ACCOUNTANCY

PROJECT
COMPANIES ACT, 1956
V.
COMPANIES ACT, 2013

A COMPARATIVE ANALYSIS WITH RESPECT TO

CHANGES IN PROVISIONS REGARDING ISSUE OF
SHARES BY PRIVATE LIMITED COMPANIES.

GROUP MEMBERS:
1. Akhileshwari Anand Raj 15A012
2. Akshansh Sharma 15A013
3. Aman Agarwal 15A017
4. Armaan Gupta 15A027
5. Chhatrola Brijesh Kanjibhai 15A038
INTRODUCTION:
Till 2013, the Companies Act, 1956 was the source of all legal obligations and rules for
Indian companies. However, due to rapid development in technology, society and methods of
conducting business, the act, instead of regulating and assisting companies, became more of a
hindrance to them. Hence there was a need to make the act more contemporary and relevant
to existing corporates, controllers, investors and other participants in India.

This need led to the formation of the Companies Act, 2013. The Companies Bill, 2011 after
being introduced in the Lok Sabha was considered by the Parliamentary Standing Committee
on Finance which submitted its report on the bill on 26 June, 2012. The bill was approved by
the Lok Sabha on 18 December, 2012 as the Companies Bill, 2012. After being approved by
the Rajya Sabha on 8 August, 2013 and receiving the President’s assent on 29 th August, 2013,
it became the Companies Act, 2013.

The changes in this act have far-reaching implications that are set to considerably change the
methods and style in which companies function in India. In the following report, we have
attempted to summarize the various changes as compared to the 1956 Act with respect to the
issue of shares by private limited companies and the likely repercussions of these deviations.

Shares can be issued by private limited companies in the following ways:

 Private Placement
 Rights issue
 Issue of bonus shares
 Issue of Sweat Equity shares
PRIVATE PLACEMENT:

Definition
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 this section including the condition that the
offer or invitation is made to not more than 50 or such higher number of persons as may be
prescribed (excluding QIB's and employees offered securities under ESOP) in a financial
year is called private placement.

Acts and Provisions

Companies Act, 1956

Section 67.

1) Any reference in this Act or in the articles of a company to offering shares or

debentures to the public shall, subject to any provision to the contrary contained in
this Act and subject also to the provisions of sub-sections (3) and (4), be construed as
including a reference to offering them to any section of the public, whether selected as
members or debenture holders of the company concerned or as clients of the person
issuing the prospectus or in any other manner.
2) Any reference in this Act or in the articles of a company to invitations to the public to
subscribe for shares or debentures shall, subject as aforesaid, be construed as
including a reference to invitations to subscribe for them extended to any section of
the public, whether selected as members or debenture holders of the company
concerned or as clients of the person issuing the prospectus or in any other manner.
3) No offer or invitation shall be treated as made to the public by virtue of sub-section
(1) or sub-section (2), as the case may be, if the offer or invitation can properly be
regarded, in all the circumstances –
a) as not being calculated to result, directly or indirectly, in the shares or
debentures becoming available for subscription or purchase by persons other than
those receiving the offer or invitation ; or
b) otherwise as being a domestic concern of the persons making and receiving the
offer or invitation:
 [Provided that nothing contained in this sub-section shall apply in a case where the
offer or invitation to subscribe for shares or debentures is made to fifty persons or
more: Provided further that nothing contained in the first proviso shall apply to the
non-banking financial companies or public financial institutions specified in section
4A of the Companies Act, 1956 (1 of 1956). (3A) Notwithstanding anything
contained in sub-section (3), the Securities and Exchange Board of India shall, in
consultation with the Reserve Bank of India, by notification in the Official Gazette,
specify the guidelines in respect of offer or invitation made to the public by a public
financial institution specified under section 4A or non-banking financial company
referred to in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of
1934).]
4) Without prejudice to the generality of sub-section (3), a provision in a company's
articles prohibiting invitations to the public to subscribe for shares or debentures shall
not be taken as prohibiting the making to members or debenture holders of an
invitation which can properly be regarded in the manner set forth in that sub-section.
5) The provisions of this Act relating to private companies shall be construed in
accordance with the provisions contained in sub- sections (1) to (4).

