THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER IV

Share Capital & Debentures

Sections 43–72

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

Kinds of Shares • Transfer & Transmission • Reduction • Buy-back

— Enriched with landmark judgments and illustrative case law —

Chapter IV — Share Capital and Debentures (Sections 43–72)

Chapter IV is the longest and arguably the most technical of the first six chapters. It addresses the capital structure of the company — the kinds of shares it may issue, the rights carried by them, their issue, transfer and transmission, alteration of capital, buy-back, and the regulation of debentures as debt securities. Mastery of this Chapter is essential for both commercial practice and examinations.

Section 43: Kinds of Share Capital

The share capital of a company limited by shares shall be of two kinds —

1. Equity share capital — (a) with voting rights; or (b) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed.
2. Preference share capital — with a preferential right to (i) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, before dividend is paid to equity shareholders; and (ii) 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, before any payment to equity shareholders.

The provisions of this Section shall not apply to a private company, except so far as the share capital structure it chooses is consistent with its memorandum and articles — a flexibility deployed by closely-held companies via the Articles of Association.

Types of Preference Shares

Section 44: Nature of Shares or Debentures

The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

Section 45: Numbering of Shares

Every share in a company having a share capital shall be distinguished by its distinctive number. Provided that nothing in this section shall apply to a share held by a person whose name is entered as holder of beneficial interest in such share in the records of a depository. This is because dematerialised shares are held in a fungible pool.

Section 46: Certificate of Shares

A certificate, issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary, specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares.

Duplicate Share Certificates

A duplicate certificate of shares may be issued, if such certificate — (a) is proved to have been lost or destroyed; or (b) has been defaced, mutilated or torn and is surrendered to the company. If a company with intent to defraud issues a duplicate certificate of shares, the company shall be punishable with fine and every officer in default shall be liable under Section 447 (fraud).

Section 47: Voting Rights

Subject to the provisions of Sections 43, 50(2) and 188(1) —

• every member of a company limited by shares and holding equity share capital therein shall have a right to vote on every resolution placed before the company; his voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.
• every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital. His voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company.

Where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.

Section 48: Variation of Shareholders' Rights

Where a share capital of the company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class, or by means of a special resolution passed at a separate meeting of the holders of the issued shares of that class, provided that — (a) the provisions in relation to such variation are contained in the memorandum or articles of the company; or (b) in the absence of any such provision in the memorandum or articles, such variation is not prohibited by the terms of issue of the shares of that class.

Dissentient shareholders holding not less than 10% of the issued shares of that class may approach the Tribunal to have the variation cancelled.

Section 52: Application of Premiums Received on Issue of Shares

Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a 'securities premium account' and the provisions of this Act relating to the reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.

Permitted Uses of Securities Premium Account

1. Issuing fully paid bonus shares to members.
2. Writing off preliminary expenses of the company.
3. Writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures.
4. Providing for the premium payable on the redemption of redeemable preference shares or debentures.
5. Purchase of its own shares or other securities under Section 68 (buy-back).

Thus, securities premium is quasi-capital and cannot be distributed as dividend.

Section 53: Prohibition on Issue of Shares at Discount

Except as provided in Section 54 (sweat equity shares), a company shall not issue shares at a discount. Any share issued by a company at a discount shall be void.

The Companies (Amendment) Act, 2017 inserted a proviso enabling a company to issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India — a lifeline for distressed debt resolution under the IBC and RBI frameworks.

Where any company fails to comply, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

Section 54: Issue of Sweat Equity Shares

Notwithstanding anything contained in Section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely —

• the issue is authorised by a special resolution passed by the company;
• the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
• not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and
• such other conditions as may be prescribed.

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

Section 55: Issue and Redemption of Preference Shares

No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable. A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue, subject to such conditions as may be prescribed. Preference shares issued by a company engaged in the setting up and dealing with infrastructural projects may be redeemable within a period not exceeding thirty years.

Conditions for Redemption

• Shall be redeemed only out of profits of the company which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purposes of such redemption.
• Shall not be redeemed unless they are fully paid.
• Where redeemed otherwise than out of a fresh issue, a sum equal to the nominal amount of the shares to be redeemed shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve to be called the 'Capital Redemption Reserve Account'.

Section 56: Transfer and Transmission of Securities

A company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer, in such form as may be prescribed, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities.

Time Limits for Delivery of Certificates

• Within one month of allotment, in the case of any allotment of any of its shares.
• Within two months from the date of receipt by the company of the instrument of transfer or intimation of transmission.
• Within six months from the date of allotment in the case of any allotment of debentures.

Transfer vs Transmission

Section 58: Refusal of Registration and Appeal against Refusal

If a private company limited by shares refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a member in the company, it shall within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferor and the transferee or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.

Appeal lies to the Tribunal within thirty days of receipt of notice of refusal, or within sixty days of lodgment if no notice is received. For public companies, registration of transfer cannot be refused unless the transfer is in contravention of law; appeals to the Tribunal lie within the same time-frames.

Section 59: Rectification of Register of Members

If the name of any person is, without sufficient cause, entered in the register of members of a company, or after having been entered in the register, is, without sufficient cause, omitted therefrom, or if a default is made, or unnecessary delay takes place in entering in the register, the fact of any person having become or ceased to be a member, the person aggrieved, or any member of the company, or the company may appeal in such form as may be prescribed, to the Tribunal.

The Tribunal may either dismiss the appeal or direct that the transfer or transmission shall be registered by the company within a period of ten days of the receipt of the order, or direct rectification of the records of the depository or the register; and direct the company to pay damages, if any, sustained by any party aggrieved.

