Company Law

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  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:

 

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.

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.

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.

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

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.

Share Capital, Issue And Allotment Of Securities

Share capital in Companies Act, 2013

Share capital of a company can be classified as:

• nominal, authorized or registered capital;
• issued and subscribed capital;
• called up and uncalled capital.

Nominal, Authorised or Registered Capital in Companies Act, 2013

Such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.

Issued Capital in Companies Act, 2013

Such capital as the company issues from time to time for subscription. It is that part of the authorised or nominal capital which the company issues for the time being for public subscription and allotment. This is computed at the face or nominal value.

Subscribed Capital in Companies Act, 2013

Such part of the capital which is for the time being subscribed by the members of a company. It is that portion of the issued capital at face value which has been subscribed for or taken up by the subscribers of shares in the company. It is clear that the entire issued capital may or may not be subscribed.

Called-up Capital in Companies Act, 2013

Such part of the capital, which has been called for payment. It is that portion of the subscribed capital which has been called up or demanded on the shares by the company.

Paid-up Share Capital in Companies Act, 2013

Such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called.

Equity and Preference Share Capital (Discussed later) in Companies Act, 2013

“Equity Share Capital”, with reference to any company limited by shares, means all share capital which is not preference share capital; “preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to-

• payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
• repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;

Share in Companies Act, 2013

A share is defined as a share in the share capital of a company, including stock except where a distinction between stock and shares is expressed or implied.

Two classes of shares in Companies Act, 2013

The Companies Act, 2013 permits a company limited by shares to issue two classes of shares, namely equity share capital and preference share capital.

Preference share in Companies Act, 2013

A preference share or preference share capital is that part of share capital which carries a preferential right with respect to both dividend and capital.

Types of preference shares in Companies Act, 2013

Preference shares may be of various types, namely participating and non-participating, cumulative and non-cumulative shares, redeemable and irredeemable preference shares.

Equity share capital in Companies Act, 2013

Equity share capital means all share capital which is not preference share capital.

Prospectus in Companies Act, 2013

Prospectus has been defined as any document described or issued as a prospectus and includes a red-herring prospectus referred to in Section 32 or shelf prospectus referred to in Section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

Shelf prospectus in Companies Act, 2013

Shelf prospectus means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus (Section 31).

Red-herring prospectus in Companies Act, 2013

What is Red Herrring Prospectus of Company ?

The expression ‘red herring prospectus’ means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

• A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.
• A company proposing to issue a red herring prospectus shall file it with the Registrar at least 3 days prior to the opening of the subscription list and the offer.
• Upon the closing of the offer of securities, the prospectus shall be filed with the Registrar and SEBI.
• Any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
• The prospectus shall state-
  • the total capital raised, whether by way of debt or share capital;
  • the closing price of the securities; and
  • any other details as were not included in the red herring prospectus.

A red herring prospectus shall carry the same obligations as are applicable to a prospectus.

What is Abridged prospectus in Companies Act, 2013 ?

• ‘Abridged prospectus’ means a memorandum containing such salient features of a prospectus as may be specified by SEBI by making regulations in this behalf [Section 2(1)].
• No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus.
• A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.
  • Where an application form is issued in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities.
  • Where an application form is issued in relation to securities which are not offered to the public.

The company shall be liable to a penalty of 50,00,000 for each default.

Offer for Sale in Companies Act, 2013

Public Offer includes or an offer for sale (OFS) of securities to the public by an existing shareholder, through issue of a prospectus.

• Under Section 25 of the Act where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company. In simple terms any document by which the offer or sale of shares or debentures to public is made shall for all purposes be treated as prospectus.
• The document “Offer for sale” is an invitation to the general public to purchase the shares of a company through an intermediary, such as an issuing house or a merchant bank.
• A company may allot or agree to allot any shares or debentures to an “Issue house” without there being any intention on the part of the company to make shares or debentures available directly to the public through issue of prospectus.
• The issue house in turn makes an “Offer for sale” to the public.

Private placement in Companies Act, 2013

“Private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in Section 42.

• Offer Letter to be in Form No. PAS-4.
• The offer shall not be made to more than 200 persons excluding QIBS and the employees of the company in a financial year under the scheme of ESOS only the person addressed in the application can apply.
• All monies payable on subscription shall not be paid by cash, but by DD or Cheque.
• If unable to allot within 60 days then repay the money in 15 days from the end of those 60 days and money shall be refunded with interest @12%p.a.
• Offer only to be made to those whose names are recorded by the company.
• The record shall be kept in Form No. PAS-5.
• A copy of record to be filed with registrar along with PAS-4 and with SEBI and the stock exchange within 30 days.

Amendment made by Companies (Amendment) Act, 2017

The Private Placement process is simplified by doing away with separate offer letter details to be kept by company and reducing number of filings to Registrar. In order to ensure that investor gets adequate information about the company which is making private placement, the disclosures made under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, embodied in the Private Placement Application Form.

There would be ease in the private placement offer related documentation to enable quick access to funds.

Change in definition of private placement is proposed to cover all securities offer and invitations other than right.

There is condensed format of private placement offer letter and application form likely to be introduced

The Companies would be allowed to make offer of multiple security instruments simultaneously.

