Share Capital and Debentures PDF

Contents PART IV SHARE CAPITAL & DEBENTURES Chapter 1 Types of Share Capital...

Contents PART IV SHARE CAPITAL & DEBENTURES Chapter 1 Types of Share Capital Synopsis 1. Share 1.1 Shares are goods and not actionable claims 1.2 Shares are movable property 2. Distinction between shares held as stock-in-trade and shares held as investment - tests - Circular No. 4/2007, dated 15.06.2007 Kinds of Share Capital Equity Shares 3. Equity share capital and rights attached thereto 3.1 Exemption to Specified IFSC Public company 3.2 Exemption to a Private company 4. Equity shares do not vest in their holders following rights 5. Issue of shares with superior rights by the listed company 6. A company must have equity shares with voting right 7. Equity shares with differential rights 7.1 Restriction on the conversion of the existing shares 7.2 Disclosure needs to be given in the Board's Report 7.3 Rights to participate in the other corporate benefits 7.4 Register of members for differential voting rights 7.5 Status of differential voting right shares issued under the Companies Act, 1956 Preference Shares 8. Basic requirements of the preference shares 9. Types of preference shares 9.1 Cumulative preference shares 9.2 Non-cumulative preference shares 9.3 Participating preference shares 9.4 Non-participating preference shares 9.5 Redeemable preference shares 9.6 Irredeemable preference shares 9.7 Convertible preference shares 9.8 Non-convertible preference shares 10. Voting rights on preferential shares 10.1 Exemptions to a private company 10.2 Voting rights are available in proportion of total paid up share capital of the company 10.3 Whether preference shareholder is counted for the purpose of calculating 200 members for a private limited company? 11. Circumstances when preference shareholder can vote on all resolutions 12. Issuance of preference shares Contents 13. Requirement of the provisions relating to the terms and conditions of the preference shares 14. Disclosure requirement in the notice of the general meeting 15. Maintenance of register of preference shareholders 16. Applicability of the SEBI Regulations 17. Issue and redemption of preference shares by company in infrastructural projects 18. Requirement for redemption of shares 18.1 Application to the Tribunal for issue of further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares 18.2 Reduction of Capital u/s 66 of the Companies Act, 2013 is a ‘Domestic Affair’ of a particular Company in which, ordinarily, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails 18.3 Petition for reduction of share capital was to be allowed when all shareholders unanimously approve such reduction 18.4 Security Premium Account can be utilized for making payment to non-promoter shareholders 18.5 Section 66(1) of the Companies Act, 2013 permits the Company to reduce its share capital in any manner subject to compliance of prescribed procedural requirements 19. Variation of rights of holders of preference shares 19.1 Procedure for variation of rights of preference shareholders 20. Rights of dissentient shareholders 20.1 Procedure to apply to the Tribunal as dissentient shareholders 21. Categories of rights or benefits 22. Presentation of the share capital in financial statements 22.1 Authorised 22.2 Issued 22.3 Subscribed 22.4 Called up 22.5 Paid up 22.6 Uncalled 22.7 Reserved Appendix 1 Appendix 2 Special Resolution for issue of equity shares with differential rights Important Provisions at a Glance Section Matters dealt with Form under CA Nos. 2013 2(84)1 Shares 2(88) 1 Sweat equity shares 432 Kinds of share capital 43(a) 2 Equity share capital may be in two types 45 1 Numbering of Shares 46 2 Certificate of shares 472 Voting Rights 484 Variation of shareholders rights 49 1 Calls on shares of same class to be made on uniform basis 50 1 Company may accept unpaid share capital, although the amount is not being called up Contents Section Matters dealt with Form under CA Nos. 2013 522 Issue of shares at Premium 53 2 Prohibition on issue of shares at discounts 54 2 Issue of Sweat equity shares 553 Issue and redemption of preference shares 562 Time limits for issuance/dispatch of share certificates 88 2 Register of Members 102 1 Statement to be annexed with the notice of General Meeting 1061 Restriction on the voting rights 1102 Passing of resolution by Postal Ballot 117 2 Filing of resolution and agreements with ROC MGT-14 133 1 Central Government to prescribed Accounting Standards 1 The section has become effective w.e.f. 12-9-2013. 2 The section has become effective w.e.f. 1-4-2014. 3 The section [except sub-section (3)] has become effective w.e.f. 1-4-2014. Sub-section (3) has become effective w.e.f. 1-6-2016. 4 The section 48 has become effective w.e.f. 15-12-2016. The shares, debentures or other interest of any member in a company shall be a movable property, transferable in the manner provided by the articles of a company. Apart from shares or debentures, interest of any member referred to above refers to right of membership in a guarantee company. This provision applies to both, a public company and a private company. 1. Share Section 2(84) of the Companies Act, 2013 defines 'Share' to mean share in the share capital of a company and includes stock. It represents the interest of the shareholder in the company, measured for the purposes of liability and dividend, by a sum of money. [Borland's Trustee v Steel Bros (1901) 1 Ch 279] It is made up of the various rights contained in the contract. 1.1 Shares are goods and not actionable claims Shares are goods under the Sale of Goods Act, 1930 [Section 2(7) of that Act; Karunakaran v Krishna AIR 1943 Mad 74; Rupchand v Kamal Kumar AIR 1955 NOC 348 (Cal)]. But they are not actionable claims. [Pranlal Gajanand Thakur v Vasudev Ramchandra Shelat (1973) 43 Comp Cas 203] Shares are "goods" within the meaning of section 76 of the Indian Contract Act. [Maneckji v Wadilal Sarabhai & Co. (1926) ILR 50 Bom 360: 30 CWN 890; Evans v Davis (1893) 2 Ch 216; Hazari Mull v Satish (1918) ILR 46 Cal 331; Fazal v Mangaldas ILR (1921) 46 Bom 489] 1.2 Shares are movable property Shares are movable property in India and they can be transferred in the manner provided in the articles of the company. [Arjun Prasad v Central Bank of India AIR 1956 Pat 32] Each share in a company having share capital must be distinguished by its appropriate numbers. [Section 45] Contents 2. Distinction between shares held as stock-in-trade and shares held as investment - tests - Circular No. 4/2007, dated 15.06.2007 In the case of CIT v Associated Industrial Development Company (P) Ltd [(1971) 82 ITR 586], the Supreme Court observed that: “Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.” In the case of CIT v H. Holck Larsen [(1986) 160 ITR 67], the Supreme Court observed: “The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact.” The Authority for Advance Rulings (AAR) [(2007) 288 ITR 641], referring to the decisions of the Supreme Court in several cases, has culled out the following principles:— “(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in- trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; (ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt.” Dealing with the above three principles, the AAR has observed in the case of Fidelity group as under:— “We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/ trust deed was as stock in-trade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/ held in the books of account i.e. whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends, etc., the transactions of purchases and sales of shares would yield capital gains and not business profits.” Contents “CBDT also wishes to emphasize that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, i.e., capital gains as well as business income. “Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.” KINDS OF SHARE CAPITAL In terms of the provisions of section 43 of the Companies Act, 2013 the share capital of a company limited by shares shall be of two kinds only, namely:— (a) equity share capital— (i) with voting rights; or (ii) with differential rights as of dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed. (b) preference share capital. EQUITY SHARES 3. Equity share capital and rights attached thereto Section 43(a) of the Act provides that the equity share capital may be of two categories viz:— (i) with voting rights; or (ii) with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed. The word ‘otherwise' in view of the Ministry of Corporate Affairs may include, inter alia rights as to participating in surplus in the events of winding up, mode of repayment, etc. Explanation: For the purposes of this section, "equity share capital", with reference to any company limited by shares, means all share capital which is not preference share capital. 3.1 Exemption to Specified IFSC Public company The MCA vide Notification No. GSR 8(E), dated 04th January, 2017 has made the provisions of section 43 not applicable to a Specified IFSC public company, where memorandum of association or articles of association of such company provides for it. 3.2 Exemption to a Private company As per Notification No. GSR 464(E), dated 05.06.2015, MCA has exempted private company from the restrictions of the types of shares. Accordingly, private companies are free to issue any class of shares. 