Companies Act, 2013

Section 42.

1) Without prejudice to the provisions of section 26, a company may, subject to the
provisions of this section, make private placement through issue of a private
placement offer letter.
2) Subject to sub-section (1), the offer of securities or invitation to subscribe securities,
shall be made to such number of persons not exceeding fifty or such higher number as
may be prescribed, [excluding qualified institutional buyers and employees of the
company being offered securities under a scheme of employees stock option as per
provisions of clause (b) of sub-section (1) of section 62], in a financial year and on
such conditions (including the form and manner of private placement) as may be
prescribed.
 Explanation I.—If a company, listed or unlisted, makes an offer to allot or
invites subscription, or allots, or enters into an agreement to allot, securities to
more than the prescribed number of persons, whether the payment for the
 securities has been received or not or whether the company intends to list its
securities or not on any recognised stock exchange in or outside India, the
same shall be deemed to be an offer to the public and shall accordingly be
governed by the provisions of Part I of this Chapter. \
 Explanation II.— For the purposes of this section, the expression— (i)
"qualified institutional buyer’’ means the qualified institutional buyer as
defined in the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009 as amended from time to time.
(ii) "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 this section.

3) No fresh offer or invitation under this section shall be made unless the allotments with
respect to any offer or invitation made earlier have been completed or that offer or
invitation has been withdrawn or abandoned by the company.
4) Any offer or invitation not in compliance with the provisions of this section shall be
treated as a public offer and all provisions of this Act, and the Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992
shall be required to be complied with.
5) All monies payable towards subscription of securities under this section shall be paid
through cheque or demand draft or other banking channels but not by cash.
6) A company making an offer or invitation under this section shall allot its securities
within sixty days from the date of receipt of the application money for such securities
and if the company is not able to allot the securities within that period, it shall repay
the application money to the subscribers within fifteen days from the date of
completion of sixty days and if the company fails to repay the application money
within the aforesaid period, it shall be liable to repay that money with interest at the
rate of twelve per cent. per annum from the expiry of the sixtieth day: Provided that
monies received on application under this section shall be kept in a separate bank
account in a scheduled bank and shall not be utilised for any purpose other than— (a)
for adjustment against allotment of securities; or (b) for the repayment of monies
where the company is unable to allot securities.
 7) All offers covered under this section shall be made only to such persons whose names
are recorded by the company prior to the invitation to subscribe, and that such persons
shall receive the offer by name, and that a complete record of such offers shall be kept
by the company in such manner as may be prescribed and complete information about
such offer shall be filed with the Registrar within a period of thirty days of circulation
of relevant private placement offer letter.
8) No company offering securities under this section shall release any public
advertisements or utilise any media, marketing or distribution channels or agents to
inform the public at large about such an offer.
9) Whenever a company makes any allotment of securities under this section, it shall file
with the Registrar a return of allotment in such manner as may be prescribed,
including the complete list of all security-holders, with their full names, addresses,
number of securities allotted and such other relevant information as may be
prescribed.
10) If a company makes an offer or accepts monies in contravention of this section, the
company, its promoters and directors shall be liable for a penalty which may extend to
the amount involved in the offer or invitation or two crore rupees, whichever is
higher, and the company shall also refund all monies to subscribers within a period of
thirty days of the order imposing the penalty.

