of the before such shares are as may be prescribed company redeemed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133 © The Institute of Chartered Accountants of India  a 4.34 CORPORATE AND OTHER LAWS Premium payable on Out of the profits of the redemption of any company or out of the preference shares issued company‘s securities on or before the premium account commencement of this Act Any other case 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 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. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.35 a Note: 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) Example 12 – Bell Homes Furnisher Limited (BHFL) unable to redeem the preference shares as they become due. Hence BHFL decided to issue further preference share against unredeemed preference shares. Holder holding 93% of such unredeemed preference shares in value, gave their consent; tribunal also assented to issue of further preference shares. The 18 holders who own remaining 7% seek redemption of shares held by them. In this case while giving approval under section 55(3), tribunal shall order the redemption forthwith of shares (7% in value) held by dissenting 18 holders. Utilisation of CRR Account [Sub-section 4] 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. 10. 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. TRANSFER AND TRANSMISSION OF SECURITIES OR INTEREST OF MEMBER IN COMPANY [SECTION 56] Requirement for Registering the Transfer of Securities [Sub-section 1] Except, where the transfer is between persons both of whose names are entered as holders of beneficial interest in the records of a depository A company shall register a transfer of; a. securities of the company, or © The Institute of Chartered Accountants of India  a 4.36 CORPORATE AND OTHER LAWS b. the interest of a member in the company in the case of a company having no share capital, Only if, following conditions fulfilled prior to such registration; a. The instrument of transfer must be executed both by the transferor and the transferee. b. The instrument must specify the name, address and occupation, if any, of the transferee. c. The instrument of transfer should be duly stamped and dated. d. The instrument of transfer should be in the prescribed form. As per Rule 11 (1) of the Companies (Share Capital and Debentures) Rules, 2014, Form No. SH-4 is to be used, in case securities are held in physical form e. The instrument should be delivered to the company along with the certificate relating to the shares transferred within 60 days from the date of execution. If the share certificate is not in existence, the letter of allotment of securities should be filed. The proviso to Section 56(1) says that where the instrument of transfer has been lost or it has not been delivered within the prescribed period (i.e. 60 days from the date of Execution), the company may register the transfer on such terms as to indemnity as the Board may think fit. Transfer of partly paid Shares on an application of transferor alone (Sub - section 3 read with rule 11 (3) of the Companies (Share Capital and Debentures) Rules, 2014 Where an application is made by the transferor alone and relates to partly paid shares, a company shall not register a transfer of partly paid shares, unless the company has given a notice in Form No. SH-5 to the transferee and the transferee has given no objection to the transfer within two weeks from the date of receipt of notice. Example 13 - Himanshu has received a notice from Chaitanya Progressive Books Private Limited on 7th August, 2023 intimating that Shefali has submitted a transfer deed duly signed by her for transfer of 500 partly paid shares (` 6 paid-up out of Face Value of ` 10 per share) in his name. Himanshu as transferee must raise his objection to the proposed transfer of partly paid shares latest by 21 st August, 2023. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.37 a Exemptions28 in case of government companies/securities Government Company, which has not committed a default in filing its financial statements under section 137 or Annual Return under section 92 with the Registrar given. Full exemption from conditions laid-down by section 56(1) in respect to transfer of securities held by nominees of the Government. Partial exemption in respect to transfer of bonds issued by a Government company. Only an intimation by the transferee specifying his name, address and occupation, if any, has been delivered to the company along with the certificate relating to the bond; and if no such certificate is in existence, along with the letter of allotment of the bond. There is no requirement of proper instrument of transfer, to be duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee. Power to Register Transmission not affected by section 56 (1) (Sub-section 2) The power of company to register transmission shall not be affected by the conditions imposed by Section 56 (1) for registration of transfer. Hence company is empowered to register transmission of right, if it receives an intimation from any person to whom such right has been transmitted. There is no need for submission of instrument of transfer in case of transmission. 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. 28 In terms of Notification No. GSR 463 (E), dated 5th June, 2015 © The Institute of Chartered Accountants of India  a 4.38 CORPORATE AND OTHER LAWS 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. 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 © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.39 a 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 [sub-section 4] 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 memorandum. of incorporation. In the case of any allotment of Within a period of two months from the date any of its shares by a company. of allotment. In the case of a transfer of Within a period of one month from the date of securities. 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 Within a period of sixty days after specified IFSC public and private incorporation, allotment, transfer or company 29 transmission. 29 GSR 9 (E), dated 4th January, 2017 © The Institute of Chartered Accountants of India  a 4.40 CORPORATE AND OTHER LAWS 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. (Proviso to sub-section 4) Example 15 – A request for transfer of shares has been received by Ind-swift Pharma Labs Limited in form SH-4 along with instrument of transfer on 25th November 2022. The company shall deliver the certificate to that effect by 24 th December 2022. Penalty [Sub-section 6] Liable Default Penalty In complying with the provisions Company and every officer of of sub-sections (1) to (5) to ` 50,000 the company who is in default section 56 Liability of Depository [Sub-section 7] 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 30. 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’. 30 Act 22 of 1996 © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.41 a 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. © The Institute of Chartered Accountants of India  a 4.42 CORPORATE AND OTHER LAWS 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 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 non- transferable. 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. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.43 a 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. Notice of Refusal to be sent [Sub-section 1] If a private company limited by shares refuses to register the transfer of, or the transmission by operation of law of the right to any securities or interest of a member in the company, then the company shall; Send notice of refusal to the transferor and the transferee or to the person giving intimation of such transmission and stating reasons thereto, Within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, was delivered to the company. Securities/other interest in Public Company [sub-section 2] The securities or other interest of any member in a public company are freely transferable. Any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. Appeal to Tribunal against Refusal [Sub-section 3] The transferee may appeal to the Tribunal against the refusal by private company to register the transfer or transmission, within a period of; a. Thirty days from the date of receipt of the notice or b. Sixty days from the date on which the instrument of transfer or the intimation of transmission, was delivered to the company, in case no notice has been sent by the company. Example 16 – An application has been received by Private Company for transfer of share on 25 th Nov 2022. The transferee didn’t get any response from company, hence may advance an appeal to the tribunal by 24th January 2023. Appeal to Tribunal against Refusal by a Public Company without sufficient cause [Sub-section 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 © The Institute of Chartered Accountants of India  a 4.44 CORPORATE AND OTHER LAWS transfer or the intimation of transmission, is delivered to the company, the transferee may appeal to the tribunal, within, within a period of a. Sixty days of such refusal or b. Ninety days of the delivery of the instrument of transfer or intimation of transmission, where no intimation has been received from the company. Example 17 – An application has been received by Public Company for transfer of share on 25 th Nov 2022. The transferee didn’t get any response from company, hence may advance an appeal to the tribunal by 23 rd February 2023. 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. 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 © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.45 a Summary of section 58 Refusal to transfer Private company Public company Can't refuse without sufficient Send notice of refusal with cause reasons Appeal to Tribunal in 30/60 Appeal to Tribunal in 60/90 days 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 Illustration – T&F Notice of refusal to register transfer of shares by private company shall be sent only to the transferee within 30 days, stating reasons of refusal therein. Answer – False, notice of refusal shall be given to both transferee and transferor under section 58(1). 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. 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 © The Institute of Chartered Accountants of India  a 4.46 CORPORATE AND OTHER LAWS 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. Example 18 – After hearing both parties of appeal over removal of name of applicant from register of member without sufficient cause, tribunal pass an order to reinstate the name in register with payment of damages to holder as well cost of litigation. Company has to pay damages as ordered apart from rectification of the register. Rights of holder is protected [Sub-section 3] Sub-section 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 © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.47 a unless the voting rights have been suspended by an order of the Tribunal. Transfer of Securities contravenes certain Acts and Direction of Tribunal [Sub- Section 4] 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 11. ALTERATION OF SHARE CAPITAL [SECTIONS 61-70] Bonus Issue (section 63) Rights Issue Reduction (section 62) (section 66) Power to limited Alteration Buy back companies of Share (Section 68) (section 61) Capital © The Institute of Chartered Accountants of India  a 4.48 CORPORATE AND OTHER LAWS Definition: 1. Authorised Capital or Nominal Capital Section 2(8) defines the term authorised capital or nominal capital to mean such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company. 2. Called-up Capital Section 2(15) states that the term called-up capital means such part of the capital, which has been called for payment. 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. e. Cancel those shares which have not been taken up and reduce its capital accordingly. Example 19 – A share with face value of ` 100, on which ` 80 is paid up, can be split into 10 shares of ` 10 nominal value each, with ` 8 being paid up. Note: Any of the above things can be done by the company by passing a resolution at a general meeting. © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.49 a 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. 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). Further subsection 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. Example 20 - If a company announces ‘1:10 rights issue’, it means an existing shareholder can buy one extra share for every ten shares held by him/her. Usually the price at which the new shares are issued by way of rights issue is less than the prevailing market price of the stock to encourage subscription. Practical Insight Right Issue by Suzlon Energy Limited (October 2022) Suzlon Energy Limited (SEL) is among the world's leading renewable energy solutions provider in India operating in wind energy segment. To part finance its needs for repayment/prepayment of certain borrowings (` 900.00 crore) and general corporate purposes (` 283.50 crore), SEL is offering a rights issue of 240 crore equity shares (Face Value ` 2) each at a price of ` 5 per share (Current Market Price of Share was ` 8.47) to mobilize ` 200.00 crore. The company is offering the right shares in the ratio of 5 shares for every 21 shares held as of the record date of October 04, 2022. Rights entitlements can be renounced up till Oct 14, 2022 (Current Market Price of Rights Entitlement was ` 1.32). © The Institute of Chartered Accountants of India  a 4.50 CORPORATE AND OTHER LAWS The issue opens for subscription on October 11, 2022, and will close on October 20, 2022. Only 50% amount (i.e. ` 2.50 per share) is to be paid on application and the balance on one or more calls by the company from time to time. Post allotment, shares will be listed on BSE and NSE. SEL is proposed to spend ` 16.50 crore for this Right Issue process. Class of companies Power to Right Issue Applicable Provisions Listed companies or Provisions of the Securities and companies intended Exchange Board of India Act, to get its securities 23(1)(c) 1992 and the rules and listed regulations made thereunder Public companies not covered above Provisions of this Act and rules Private companies made thereunder 23(2)(a) not covered above 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 Option cash considerations u/s 62(1)(a) u/s 62(1)(b) u/s 62(1)(c) (Special Resolution + (Special Resolution) (Special Resolution) Offer through notice) © The Institute of Chartered Accountants of India  SHARE CAPITAL AND DEBENTURES 4.51 a 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