Sainavle

Transfer And Transmission Of Securities

Transfer of securities Under Companies Act, 2013

As per Section 56(1) of the Companies Act, 2013, a company, whether public or private shall not register transfer of securities of the company unless a proper instrument of transfer duly stamped, dated and executed by or on behalf of the transferor and transferee has been delivered to the company along with the certificate relating to the securities or if no such certificate is in existence, along with the related letter of allotment of securities.

• Transfer takes place by a voluntary act of the transferor.
• An instrument of transfer is required in case of transfer.
• Transfer is a normal course of transferring property.
• Transfer of securities is generally made for some consideration.
• Stamp duty is payable on transfer of securities by a holder of securities.

Depository system Under Companies Act, 2013

Depository system reduces the cost of issue and transfer of securities by eliminating stamp duty, it entitles the transferee to all the rights associated with the securities immediately on settlement of purchase transaction.

Transfer And Transmission Of Securities

Fungibility Under Companies Act, 2013

A good or asset’s interchangeability with other individual goods/assets of the same type. Assets possessing this property simplify the exchange/trade process, as interchangeability assumes that everyone values all goods of that class as the same.

Stamp duty Under Companies Act, 2013

The tax placed on legal documents usually in the transfer of assets or property. The transfer of documents in locations where this law exists, is only legally enforceable once they are stamped, which shows the amount of tax paid.

Transmission of Securities Under Companies Act, 2013

• Transmission of Securities refers to those cases where a person acquires an interest in securities by operation of any provision of law, such as by right of inheritance or succession or by reason of the insolvency or lunacy of the holder of securities or by purchase in a Court-sale.
• Transmission is the result of the operation of law.
• No instrument of transfer is required in case of transmission.
• Transmission takes place on death or insolvency of a holder of securities.
• Transmission of securities is generally made without any consideration.
• No stamp duty is payable on transmission of securities.

Lien on shares Under Companies Act, 2013

Lien on shares is the right to retain possession of a thing until a claim is satisfied. In the case of a company lien on a share means that the member would not be permitted to transfer his shares unless he pays his debt to the company.

Blank Transfer Under Companies Act, 2013

When a shareholder signs the transfer form without filling in the name of the transferee and the date of execution and hands it over with the share certificate to the transferee thereby enabling the transferee to deal with the shares, he is said to have made a transfer ‘in blank’ or a ‘blank transfer’.

Forged Transfer Under Companies Act, 2013

• A forged transfer is a nullity and therefore, the original owner of the shares continues to be the shareholder and the company is bound to restore his name on the register of members [People’s Ins. Co. v. Wood and Co., 1961 (31) Com Cases 61].
• A forged document never has any legal effect. It can never move ownership from one person to another, however, genuine it may appear.

Dematerialisation of Shares Under Companies Act, 2013

• Dematerialisation of securities means holding of securities in electronic form in lieu of physical certificates. Dematerialisation is comparable to keeping your money in a bank account.
• In demat form, physical share certificates are replaced by electronic book entries; purchase of shares are reflected as credits in demat account and sales are reflected as debits.
• The risk associated with physical share certificates such as loss, replacement, theft, damage, etc. are overcome in the share certificates held in Dematerialisation form which are totally risk free.

Rematerialisation of Securities Under Companies Act, 2013

Rematerialisation is conversion of electronic securities into physical certificates of such securities. This can be done in the following manner:

• Beneficial owner sends request to DP.
• DP intimates Depository (NSDL or CDSL) of such request electronically.
• Depository confirms rematerialisation request to the company’s Share Transfer Agents.
• Share Transfer Agent updates accounts, prints certificates and confirms the Depository.
• Depository updates accounts and downloads the details to the DP.
• Share Transfer Agent dispatches certificates to holder thereof.
• The DP also sends intimation about rematerialisation to its client.

Transmission Of Shares Companies Act 2013

Transfer And Transmission Of Securities Short Notes

Write a note on the following:

Fungibility

Answer:

Write a note on the following:

A forged transfer of shares is a nullity.

Answer:

Transfer And Transmission Of Securities Distinguish Between

Distinguish between the following:

‘Beneficial owners under depository mode’ and ‘registered owners under depository mode’.

Answer:

Distinguish Between the following:

‘Transfer’ and ‘transmission’ of shares.

Answer:

Transfer And Transmission Of Securities Descriptive Questions

What are the benefits of the depository system of stock holding?

Answer:

Share Transfer Procedure India

Examine the validity of transfer and transmission of shares in favour of a minor under the provisions of the Companies Act, 2013.

Answer:

Aniket has fraudulently sold his shares to two different transferees. Who will be entitled to the shares in priority?

Answer:

• Referring to Society General De Paris v. Jonet Walker and other (1886) it was held that where a shareholder has fraudulently sold his shares to two different transferees, the first purchaser will, on the ground of time alone, be entitled to the shares in priority to the second.
• Applying the case here, the first purchaser will be entitled to the shares in priority.

The Articles of Association of a company cannot impose a blanket ban prohibiting transfer of shares in favour of a minor. Such a restriction is unreasonable and not sustainable.

Answer:

• The Articles of Association of a company cannot impose a blanket ban prohibiting transfer of shares in favor of a minor, as such a restriction is unreasonable and not sustainable. Section 44 of the Companies Act, 2013 provides that shares in a company are movable property and are transferable in the manner provided by the Articles.
• The expression “in the manner provided by the articles of association the company” can only be interpreted to mean the procedure to be opted for transfer and impose restrictions, which are meaningful and reasonable.. In case, the restriction imposed on transfer to a minor is accepted, it would mean that the shares of a deceased member can never be inherited by the legal heir who might be a minor.
• This would lead to a highly unjust situation and cannot be accepted as tenable.
• Accordingly, if the shares can be transmitted in favour of a minor, there is no reason why the shares which are fully paid -up and in respect of which no financial liability devolves on the minor are to be held as not transferable merely because of the ban imposed in the Articles of Association [Saroj v. Britannia Industries Ltd., Appeal No.5/80 decided 14.12.81 by CLB).