4. Equity shares do not vest in their holders following rights In case if a company has equity and preferential capital, both, the holder of equity shares does not have the following rights:— (a) Preferential right in respect of payment of dividend; (b) Preferential right in respect of payment of capital in the event of liquidation of a company. Contents In such cases the preferential shareholders shall get preferential rights in the payment of dividend, if any and payment of capital if company goes into liquidation. The Patna High Court has held that before there can be preference shares, there must be at least two classes of dividends governing two such classes of shares in which one class is given a preferential treatment over the other. The effect of section 85 read with section 86 is that all share capital which is not preference share capital is equity share capital and, for the purpose of being brought within the purview of preference share capital, the conditions to be satisfied are that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or at a fixed rate and as respects capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid. [Bihar State Financial Corporation v CIT (1976) 46 Comp Cas 155 (Pat)] 5. Issue of shares with superior rights by the listed company The SEBI (LODR) Regulations as amended by SEBI (LODR) (Fourth Amendment) Regulations, 2019, w.e.f. 29.7.2019 has provided that the listed entity shall not issue shares in any manner that may confer on any person superior or inferior rights as to dividend vis-à-vis the rights on equity shares that are already listed or inferior voting rights vis-à-vis the rights on equity shares that are already listed: Provided that a listed entity having Superior Rights (SR) equity shares issued to its promoters/ founders, may issue SR equity shares to its SR shareholders only through a bonus, split or rights issue in accordance with the provisions of the SEBI (ICDR) Regulations, 2018 and the Companies Act, 2013. The SEBI (LODR) Regulations as amended by SEBI (LODR) (Fourth Amendment) Regulations, 2019, w.e.f. 29.7.2019 has provided under Regulation 41A(1) that the SR equity shares shall be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions. The total voting rights of SR shareholders (including ordinary shares) in the issuer upon listing, pursuant to an initial public offer, shall not at any point of time exceed seventy four per cent. The SR equity shares shall be treated as ordinary equity shares in terms of voting rights (i.e. one SR share shall only have one vote) in the following circumstances— (i) appointment or removal of independent directors and/or auditor; (ii) where a promoter is willingly transferring control to another entity; (iii) related party transactions in terms of these regulations involving an SR shareholder; (iv) voluntary winding up of the listed entity; (v) changes to the Articles of Association or Memorandum of Association of the listed entity, except any change affecting the SR equity share; (vi) initiation of a voluntary resolution process under the Insolvency Code; vii. utilization of funds for purposes other than business; (vii) substantial value transaction based on materiality threshold as specified under these regulations; (viii) passing of special resolution in respect of delisting or buy-back of shares; and (ix) other circumstances or subject matter as may be specified by the Board, from time to time. The SR equity shares shall be converted into equity shares having voting rights same as that of ordinary shares on the fifth anniversary of listing of ordinary shares of the listed entity: Provided that the SR equity shares may be valid for upto an additional five years, after a resolution to that effect has been passed, where the SR shareholders have not been permitted to vote: Provided further that the SR shareholders may convert their SR equity shares into ordinary equity shares at any time prior to the period as specified in this sub-regulation. Contents The SR equity shares shall be compulsorily converted into equity shares having voting rights same as that of ordinary shares on the occurrence of any of the following events – (i) demise of the promoter(s) or founder holding such shares; (ii) an SR shareholder resigns from the executive position in the listed entity; (iii) merger or acquisition of the listed entity having SR shareholder/s, where the control would no longer remain with the SR shareholder/s; (iv) the SR equity shares are sold by an SR shareholder who continues to hold such shares after the lock-in period but prior to the lapse of validity of such SR equity shares. Under the Companies Act, preference shares have inter alia preferential rights as to dividend as compared to equity shares. The unintended consequence of this provision would be to prevent a company from issuing preference shares, which have no superior rights in respect of voting or dividend over existing equity shares other than the preferential rights to dividend. The provision does not prevent issue of shares with rights inferior as regards voting or dividend compared to the existing equity shares. The above provision should apply only to a proposed future issue of shares with superior rights and not impact shares with superior rights issued prior to 21st July, 2009. 6. A company must have equity shares with voting right A company cannot be legally incorporated without having equity shares with the voting rights, therefore it cannot have the non-voting or preference shares only. If the Company is not having equity shares with the voting rights, the Company shall not be in a position to pass any resolution in general meeting. 7. Equity shares with differential rights For the purposes of sub-clause (ii) of clause (a) of section 43, rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 as amended by the Companies (Share Capital and Debentures) Amendment Rules, 2019, w.e.f. 16-8-2019 provides that 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: (a) the articles of association of the company authorizes the issue of shares with differential rights; (b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders: Provided that 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; (c) the voting power in respect of shares with differential rights of the company shall not exceed 74% of total voting power including voting power in respect of equity shares with differential rights issued at any point of time; (d) 1 [xxx]; (e) 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; (f) 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 preference shares or debentures or payment of dividend; 1 Omitted “the company having consistent track record of distributable profits for the last three years” by the Companies (Share Capital and Debentures) Amendment Rules, 2019, w.e.f. 16-8-2019. Contents (g) the company has not defaulted in payment of dividend on preference shares or repayment of any term loan from a public financial institution or 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 to Investor Education and Protection Fund of the Central Government: [Provided that a company may issue rights upon expiry of five years from which such default was 1 made good.] (h) the company has not been penalized by the Court or Tribunal during the last three years of any offence under Reserve Bank of India Act, 1934, Securities and Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange Management Act, 1999 or any other special Act under which such companies are being regulated by sectoral regulators. Rule 4(2) provides that the explanatory statement to be annexed to the notice of the general meeting to be convened pursuant to section 102 or of a postal ballot pursuant to section 110 shall contain the following particulars namely: (a) total number of shares to be issued with differential rights; (b) details of the differential rights; (c) percentage of the proposed issue of shares to the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time; (d) the reasons/justification for the issue; (e) the price at which such shares are proposed to be issued either at par or at premium; (f) basis on which the price has been arrived at; (g) (i) in case of private placement or preferential issue; (a) details of total number of shares proposed to be allotted to promoters, directors and key managerial personnel; (b) details of total number of shares proposed to be allotted to persons other than promoters, directors and key managerial personnel and their relationship, if any, with any promoter, director or key managerial personnel; (ii) in case of public issue - reservation, if any, for different classes of applicants including promoters, directors or key managerial personnel; (h) the percentage of voting right which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital; (i) the scale or proportion in which the voting rights of such class or type of shares shall vary; (j) the change in control, if any, in the company that may occur consequent to the issue of equity shares with differential voting rights; (k) the diluted Earning Per Share pursuant to the issue of such shares, calculated in accordance with the applicable accounting standards. (l) the pre and post issue shareholding pattern along with voting rights as per clause 31 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Since the MCA has vide Notification No. GSR 464(E), dated 05.06.2015 exempted private companies from the restrictions of the type of shares, therefore in such case the above said Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 shall not be applicable to private companies. 