Restriction on utilization of subscription money before making actual allotment and additionally before filing the allotment return to the registrar. Since contract is concluding on allotment and return filing is just a post conclusion compliance, there may be difficulty in compliance.

The penalty provisions for raising of capital are pro-posed to be rationalized by linking it to the amount involved in the issue (twice the amount involved or 2 crores whichever is lower).

Period for filing return of return of allotment is pro-posed to be reduced to 15 days.

Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018

• For the purposes of sub-section (2) and sub-section (3) of Section 42, a company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations: Provided that in the explanatory statement annexed to the notice for shareholders’ approval, the following disclosure shall be made:-
  • particulars of the offer including date of passing of Board resolution;
  • kinds of securities offered and the price at which security is being offered;
  • basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
  • name and address of valuer who performed valuation;
  • amount which the company intends to raise by way of such securities;
  • material terms of raising such securities, proposed time schedule, purposes or objects of offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects; principle terms of assets charged as securities:
• Provided further that this sub-rule shall not apply in case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in clause (c) of sub-section (1) of Section 180 and in such cases relevant Board resolution under clause (c) of sub-section (3) of Section 179 would be adequate:
• Provided also that in case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of Section 180, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitations for such debentures during the year.
• For the purpose of sub-section (2) of Section 42, an offer or invitation to subscribe securities under private placement shall not be made to persons more than two hundred in the aggregate in a financial year: Provided that any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of Section 62 shall not be considered while calculating the limit of two hundred persons. Explanation.- For the purposes of this sub-rule, it is hereby clarified that the restrictions aforesaid would be reckoned individually for each kind of security that is equity share, preference share or debenture.
• A private placement offer cum application letter shall be in the form of an application in Form PAS-4 serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the name of such person pursuant to sub-section (3) of Section 42: Provided that no person other than the person so addressed in the private placement offer.cum application letter shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.
• The company shall maintain a complete record of private placement offers in Form PAS-5.
• The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank account from where such payment for subscription has been received: Provided that monies payable on subscription to securities to be hold by joint holders shall be paid from the bank account of the person whose name appears first in the application: Provided further that the provisions of this sub-rule shall not apply in case of issue of shares for consideration other than cash.
• A return of allotment of securities under section 42 shall be filed with the Registrar within fifteen days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all the allottees containing- (i) the full name, address, Permanent Account Number and E-mail ID of such security holder; (ii) the class of security held; (iii) the date of allotment of security; (iv) the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.
• The provisions of sub-rule (2) shall not be applicable to (a) non-banking financial companies which are registered with the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934); and (b) housing finance companies which are registered with the National Housing Bank under the National Housing Bank Act, 1987 (53 of 1987), if they are complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on private placement basis: Provided that such companies shall comply with sub-rule (2) in case the Reserve Bank of India or the National Housing Bank have not specified similar regulations.
• A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry: Provided that private companies shall file with the Registry copy of the Board resolution or special resolution with respect to approval under clause (c) of sub-section (3) of Section 179.

Issue of shares at premium [Section 52]

• Share premium to be transferred to share premium account.
• Utilisation of share premium account should be as prescribed in Section 52.

Issue of shares at discount [Section 53]

• Issue of shares at discount is prohibited except by issue of sweat equity shares.
  Any share issued by the company at a discount shall be void.

Amendment made by Companies (Amendment) Act, 2017 in sub-section (2), for the words “discounted price”, the word “discount” shall be substituted;

“Allotment” of securities in Companies Act, 2013

“Allotment” of securities means the act of appropriation by the Board of Directors of the company out of the previously un-appropriated capital of a company of a certain number of securities to persons who have made applications for securities.

Share certificate in Companies Act, 2013

A share certificate is a certificate issued to the members by the company under its common seal specifying the number of shares held by him and the amount paid on each share.

• Pass board resolution.
• Certificate shall be issued in Form No. SH-1 and shall specify the name of person in whose favour the certificate is issued.
• Common Seal (if any).
• A certificate issued by the company is prima facie evidence of the title of the member to the shares specified therein.
• Every share certificate shall be issued under the common seal, (if any) of the company or in case company does not have a common seal, certificate be duly issued under signature of two directors or one director and a company secretary if company has appointed a company secretary.

Return of allotment in Companies Act, 2013

After allotment of securities, a return of allotment in the Form PAS-3 is required to be filed with Registrar of Companies within 30 days of allotment of securities.

Call

A call is a demand by the company upon its shareholders to pay the whole or part of the balance still due on each class of shares allotted, made at any time during the life of the company.

• Board of Directors to make call(s) on shares.
• Call(s) to be made bonafide in the interest of the company.
• Call(s) must be made on uniform basis.
• Notice of call(s).
• Time limitations for receiving the call money.

Split certificate

A split certificate means a separate certificate claimed by a shareholder for a portion of his holding.

List Of Important Forms

Allotment Of Shares Short Notes

Question 1. Write a note on the following:

Red-herring prospectus.

Answer:

Allotment Of Shares Under Companies Act, 2013 Distinguish Between

Question 1. Distinguish between the following:

‘Capital reserve’ and ‘reserve capital’.

Answer:

Question 2. Distinguish between the following:

‘Letter of allotment’ and ‘letter of renunciation’.

 ‘Brokerage’ and ‘underwriting commission’.