Transfer And Transmission Of Securities Practical Questions

Mohan applied for 4,000 shares in a company but no allotment was made to him. Subsequently, 4,000 shares were transferred to him without his request and his name was entered in the register of members. Mohan stood by and allowed his name to remain in the register of members. Subsequently, the company went into liquidation and he was held liable as a contributory. Now, Mohan wants to apply to the Tribunal for rectification of the register of members. Can he do so? Explain.

Answer:

An employee of a company purchased certain shares of his company through a member of a stock exchange and lodged with the company an application for transfer of shares in his (employee’s) name. The company refused to execute the transfer on the suspicion that the employee, if admitted as a member of the company, will create nuisance in general meetings and seek access to the records of the company. Decide giving reasons –

• Whether the company’s contention shall be tenable; and
• What is the remedy available to the employee in the given case?

Answer:

P Realtors Ltd., A Construction Ltd. and five other individuals have incorporated XYZ Builders Ltd. to construct a commercial complex. P Realtors Ltd. and A Construction Ltd. have executed an agreement according to which none of these companies can sell their shares in the new company before completion of construction of the commercial complex. Due to financial crunch, P Realtors decides to sell its shares in XYZ Builders Ltd. to PQR Builders Ltd. Can A Construction Ltd. restrain the transfer of shares before completion of construction of the commercial complex? (3 marks)

Answer:

With reference to the definition of a private company as provided under Section 2 (68) of the Companies Act, 2013, a private company is only authorised to exercise restriction by its Articles on the transfer of shares of the company held by its members.

In other words, in public companies the shares are freely transferable and no restrictions can be imposed on the members right regarding transfer of their shares.

In the above case the agreement between P Realtors Ltd. and A Construction Ltd restricting their rights to transfer their shares till completion of the project will be held subservient to the provision contained in the Companies Act, 2013, which provide for free transferability of shares.

Hence, A Construction Ltd. will not be able to restrain P Realtors from transferring their shares in XYZ Builders Ltd. to PQR Builders Ltd.

Santosh Kumar, an employee of a listed company purchased certain shares of his company through a member of a stock exchange and lodged with the company for transfer of shares in his (employee’s) name. The company refused to execute the transfer on the suspicion that the employee, if admitted as a member of the company, will create nuisance in general meetings and seek access to the records of the company. Decide giving reasons:

• Whether the company’s contention shall be tenable; and
• What is the remedy available to the employee in the given case?

Answer:

The securities or other interest of any member in a public company are freely transferable (it means, no restriction on transfer of share from one person to another person). Refusal to register share transfer on suspicion that the employee if admitted as a member will attend general meetings of the company and may create nuisance by raising irrelevant issues and also get access to the records to the company as a shareholder is not a valid reason.

Therefore, as per Section 58 (4) of the Companies Act, 2013, if a public company without sufficient cause refuses to register the transfer of securities within a period of 30 days from the date on which the instrument of transfer is delivered to the company, the transferee may, within period of 60 days of such refusal or where no intimation has been received from the company, within 90 days of the delivery of the instrument of transfer, can appeal to the Tribunal.

Therefore, taking into account the above:

• The refusal by the company to register the transfer shares in the name of the employee is not tenable.
• Employee in this case can go for appeal to the Tribunal against the company’s refusal.

Transfer And Transmission Of Securities Short Notes

Question 1. Write short notes on Rematerialisation of securities.

Answer:

Rematerialisation is conversion of electronic securities into physical certificates of such securities. This can be done in the following manner:

• Beneficial owner sends request to DP.
• DP intimates Depository (NSDL or CDSL) of such request electronically.
• Depository confirms rematerialisation request to the company’s Share Transfer Agents.
• Share Transfer Agent updates accounts, prints certificates and confirms the Depository.
• Depository updates accounts and downloads the details to the DP.
• Share Transfer Agent dispatches certificates to holder thereof.
• The DP also sends intimation about rematerialisation to its client.

Difference Between Transfer And Transmission

Question 2. Write short notes on Dematerialisation of securities.

Answer:

Dematerialisation of securities means holding of securities in electronic form in lieu of physical certificates. Dematerialisation is comparable to keeping your money in a bank account. In demat form, physical share certificates are replaced by electronic book entries; purchase of shares are reflected as credits in demat account and sales are reflected as debits.

The risk associated with physical share certificates such as loss, replacement, theft, damage, etc. are overcome in the share certificates held in Dematerialisation form which are totally risk free.

Transfer And Transmission Of Securities Descriptive Questions

Question 3. Enumerate the steps for transfer of dematerialised shares.

Answer:

Section 7 of the Depositories Act, 1996 lays down that every depository shall, on receipt of intimation from a participant, register the transfer of shares in the name of the transferee and where the beneficial owner or a transferee of any shares seeks to have custody of such shares, the depository shall inform the issuer accordingly.

The transfer deed and all other provisions stipulated in Section 56 of the Companies Act, 2013 shall not apply to the transfers affected within the depository mode.

No stamp duty is levied on transfer of securities held in demat form. Any number of securities can be transferred/ delivered with one delivery instruction. Therefore, the paperwork and signing of multiple transfer forms is done away with.

The procedure for sale of shares held in demat form is as under:

• Sale shall be made through a broker who is a member of National Stock Exchange;
• Shareholder, i.e., the beneficial owner (BO) will give delivery instruction through Delivery Instruction Slip (DIS) to depository participant (DP) to debit his account and credit the broker’s account. Such instruction should reach the DP’s office at least 24 hours before the pay-in, failing which, DP will accept the instruction only at the BO’s risk;
• The broker shall give instructions to his DP for delivery to clearing corporation of the concerned stock;
• exchange and receive payment from clearing corporation.

The broker shall make payment to the investor in physical form. The procedure for purchases of securities held in demat form is as under:

• broker will receive the securitias in his account on the payout day;
• broker will give instruction to is depository participant to debit his account and credit beneficial o vner’s account;
• BO will give ‘Receipt Instruction’ to DP for receiving credit by filling appropriate form. However, BO can give standing instruction for credit to his account that will obviate the need of giving Receipt Instruction every time.

Question 4. Enumerate the steps for hypothecation of dematerialised shares.

Answer:

A beneficial owner may, with the prior approval of the depository, pledge or hypothecate his shares held in a depository. Upon receipt of intimation from the beneficial owner about the pledge or hypothecation of his shares, the depository shall accordingly make entries in its records.