1 Inserted by the Companies (Share Capital and Debentures) Third Amendment Rules, 2016, w.e.f. 19th July, 2016. Contents 7.1 Restriction on the conversion of the existing shares The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa. 7.2 Disclosure needs to be given in the Board’s Report Rule 4(4) provides that the Board of Directors shall, inter alia, disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the following details namely: (a) the total number of shares allotted with differential rights; (b) the details of the differential rights relating to voting rights and dividends; (c) the percentage of the issue of shares with differential rights to the total post issue equity capital and percentage of voting right which the equity share capital with differential voting right issued at any point of time and percentage of voting rights which the equity share capital shall carry to the total voting right of the aggregate equity share capital; (d) the price at which such shares have been issued; (e) the particulars of promoters, directors or key managerial personnel to whom such shares are issued; (f) the change in control, if any, in the company consequent to the issue of equity shares with differential voting rights; (g) the diluted Earning Per Share pursuant to the issue of such shares, calculated in accordance with the applicable accounting standards; (h) pre and post issue shareholding pattern along with voting rights in the format specified under the rules. 7.3 Rights to participate in the other corporate benefits 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, subject to the differential rights with which such shares have been issued. 7.4 Register of members for differential voting rights 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. 7.5 Status of differential voting right shares issued under the Companies Act, 1956 The MCA has vide Notification No. GSR 413(E), dated 18th June, 2014 inserted Explanation to rule 4 in the Companies (Share Capital and Debentures) Rules, 2014 to clarify that equity shares with differential rights issued by any company under the provisions of Companies Act, 1956, and the rules made thereunder shall continue to be regulated under such provisions and rules. PREFERENCE SHARES 8. Basic requirements of the preference shares A company limited by shares cannot issue any preference shares which are irredeemable. However, a company limited by shares may, if authorised by its Articles, issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue. [Section 55(2)] This means that a public company or a private company may issue preference shares only if its Articles authorise to do so. Issue of preference shares for period exceeding 20 years is permitted for infrastructure projects. Contents To qualify the preference share, it should fulfill both the following requirements provided in Explanation to section 43 of the Companies Act, 2013 namely:— (i) that it carries or will carry a preferential right to be paid dividend of a fixed amount or at a fixed rate which may either be free of or subject to income-tax; and (ii) that it carries or will carry a preferential right in the case of winding up to repayment of capital paid up or deemed to have been paid-up, where or not there is any other preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:— (i) that in respect of dividends, in addition to the preferential rights to the amounts specified in clause (a) para above, it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; (ii) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in clause (b) para above, it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid. Dividends can be paid to cumulative preference shareholders in winding up whilst assets of the company are being distributed, and they rank in priority to other shareholders both as regards dividend and capital. [Bombay Chlorine Products Ltd., In re (1965) 35 Comp Cas 282 (Bom)] Where cumulative preference shareholders are entitled to share in surplus of assets on winding up, they are not entitled to preference for arrears of dividend unless there is specific provision for priority to such arrears. Where the preference shareholders are entitled to participate in surplus assets on winding up, surplus assets will include undistributed profits on the date of liquidation. [Dimbula Valley (Ceylon) Tea Co. Ltd. v Laurie (1961) 31 Comp Cas 655 (Ch. D)] In Sahu Cylinders & Udyog (P) Ltd. v Registrar of Companies (2007) 80 SCL 37 (Mad), it was held that while consent of Company Law Board [now Tribunal] may have to be obtained by a company for issuance of redeemable preference shares by virtue of stipulations contained in section 80A [now section 55(3) of the Companies Act, 2013], it cannot be said that such a consent should have been mandatorily obtained in advance and in absence of any such prior consent, any company can be wholly prevented from applying for such consent after issuance of redeemable preference shares. Consent to be obtained under proviso to section 80A from Company Law Board can be obtained after issuance of redeemable preference shares in lieu of irredeemable shares already issued, so long as such issuance was bona fide and in order to fulfill object and purpose of amendment with which section 80A came to be introduced. 9. Types of preference shares The preference shares may be classified into following categories and may carry preferential rights as per the provisions of the articles of the company. 9.1 Cumulative preference shares In the case of cumulative preference shares, the shareholders are entitled to receive the dividend for a year which could not be paid due to losses or inadequate profits in the subsequent year(s) whenever there are sufficient profit. 9.2 Non-cumulative preference shares If dividend on non-cumulative preference shares is not paid in any year on account of losses or inadequate profits or otherwise, then the right to dividend for that year is lost and cannot be carried over in subsequent years. Contents 9.3 Participating preference shares These types of shares are entitled to participate in the surplus profit/dividend besides, entitlement to fixed dividend or dividend at fixed rate. 9.4 Non-participating preference shares These types of shares are entitled to receive fixed amount of dividend or dividend at fixed rate but do not have right to participate in surplus profits. 9.5 Redeemable preference shares Section 55(2) provides that a company limited by shares may, if so authorised by its Articles, issue preference shares which are to be redeemed within a period not exceeding 20 years from the date of their issue subject to such conditions as may be prescribed. Distribution of profit through redeemable preference bonus shares constitutes “dividend” at the stage of redemption involving release of assets. [Shashibala Navnitlal v CIT 54 ITR 478 (Guj)] 9.6 Irredeemable preference shares A company shall not issue preference shares which are redeemable after the expiry of a period of 20 years from the date of its issue except for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders. 9.7 Convertible preference shares These shares may be converted into equity shares as per the terms and conditions of their issue. 9.8 Non-convertible preference shares These shares are not convertible into equity shares but have the preferential rights to payment of capital in the event of liquidation of the company or otherwise. 10. 1Voting rights on preferential shares (1) Subject to the 2[provisions of section 43(2) and 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)3 his voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company. (2) Every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital and his voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company: 1 Exceptions, Modifications and Adaptations to an unlisted public company licensed to operate from IFSC located in approved SEZ under section 462.—Shall not apply to a Specified IFSC public company, where memorandum of association or articles of association of such company provides for it. [Notification No. GSR 8(E), dated 4-1-2017] 2 Substituted for “provisions of section 43 and sub-section (2) of section 50” by Companies (Amendment) Act, 2017, w.e.f. 9-2-2018, vide Notification No. SO 630(E), dated 9-2-2018. 3 Exceptions, Modifications and Adaptations for Nidhis under section 462.