Changes and their Effect

 The words “private placement” are not specifically mentioned in the Companies Act,
1956 and only mentioned as the opposite of offering subscriptions to the public while
private placement is mentioned clearly and comprehensively in the Companies Act,
2013. This ensures better regulations and instructions for corporates, investors and
other participants.
 In the former act, SEBI and RBI as mentioned as the governing bodies that will form
the guidelines for corporates to issue shares while in the latter act, sections within the
act itself govern the rules for corporates to issue shares. This not only enhances
consistency and predictability but also reduces the pressure on SEBI and RBI and
allows them to concentrate on more essential areas.
  The terms “private placement” and “qualified institutional buyer” are defined in the
clauses of the Companies Act, 2013 itself and not in Companies Act, 1956. This helps
in better clarity in the understanding of the Act and ease in solving legal disputes.
 There are several clauses in the 2013 Act that are not mentioned in the 1956 Act.
These clauses are about:
a) A company being able to make private placement through the issue of a
private placement offer letter.
b) Limiting the number of persons that can be made a private placement offer in
a financial year to 50 persons and stating relevant conditions.
c) Mode of payment of subscription of such securities.
d) Recording of names of the persons being offered private placement and
offering shares by name.

Such clauses, not present in the earlier act, give clear and comprehensive rules for
regulation of corporates. They also ensure rewards and penalties are easier to
decide and give better methods and ways to both corporates and investors.

Thus there have been significant changes in the Companies Act with respect to private
placement by private limited companies.

RIGHTS ISSUE:
An issue of shares offered at a special price by a company to its existing shareholders in
proportion to their holding of old shares is called rights issue.

Acts and Provisions

Companies Act, 1956

Section 81.

1) Where at any time after the expiry of two years from the formation of a company or at
any time after the expiry of one year from the allotment of shares in that company
made for the first time after its formation, whichever is earlier, it is proposed to
increase the subscribed capital of the company by allotment of further shares, then, -
 A) such further shares shall be offered to the persons who, at the date of the offer,
are holders of the equity shares of the company, in proportion, as nearly as
circumstances admit, to the capital paid-up on those shares at that date ;

B) the offer aforesaid shall be made by notice specifying the number of shares
offered and limiting a time not being less than fifteen days from the date of the
offer within which the offer, if not accepted, will be deemed to have been declined
;

C) unless the articles of the company otherwise provide, the offer aforesaid 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 ; and the notice
referred to in clause (b) shall contain a statement of this right ;

D) after the expiry of the time specified in the notice aforesaid, or on receipt of
earlier intimation from the person to whom such notice is given that he declines to
accept the shares offered, the Board of directors may dispose of them in such
manner as they think most beneficial to the company.
Explanation. - In this sub-section, "equity share capital" and "equity shares" have
the same meaning as in section 85.
(1A) Notwithstanding anything contained in sub-section (1), the further shares
aforesaid may be offered to any persons [whether or not those persons include the
persons referred to in clause (a) of sub-section (1)] in any manner whatsoever - (a)
if a special resolution to that effect is passed by the company in general meeting,
or (b) where no such special resolution is passed, if the votes cast (whether on a
show of hands, or on a poll, as the case may be) in favour of the proposal
contained in the resolution moved in that general meeting (including the casting
vote, if any, of the chairman) by members who, being entitled so to do, vote in
person, or where proxies are allowed, by proxy, exceed the votes, if any, cast
against the proposal by members so entitled and voting and the Central
Government is satisfied, on an application made by the Board of directors in this
behalf, that the proposal is most beneficial to the company.

2) Nothing in clause (c) of sub-section (1) shall be deemed - (a) to extend the time within
which the offer should be accepted, or (b) to authorise any person to exercise the right
 of renunciation for a second time, on the ground that the person in whose favour the
renunciation was first made has declined to take the shares comprised in the
renunciation.

3) Nothing in this section shall apply - (a) to a private company…

Companies Act, 2013

Section 62.

1) 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—
a) 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, namely:
i. 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;
ii. unless the articles of the company otherwise provide, the offer aforesaid
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; and the notice referred to in clause (i) shall contain a statement of
this right; Publication of authorised, subscribed and paid-up capital. Power
of limited company to alter its share capital. Further issue of share capital.
iii. after the expiry of the time specified in the notice aforesaid, or on receipt
of earlier intimation from the person to whom such notice is given that he
declines to accept the shares offered, the Board of Directors may dispose
of them in such manner which is not dis-advantageous to the shareholders
and the company;
 b) to employees under a scheme of employees’ stock option, subject to special
resolution passed by company and subject to such conditions as may be
prescribed; or
c) to any persons, if it is authorised by a special resolution, whether or not those
persons include the persons referred to in clause (a) or clause (b), 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 value subject to such conditions as may be
prescribed.
2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be
dispatched through registered post or speed post or through electronic mode to all the
existing shareholders at least three days before the opening of the issue.