Such an entry in the records of a depository shall be evidence of a pledge or hypothecation [Section 12]. Both the pledger and pledgee must have a depository account. The procedure for pledge or hypothecation of shares held in demat form is as under:

• Investor shall submit the details of shares to be pledged to the DP in the prescribed format.
• DP shall verify the records and on being satisfied that the shares are available for pledge, make a note in the records and forward the application to the Depository for approval.
• Depository shall obtain confirmation from pledgee and record the pledge within 15 days of application.
• Depository shall send intimation to the DP of both the pledger and pledgee who will inform the pledger and pledgee respectively.
• The pledgee may invoke the pledge in accordance with the terms of pledge and on such invocation the name of pledgee is entered in the Register of Beneficial Owners by the Depository.
• During the period the pledge is in force, the DP shall not give effect to transfer of any security without the concurrence of the pledgee.
• On closure of the loan, the pledger shall request the DP to close the pledge. The pledgee, on getting payment, shall make a request for closure of pledge to his DP.
• For making hypothecation of shares held in demat form the above procedure is to be followed. However, before registering the hypothecatee as a beneficial owner, the Depository should obtain the consent from the hypothecator.

Sebi Rules For Transfer Of Shares

Question 5. How does investor avail the services of depositary.

Answer:

• In the case of existing securities:
  • An investor before availing the services of a depository, shall enter into an agreement with the depository through a participant and then shall surrender security certificates to the issuer. The issuer on receipt of security certificate shall cancel them and substitute in its records the name of the depository as the registered owner in respect of that security and inform the depository accordingly. The depository shall thereafter enter the name of the investor in its records as beneficial owner.
• In the case of fresh issue:
  • At the time of initial offer the investor would indicate his choice in the application form. If the investor opts to hold a security in the depository mode, the issuer shall intimate the concerned depository about the details of allotment of a security made in the favour of investors and records the depository as registered owner of the securities.
  • On receipt of such information, the depository shall enter in its records the names of allottees as the beneficial owners. In such case a prior agreement by the investor with the depository as well as an agreement between the issuer company and depository may be necessary.
• In the case of exit from the depository:
  • If a beneficial owner or a transferee of a security desires to take away a security from depository, he shall inform the depository of his intention. The depository in turn shall make appropriate entries in its records and inform the issuer. The issuer shall make arrangements for the issue of certificate of securities to the investor within 30 days of the receipt of intimation from the depository.
• In the case of transfer within the depository:
  • The depository shall record all transfers of securities made among the beneficial owners on receipt of suitable intimation to the effect that a genuine purchase transaction has been settled.
• In the case of pledge:
  • Before creation of any pledge or hypothecation in respect of a security, the beneficial owner is required to obtain prior approval of the depository and on creation of pledge or hypothecation; the beneficial owner shall give intimation of such pledge or hypothecation to the depository. The depository shall make appropriate entries in its records which will be admissible as evidence.

Transfer And Transmission Of Securities

Question 6. Describes the process of the company to be followed by on refusal to register the transfer of securities.

Answer:

Section 58 of the Companies Act, 2013, deals with process of the company to be followed by on refusal to register the transfer of securities.

• If a private company limited by shares refuses (whether in pursuance of any power of the company under its articles or otherwise), to register the transfer of, or the transmission of the right to any securities or interest of a member in the company, then the company shall send notice of the refusal to the transferor and the transferee or to the person giving intimation of such transmission, 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. Notice shall contain the reasons for refusal to register the transfer or transmission.
• The transferee may appeal to the Tribunal against the refusal within a period of thirty days from the date of receipt of the notice or in case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, was delivered to the company.[Section 58(3)]
• If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal. .[Section 58(4)]
• The Tribunal, while dealing with an appeal may, after hearing the parties, either dismiss the appeal, or by order-
• direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or
• direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.[Section 58(5)]
• 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.[Section 58(6)]

Buy Back Of Securities And Reduction Of Share Capital

Buy-back of shares Under Companies Act, 2013

The repurchase of shares by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply) or to eliminate any threats by shareholders who may be looking for a controlling stake.

Reduction of capital Under Companies Act, 2013

• Reduction of capital means reduction of issued, subscribed or paid-up share capital of the company. Various modes of reduction have been laid down in the Companies Act.
• Reduction of share capital is governed by the provisions of Section 66 of the Companies Act, 2013.
• Reduction of share capital is required to be done by special resolution.
• Reduction of share capital is to be confirmed by the Tribunal.

Buy Buyback of Shares Under Companies Act 2013

Surrender of shares Under Companies Act, 2013

Surrender of shares means surrender to the company on part of shareholder of shares voluntarily. It amount to reduction of capital.

Forfeiture of shares Under Companies Act, 2013

A company may if authorized by its articles, forfeit shares for non-payment of calls and the same will not require confirmation of the Tribunal and amounts to reduction of capital.

Diminution of capital Under Companies Act, 2013

Diminution of capital is the cancellation of the unsubscribed part of the issued capital. It can be effected by an ordinary resolution provided articles of the company authorize to do so. It does not need any confirmation of Tribunal.

Buy Back Of Securities Short Notes

Write a note on the following:

Conditions for valid forfeiture of shares

Answer:

Buy Back Of Securities Descriptive Questions

Answer the following citing the relevant provisions of law/case law, if any:

Explain the procedure for reduction of share capital.