—Shall apply, subject to the modification that no member shall exercise voting rights on poll in excess of five per cent of total voting rights of equity shareholders. [Notification No. GSR 465(E), dated 5-6-2015] Contents Provided that 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: Provided further that where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company. It is only if the dividend due on cumulative preference shares remains unpaid for a aggregate period of not less than two years preceding the date of commencement of meeting that a cumulative preference shareholder gets the right to vote on all resolutions. [Hotel Queen Road (P) Ltd. v Hill Crest Reality Sdn. Bhd. (2006) 68 SCL 197 (Del)] Owner of preference shares, being not part of assignment deed for transfer of debt, is free to deal with such shares, and can deal with and sell those shares Where there is no material on the record to show that the thirty lakh preference shares were not subscribed by the erstwhile financial corporation, and those preference shares were offered as security for the loan availed from it, the plea of the appellant that those shares were a part of ‘corporate debt restructuring’ [on transfer of debt by an assignment deed] could not be entertained, and sale of those preference shares by the financial corporation was not impeachable on the basis of material on record, because there was no provision in the Companies Act, or in the Indian Contract Act, 1872, to prohibit the owner of such preference shares to deal with the same or sell those shares. [Prag Bosimi Synthetics Ltd. v 3A Capital Ltd. (2017) 140 CLA 199 (Gau)] 10.1 Exemptions to a private company As per Notification No. GSR 464(E), dated 05.06.2015, MCA has exempted the provisions for applicability of the voting rights in case of a private company, if anything else is provided in the Memorandum or Articles of Association by such private company. Thus a private company may have disproportional voting rights on its shares. 10.2 Voting rights are available in proportion of total paid up share capital of the company If voting is done by way of poll then preference shareholders will have right to vote in proportion to their shares of the total paid up share capital of the company. The voting right shall be in the same proportion as the capital paid up, in respect of the preference shares bears of the total paid up equity capital of the company. 10.3 Whether preference shareholder is counted for the purpose of calculating 200 members for a private limited company? It is felt that if the same person subscribes to both equity and preference shares, such person will be treated as one member and not two members provided all the particulars furnished by the person subscribing to both preference and equity share capital are same for the purpose of entering the details in the Register of Members as per section 88 of the Act. It should also be noted that such persons’ name will be removed in case the preference shares are redeemed and the total share holding of such person stands nullified alternatively in case the preference shares are converted into equity shares the fresh allotment will be credited into such persons’ existing folio number and the shareholding will stand increased. Preference shareholders are members within the meaning of the Act and will be counted for the purpose of calculating 200 members under section 2(68) of the Act. 11. Circumstances when preference shareholder can vote on all resolutions Every member of a company limited by share, holding any preference share capital therein, in respect of such capital shall be entitled to vote on every resolution placed before the company at any meeting, if the dividend due on such capital or any part of such dividend has remained unpaid for a period of two years or more. Contents As per Notification No. GSR 464(E), dated 05.06.2015, the MCA has exempted the provisions for applicability of the voting rights in case of a private company, however it cannot be interpreted that preference shareholders of private company will not carry any voting rights if the dividend thereon has remained unpaid for a period of two years or more. Private company may, at the time of issue of shares put the condition of voting rights on account of non-payment of dividends as part of the terms of issue of preference shares. 12. Issuance of preference shares Rule 9(1) of the Companies (Share Capital and Debentures) Rules, 2014 provides that for the purposes of section 55(2), a company having a share capital may, if so authorized by its articles, issue preference shares subject to the following conditions: (a) the issue of such shares has been authorized by passing a special resolution in the general meeting of the company; (b) the company, at the time of such issue of preference shares, has no subsisting default in the redemption of preference shares issued either before or after the commencement of this Act or in payment of dividend due on any preference shares. 13. Requirement of the provisions relating to the terms and conditions of the preference shares Rule 9(2) of the Companies (Share Capital and Debentures) Rules, 2014 provides that a company issuing preference shares shall set out in the articles of association, the regulations in respect of the following matters relating to such shares namely: (a) priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares; (b) participation in surplus funds; (c) participation in surplus assets and profits, on winding-up which may remain after the entire capital has been repaid; (d) payment of dividend on cumulative or non-cumulative basis; (e) conversion of preference shares into equity shares; (f) voting rights (g) redemption of preference shares. 14. Disclosure requirement in the notice of the general meeting Rule 9(3) of the Companies (Share Capital and Debentures) Rules, 2014 provides that the explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall inter alia provide the complete material facts concerned with and relevant to the issue of such shares, including: (a) size of the issue and number of preference shares to be issued and nominal value of each share; (b) nature of such shares i.e. cumulative or non-cumulative, participating or non-participating, convertible or non-convertible; (c) objectives of the issue; (d) manner of issue of shares; (e) price at which such shares are proposed to be issued; (f) basis on which the price has been arrived at; (g) terms of issue, including terms and rate of dividend on each share, etc.; (h) terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible the terms of conversion; Contents (i) manner and modes of redemption; (j) current shareholding pattern of the company; (k) expected dilution in equity share capital upon conversion of preference shares. 15. Maintenance of register of preference shareholders Where a company issues preference shares, the Register of Members maintained under section 88 shall contain the particulars in respect of such preference shareholder(s). [Rule 9(4)] 16. Applicability of the SEBI Regulations A company intending to list its preference shares on a recognized stock exchange shall issue such shares in accordance with the Regulations made by the Securities and Exchange Board of India in this behalf. 17. Issue and redemption of preference shares by company in infrastructural projects Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014 provides that for the purposes of first proviso to section 55(2), a company engaged in the setting up and dealing with infrastructure projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum 10% of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders. 18. Requirement for redemption of shares Section 55 provides conditions for redemption of preference share which has to be complied with by a company. The preference shares shall be redeemed out of profits of the company, which would otherwise be available for distribution as dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption. Only fully paid preference shares shall be redeemed. The premium, if any, payable on redemption shall be provided out of profits or out of the company's security premium account, before the shares are redeemed. Where any preference shares are redeemed out of profits, a sum equivalent to the nominal value of the shares redeemed shall be transferred to the capital redemption reserve fund and the provisions of the Act relating to reduction of share capital of a company shall apply as if the Capital Redemption Reserve Account were paid-up share capital of the company. 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. Rule 9(6) of the Companies (Share Capital and Debentures) Rules, 2014 provides that a company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act. The preference shares may be redeemed: (a) at a fixed time or on the happening of a particular event; or (b) any time at the company's option; or (c) any time at the shareholder's option. 