‘Reserve capital’ and ‘capital reserve’.

Answer:

Letter Of Allotment

Letter of Reunciation

Brokage and underwriting commission:

Question 3. Distinguish between the following:

‘Preference shares’ and ‘equity shares’.

‘Red-herring prospectus’ and ‘abridged prospectus’.

Answer:

Following are the main points of distinction between Red-herring Prospectus & Abridged Prospectus:

Allotment Of Shares Descriptive Questions

Question 1. Explain the manner in which calls on shares should be made by a company.

Answer:

Question 2. Explain the following:

Securities premium shall be utilised for certain specific purposes only.

Answer:

Question 3. Comment on the following:

Public companies can issue ‘shelf prospectus’.

Answer.

Question 4. Answer the following citing the relevant provisions of law/case law, if any:

A company has issued a prospectus to the public stating that the company has paid dividend regularly and the prospectus is silent relating to the sources of profits, i.e., whether trading profits or capital profits. The fact is that the company has incurred losses for all the last 5 years, but the dividend is paid out of realised capital profits (i.e., secret reserves). Y, a shareholder, claimed that the prospectus is false. Whether Y’s contention is correct? Discuss.

Answer:

Question 5. Shortcut Ltd. has allotted shares to investors of the company without filing prospectus with the Registrar of Companies, Mumbai. Explain the remedies available to the investors in this regard.

Answer:

Question 6. Comment on the following:

A public limited company incorporated under the Companies Act, 2013 may amend its articles of association so as to confer upon it power to forfeit the shares of those members who have defaulted in the payment of calls made by the company.

Answer:

Question 7. “If a company does not receive minimum subscription, it should refund money received from applicants within such time as may be prescribed”. Explain the above statement with suitable comments.

Answer:

According to Section 39 of the Companies Act, 2013 allotment of any securities of a company offered to the public for subscription shall be made only when the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other

The amount payable on application on every security shall not be less than five per cent of the nominal amount of the security or such other percentage or amount, as may be specified by the Securities and Exchange Board of India (SEBI) by making regulations in this behalf.

Refund of money:

In cases where the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by SEBI, the amount received as above shall be returned.

The application money shall be repaid within a period of fifteen days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of fifteen percent per annum. The application money to be refunded shall be credited only to the bank account from which the subscription was remitted.

Question 8. State the time limit within which certificate of securities as provided in Companies Act, 2013 to be issued in case of :

Any allotment of shares.

Any allotment of debentures.

What is the punishment in case of default committed in the above cases?

Answer:

Under Section 56(4) of the Companies Act, 2013, every company, unless prohibited by any provision of law or any order of any Court Tribunal or other authority must deliver the certificates of all securities allotted, transferred or transmitted.

• Within a period of two months from the date of incorporation, in the case of subscribers to the Memorandum and within a period of two months from the date of allotment in the case of any allotment of any of its shares;.
• Within a period of six months from the date of allotment in the case of any allotment of debenture

However, as per the proviso to sub Section 4 of Section 56. where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.

Where any default is made in complying with the above provisions, Section 56(6) states the company shall be punishable with fine which shall not be less than 25,000 but which may extend to ₹ 5 Lakh and every officer of the company who is in default shall be punishable with fine which shall not be less than 10,000 but which may extend to * 1,00,000.

Amendment made by Companies (Amendment) Act, 2020

“(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company, and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

Question 9. Comment on the following:

Certain members of a company are allowed to offer for sale their shareholding in the company to the public, such offer document is deemed to be a prospectus issued by the company.

Answer:

• As per Section 28 of the Companies Act, 2013 permits certain members of a company, in consultation with Board of directors, to offer the whole or a part of their holdings of shares to the public. The document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company.
• Since public offer is not same as offer for sale. However many provisions relating to issue of prospectus does apply to such an offer, yet many provisions including requirement of minimum subscription does not apply to the same.
• All laws and rules made under this agreement as to the contents of the prospectus and as to liability in respect of misstatements in and omission from prospectus or otherwise relating to prospectus shall apply as if this offer document is a prospectus issued by the company.
• The section states that the members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the public, shall collectively authorize the company, whose share were offered for sale to the public, to take all actions in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by it on this matter.
• Rule 8 of The Companies (Prospectus and Allotment of Securities) Rules, 2014 in this context state that the provisions of “Prospectus and Allotment of Securities” and rules made there under shall be applicable to an offer of sale referred to in Section 28 of Companies Act, 2013 except for the following, namely:-
  • the provisions relating to minimum subscription;
  • the provisions for minimum application value;
  • the provisions requiring any statement to be made by the Board of directors in respect of the utilization of money; and
  • any other provision or information which cannot be compiled or gathered by the offer or, with detailed justifications for not being able to comply with such provisions.
• Another rules provide that such offer document or prospectus issued under the section shall disclose the name of the entity bearing the cost of making the offer for sale along with reasons.

Comment on the following:

Amount lying in the securities premium account belongs to the shareholders and can be used freely for their benefit.

Answer:

According to Section 52(2) of the Companies Act, 2013, the securities premium can be utilised only:

• towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
• in writing off the preliminary expenses of the company;
• in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
• in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
• for the purchase of its own shares or other securities under Section 68 of the Companies Act, 2013.