Section 61: Power of Limited Company to Alter its Share Capital

A limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to —

1. increase its authorised share capital by such amount as it thinks expedient;
2. consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares (provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal);
3. convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;
4. sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum;
5. cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

A cancellation of shares under (v) shall not be deemed to be a reduction of share capital. Any such alteration requires filing of notice with the Registrar in Form SH-7 within thirty days.

Section 62: Further Issue of Share Capital — Rights Issue

Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered —

1. to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions —

• the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
• unless the articles of the company otherwise provide, the offer shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person;

1. to employees under a scheme of employees' stock option, subject to a special resolution passed by the company and subject to such conditions as may be prescribed; or
2. to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (i) or (ii), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to such conditions as may be prescribed (this is the 'preferential allotment' route).

Rationale of Rights Issue

Section 62 enshrines the pre-emptive right of existing shareholders — when a company issues fresh shares, existing members should get the first right of refusal to maintain their proportionate stake. This prevents dilution without consent.

Section 63: Issue of Bonus Shares

A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of —

• its free reserves;
• the securities premium account; or
• the capital redemption reserve account.

Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.

Conditions [Section 63(2)]

• It is authorised by its articles.
• It has, on the recommendation of the Board, been authorised in the general meeting of the company.
• It has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.
• It has not defaulted in respect of the payment of statutory dues of the employees, such as contribution to provident fund, gratuity and bonus.
• The partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up.
• It complies with such conditions as may be prescribed.

Bonus shares shall not be issued in lieu of dividend. Once the Board recommends a bonus issue, that decision cannot subsequently be withdrawn.

Section 64: Notice of Alteration of Share Capital

Where a company alters its share capital in any of the manners specified in Section 61(1); an order made by the Government is received by the company under Section 66 confirming the reduction of share capital; the company redeems any redeemable preference shares; the company shall file a notice in the prescribed form with the Registrar within a period of thirty days of such alteration or increase or redemption, as the case may be, along with an altered memorandum.

Section 66: Reduction of Share Capital

Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce its share capital in any manner and in particular, may —

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

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

No reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.

Procedure

• Special resolution of the company.
• Petition to the Tribunal (NCLT).
• Notice to creditors, the Central Government, SEBI (for listed companies), and the RoC.
• Confirmation by the Tribunal with such terms and conditions as it thinks fit.
• Filing of Tribunal order with the RoC — only upon such registration, reduction takes effect.

Section 67: Restrictions on Purchase by Company or Giving of Loans by it for Purchase of its Shares

No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of this Act. No public company shall give, whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company.

This is a codification of the rule against financial assistance, designed to prevent the company from financing the purchase of its own shares, which would amount to an indirect reduction of capital.

Section 68: Power of Company to Purchase its Own Securities (Buy-back)

Notwithstanding anything contained in this Act, but subject to the provisions of Section 70, a company may purchase its own shares or other specified securities (buy-back) out of —

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

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

Conditions for Buy-back [Section 68(2)]

• The buy-back is authorised by its articles.
• A special resolution has been passed at a general meeting of the company authorising the buy-back (a Board resolution suffices up to 10% of paid-up equity capital and free reserves).
• The buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company; however, in respect of equity shares in any financial year, the buy-back cannot exceed 25% of its paid-up equity capital.
• The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves.
• All the shares or other specified securities for buy-back are fully paid-up.
• The buy-back of listed shares is in accordance with SEBI regulations; for unlisted, with the rules prescribed.
• The buy-back is completed within a period of one year from the date of passing of the resolution.
• Once buy-back is completed, a company shall not make a further issue of same kind of shares within a period of six months except by way of bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

Post Buy-back

Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back. The amount equal to the nominal value of the shares so purchased shall be transferred to the Capital Redemption Reserve Account. The company must also file with the RoC and SEBI a return containing such particulars relating to the buy-back within thirty days of such completion.

Section 70: Prohibition for Buy-back in Certain Circumstances

No company shall directly or indirectly purchase its own shares or other specified securities —

• through any subsidiary company including its own subsidiary companies;
• through any investment company or group of investment companies; or
• if a default is made by the company in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

Provided that the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.

Section 71: Debentures

A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting. No company shall issue any debentures carrying any voting rights.

Key Provisions Relating to Debentures

• Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed — Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 prescribes tenure, security creation, debenture trustees etc.
• The company shall create a 'Debenture Redemption Reserve' account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures. (The DRR requirement has been relaxed for listed companies and NBFCs/HFCs by 2019 amendments.)
• A debenture trustee shall be appointed before issue of debentures inviting acceptance from more than 500 persons or where debentures are offered to the public. The debenture trustee protects the interests of debenture-holders.
• A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance. This reverses the common-law rule in South African Territories v. Wallington, [1898] AC 309, and mirrors Section 14(3)(b) of the Specific Relief Act, 1963.
• If any default is made in complying with the order of the Tribunal, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than two lakh rupees but which may extend to five lakh rupees, or with both.

Distinction: Shares vs Debentures

Section 72: Power to Nominate

Every holder of securities of a company may, at any time, nominate, in the prescribed manner, any person to whom his securities shall vest in the event of his death. Where the securities of a company are held by more than one person jointly, the joint holders may together nominate, in the prescribed manner, any person to whom all the rights in the securities shall vest in the event of death of all the joint holders.

Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of the securities of a company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the securities of the company, the nominee shall, on the death of the holder of securities or, as the case may be, on the death of the joint holders, become entitled to all the rights in the securities, of the holder or, as the case may be, of all the joint holders, in relation to such securities, to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.