18.1 Application to the Tribunal for issue of further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares Section 55(3) notified vide Notification No. S.O. 1934(E), dated 1st June, 2016 contemplates that 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, 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, Contents 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. An application to the Tribunal shall be filed in Form NCLT-1 with fee of `5,000 alongwith Form NCLT-2 accompanied with following documents: (a) Copy of the memorandum and articles of association (b) Documents showing the terms of issue of the existing preference shares. (c) Copy of the Board resolution and resolution of general meeting for issue of further redeemable preference shares. (d) Copy of the latest audited balance sheet with the profit and loss accounts of the company with auditor’s report and directors’ report. (e) Affidavit verifying the petition. (f) Bank draft evidencing the payment of application fee. (g) Memorandum of Appearance with copy of the Board resolution or the executed vakalatnama, as the case may be. 18.2 Reduction of Capital u/s 66 of the Companies Act, 2013 is a ‘Domestic Affair’ of a particular Company in which, ordinarily, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails The NCLAT observed that the reduction of capital u/s 66 of the Companies Act, 2013 is a ‘Domestic Affair’ of a particular company in which, ordinarily, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails. As the Appellant has admitted its typographical error in the extract of the Minutes of the Meeting characterising the ‘special resolution’ as ‘unanimous ordinary resolution’ and also taking into consideration of the fact that the Appellant had filed the special resolution with ROC, which satisfies the requirement of section 66 of the Companies Act, 2013, NCLAT allowed the Appeal, thereby confirming the reduction of share capital of the Appellant Company. (Economy Hotels India Services Pvt. Ltd. v. Registrar of Companies, NCLAT) 18.3 Petition for reduction of share capital was to be allowed when all shareholders unanimously approve such reduction The Petitioner-company was engaged in business of software development and maintenance for employee benefits etc. The Petitioner stated that shareholders of the petitioner-company unanimously approved special resolution for reduction of share capital of the petitioner-company. This instant petition was filed for confirmation of said special resolution passed by shareholders of the petitioner-company for reduction of paid up equity share capital. The NCLT noted that Articles of Association of the petitioner- company empowered it to reduce its share capital in any manner for time being authorized by law, by passing a special resolution. No objector had come before instant Tribunal to oppose instant petition nor had any party controverted any averments made in petition. In view of facts that all shareholders had approved reduction including shareholders whose shares were being cancelled, instant petition for reduction of share capital was to be allowed (Better World Technology (P.) Ltd., In re (NCLT - Mumbai.) 18.4 Security Premium Account can be utilized for making payment to non-promoter shareholders The Appellant filed this Appeal against the order dated 28.08.2019 passed by the NCLT, Bengaluru whereby the Tribunal held that as per Section 52(2) of the Companies Act, 2013, Security Premium Account may be used only for the purpose specifically provided under Section 52(2) of the Companies Act, 2013. Further, selective reduction in equity share capital to a particular group involving non-promoter shareholders and bringing the company as a wholly owned subsidiary of its current holding company and Contents also return excess of capital to them is an arrangement between the company and shareholders or a class of them and hence, it is not covered under Section 66 of the Companies Act, 2013. However, the case may be covered under Sections 230-232 of the Companies Act, 2013, wherein compromise or arrangement between the Company and its creditors or any class of them or between a Company and its members or any class of them is permissible. Therefore, the Company failed to make out any case under Section 66 of the Act and thus, the petition is dismissed. Being aggrieved with this order, the Appellant filed this Appeal. The NCLAT observed that Security Premium Account can be utilized for making payment to non-promoter shareholders. W.r.t. the submissions made by the Respondents that the amount lying in the Security Premium Account can be applied by the company, only for the purposes which are specifically provided in Section 52(2) of the Companies Act, 2013 and for no other purpose is not convincible. Further, it can be held that selective reduction is permissible if the non-promoter shareholders are being paid fair value of their shares. Furthermore, Section 66 of the Companies Act, 2013 makes provision for reduction of share capital simpliciter without it being part of any scheme of compromise and arrangement. Therefore, the Tribunal has erroneously held that the Application for reduction of share is not maintainable under Section 66 of the Companies Act, 2013, consent affidavits from the creditors is mandatory for reduction of share capital, Security Premium Account cannot be utilized for making payment to non-promoter shareholders, selective reduction of shareholders of non-promoter shareholders is not permissible and has dismissed the Application on untenable grounds. Therefore, the impugned order passed by the Tribunal is set aside. [Brillio Technologies Pvt. Ltd. (Appellant) v ROC, Karnataka (Respondents) NCLAT dated 19.04.2021] 18.5 Section 66(1) of the Companies Act, 2013 permits the Company to reduce its share capital in any manner subject to compliance of prescribed procedural requirements In this case the Respondent Company was converted into a Public Company and its shares were listed on BSE. However, subsequently its shares were delisted and after delisting, its shares comprised public shareholders comprising of 11,81,036 shares, which comes to 3.59% of total paid up share capital of the company. Appellants herein are the minority/non-promotor shareholders of the Respondent Company. Further, the Respondent Company intend to reduce its equity-share capital under Section 66 of the Companies Act, 2013 thereby extinguishing all the non-promotor shareholding. The Appellants submitted that the Respondent Company is making good profits and therefore the reduction of share capital especially extinguishing the public shares of the Company is unjustified. The Respondent submitted that Section 66(1) of the Companies Act, 2013 expressly permits the Company to reduce its share capital in any manner including by way of selective reduction subject to compliance of prescribed procedural requirements. Further, it is submitted that it is a settled principle of law that reduction of share capital of a Company is a matter of domestic concern and commercial wisdom of the Company and while reducing the share capital, the Company can decide to extinguish some of its shares without dealing with the same manner as with all other shares of the same class. The NCLAT has observed that w.r.t. the contention of the Appellants, that the Company adopted a selective method for the reduction of the share capital is concerned, Section 66(1) of the Companies Act, 2013 permits the Company to reduce the share capital in any manner and held that the reduction of the share capital is in accordance with law but it is unfair and unjust depriving the fruits of the company to its shareholders. So to protect the economic interest of public shareholders/non-Promoter shareholders, the company is directed to get the shares revalued by a registered/independent valuer and pay the fair price arrived at by the valuer based on the latest audited accounts of the Company. [Piyush Dilipbhai Shah (Appellants) v Syngenta India Ltd. (Respondent) NCLAT dated 05/03/2021] 19. Variation of rights of holders of preference shares Section 48 notified w.e.f. 15-12-2016 vide Notification No. SO 3677(E), dated 7-12-2016 provides that where the share capital of a company is divided into different classes of shares, the rights attached to may be varied either with the consent in writing of the holders of not less than three-fourth of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class. (Appendix 1) Contents Variation of rights of a class of shareholders can be effected either by consent or by special resolution; it is not necessary that the consent given should be further confirmed by a special resolution. [Rampuria Cotton Mills Ltd., In re (1959) 29 Comp Cas 85 (Cal)] Accordingly, where there are equity shares and preference shares in a company the rights attached to the preference shares, namely the rate of dividend payable on such shares or the period of redemption can be varied by passing a special resolution at a meeting of the holders of the preference shares. The special resolution in respect of section 48 in a listed company shall be passed by postal ballot. The variation can be made, provided there is provision in the Articles or Memorandum or in the absence of any such specific provision, the variation shall not be prohibited by the terms 'of the issue of the shares. If the company has issued more than one series of preference shares, each having different rights, each issue will belong to a class and action shall be taken for each class separately. 