Hence, the amount available in the securities premium is restrictive in nature and can only be used for specified purposes.

Question 10. Santosh, CEO of the company, has advised the Board of directors of an unlisted company that in order to market the public issue and generate interest and awareness amongst the public a prospectus can be issued without giving details of number of shares and the issue price. Examine the correctness of the advice in light of the provisions of the Companies Act, 2013.

Answer:

Section 32 of the Companies Act, 2013, Red herring Prospectus means “a prospectus which does not include complete particulars of the quantum or price of the securities included therein.” In other words, a Red herring Prospectus is a prospectus, which does not include details of either price or number of securities being offered, or the amount of issue.

As per section 32(1) of the Companies Act, 2013, a company proposing to make an offer of securities may issue a Red herring Prospectus prior to the issue of a prospectus. Such company proposing to issue a Red herring Prospectus shall file it with the Registrar of Companies at least 3 days prior to the opening of the subscription list and the offer. Hence, the advice given by CEO Santosh is correct. Space to write important points for revision

Question 11. Provide a specimen of board resolution for preparation of annual report in abridged form for mailing to the members. Assume facts and figures for the purposes of mentioning in the resolution.

Answer:

The Board Resolution for preparation of Annual Report in abridged form “RESOLVED THAT pursuant to the provisions of second proviso of Section

136(1) of the Companies Act, 2013 and Rule 10 of the Companies (Accounts) Rules 2014, the Annual Report comprising of the Balance Sheet, Profit and Loss Account and other relevant documents to be attached to the financial statements in abridged form for the financial year ended 31st March… also, to be prepared, finalised and audited in the prescribed Form No. AOC-3 for sending to the members of the company.”

“RESOLVED FURTHER THAT the draft audited financial statement containing salient features of financial statements for the year ended 31st March, prepared in the prescribed Form No. AOC-3 as submitted to the meeting, be and are hereby approved and the same be authenticated by the directors of the company as required under Section 136 of the Companies Act, 2013 and be sent to the statutory auditors of the company for their report thereon and thereafter be sent to the members of the company for adoption at the ensuing annual general meeting of the company.”

Allotment Of Shares Practical Questions

Question 1. Answer the following citing the relevant provisions of law/case law, if any:

A deceitful prospectus was issued by the directors on behalf of the company. Pavan received a copy of it, but did not take any shares in the company. The allotment of shares to applicants was completed. Several months later, Pavan bought 2,000 shares of that company from the stock market. He proceeded with a suit against the directors for issuing deceitful prospectus. Will he succeed?

Answer:

Question 2. On receipt of 85% of the minimum subscription stated in the prospectus, Little Stars Ltd. allotted 200 shares to Ranjit and the money was deposited in a scheduled bank. Later on, it was revealed that 40% of the amount withdrawn was for acquisition of fixed assets for the company. Ranjit, knowing these facts, refused to accept the allotment contending that the allotment was irregular under the provisions of the Companies Act, 2013. As an expert on company law advise Ranjit.

Answer:

Question 3. KBC Ltd. filed Form PAS-3 with the Registrar of Companies (ROC). Mumbai as required under the Companies Act, 2013 with late fees as it was not filed within the due date. The ROC on examining the e-form, found it necessary to call for further information. He gave a notice to the company directing it to furnish the required information within the prescribed time. The company furnished only a part of the required information. Discuss the consequences of the action in such circumstances under the provisions of the Companies Act, 2013. 

Answer:

Rule 10(2) of the Companies (the Registration offices and Fees) Rules, 2014 provides that, where the Registrar on examining any application or e-form or document finds it necessary to call for further information or finds such application or e-form or document to be defective or incomplete in any respect, he shall give intimation of such information called for or defect or incompleteness, by e-mail on the last intimated e-mail address of the person or the company, which has filed such application or e-form or document, directing him or it to furnish such information or to rectify such defects or incompleteness or to re-submit such application or e-Form or document within the prescribed time.

Rule 10(4) of the Companies (the Registration offices and Fees) Rules, 2014 provides that, in case where such further information called for has not been provided or has been furnished partially or defects or incompleteness has not been rectified or has been rectified partially or has not been rectified as required within the stipulated period, the Registrar shall either reject or treat the application or e-form or document, as the case may be, as invalid in the electronic record, and shall inform the person or the company.

Accordingly, where any document is recorded as invalid by the Registrar, the document may be rectified by the person or company by only fresh filing along with payment of fee and additional fee, as applicable at the time of fresh filing, without prejudice to any other liability under the Companies Act.

 Members And Shareholders

Modes of acquiring membership

Section 2(55) of the Companies Act, 2013 provides the modes by which a person may acquire membership of a Company.

• by subscribing to the Memorandum,
• by agreeing in writing to become a member,
• by holding equity share capital of a Company as beneficial owner in the records of the depository.

Joint Members in Companies Act 2013

If more than one person apply for shares in a company and shares are allotted to them, each one of such applicant becomes a member. Unless the Articles of the company otherwise provide, joint members can insist on having their names registered in any order they may require.

They may also have their holding split into several joint holdings with their names in different orders so that all of them may have a right to vote as first named holding in one or the other joint holdings.