Changes and their Effect

 It was not mandatory for a private company to make right offer under the Companies
Act, 1956 and the act clearly mentions that the right offer does not include private
companies. The Companies Act, 2013 requires private companies to make right offer
to existing shareholders. This ensures the welfare of existing shareholders.
 The Companies Act, 2013 also includes a maximum limit of days for which shares are
offered unlike the earlier act, this ensures that corporates do not offer shares to
existing shareholders for too long to avoid new shareholders and also ensures that
shareholders are more responsible and aware since they are required to decline or
accept within a certain period of time.
 There is another clause in the Companies Act, 2013, not present in the Companies
Act, 1956 which states that shareholders need to be informed of the offer at least three
days before the issue through speed post, electronic medium etc. This ensures that
shareholders are well informed and informed in time about rights issue and have
sufficient time to make a decision.
 Once time of offer expires or if shareholder declines the offer for shares, according to
the Companies Act, 1956 the Board of Directors may dispose of them in a way that is
“most beneficial to the company” while the Companies Act, 2013 says that the Board
of Directors may dispose of them in a way that is “not dis-advantageous to the
shareholders and the company”. This new way of framing the clause helps in making
 sure that a corporate does not misinterpret the clause or misuse it and the interests of
shareholders are taken care of.
 The new Companies Act also includes a clause that allows right offer to employees
under a scheme of employee stock option plan. This new provision helps in the
motivation of employees and make a corporate more responsible for their well-being.

Hence, there have been noteworthy modifications in the Companies Act with respect to rights
issue by private limited companies.

BONUS ISSUE:
A bonus share is a free share of stock given to current shareholders in a company, based upon
the number of shares that the shareholder already owns.

Acts and Provisions

Companies Act, 1956

Section 581ZJ.

Any Producer Company may, upon recommendation of the Board and passing of resolution
in the general meeting, issue bonus shares by capitalization of amounts from general reserves
referred to in section 581ZI in proportion to the shares held by the Members on the date of
the issue of such shares.

Companies Act, 2013

Section 63.

1) A company may issue fully paid-up bonus shares to its members, in any manner
whatsoever, out of—
i. Its free reserves;
ii. The securities premium account; or Issue of bonus shares.
 iii. The capital redemption reserve account: Provided that no issue of bonus
shares shall be made by capitalizing reserves created by the revaluation of
assets.

2) No company shall capitalize its profits or reserves for the purpose of issuing fully
paid-up bonus shares under sub-section (1), unless—
a) It is authorized by its articles;
b) It has, on the recommendation of the Board, been authorized in the general
meeting of the company;
c) It has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
d) It has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
e) The partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up;
f) It complies with such conditions as may be prescribed.

3) The bonus shares shall not be issued in lieu of dividend.

Changes and their Effect

 In the Companies Act, 1956 bonus issue was mentioned only in the clause of a section
in a very limited manner while in the Companies Act, 2013, Section 63 deals
exclusively with bonus issue. By introducing a section specifically for issue of bonus
shares, the act brought in sanctity to it and removed any ambiguity regarding bonus
issue.
 By introducing an entire section for bonus shares, the Companies Act, 2013 dealt with
several issues and aspects within the section that were not mentioned in the earlier act,
some of them are:
a) The source out which a company could issue bonus shares,
b) The source out of which a company cannot utilize for such issue,
c) The secretarial formalities to be complied with
d) The companies who are not eligible to issue bonus shares
 e) Non withdrawal of bonus issue once issued.

By stating and dealing with these different features of bonus shares, the new act
helped making the rules and regulations regarding issue concrete and also helped
make shareholders aware of what they were entitled to and when.

 By mentioning what sources are to be used and what sources are not to be used, the
act also helps in making sure that companies follow the various principles of
accountancy like the principle of conservatism and ensures liquidity and availability
of cash.

Thus there have been quite a few changes in the Companies Act with respect to the issue of
bonus shares by private limited companies.

SWEAT EQUITY SHARES:

Sweat equity shares” means such equity shares, which 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.

Acts and Provisions

Companies Act, 1956

Section 79A

1) Notwithstanding anything contained in section 79, a company may issue sweat equity
shares of a class of shares already issued if the following conditions are fulfilled,
namely :
a) the issue of sweat equity shares is authorised by a special resolution passed by the
company in the general meeting ;
b) the resolution specifies the number of shares, current market price, consideration,
if any, and the class or classes of directors or employees to whom such equity
shares are to be issued ;
 c) not less than one year has, at the date of the issue, elapsed since the date on which
company was entitled to commence business ;
d) the sweat equity shares of a company, whose equity shares are listed on a
recognised stock exchange, are issued in accordance with the regulations made by
the Securities and Exchange Board of India in this behalf: Provided that in the
case of a company whose equity shares are not listed on any recognised stock
exchange, the sweat equity shares are issued in accordance with the guidelines as
may be prescribed.
Explanation I. - For the purposes of this sub-section, the expression "a company"
means company incorporated, formed and registered under this Act and includes
its subsidiary company incorporated in a country outside India.
Explanation II. - For the purposes of this Act, the expression "sweat equity shares"
means equity shares issued by the company to 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.
2) All the limitations, restrictions and provisions relating to equity shares shall be
applicable to such sweat equity shares issued under sub- section (1).

Companies Act, 2013

Section 54.

1) 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:—
a) the issue is authorised by a special resolution passed by the company;
b) 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;
c) not less than one year has, at the date of such issue, elapsed since the date on
which the company had commenced business; and
d) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the regulations
made by the Securities and Exchange Board in this behalf and if they are not so
 listed, the sweat equity shares are issued in accordance with such rules as may be
prescribed.
2) The rights, limitations, restrictions and provisions as are for the time being applicable
to equity shares shall be applicable to the sweat equity shares issued under this section
and the holders of such shares shall rank pari passu with other equity shareholders.

Changes and their Effect

 In the Companies Act, 1956 sweat equity shares are mentioned in a clause under
section 79 while in the Companies Act, 2013, they are mentioned in a separate section
altogether. This indicates the higher importance given to sweat equity shares in the
later act which is necessary for both employees and directors as an incentive to work
towards the good of the company.
 The Companies Act, 2013 also has an additional clause stating the equality of sweat
equity shares with equity shares, which is necessary so that corporates do not try to
prioritize some shareholders over others.

Apart from the above two changes, there are no other significant changes in the provisions of
the Companies Act regarding sweat equity shares issued by private limited companies.

CONCLUSION:
In the above analysis, we observed the differences between the Companies Act, 1956 and the
Companies Act, 2013 with respect to the issue of shares by private limited companies. We
realized through our analysis that there have been significant changes in the act and several of
them have been for the betterment of shareholders, investors and/or employees. New clauses
and provisions ensure liability and responsibility of corporates and encourage them to be
more socially responsible. It has become easier to issue shares and the act also aims at
making shareholders more aware of their position with respect to a company. Every change
in the act has significant impact on corporates.

In conclusion, one can say that as time passes and social, technological, economic, political
and legal aspects of the corporate sector change, there arises a need to change the rules and
regulations that standardize and control this sector and its participants. The institution of a
comprehensive, contemporary and relevant Companies Act, 2013 is an achievement but its
implementation is still a challenge. No act is useful if not implemented in the correct and
proper manner. Also, while the Companies Act, 2013 covers some of the major drawbacks of
the Companies Act, 1956, there is a possibility of loopholes in the Companies Act 2013 itself.
We have progressed quite a bit with this act, however we shouldn’t be complacent and need
to ensure that this act doesn’t have any major faults and fix any, if present, as soon as
possible for the best possible business environment.

BIBLIOGRAPHY:
 Companies Act, 1956
 Companies Act, 2013
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