19.1 Procedure for variation of rights of preference shareholders (i) Check the Memorandum and Articles for provision relating to variation of rights. (ii) Where there is no provision in the Memorandum or Articles, it should be ensured that the variation is not prohibited by the terms of issue. (iii) If neither the Memorandum and Articles nor the terms of issue permit variation of rights, then first take steps to alter the Memorandum or Articles as the case may be to permit variation. (iv) Consider and approve the proposal at a meeting of the Board. (v) Intimate the particulars of the proposed change to the stock exchange where the shares are listed. In terms of the listing agreement, the company cannot make any change in the terms or nature of its securities that are listed on the stock exchange without giving twenty-one days' prior notice to the Exchange of the proposed change and making an application for listing of the securities as changed, if so required by the Exchange. (vi) Separate class meetings will be called of preference shareholders and equity shareholders. Where the variation affects only one class, it is sufficient if the meeting of that class only is held. But it is desirable, that the consent of the members belonging to the other class should be taken, as their rights will automatically be varied by the proposed change. (vii) Special resolutions should be passed in regard to the variation. (viii) If a company is a listed company, then special resolution aforesaid is to be passed through postal ballot only. (ix) A general meeting will be convened to pass a special resolution. (x) Prescribed e-Form MGT-14 will be filed in respect of resolutions passed in the class meetings as well as in the general meeting with the Registrar electronically within 30 days of passing of resolution. (xi) Where the dissenting shareholders have made an application to the Tribunal, the company shall file a copy, of the Tribunal's order with the Registrar within 30 days of the service thereof on the company. (xii) Particulars of variation should be noted in every copy of the Memorandum and Articles. [Section 15] 20. Rights of dissentient shareholders Dissentient holders of the said shares, who did not vote in favour of the resolution and who in the aggregate are holding not less than 10% of the said issued shares, may apply to the court within 21 days from the date of passing resolution as per provisions of section 48(2) to cancel the variation. In that case the variation shall not have any effect unless and until it is confirmed by the Tribunal. Contents The decision of the Tribunal on any such application shall be final. Copy of the order of the Tribunal shall be filed with the Registrar of Companies within 30 days of the service of the order on the company. [Section 48(4)] 20.1 Procedure to apply to the Tribunal as dissentient shareholders (i) Ensure that the application to the Tribunal is made by holders of not less than ten per cent of the issued shares of the class being persons who did not consent or vote in favour of the resolution for the variation. [Section 48(2)] (ii) If the applicant is corporate shareholder, make sure that the board resolution is passed authorizing the director, company secretary or the officer of the company to submit an application to the High Court. (iii) Make the application by way of petition in Form NCLT-1 to the Tribunal within 21 days after the date on which the consent was given or the resolution for variation was passed. [Section 48(2)] (iv) The application in Form NCLT-1 shall be accompanied with following documents: (a) the particulars of registration; (b) the capital structure, the different classes of shares into which the share capital of the company is divided and the rights attached to each class of shares; (c) the provisions of the memorandum or articles authorizing the variation of the rights attached to the various classes of shares; (d) the total number of shares of the class whose rights have been varied; (e) the nature of the variation made, and so far as may have been ascertained by the applicants, the number of shareholders of the class who gave their consent to the variation or voted in favour of the resolutions for variation and the number of shares held by them; (f) the number of shareholders who did not consent to the variation or who voted against the resolution, and the number of shares held by them; (g) the date on which the consent was given on the resolution was passed; and (h) the reasons for opposing the variation. (v) Ensure that the aforesaid petition is either made by all the dissentient shareholders or by one or more of them on behalf of the others. (vi) The applicant shall at least 14 days before the date of the filing of the petition advertise the application in Form NCLT-3A at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situate, and at least once in English language in an English newspaper circulating in that district. (vii) Where any objection of any person whose interest is likely to be affected by the proposed application is received by the applicant, a copy thereof shall be served to the Registrar of Companies and Regional Director on or before the date of hearing. (viii) On any application, the Tribunal, after hearing the applicant and any other person, as appears to it, to be interested in the application, may, if it is satisfied, having regard to all the circumstances of the case that the variation would unfairly prejudice to the shareholders of the class represented by the applicant, cancel the variation and shall, if not so satisfied, confirm the variation for reasons to be recorded. (ix) On receipt of the order of the Tribunal, see that the other company files the certified copy of the order with Registrar within 30 days of obtaining the copy of the order. Contents 21. Categories of rights or benefits In Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper & Printing Co Ltd [(1986) 2 All ER 816: (1986) 2 BCC 99, 227: (1986) BCLC 286: (1987) 2 Comp LJ 39 (Ch D)], the court identified three categories of the rights or benefits which may be contained in articles of association of a company: (a) First, the rights or benefits annexed to particular shares such as voting rights, dividend rights and right to participate in surplus assets on a winding up. If articles provide that particular shares carry particular rights not enjoyed by the holders of other shares, it is easy to conclude that such rights are class rights. (b) Secondly, the rights or benefits, which are conferred on individuals, not in the capacity of members but for ulterior reasons connected with the administration of the company's affairs or the conduct of its business. These may include right to be the company's solicitor or the right to be the company's president. [Eley v Positive Government Security Life Assurance Company Ltd (1875) 1 Ex D 20: 45 LJ QB 58: 33 LT 743: 24 WR 252, affirmed in (1876) 2 Ex D 88]. These are not class rights. (c) Thirdly, the rights or benefits that although not attached to any particular shares, are none the less conferred on the beneficiary in the capacity of member of the company. This includes the right under the articles for a director's share to carry weighted votes on a resolution to remove him; the right under the articles entitling every member to sell his shares to the directors of the company at a fair valuation, and the right under the Articles to appoint director so long as the member holds 10% of the company's issued share capital. These are class rights. 22. Presentation of the share capital in financial statements A company has to disclose its share capital in the various statements and returns viz Annual Return, Balance Sheet, Forms and various applications to be submitted to various authorities from time to time. It has to represent the status of share capital as per requirements, which may be shown as under: 22.1 Authorised The capital clause of the Memorandum of Association of a company contains description of the authorised share capital. This is the capital with which a company is to be registered originally or the increased authorised share capital as the case may be. The company is required to pay adequate registration fee to the concerned Registrar of Companies. 22.2 Issued Issued capital is a part of the authorised capital, which is offered for subscription in form of shares of the company. It also includes share capital issued for consideration otherwise than in cash. 22.3 Subscribed It is a part of the issued share capital, which has been subscribed by the public in case of a public limited company and includes shares purchased by the vendors. 