Answer:

Reduction of Share Capital [Section 66]

• Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may:
  • extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
  • either with or without extinguishing or reducing liability on any of its shares,
    • cancel any paid-up share capital which is lost or is unrepresented by available assets; or
    • pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
• The Tribunal shall give notice of every application made to it under sub-section (1) to the ‘Central Government, Registrar and to the Securities and Exchange Board, in the case of listed companies, and the creditors of the company and shall take into consideration the representations, if any, made to it by that Government, Registrar, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of the notice.
• The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit. Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in Section 133 or any other provision of this Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.
• The order of confirmation of the reduction of share capital by the Tribunal under sub-Section (3) shall be published by the company in such manner as the Tribunal may direct.
• The company shall deliver a certified copy of the order of the Tribunal under subsection (3) and of a minute approved by the Tribunal showing:
  • the amount of share capital;
  • the number of shares into which it is to be divided;
  • the amount of each share; and
  • the amount, if any, at the date of registration deemed to be paid-up on each share, to the Registrar within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.
• Nothing in this section shall apply to buy-back of its own securities by a company under Section 68.
• A member of the company, past or present, shall not be liable to any call or contribution in respect of any share held by him exceeding the amount of difference, if any, between the amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the amount of the share as fixed by the order of reduction.
• Where the name of any creditor entitled to object to the reduction of share capital under this section is, by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered on the list of creditors, and after such reduction, the company is unable, within the meaning of sub-section (2) of Section 271, to pay the amount of his debt or claim:
  • every person, who was a member of the company on the date of the registration of the order for reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he would have been liable to contribute if the company had commenced winding up on the day immediately before the said date; and
  • if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up.
• Nothing in sub-section (8) shall affect the rights of the contributories among themselves.
• If any officer of the company:
  • knowingly conceals the name of any creditor entitled to object to the reduction;
  • knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
  • abets or is privy to any such concealment or misrepresentation as aforesaid, he shall be liable under Section 447.

Amendments as per Companies (Amendment) Act, 2017 Revised Section 447-

“Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud involving an amount of at least ten lakh rupees or one percent of the turnover of the company, whichever is lower, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

Buyback Of Securities Procedure

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent of the turnover of the company, whichever is lower and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.”

• If a company fails to comply with the provisions of sub-section (4), it shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees.

Note: Amendment made by Companies (Amendment) Act, 2020 Provides that the Section 66 of the principal Act, sub-section(11) shall be omitted. Space to write important points for revision

Comment on the following:

A company incorporated under the Companies Act, 2013 does not have the right to reduce its share capital on selective basis.

Answer:

Comment on the following:

Reduction of share capital and Diminution of share capital mean the same.

Answer:

According to Section 66(1) of the Companies Act, 2013 states that subject to approval by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by passing a special resolution at general meeting reduce the share capital in any manner, and in, particular, may-

• extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
• either with or without extinguishing or reducing liability on any of its shares,-
  • cancel any paid-up share capital which is lost or is unrepresented by available assets; or
  • pay off any paid-up share capital which is in excess of the wants of the company,

alter its memorandum of association by reducing the amount of its share capital and of its shares accordingly.

As per Section 61(1)(e) of the Companies Act, 2013 provides that, a limited company having share capital, if authorised by its Articles of association may cancel shares, by passing an ordinary resolution at general meeting in that behalf, which have not been taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

Diminution needs no confirmation by the Tribunal. Further, Section 61(2) of the Companies Act, 2013 provides that the cancellation of shares under section 61(1) of the Companies Act, 2013 shall not be deemed to be reduction of share capital.

Hence, Reduction of Share Capital and Diminution of Share Capital is not the same.

Buyback Rules Under Companies Act

Buy Back Of Securities Practical Question

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

Authorised equity share capital         10 crore

(1 crore shares of 10 each)

Paid-up equity share capital              5 crore

General reserve                                 5 crore

Debenture redemption reserve        2 crore

Board of Directors by a resolution passed at its meeting decides to go for buy-back of shares of the extent of 20% of the company’s paid-up share capital and free reserves. Examine the validity of the Board’s resolution with reference to the provisions of the Companies Act, 2013.

Answer:

Enkebee Ltd. wants to purchase its own 1,00,000 equity shares @ 10 each out of the following:

Unsecured loan  5 lakh

Balance of depreciation reserve for 3 lakh

Securities premium account 4 lakh.

Examine the legality of the above transactions for the buy-back of securities of the company under the provisions of the Companies Act, 2013.

Answer:

According to Section 68(1) of the Companies Act, 2013, a company may purchase its own shares or other specified securities out of the following:

• its free reserves; or
• the securities premium account; or
• the proceeds of any shares or other specified securities.

Hence, Enkebee Ltd. can purchase its own shares only out of the Securities Premium account and not out of unsecured loan or balance of depreciation reserve (not being free reserve).

Confident Ltd. has forfeited 50,000 equity shares of the company@10 each and same were re-issued. After the filing of the annual return, the Registrar of Companies (ROC) has issued show cause notice to the company for default of provisions of Section 39 of the Companies Act, 2013. Is the action of the ROC tenable under the provisions of the Companies Act, 2013? Discuss with relevant case law, if any.

Answer:

• Re-issue of forfeited shares does not require filing of return of allotment. In a similar case Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd., the Supreme Court held that the exchange was not liable to file any return of the forfeited shares under Section 75(1) of the Companies Act, 1956 [Corresponds to Section 39 of the Companies Act, 2013] when the same were re-issued.
• The Court observed that when a share is forfeited and re-issued, there is no allotment, in the sense of appropriation of shares out of the authorised and unappropriated capital and approved the observations of Harries C.J. in S.M. Nandy’s case that:
• “On such forfeiture all that happened was that the right of the particular shareholder disappeared but the shares considered as a unit of issued capital continued to exist and was kept in suspense until another shareholder was found for it”.
• Accordingly, in the present case Show cause notice issued by RoC to Confident Ltd. fo: default of provisions of Section 39 of the Companies Act, 2013 is not tenable.

Premium Ltd. is considering buy-back of its shares without using any proceeds of shares or other specified securities. The balance sheet of Premium Ltd. shows the following status as on 31st March, 2018: Asset/Liabilities

Conditions For Buyback Of Shares In India

Determine the maximum quantum of buy-back of shares with the shareholders’ approval as on 1st April, 2018.

Answer:

The maximum quantum of buy-back that Premium Ltd. can make as on 1st April, 2018, in pursuance to Section 68 of Companies Act, 2013 is 25% of aggregate of paid-up capital and free reserves of the company. Further provided that the reference to twenty five per cent shall be construed with respect to its total paid-up equity capital in that financial year and the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back should not be more than twice the paid-up capital and its free reserves.

Analysis of the Case Law:

Free Reserves – 5,00,000

Securities premium Account – Nil

Proceeds of other specified securities – Nil

Total Debt i.e. (7,00,000+ 15,00,000) -22,00,000

Sum of paid up Equity capital + free reserves – 15,00,000

Therefore, the maximum fund available for buy-back (in absence of securities premium account and proceeds of issue of any other specified securities) is 5,00,000.

Amount that must be maintained as sum total of free reserves and paid up equity capital is half of total debt i.e. half of 22,00,000 i.e. 11,00,000.

Buy back can be made upto 25% of Paid up capital and free reserves i.e. 10,00,000+ 5,00,000 i.e. 15,00,000 × 25% = 3,75,000. Further debt equity ratio is

Debt:

Secured and unsecured debt = 15,00,000+ 7,00,000 = 22,00,000

Capital after Buy Back:

Total Capital 10,00,000-3,75,000 = 6,25,000

Free reserve = 5,00,000-3,75,000 = 1,25,000

Total Capital + free reserve 6,25,000+ 1,25,000 = 7,50,000 Debt equity ratio = 22,00,000/7,50,000 = 2.93

The ratio being more than twice the paid-up capital and its free reserves the maximum quantum of 3,75,000 is not advisable.

As expressed above post buy-back debt equity ratio must not be more than 2. Accordingly, post buy-back total capital and free reserve must be half of debts i.e. (15,00,000+7,00,000)/2=11,00,000. The maximum buy-back of equity may be {(10,00,000+ 5,00,000) -11,00,000)/2 = 2,00,000.

Hence, in the above case, maximum possible buy-back is of  ₹ 2,00,000 amounting to 20,000 equity shares of ₹ 10 each.

Buyback Of Shares Meaning And Process

Monika Ltd. wants to purchase its own 5,00,000 equity shares @ ₹10/- each out of the following:

₹ lakh

(a) Unsecured Loans              25

(b) Balance of Free Reserves  15

(c) Securities Premium Account    10

Examine the legality of the above transactions for the buy-back of securities of the company under the provisions of the Companies Act, 2013

Answer:

As per Section 68(1) of the Companies Act, 2013 a company may purchase its own shares or other specified securities (known as “buy-back”) out of:

• its free reserves; or
• the securities premium account; or
• the proceeds of the issue of any shares or other specified securities.

Although, no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Hence, in the above case Monika Ltd. can purchase its own 5,00,000 equity shares @10 each out of free reserves and from the securities premium account in accordance with the provisions of the Companies Act, 2013. But it cannot do buy-back from the amount of Unsecured Loan as it will be contravention of the provisions of Section 68 of the Companies Act, 2013.

Issue Of Securities

Issue of shares with differential voting rights [Section 43(a) (ii)]

• Articles to authorise the issue.
• Ordinary resolution to be passed and if shares are listed then approval through postal ballot.
• The voting power in respect of shares with differential rights of the company shall not exceed seventy four per cent of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.
• The company not to be penalised under specified legislature in last 3 years.
• No default in filing financial statements in the last 3 years.
• No default in payment of dividend.

Issue/re-demption of preference shares [Section 55]

• Issue to be authorised by special resolution.
• Explanatory statement to be annexed to the notice of general meeting containing the relevant material facts.
• No company shall issue irredeemable preference shares of redeemable preference shares with the redemption period beyond 20 years.
• Infrastructural companies may issue preference shares for a period exceeding 20 years but not exceeding 30 years.

Rights Issue

Rights issue is an issue of capital to be offered to the existing shareholders of the company through a letter of offer.

• Listed companies to inform concerned stock exchanges.
• Company to give notice to equity shareholder giving him 15-30 days to decide.
• Company can issue shares to other than existing share holder for cash or other than cash if a special resolution is obtained.
• Price to be determined by the registered valuer’s report.
• The provisions of Section 62 are applicable to all type of companies.

ESOP

• Pass special resolution.
• Disclosures to be made in explanatory statement.
• Free pricing in conformity with accounting policies.
• Separate resolution to be obtained for granting options to employees of holding/subsidiaries.
• Minimum 1 year period between grant of options and vesting of option.
• Company is free to set lock-in period.
• Option granted shall not be transferable, pledged, hypothecated, mortgaged in any manner.
• Disclosures to be made in board report.
• Register to be maintained in form SH-6.
• Listed companies to comply with SEBI guidelines.

Preferential Issue Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014

• Pass special resolution.
• Listed company shall follow SEBI regulations. Issue to be authorised by the articles.
• Securities to be made fully paid-up on allotment.
• Disclosures to be made in explanatory statement to be annexed to the notice of general meeting.
• Allotment to get completed within 12 months if not completed a fresh resolution is required.
• Price determination by the registered valuer’s report.

Bonus share

When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits into capital and divides the capital among the existing members in proportion to their entitlements. Members do not have to pay any amount for such shares. A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares.

• Authorised by articles.
• Authorised on recommendation of the board in general meeting.
• No default in payment of interest or principle in respect of debt securities and fixed deposits and in respect of payment to employees.
• Partly paid up shares to be made fully paid up on allotment.
• Listed companies to follow SEBI regulations.
• Once announced by the board about bonus issue no company shall withdraw the same.

Sweat equity shares

Means equity shares issued by a company to its employees or directors at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

• Issue of sweat equity shares to be authorized by special resolution at a general meeting.
• The special resolution authorizing sweat equity shares is not valid if the allotment is made after 12 months of passing the resolution. i.e., the validity of special resolution is 12 months.
• The price of sweat equity shares is to be determined by a registered valuer.
• The company shall maintain a Register of Sweat Equity Shares in Form No. SH 3.
• Issue of sweat equity shares to employees and directors at a discount under Section 54 is outside the scope of Section 53.

Companies (Share Capital and Debentures) Second Amendment Rules, 2018

For the purpose of rules relating to issuance of Sweat equity shares the definition of Employee has been modified through this amendment. Current definition is as under:

“Employee” means-

• a permanent employee of the company who has been working in India or outside India; or
• a director of the company, whether a whole time director or not; or
• an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company;

Issue Of Securities Companies Act 2013

Issue Of Securities  Short Notes

Write a note on the following:

Issue of sweat equity shares.

Answer:

Issue Of Securities  Distinguish Between

Distinguish between the following:

‘ESOP’ and ‘sweat equity shares’.

Answer:

Distinguish between the following:

Redemption of shares and Redemption of debentures.