Cessation of membership in Companies Act 2013

A person ceases to be a member of a company when his name is removed from its register of members, which may occur in any of the following situations:

• He transfers his shares to another person;
• His shares are forfeited;
• His shares are sold by the company to enforce a lien;
• He dies; (his estate, however, remains liable for calls);
• He is adjudged insolvent and the Official Assignee disclaims his shares;
• His redeemable preference shares are redeemed;
• The company is wound up:

Inspection of Registers in Companies Act 2013

According to Section 94(2) read with Rule 14 of Companies (Management and Administration) Rules, 2014 the registers and their indices, except when they are closed under the provisions of this Act, and the copies of all the returns shall be open for inspection by any member, debenture-holder, other security holder or beneficial owner, during business hours without payment of any fees and by any other person on payment of such fees as may be specified in the articles of association of the company but not exceeding 50 for each inspection.

Foreign Register in Companies Act 2013

Section 88(4) of the Companies Act, 2013 empowers companies to keep foreign registers of members or debenture-holders, other security holders or beneficial owners residing outside India. It states:

“A company may, if so authorised by its articles, keep in any country outside India, in such manner as may be prescribed, a part of the register referred to in sub-section (1), called “foreign register” containing the names and particulars of the members, debentureholders, other security holders or beneficial owners residing outside India.”

Closing of register of members in Companies Act 2013

A company may close the register of members or the register of debentureholders or the register of other se curity holders for any period or periods not exceeding in the aggregate forty-five days in each year, but not exceeding thirty days at any one time, subject to giving of previous notice of at least 7 days or such lesser period as may be specified by Securities and Exchange Board for listed companies.

Significant Beneficial Owner in Companies Act 2013

Section 90 of the Act provides that every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of Section 2, over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed.

Collective Membership Rights in Companies Act 2013

Members of a company have certain rights which can be exercised by members collectively by means of democratic process, i.e. by majority of members usually unless otherwise prescribed.

• This involves the principle of submission by all members to the will of the majority, provided that the will is exercised in accordance with the law and the Memorandum and Articles of Association of the company.
• Thus, the shareholders in majority determine the policy of the company and exercise control over the management of the company.

Dissenting members in Companies Act 2013

Rights attached to the shares of any class can be varied with the consent in writing of the holders of not less than three-fourths 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 the class.

Variation of Share-holder’s Rights in Companies Act 2013

Section 48 (1) of the Companies Act, 2013 lays down that where a share capital of the company is divided into different classes of shares, the rights attached to the shares of any class can be varied with the consent in writing of the holders of not less than three-fourths 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. Further, the variation of rights of shareholders can be effected only:

• if provision with respect to such variation is contained in the Memorandum or Articles of association of the company; or
• in the absence of any such provision in a Memorandum or Articles of association of the company, if such a variation is not prohibited by the terms of issue of the shares of that class.

Shareholders’ Democracy in Companies Act 2013

The concept of shareholders’ democracy in the present day corporate world denotes the shareholders’ supremacy in the governance of the business and affairs of corporate sector either directly or through their elected representatives.

• Under the Companies Act the powers have been divided between two segments: one is the Board of Directors and the other is of shareholders.
• The directors exercise their powers through meetings of Board of directors and shareholders exercise their powers through General Meetings.
• Although constitutionally all the acts relating to the company can be performed in General Meetings but most of the powers in regard thereto are delegated to the Board of directors by virtue of the constitutional documents of the company viz. the Memorandum of Association and Articles of Association.

Shareholder’s Agreement in Companies Act 2013

Shareholders’ agreements (SHA) are quite common in business. In India shareholder’s agreement have gained popularity and currency only lately with bloom in newer forms of businesses. There are numerous situations where such agreements are entered into family companies, JV companies, venture capital investments, private equity investments, strategic alliances, and so on.

Shareholders’ agreement is a contractual arrangement between the shareholders of a company describing how the company should be operated and the defining inter-se shareholders’ rights and obligations. shareholders’ agreement. SHAS are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party. Such agreements are specifically drafted to provide specific rights, impose definite restrictions over and above those provided by the Companies Act.

Veto Power or Rights in Companies Act 2013

• A right is inherent. Shareholders rights refer to rights enshrined in the constitutional document of the company or as provided by the law. A power has its genesis under the provisions of law.
• As per the provisions of the Companies Act, 2013 there are some resemblance where the management can take decisions on their own, by virtue of law.
• However, there are some instances where the consent of the shareholders is mandatory to approve any decision or transaction which is said to be as the veto power or veto right of shareholders of the company.
• For instance in case of related-party transactions, promoters, who are majority shareholders, cannot vote in special resolutions in cases of related-party transactions.

Veto Power and Casting Vote in Companies Act 2013

Veto power is different than casting vote of Chairman. Casting vote is applicable on in case of equality of votes in favour and against.

• In case of equality the Chairman may give vote either in favour or against the resolution and it can be carried accordingly.
• Veto power has not been defined in Companies Act.
• However, dictionary meaning of veto power is: “to refuse to admit or approve; specifically: to refuse assent to (a legislative bill) so as to prevent enactment or cause reconsideration.”

Assignment of Shares in a Company in Companies Act 2013

Section 44 of the Companies Act, 2013 defines the nature of property in the shares of a company. It lays down: “The shares or debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.”