22.4 Called up It is the sum of total amount called on all shares comprised in the issued and subscribed capital. If the full value of the shares is called up on application then the subscribed capital and called up capital will be the same. 22.5 Paid up This consists of the amount actually paid up or credited as paid up on the shares subscribed. Share premium received on issuance of shares are not considered in the paid up capital and hence, it is separately shown as share premium account in the reserves and surplus. Contents 22.6 Uncalled Uncalled capital is a part of the subscribed capital, which has not been called up but it may be called up in future. 22.7 Reserved It is that part of uncalled capital which company has decided to call on liquidation of the company and is termed as reserved capital. Reserve capital once created cannot be unreserved, but may be cancelled on reduction of share capital [Re Midland Railway Carriage and Wagon Co. (1907) WN 175]. Such capital cannot be charged by the company under a power in its memorandum or articles which empowers to charge uncalled capital. [Re Mayfair Property Co, Barlett v Mayfair Property Co. (1898) 2 Ch 28; Re Pyle Works (1890) 44 Ch D 486] Contents Appendix 1 I. Specimen of General meeting resolution where option is given to existing preference shareholders RESOLVED THAT:— (a) the Board of directors of the company be and are hereby authorised to offer the 25,000 new.......% redeemable cumulative second preference shares of `100 each to the existing holders of equity shares of the company as on the 5th day of...................... in accordance with the terms and conditions contained in clauses (a), (b), (c) and (d) of sub-section (1) of section 62 of the Companies Act, 2013, and if the shares so offered are not being taken up by the existing holders of equity shares, to provide simultaneously an opportunity to the holders of the existing 1,00,000.......% redeemable cumulative first preference shares respectively whose name appears on the register of first preference shareholders on 5th day of................. to apply for any of the new redeemable cumulative second preference shares subject to the condition that their applications will be considered for so much of the shares as are not taken up by the holders of equity shares, with liberty to the holders of the said 25,000 existing............% redeemable cumulative first preference shares of `100 each to apply for the new cumulative redeemable second preference shares by surrendering the share certificates for the existing shares of corresponding nominal value duly discharged in such form as the Board may determine for cancellation; (b) the Board of directors be and they are hereby authorised to offer any of the said 25,000 new........% cumulative redeemable second preference shares of `100 each not ultimately taken up by the existing shareholders under the foregoing provisions, to the public by a prospectus in such manner and on such terms and conditions as the Board may determine; (c) the Board of directors be and they are hereby authorised to take all necessary steps for implementation of the above proposals. II. Specimen of Board Resolution for redemption of Preference Shares RESOLVED THAT pursuant to the provisions of section 55 of the Companies Act, 2013 1,00,000 12% Cumulative Redeemable Preference Shares of `100 each aggregating to `1,00,00,000 be redeemed out of the current years profits on………….., the due date of redemption, by surrender of shares by the shareholders thereof. RESOLVED FURTHER THAT the Register of members relating to 1,00,000 12% Cumulative Redeemable Preference Shares of `100 each and the Share Transfer books be closed from _______ to _______ (both days inclusive) and the notice thereof be duly given by the Company Secretary to the stock exchanges and in the newspaper by way of an advertisement. III. Specimen of Preference Shareholders meeting resolution for early redemption of redeemable preference shares RESOLVED THAT the consent of Preference Shareholders be and is hereby accorded pursuant to the provisions of section 48 and other applicable provisions, if any, of the Companies Act, 2013, to the Board of Directors of the Company (hereinafter called “the Board” and which term shall be deemed to include any Committee, which the Board may have constituted or hereinafter constitute to exercise its powers including the powers conferred by this resolution and with the power to delegate such authority to any person or persons) for early redemption of 5,59,521 0.10% Redeemable Cumulative Preference Shares of `50/- each at a discounted rate of 12% p.a. compounded annually which are due for redemption during the period ………. to………. RESOLVED FURTHER THAT the Board be and is hereby authorised to do all such acts, deeds and things and to sign all such documents as may be necessary, expedient and incidental thereto to give effect to this resolution. Explanatory Statement In the context of improved cash flow it is proposed to redeem the preference shares before its due date of redemption i.e. during the period ………. to …….. at the discounted rate of 12% p.a. compounded annually, other terms and conditions would be same as stipulated at the time of issue of preference shares or changed from time to time. Mr. AJ, Managing Director of the Company is also a Director in XL Limited, Preference Shareholder of the Company and hence may be deemed to be concerned or interested in the said resolution as set out above. Save and except as above, none of the Directors, Key Managerial Persons or their relatives are, in any way, concerned or interested in this resolution. The Board of Directors accordingly recommends the resolution set out above for your approval. Contents IV. Specimen of General meeting resolution for variation of shareholders' rights RESOLVED THAT subject to the provisions contained in section 48 of the Companies Act, 2013 approval be and is hereby granted for increasing the rate of preference dividend from 10% to 12% and for making consequential amendments to Clause V of the Memorandum of Association and Article 5 of the Articles of Association of the Company. RESOLVED FURTHER THAT the Board of directors of the Company be and are hereby authorised to do all such acts, deeds and things necessary for the purpose of giving effect to this resolution. Explanatory statement The company had issued 1,00,000 10% Redeemable Cumulative Preference Shares of `100 each for augmenting meeting its working requirements immediately after commencement of commercial production. Now, the company's products have been well accepted in the market and company has been doing extremely well. A demand was raised by the preference shareholders for increasing the rate of dividend on the preference shares and the Board of directors of the company has accepted the said demand. Hence, the resolution is to be passed as special resolution under section 48 of the Companies Act, 2013. None of the directors, key managerial persons or their relatives are concerned or interested in the proposed resolution except the amount of difference rate of dividend as the case may be payable to the directors, key managerial persons and their relatives on holding of the number of preference shares by them from time to time. V. Specimen of resolution for variation of preference shareholders' rights RESOLVED THAT the terms and conditions of issue of 9% Redeemable Preference Shares of `100 each be and are hereby amended as follows: "The Redeemable Preference Shares shall be redeemed at the end of seven years instead of nine years, provided however that the said redemption shall be as per the terms of redemption specified in the terms and conditions originally agreed to." RESOLVED FURTHER THAT the Board of Directors be and is hereby authorized to take all decisions with respect to the redemption including settling of disputes, giving directions, etc. Explanatory Statement In the context of improved cash flow and in the light of requests from the preference shareholders, it is proposed to redeem the preference shares at the end of seven years instead of nine years as stipulated in the terms and conditions of issue. Since the existing Articles of Association of the Company do not contain any provisions for variation of the terms and conditions of issue, this special resolution is submitted for approval of the shareholders. No director, key managerial persons or their relatives are interested or concerned in this resolution financially or otherwise. Copies of the Memorandum and Articles of Association of the Company are available for inspection by members during business hours on any working day. VI. Consent letter from the Preference Shareholder for variation of the terms of the Preference Shares To, Board of Directors ABC Retail Pvt. Ltd., Indore (M.P.) 452001 Subject: Request for renewal of investment in Preference shares of ABC Retail Pvt. Ltd. Dear Director, I have made an Investment in the 20.00 Lacs Non-Cumulative Redeemable Preference Shares of `10/- each with the Company on 31st March, …. which were due for redemption within a period of three years and I have consented for roll over the redemption period for a period of five years, therefore due for redemption on or before 31st March, …. for the period for 3 years, which were further extended for 5 years in March,…... Since I am single shareholder of that clause of the shares therefore, I condone the requirement for holding clause meeting and request to the Board to consider and do the needful for extension of the redemption period. Thanking you. Yours sincerely, Contents ABC PREFERENCE SHAREHOLDER L.F.No. P/2 VII. Specimen of Board resolution for variation of rights of preference shareholders in case where only one shareholder of that category and he has accorded his consent to the Board. The Chairman informed that Company has received request letter from Shri ABC, its Preference Shareholder holding 20.00 Lacs (100%) Non Cumulative Redeemable Preference Shares which are due for redemption on 31st March, ….. for a further period upto 3 years, i.e. on or before 30th March, …. The Board considered that since the Company is having only one shareholder of this class, the meeting cannot be constituted or held moreover the requirement of conducting meeting of class of the shareholders “Preference shareholder” has also been dispensed off by the shareholder and now the Company is having consent of 100% shareholder of that class. The matter was considered by the Board and after due discussion following resolution was passed unanimously: RESOLVED THAT pursuant to Section 55 of Companies Act, 2013 and other applicable provisions and rules thereof, consent of the Non Cumulative Preference Shareholder Shri ABC holding 100% of the total Preference Capital of the Company, the redemption period of the same due on 31st March, 2019 be and is hereby extended for a further period of three years upto 30th March, ….. and other terms and conditions of the same shall remain unchanged. FURTHER RESOLVED THAT Shri ABC and/or Shri HBC Directors of the Company are hereby severally authorized to do all such acts, deeds and things as may be required to validate the resolution. Appendix 2 Special Resolution for issue of equity shares with differential rights RESOLVED THAT pursuant to the provisions of sections 43 and 61 and other applicable provisions, if any, of the Companies Act, 2013, the consent be and is hereby given for the issue of........... Equity Shares of `............. each, not exceeding 25% of the total issued capital of the Company, with differential rights as to voting. RESOLVED FURTHER THAT the Board of directors of the Company be and is hereby empowered to do all such acts and things to give effect to this resolution. Explanatory Statement Section 43 of the Companies Act, 2013, enables a company to issue equity share capital with differential rights as to voting, dividend or otherwise in accordance with the rules and subject to such conditions as may be prescribed. The resolution is to empower the Company to issue shares with differential rights, so however, the quantum of such issue shall not exceed 25% of the total issued capital. The details as to differential rights are given in the Annexure to this explanatory statement. The voting with regard to issuance of shares with differential voting rights is required to be exercised through postal ballot. The necessary papers in this behalf are also sent herewith. The directors of the Company and their relatives may be deemed to be concerned or interested financially in these resolutions, to the extent of the shares as may be allotted to them in the Company. Contents Chapter 2 Share Certificates Synopsis Share Certificate 1. Share certificate shall be prima facie evidence of the title of shares 1.1 Share certificates are not negotiable or warranty of title 1.2 Time limit for issuance of share certificates 1.3 Delay caused is issuance of share certificate is compoundable 2. Significance of issuance of shares certificates 2.1 Share certificate is not a representation of continuing ownership 3. Service of share certificates 4. Stamping of share certificates 5. Issuance of share certificates (where shares are not in demat form) 6. Format of the share certificate 7. Signature and affixing common seal on the share certificates 8. Entry of the share certificates in the Register of members Renewed or Duplicate Share Certificate 9. Renewal or issuance of duplicate share certificate on production of evidence/old certificate 9.1 Share certificates may be issued without surrender of share certificate in specific cases for replacement of existing shares only 9.2 Requirement of indemnity bond in certain cases before issuance of duplicate shares 9.3 Powers for issuance of duplicate shares may be delegated by the Board to committee of directors 10. Fee on issuance of duplicate share certificates 11. Recording on the share certificates for issuance of duplicate certificates 12. Time limit for issuance of duplicate share certificates 13. Register of duplicate share certificates 13.1 Inspection of the Register of duplicate shares 13.2 Authentication of entries in the Register of Renewed and Duplicate Shares 14. Penalty 15. Issuance of share certificates on sub-division/consolidation or in exchange of those defaced or where the pages have been utilised 16. Stamp duty on sub-divided, consolidated and duplicate share certificates 17. Maintenance of share certificate forms and related books and documents 17.1 Responsibility of the officers relating to the share certificates 18. Preservation of records and cancellation of the share certificates Depository 19. Meaning of Depository 20. Depository has functions similar to bank 21. Depository Participant (DP) 22. Beneficial owner 23. Option to receive physical security certificate or hold in electronic mode 24. Legal framework for a Depository 25. Facilities offered by Depository System 26. Benefits of holding securities in electronic mode 27. Options to hold securities in Electronic mode for listed companies 27.1 Issue of securities and transfer of the same in dematerialised form by unlisted public companies after 2nd October, 2018 27.2 Subsidiary of a public company is also required to issue securities and transfer of the same in dematerialised form after 2nd October, 2018 27.3 Issue of securities in dematerialised form by private companies other than Small and OPC 27.4 Every unlisted public company governed by this rule shall submit Form PAS-6 to the Registrar Contents 28. Opening of Depository Account 29. Mandatory requirement to have PAN for opening and maintaining D-mat Account 30. PAN as the sole identification number for all transactions in the securities market 31. Dematerialisation of securities 31.1 Procedure for dematerialisation to be followed by the issuer company 31.2 Procedure for Dematerialisation to be followed by Company after the completion of formalities by DP 32. Rematerialisation of securities 32.1 Procedure for rematerialisation 32.2 Account transfer 33. Transfer, transmission and transposition 33.1 Transfer 33.2 Exemptions to a Government company from requirement of the share transfer form in certain cases 33.3 Transmission 33.4 Transposition 34. Pledge or hypothecation of securities held in an electronic mode 35. Nomination in case of electronic mode 36. Corporate Action by the issuer company 37. ECS Facility 38. Reporting to Clients 39. Admission of debt instruments/securities with CDSL 40. Reconciliation of the issued, subscribed, paid up and listed capital, held in the demat and/or physical form 41. Appointment of Common Agency for share registry work in physical and electronic mode 42. Fees/charges payable for demat facility 43. Rights of depositories and beneficial owner 44. Depositories to indemnify losses 45. Serving of documents 46. Register and index of beneficial owners 47. SEBI safeguards to address the concerns of the investors on transfer of securities in dematerialized mode 48. Penalties prescribed under the Depositories Act, 1996 49. Determination of date of transfer and the period of holding of securities held in dematerialised form under section 45(2) of Income-tax Act, 1961 50. Submission of Audit Report under Regulation 76 of SEBI (Depositories and Participants) Regulations, 2018 Appendix 1 Letter to shareholder regarding issuance of duplicate share certificate Appendix 2 Specimen of Affidavit in respect of loss of certificates Appendix 3 Specimen of Indemnity Bond Appendix 4 Specimen of Notice for loss of Share Certificates Appendix 5 Specimen of Board Resolutions Appendix 6 Specimen of Special Resolution Appendix 7 Circulars issued by SEBI related to PAN Appendix 8 Specimen of the Resolutions Important Provisions at a Glance Section Matters dealt with Form under CA Nos. 2013 2(55)1 Member 20 2 Service of Documents Contents Section Matters dealt with Form under CA Nos. 2013 381 Punishment for personation for acquisition, etc., of securities 46 2 Certificate of Shares SH-1 Register for issuance of duplicate and renewal of share certificates SH-2 562 Transfer and Transmission of securities 88 2 Register of Members 1 The section has become effective w.e.f. 12-9-2013. 2 The section has become effective w.e.f. 1-4-2014. SHARE CERTIFICATE Section 46 of the Act provides the following in respect of share certificates issued by a company: 1. Share certificate shall be prima facie evidence