Answer:

Issue Of Securities  Descriptive Questions

Comment on the following:

Every employee of a company shall be eligible to participate in Employee Stock Option Scheme (ESOS).

Answer:

Whether equity shares already issued can be converted into redeemable preference shares? Discuss. 

Answer:

Section 62 of Companies Act, 2013 ensures pre- emptive rights of shareholders. Discuss.

Answer:

Comment on the following:

In no circumstances a company can issue redeemable preference shares with a redemption period beyond 20 years.

Answer:

Referring to the provisions of the Companies Act, 2013, state the conditions required to be fulfilled before a company can issue bonus shares to shareholders of the company.

Answer:

In view of the provisions of the Companies Act, 2013 relating to ‘securities premium’, state whether the amount lying in securities premium account of a company can be used:

For issuance of bonus shares; and

For payment of dividend declared by the company at its general meeting.

Answer:

Companies Act 2013 Securities Issue Process

Board of directors of Progressive Ltd. decides to issue equity shares of the company with differential voting rights. Examining the provisions of the Companies Act, 2013, state the conditions to be complied with by the company in this regard.

Answer:

Section 43 enables companies to issue a variety of equity shares with differential rights etc. Rule 4 of Companies (Share Capital and Debentures) Rules, 2014 states the following conditions regarding shares with differential voting rights.

As a Practicing Company Secretary, advise your client company regarding the matters relating to issue of shares with differential rights, to be included in the Board of Directors Report.

Answer:

Pursuant to Rule (4) sub-rule (4) of the Companies (Share Capital and Debentures) Rules, 2014, the Board of Directors shall inter alia, disclosure in the Board Report for the financial year in which the issue of equity shares with differential Rights was completed, the following details, namely:

• total number of shares allotted with differential rights,
• details of the differential rights relating to voting rights and dividend,
• the percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time,
• the price at which such shares shall be issued,
• the particulars of promoter, directors, or KMP to whom such shares are issued,
• the change in control, if any in company,
• the diluted EPS pursuant to issue of each class of shares.
• the pre and post issue shareholding pattern.

The Board of Directors of the company are accordingly advised to make disclosures in their report-Director’s Responsibility Statement. – Space to write important points for revision-

Issue Of Securities  Practical Questions

The Board of directors of Nav Avtar Ltd. passed a resolution for issue of rights shares. However, certain shareholders of the company raised an objection as to whether the company needed additional capital. Discuss the validity of the counter-move taken by the shareholders and resolution passed by the Board.

The Board of directors of Aakash Ltd., a listed company, at its meeting held on 1st April, 2011 announced a proposal for issue of bonus shares to all equity shareholders of the company at 1:1 ratio. On 1st May, 2011, the directors at another meeting passed a resolution to reverse the proposal of bonus issue announced on 1st April, 2011. Discuss the validity of the proposal and the reversal.

Answer:

During the financial year 2016-17, the Board of Directors of CARE Automation Services Limited has issued shares to employees under Employees Stock Option Scheme. Ms. Excellent has recently joined the Board of the company and asks you, the Secretary of the company, as to what details are to be disclosed in the Board’s Report for the year ending 31st March, 2017 in this regard. Advise her.

Answer:

Pursuant to Rule 12(9) of the Companies (Share Capital and Debentures)

Rules, 2014 the Board shall disclose following details of ESUP→

• options granted;
• options vested;
• total no. of shares arising as a result of exercise a options;
• options lapsed;
• the exercise price;
• variation of times of offer;
• money realised by exercise of options;
• total options in force;
• employee wise detail enforced regarding ESOS grant to KMP.

ABC Ltd. holds 75% equity share capital of DEF Ltd. and controls composition of Board of Directors of DEF Ltd. ABC Ltd. goes for public issue for raising further share capital. Board of Directors of ABC Ltd. allót 10% of the issue to DEF Ltd. Referring to the provisions of the Companies Act, 2013 examine the validity of Board’s decision to allot 10% – of issue to DEF Ltd. DEF Ltd. holds certain number of shares as a legal representative of a deceased member of ABC Ltd. and has a right to vote at a general meeting of ABC Ltd. in respect of such shareholdering, will this right be affected by issue of 10% to DEF Ltd. by ABC Ltd.?

Answer:

Note

Further, in the following circumstances, where a subsidiary can hold the shares of its holding company:

• Where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or
• Where the subsidiary company holds such shares as a trustee; or
• Where the subsidiary company is a shareholder even before it became a subsidiary company of its holding company.

The subsidiary company, however, as referred above shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee.

Private Placement Vs Public Issue

Green Commercial Ltd., an unlisted company, has made a preferential offer of shares for consideration other than cash. A question has been raised by the accounts department as to the valuation of consideration at allotment and the manner of treatment of non-cash consideration in books of account. As a practising company secretary advise the company with reference to the provisions of the Companies Act, 2013.

Answer:

Under Section 62 read with Rule 13(2) of the Companies (Share Capital and Debentures) Rules 2014, where shares or other securities are to be allotted for consideration other than cash, the valuation of such consideration shall be done by a registered valuer who shall submit a valuation report to the company for justification of valuation.

Where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company-

• where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or
• where above clause is not applicable, it shall be expensed as provided in the accounting standards.

The Practicing Company Secretary (PCS) can advised the Green Commercial Ltd. accordingly.

The share capital of Raney Ltd. is 30 crore. ‘Russel’ is appointed as the managing director of the company, the company wants to compensate him by issue of shares for supplying technical know-how without any cost. In this context, answer the following:

• Whether the company is allowed to allot such shares?
• Is approval of shareholders required for issuing such shares?
• If found eligible to allot such shares, what will be the quantum (value) of shares that can be allotted?
• Can Russel sell such allotted shares in the market?
• Will the amount that he receives on sale of his shares be considered a part of his remuneration?

Answer:

• Yes, Section 54 of the Companies Act, 2013 permits issue of sweat equity shares to employees or directors in recognition of their contribution for providing know how etc. as mentioned earlier. As the contribution made by employees/directors results in increased profits to the company for a number of years, sweat equity shares provide a new form of adequate return.
• Yes, Rule 8(1) of the Companies (Share capital and Debentures) Rules, 2014 provides that the special resolution shall be passed authorizing the issue of sweat equity shares and shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special resolution.
• Rule 8(4) of the Companies (Share capital and Debentures) Rules, 2014 provides that the company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year or shares of the issue value of rupees five crores, whichever is higher, The issuance of sweat equity shares in the company shall not exceed 25%, of the paid up equity capital of the company at any time.
• As the paid-up capital of the company is 30 crores. Hence he can be allotted with 15% of existing equity i.e. (15% of 30 crores up to € 4.5 Crores) value of shares or 5 crores whichever is higher.
• Rule 8(5) of the Companies (Share capital and Debentures) Rules, 2014 says that the sweat equity shares issued to directors or employees shall be locked/non transferrable for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock-in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.
• Yes, Rule 8(10) of the Companies (Share capital and Debentures) Rules, 2014 provides that the amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of Sections 197 and 198 of the Act, if the following conditions are fulfilled namely-
  • The sweat equity shares are issued to any director or manager; and
  • They are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.

The Board of Directors of Aakash Ltd., a listed company, in its meeting held on 1st April, 2021 announced a proposal for issue of bonus shares to all equity shareholders of the company in the ratio of 1: 1. On 1st May 2021, the directors at another meeting passed a resolution to reverse the proposal of bonus issue announced on 1st April, 2021. Discuss the validity of the resolutions. 

Answer.

A listed company is need to comply with the requirements of the Companies Act, 2013, rules made thereunder and SEBI (ICDR) Regulations, 2018 for issue of bonus shares.

As per section 63(2) of the Companies Act, 2013, no company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, unless it has, on the recommendation of the Board of Director been authorised in the general meeting of the company.

Further, as per Rule 14 of the Companies (Share capital and Debentures) Rules, 2014, a company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.

Also, the SEBI (ICDR) Regulations, 2018 provides that a bonus issue, once announced, shall not be withdrawn.

In view of the above case, the BOD of Aakash Limited once announced the issue of bonus share on 1st April 2021 to all equity shareholders of the company in the ratio of 1:1 cannot subsequently reverse the proposal of such issue in another board meeting. Therefore, the first board resolution proposing the bonus share is valid but second board resolution for reversal ‘is not valid.

Which of the following companies is eligible to issue shares with Differential Voting Rights (DVRs) during the financial year 2022-23?

Issue Of Securities  Short Notes

Question 1. Write short note on preferential offer.

Answer:

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

Issue Of Securities  Descriptive Questions

Question 2. Describe the Procedure for Issue of Equity Shares with Differential Voting Rights.

Answer:

Procedure for Issue of Equity Shares with Differential Voting Rights

• Check whether the Articles of Association of the company authorizes issue of equity shares with differential rights and if not, the name and the Articles of Association of the company.
• Hold the Board meeting to issue the notice of general meeting fo issuance of equity share with differential rights.
• Before issuing equity shares with differential rights as to dividend, voting or otherwise, ensure that the conditions of issue are fully satisfied.
• If the company is listed with any of the recognized stock exchange, then within 15 minutes of the closure of the aforesaid Board Meeting intimate to the concerned Stock Exchange about the decision taken at the Board Meeting.
• Pass the ordinary resolution in the general meeting or through Postal Ballot under Section 110 of the Act.
• Once the company makes any allotment, then it shall, within 30 days thereafter, file with the Registrar a return allotment in Form PAS-3, along with the fees as specified in the Companies (Registration Offices and Fees) Rules, 2014.
• The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.
• In case of listed company, send copies of the notice and a copy of the proceedings of the general meeting to the stock exchange within 24 hours of the occurrence of event. [Regulation 30 (6) of SEBI (Listing Obligations and Disclosure Requirements), 2015].
• Complete all other proceedings for the issue of certificate of shares with differential voting rights making necessary entries in various registers. In case of a company whose shares are dematerialized form, inform the depositories about the same for credit to the respective accounts.
• Intimate the details of allotment of shares to the Depository immediately on allotment of such shares.
• Maintain the Register of Members under Section 88 containing all the relevant particulars of the shares so issued along with details of the shareholders.

Sebi Guidelines For Issue Of Securities

Question 3. Describe the Procedure for issue of shares on Preferential basis.

Answer:

Procedure for issue of shares on Preferential basis

• Check whether the issue is authorize by Articles. If not make necessary amendments to alter the articles of association, through special resolution passed at the shareholders’ meeting.
• Convene a Board Meeting to approve the notice of General Meeting and necessary special Resolution/s along with explanatory statements as required.
• It is to be noted that preferential issue of share are required to comply with Section 42 also which relates to private placement. However, in case of preferential offer to one or more existing members the aspects relating to letter offer as stated in Rule14(1) and proviso to Rule1 4(3) of Companies (Prospectus and Allotment of Securities) Rules, 2014 shall not apply.
• The company shall ensure that all the disclosures in the explanatory statement are annexed to the notice of the general meeting pursuant to Section102 of the Act.
• Convene General Meeting and pass necessary Special Resolution/s.
• Ensure to file Form MGT-14 with Registrar of Companies with in 30 days of passing the Resolution.
• the allotment of securities on a preferential basis made pursuant to the special resolution passed shall be completed with in a period of 12 months from the date of passing of the special resolution. If the allotment of securities is not completed within 12 months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete such allotment thereafter.
• the price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered valuer; and when convertible securities are offered on a preferential basis with an option to apply for and get equity shares allotted, the price of the resultant shares pursuant to conversion shall be determined:
  • either up front at the time when the offer of convertible securities is made on the basis of valuation report of the registered valuer given at the stage of such offer, or
  • at the time, which shall not be earlier than thirty days to the date when the holder of convertible security becomes entitled to apply for shares, on the basis of valuation report of the registered valuer given not earlier than sixty days of the date when the holder of convertible security becomes entitled to apply for shares.
    The company shall take a decision on the above clause (i) and (ii) at the time of offer of convertible security itself and make such disclosure in the explanatory statement to be annexed to the notice.
• Where shares or other securities are to be allotted for consideration other than cash, the valuation of such consideration shall be done by a registered valuer who shall submit a valuation report to the company giving justification for the valuation;
• Where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company-
  • Where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or
  • Where clause (i) is not applicable, it shall be expensed as provided in the accounting standards.
• Once the allotment is made, the company shall within 30 days of allotment, file with the Registrar a return of allotment in Form PAS.3, along with the fee as specified in Companies (Registration of Offices and Fees) Rules, 2014.
• Deliver the share certificates of allotted shares within a period of 2 months from the date of allotment.
• Intimate the details of allotment of shares to the Depository immediately on allotment of such shares

Question 4. Describe the procedure for issue of bonus shares.

Answer:

• Check whether the Article of Association authorizes issue of bonus share. If not, the name and the Articles of Association of the company by passing the Special Resolution.
• Check whether the Bonus issue results in increase of authorized capital. If so, make necessary alterations in the Memorandum/Articles of Association by passing special Resolution.
• In the case of listed entity, give prior intimation to the stock exchange at least two working days in advance of the date of Board Meeting excluding the date of intimation and the date of the meeting [Refer Regulation 29 of Listing Regulations]
• Hold the Board Meeting and get the following proposal to be approved by the Board:
  • To recommend the bonus issue;
  • To approve the resolution to be passed at a general meeting;
    • To authorize the Bonus issue
    • To approve requisite resolution for increase of the capital and consequential alteration of the Memorandum of Association/Articles of Association (if necessary)
    • To enable the Articles to authorize the issue, if necessary.
• Ensure that bonus issue has been made out of free reserves built out of the genuine profits or securities premium or capital redemption reserve account.
• Ensure that reserves created by revaluation of assets are not capitalized.
• Ensure that the company has not defaulted in payment of interest or principal in respect of fixed deposits and or debt securities issued by it or in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc.
• Ensure that the bonus issue is not made in lieu of dividend.
• The company which has once announced the decision of its Board recommending a bonus issue shall not subsequently withdraw the same.
• If there are any partly paid-up shares, ensure that these are made fully paid-up before the bonus issue is recommended by the Board of directors.
• Hold the general meeting and get the resolution/s for issue of bonus shares passed by the members.
• Once Special Resolution is passed file Form MGT-14 along with the fees with the Registrar with in 30 days of passing of the resolution along with the altered article of association.
• With in 30 days of allotment file with the registrar the Return of allotment in Form PAS-3 along with fee as specified in Companies (Registration of Offices and Fees), Rules 2014.
• All share certificates shall be delivered to the shareholders within two months from the date of allotment of bonus issue as required under section56(4). Incase of a Specified IFSC public and private company the share certificates shall be delivered within sixty days of allotment.
• Intimate the details of allotment of shares to the Depository immediately on allotment of such shares.
• In case of listed companies the conditions prescribed under SEBI (LODR), Regulation 2018 and SEBI (ICDR) Regulation 2009 are to be complied with.

Issue Of Securities Companies Act 2013

Question 5. Describe the Procedure for issue of Right Shares.

Answer:

Procedure for issue of Right Shares

• Check whether the rights issue results in increase of authorized capital.,
• If so call a board meeting to approve the notice of General meeting to pass necessary special resolutions at the general meeting to amend Memorandum/Articles of Association
• Convene the general Meeting and obtain shareholders’ approval through special Resolution.
• The offer should be made by notice, specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined. This notice shall be dispatched through Registered post or speed post or through electronic mode to all the existing shareholders at lest three days before the opening of the issue. However, in case of private companies in case 90% of members have given their consent in writing or in electronic mode, the lesser period than the specified period shall apply.
• Check the copy of form SH7, MGT14 filed with ROC.
• The shares declined by the existing shareholder can be disposed off by the company in manner which is not disadvantageous to the shareholders and the company.
• Once the allotment is made, the company shall within 30 days of allotment, file with the Registrar are turn of allotment in Form PAS.3, along with the fee as specified in Companies (Registration of Offices and Fees) Rules, 2014.
• Deliver the share certificates of allotted shares within a period of 2 months from the date of allotment.
• Intimate the details of allotment of shares to the Depository immediately on allotment of such shares

Types Of Securities In Company Law

Question 6. Describe the Procedure to issue and redemption of Preference Shares.

Answer:

Procedure to issue and redemption of Preference Shares

• For issue of preference shares the articles of the company should authorize for it, if not then amendment in the articles of the company is required. Also ensure that there is no subsisting defaults in redemption of preference shares earlier or in payment of dividend due on any preference shares.
• Ensure that the resolution for issuing preference shares contains all the relevant particulars as mentioned above
• Issue the notice of general meeting along with the explanatory statement, to provide the required details.
• In the case of listed entity, intimate the stock exchange at least two working days in advance of the date of board meeting (Refer Regulation 29 of Listing Regulations)
• Pass special resolution and file with the registrar Form MGT-14 along with the fee so specified in the Companies (Registration of Offices and Fees) Rules, 2014 within 30 days of passing the resolution
  Note: in case of One Person Company for the purpose of passing of ordinary and special resolution in general meeting, any business which is required to be transacted at an annual general meeting or other general meeting of accompany by means of an ordinary or special resolution, it shall be sufficient if the resolution is communicated by the member to the company and entered in the minutes book and signed and dated by the member and such date shall be deemed to be the date of meeting for all purpose under this act.
• Within 30 days of allotment file with the registrar the Return of allotment in Form PAS-3 along with fee as specified in companies (Registration of Offices and Fees), Rules 2014
• Update the register of members maintained under Section 88 after issue of preference shares
• The company may redeem the preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders
• The preference shares may be redeemed as given below:
  • At affixed time or happening of a particular event
  • Any time at the company’s option
  • Any time at the shareholders option
• The notice of redemption of preference shares shall be filed by the company with the Registrar in Form SH-7 along with altered MOA with the fee as specified in Companies (Registration of Offices and Fees), Rules, 2014 within 30 days of redemption of preference shares.
• Once the allotment is made, the company shall within 30 days of allotment, file with the Registrar are turn of allotment in Form PAS.3, along with the fee as specified in Companies (Registration of Offices and Fees) Rules, 2014.
• Deliver the share certificates of allotted shares within a period of 2 months from the date of allotment.
• Intimate the details of allotment of shares to the Depository immediately on allotment of such shares.