Companies Act 2013 Short Notes

Question 1. Write a note on the following:

Rights of dissentient shareholders.

Answer:

Companies Act 2013 Descriptive Questions

Question 1. Comment on the following:

A Limited Liability Partnership can become member in a company incorporated under the provisions of the Companies Act, 2013.

Answer:

• Subject to the Memorandum and Articles, any sui juris (a person who is competent to contract on its own behalf) except the company itself, can become a member of a company.
• Yes, Limited Liability Partnership, being an incorporated body and separate legal entity, under the statute, can become a member of a company.

Question 2. A member of an incorporated company becomes insolvent. He claimed right to vote and receive dividend from the company. Referring to the provisions of the Companies Act, 2013 discuss whether his claim is valid. 

Answer:

• An insolvent may be a member of a company as long as he is on the register of members. He is entitled to vote, but he loses all beneficial interest in the shares and company will pay dividend on his shares to the Official Assignee or Receiver [Morgan v. Gray, (1953)].
• Hence, his claim is invalid and his dividend shall be paid to official assignee.

Question 3. Every shareholder of a company is known as member while every member may not be known as shareholder.

Answer:

• A company is composed of, members though it has its own separate legal entity. The members of the company are the persons who constitute the company as a corporate entity.
• In the case of a company limited by shares, the shareholders are the members.
• The terms “members” and “shareholders” are usually used interchangeably being synonymous, as there can be no membership except through the medium of shareholding.
• Thus, generally speaking every shareholder is a member and every member is a shareholder.
• However, there may be exceptions to this statement, e.g., a person may be a holder of share(s) by transfer but will not become its member until the transfer is registered in the books of the company in his favor and his name is entered in the register of members.
• Similarly, a member who has transferred his shares, though he does not hold any shares yet he continues to be member of the company until the transfer is registered and his name is removed from the register of members maintained by the company under Section 88 of the Companies Act, 2013.
• A member is a person who has subscribed to the memorandum of association of the company.
• A shareholder is a person who owns the shares of the company.
• The bearer of a share warrant is not a member, but the bearer of a share warrant can be a shareholder.

Question 4. Draft “A specimen of deed of Assignment of shares of a company”.

Answer:

Specimen of Deed of Assignment of Shares of Company:

And the assignee hereby agrees to take the said Equity Shares subject to such conditions.

In Witness Whereof the assignor and the assignee do hereto affix their respective signatures on the day, month and the year stated above. Witness: Assignor :

Question 5. A public limited company has only seven shareholders. Being all the shares paid in full, one such shareholder purchased all the shares of another shareholder in a private settlement between them reducing the no. of shareholders to six. The company continues to carry on its business thereafter. Discuss with reference to the Companies Act, 2013 the implications of this transaction on the functioning of the company

Answer:

• Section 3A of the Companies Act, 2013 provides that if at any time the number of members of a company is reduced, in the case of a public company, below seven or in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued there for.
• In view of the above provision, if the company continued to carry on the business with that reduced membership (i.e. 6) beyond six months period, only those members who are cognisant of the fact that it is carrying on business with less than seven members shall be severally liable for the payment of the whole of debts of the company contracted during that time, and may be severally sued therefor.

Question 6. Who is a ‘Significant Beneficial Owner’ under the Companies Act, 2013? Is Significant Beneficial Owner required to file BEN-1 to the reporting company?

Answer:

Pursuant to Section 90 of the Companies Act, 2013 every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India holds beneficial interests, of not less than 25% or such other percentage as may be specified, in shares of a company or the right to exercise or the actual exercise of significant influence or control as per as Section 2(27) over the reporting company is a significant beneficial owner.

• Such an individual being the Significant beneficial Owner holding such beneficial interest is required to make a declaration to the reporting company specifying the nature of his interest and other particulars as required.
• From commencement of the Companies (SBO) Amendment Rules, 2019, every SBO in a reporting company, is required to give the requisite declaration of his beneficial ownership in Form No. BEN-1 to the reporting company within 90 days from such commencement.

Examine with reference to the provisions of the Companies Act, 2013 whether any of the following persons can become member of the company engaged in the business of producing steel products?

• Pawnee
• Partnership firm
• Unregistered trade union.

Companies Act 2013 Practical Questions

Question 1. 1,000 Shares of Astro Ltd. are registered in the names of three persons P, Q and R jointly. Interestingly, the articles of the company provide that the survivors shall be the only person to be recognised by the company as having any title to the shares of the company. Unfortunately, P and Q died in an air crash. In these circumstances, R, being the survivor claims to be the full owner of the said 1,000 shares. However, the legal heirs of P and Q are also making counter claims. Who will succeed? Explain.

A, B and C are joint holders of shares in Clearhead Ltd. The joint holders now ask the company for altering or rearranging the serial order of their names in the register of members of the company. In reply, the company intends to ask the joint holders to execute a transfer deed for transposition of names in the register of members. Advise the company on the course of action.

Answer:

Question 2. ABC & Co., a partnership firm applied for shares in XYZ Ltd. The company allotted the shares required by the partnership firm. In the given context, what is the liability of the partners and the partnership firm?

Answer:

Question 3. A2Z Management Services Limited is a listed company quoted at Bombay Stock Exchange Limited. The company closed its register of debenture holders in June and August 2016 for 12 and 21 days respectively. The Chief Financial Officer (CFO) of the company has informed the Secretary of the company to consider closing the register in December for another 15 days for some strategic reasons. Referring to the provisions of the Companies Act, 2013, examine the validity of the above action of the company.

Answer:

Question 4. Ram Singh is a shareholder of Alexandra India Ltd. The Board of directors of the company are of the view that the conduct of Ram Singh has been detrimental to the interest of the company. Further, the Board also noted that Ram Singh is director in a company which is a competitor company of Alexandra India Ltd. The Articles of Association of Alexandra India Ltd. permit expulsion of members. The Board unanimously decided to expel Ram Singh from the company. Discuss the relevant provisions of Companies Act, 2013 in this regard. If Ram Singh files a case against the Board whether he will win the case?

Answer:

• A controversy has arisen as to whether a public limited company had powers to insert an article in its Articles of Association relating to expulsion of a member by the Board of Directors of the company where the directors were of the view that the activities or conduct of such a member was detrimental to the interests of the company.
• The Department of Company Affairs (now, Ministry of Corporate Affairs) clarified that an article for expulsion of a member is opposed to the fundamental principles of the Company Jurisprudence and is ultra vires the company, the reason being that such a provision will be against the provisions of the Companies Act relating to the rights of a member in a company, the powers of the Central Government as an appellate authority under Section 111 of the Act and the powers of the Court under Sections 107, 395 and 397 of the Companies Act, 1956.
• These sections correspond to Sections 38, 58, 48, 235 and 241 of the Companies Act, 2013 respectively having the same impact as earlier provisions.
• Further, according to Section 6 of the Companies Act, 2013, the Act shall override the Memorandum and Articles of Association and any provisions contained in these documents repugnant to the provisions of the Companies Act, 2013 shall be void.
• Hence, any assumption of the powers by the Board of Directors to expel a member by alteration of Articles of Association shall be illegal and void.
• The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Com Cases 1 has laid down the law as to the conditions on the basis of which directors could refuse a person to be admitted as a member of the company. The principles laid down by the Supreme Court in this case, even though pertain to the refusal by a company to the admission of a person as a member of the company, are applicable even with greater force to a case of expulsion of an existing member.
• As, under Article 141 of the Constitution, the law declared by the Supreme Court is binding on all courts within the territory of India, any provision pertaining to the expulsion of a member by the management of a company which is against the law as laid down by the Supreme Court will be illegal and ultra vires. In the light of the aforesaid position, it is clarified that assumption by the Board of directors of a company of any power to expel a member by amending its articles of association is illegal and void.
• If Ram Singh a files a suit against the company or the directors he will certainly win the case, as expulsion of a member is illegal and void as per the Companies Act 2013.

Question 5. Sumeet, Puneet and Manmeet were subscribers to the Memorandum of Association of a private company for 500 shares, 300 shares and 200 shares respectively. After incorporation, Sumeet and Puneet bought the shares, they had subscribed for, from the company whereas Manmeet bought 200 shares from Sumeet. Will Manmeet be liable to the company for the shares, he has not bought from the company?

Answer:

In the case of a subscriber, no application or allotment is obligatory to become a member. Since, by virtue of his subscribing to the memorandum, he is deemed to have agreed to become a member and he becomes ipso facto member on the incorporation of the company and is liable for the shares he has subscribed.

As per Section 10(2) of the Companies Act, 2013, all monies payable by any member to the company under the Memorandum of Association or Articles of Association of the company shall be debt due from him to the company.

Further, a subscriber to the Memorandum must make payment for his shares, even if the promoters have promised him the shares for services rendered in connection with the promotion of the company.

When the Subscriber subscribes to the Memorandum, he gives an undertaking to the company that he will pay to the company for the shares he has subscribed.

Further, Subscribers has to take these shares directly from the company and not through transfer from other member(s).

In the above case, Manmeet is not absolved from his liability to the company by purchasing the shares from Sumeet. He has a statutory responsibility to buy the shares from the company by making payment to the company.

Question 6. X applied for 400 shares in XYZ Ltd. and paid $2.50 on the face value of 10 but no allotment was made to him. Subsequently 400 shares were allotted and issued to him without his request and his name was entered in the register of members.

X knew it but took no steps for rectification of the register of members. The company went into liquidation and X was held liable as a contributory. X claims that he is not liable as contributory. Whether his claim is tenable?

Answer:

Registers, etc. to be Evidence:

According to Section 95 of the Companies Act, 2013 states that the register, their indices and copies of annual returns maintained under section 88 and 94 shall be prima facie evidence of any matter directed or authorised to be inserted therein by or under this Act.

A register of members is prima facie evidence of the truth of its contents. Consequently, if a person’s name, to his knowledge, is there in the register of members of a company, he shall be deemed to be a member and onus lies on him to prove that he is not a member.

He must promptly appeal to the Tribunal for rectification of the register under section 59 of the Companies Act, 2013 to take his name off the register, failing which the doctrine of holding out will apply.

In Re. M.F.R.D. Cruz, A.I.R. 1939 Madras 803, the Court held “when a person knows that his name is included in the register of shareholders and he stands by and allow his name to remain, he is holding out to the public that he is a shareholder and thereby he loses his right to have his name removed”.

Local Ltd. is planning to issue its equity shares to persons residing outside India. In this context, Chairman of the company wants to know on the following matters:

• What are the provisions relating to maintaining the foreign register of members?
• Can company discontinue maintaining forsign register of members? If so, when?
• Give your inputs to the Chairman of Local Ltd.

Companies Act 2013 Short Notes

Question 1. Write short on Significant Beneficial Owner.

Answer:

• Section 90 of the Act provides that every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of Section 2, over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed.
• Further every company shall maintain a register of the interest declared by individuals stated above and changes therein which shall include the name of individual, his date of birth, address, details of ownership in the company and such other details as may be prescribed.
• The register so maintained shall be open to inspection by any member of the company on payment of such fees as may be prescribed.
• Every company shall file a return of significant beneficial owners of the company and changes therein with the Registrar containing names, addresses and other details as may be prescribed within such time, in such form and manner as may be prescribed. -Space to write important points for revision

Question 2. Write short on the following:

1. Shareholders’ Democracy
2. Shareholders’ Agreement

Answer:

• Shareholders’ Democracy
  • The concept of shareholders’ democracy in the present day corporate world denotes the shareholders’ supremacy in the governance of the business and affairs of corporate sector either directly or through their elected representatives.
  • Under the Companies Act the powers have been divided between two segments: one is the Board of Directors and the other is of shareholders.
  • The directors exercise their powers through meetings of Board of directors and shareholders exercise their powers through General Meetings.
  • Although constitutionally all the acts relating to the company can be performed in General Meetings but most of the powers in regard thereto are delegated to the Board of directors by virtue of the constitutional documents of the company viz. the Memorandum of Association and Articles of Association.
  • Proviso to this section restricts the power of the Board of directors to do things which are specifically required to be done by shareholders in the General Meetings under the provisions of Companies Act or Memorandum of Association or the Articles of Association.
  • Thus the Companies Act has tried to demarcate the area of control of directors as well as that of shareholders. Basically all the business to be transacted at the meetings of shareholders is by means of an ordinary resolution or a special resolution or by postal ballot.
• Shareholder’s Agreement
  • Shareholders’ agreements (SHA) are quite common in business. In India shareholder’s agreement have gained popularity and currency only lately with bloom in newer forms of businesses.
  • There are numerous situations where such agreements are entered into-family companies, JV companies, venture capital investments, private equity investments, strategic alliances, and so on.
  • Shareholders’ agreement is a contractual arrangement between the shareholders of a company describing how the company should be operated and the defining inter-se shareholders’ rights and obligations. shareholders’ agreement.
  • SHAS are the result of mutual understanding among the shareholders of a company to which, the company generally becomes a consenting party.
  • Such agreements are specifically drafted to provide specific rights, impose definite restrictions over and above those provided by the Companies Act,
• Enforceability of the Shareholder’s Agreement
  • Though the international view is split but to a large extent courts are inclined towards favouring SHA as long as they are not found to be detrimental to the minority stakeholder’s rights.
  • In the leading case of Russell v. Northern Bank Development Corporation Ltd [1992] BCC 578; [1992] 1 WLR 588, the House of Lords found that though a’company cannot deprive itself of its power to alter its constitution, the members of the company could agree in a shareholders’ agreement as to how they will exercise their voting rights on a resolution to alter the articles/constitution. The US Courts have largely accepted shareholder agreement.

Companies Act 2013 Distinguish Between

Question 3. Distinguish Between Veto Power and Costing Vote.

Answer:

• Veto power is different than casting vote of Chairman. Casting vote is applicable on in case of equality of votes in favour and against.
• In case of equality the Chairman may give vote either in favour or against the resolution and it can be carried accordingly.
• Veto power has not been defined in Companies Act. However, dictionary meaning of veto power is: “to refuse to admit or approve; specifically: to refuse assent to (a legislative bill) so as to prevent enactment or cause reconsideration.”
• Shareholders Agreement and Articles of Association of a company may provide for certain rights to the minority shareholder who has invested funds in the company.
• Such powers may include power to refuse capital expenditure over certain specified limit.
• In case the representative of the minority group is not in favour of the capital expenditure proposed by the company, he can exercise his right under the Articles which in common terminology is referred to as “veto powers”.

Companies Act 2013 Descriptive Questions

Question 4. What do you understand by Veto Power or Rights.

Answer:

• A right is inherent. Shareholders rights refer to rights enshrined in the constitutional document of the company or as provided by the law. A power has its genesis under the provisions of law.
• As per the provisions of the Companies Act, 2013 there are some resemblance where the management can take decisions own their own, by virtue of law.
• However, there are some instances where the consent of the shareholders is mandatory to approve any decision or transaction which is said to be as the veto power or veto right of shareholders of the company.
• For instance in case of related-party transactions, promoters, who are majority shareholders, cannot vote in special resolutions in cases of related-party transactions.
• As stated under the provisions of Section 188 any related-party transaction that is not done in the ordinary course of business and is not at an arm’s length will need approval of minority shareholders by way of a special resolution.
• The other instance where the law provides veto power to shareholders is in case of class action suits. Section 245 of Companies Act, 2013 provides for class action to be instituted against the company as well as the auditors of the company.
• Under the provisions of sub-section (3) of Section 245, in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares.