REDUCTION OF SHARE CAPITAL - is always of issued capital

SECTION 66 read with National Company Law Tribunal (Procedure for Reduction of
Share Capital of Company) rules, 2016

Section 66 (1): A limited Company (Limited by shares or guarantee) having share capital can
reduce its share capital in any way and in particularly may reduce the capital in the following ways
subject to the confirmation by the Tribunal:

Sec 66 does not apply in case of reduction of share capital of an UNLIMITED CO. having
share capital. That means an unlimited co having share capital can reduce its share capital as
per its AOA.

(a) Extinguish or reduce the liability on any of its shares in respect of the share capital not paid-
up. e.g. where the shares are of Rs. 100/- each and paid up is Rs. 75/-. Reduce the shares to Rs.
75/- fully paid up.
(b) Cancel any paid-up share capital, which is lost or is unrepresented by available assets.

e.g.: Balance sheet:

Paid up capital Rs. 10,00,000/- Assets Rs. 7,00,000/-

LOSS Rs. 3,00,000/-

Now co decides to reduce its PUC upto the assets available with the co. i.e. 7,00,000/-.
Rs. 3 Lacs will be reduced.

(c) Pay off any paid-up share capital, which is in excess of the wants of the company.

Note: It may be noted that reduction of capital shall not 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.

Section 66(1) the Company can reduce its share capital:

 If authorized by AOA of the Company;
 By passing a special resolution in the general meeting of the Company;
 Subject to the confirmation of Tribunal;
 If necessary alter the memorandum by reducing the amount of share capital.

Rule 2 Form of application or petition for Reduction of share capital under section 66 (1):

(1) An application to the Tribunal to confirm a reduction of share capital of a company shall
be in Form No. RSC-1 and fee shall be, as prescribed in the Schedule of fee to these rules
which is Rs. 5,000/-.
(2) An application to confirm a reduction of share capital of a company shall be accompanied
with:

- 80 -
 a. the list of creditors duly certified by the Managing Director, or in his absence, by two
directors, as true and correct, which is made as on a date not earlier than fifteen days
prior to the date of filing of an application showing the details of the creditors of the
company, class-wise, indicating their names, addresses and amounts owed to them;
b. a certificate from the auditor of the company to the effect that the list of creditors
referred to in clause (a) is correct as per the records of the company verified by the
auditor;
c. a certificate by the auditor and declaration by a director of the company that the
company is not, as on the date of filing of the application, in arrears in the repayment
of the deposits or the interest thereon; and
d. a certificate by the company’s auditor to the effect that the accounting treatment
proposed by the company for the reduction of share capital is in conformity with the
accounting standards specified in section 133 or any other provisions of Act.

(3) Copies of the list of creditors shall be kept at the registered office of the company and any
person desirous of inspecting the same may, at any time during the ordinary hours of
business, inspect and take extracts from the same on payment of the sum of rupees fifty for
inspection and for taking extracts on payment of the sum of rupees ten per page to the
company.

NOTICE BY TRIBUNAL - SECTION 66(2) and Rule 3

The Tribunal shall, within fifteen days of submission of the application under rule 2, give notice,
or direct that notice be given to:
i. the Central Government in Form No. RSC -2
ii. the Securities and Exchange Board, in the case of listed companies in Form No. RSC
- 2, and
iii. the creditors of the company in Form No. RSC – 3
iv. the Registrar

 The notice under clause (iii) of sub-rule (1) shall be sent, within seven days of the direction
given under that sub-rule or such other period as may be directed by the Tribunal, to each
creditor whose name is entered in the list of creditors submitted by the company about the
presentation of the application and of the said list, stating the amount of the proposed
reduction of share capital and the amount or estimated value of the debt or the contingent
debt or claim or both for which such creditor's name is entered in the said list, and the time
within which the creditor may send his representations and objections (Rule 3 (2)).

 It shall take into consideration the representations, if any, made to it by that Government,
Registrar, the Securities and Exchange Board and the creditors within a period of three
months from the date of receipt of the notice.
 If no representation has been received from the Central Government, Registrar, the
Securities and Exchange Board or the creditors within the said period, it shall be presumed
that they have no objection to the reduction - Proviso to Section 66(2)
 The Tribunal shall along with directions under sub-rule (1) give directions for the notice to
be published, in Form No. RSC-4 within seven days from the date on which the directions
are given, in English language in a leading English newspaper and in a leading vernacular
language newspaper, both having wide circulation in the State in which the registered
office of the company is situated, or such newspapers as may be directed by the Tribunal
and for uploading on the website of the company (if any) seeking objections from the
creditors and intimating about the date of hearing (Rule 4 (3)).

- 81 -
  The notice under sub-rule (3) shall state the amount of the proposed reduction of share
capital, and the places, where the aforesaid list of creditors may be inspected, and the time
as fixed by the Tribunal within which creditors of the company may send their objections
(Rule 4 (4)).

Provided that the objections, if any, shall be filed in the Tribunal within three months from
the date of publication of the notice with a copy served on the company.

 The company or the person who was directed to issue notices and the publication in the
newspaper under this rule shall, as soon as may be, but not later than seven days from the
date of issue of such notices, file an affidavit in Form No. RSC- 5 confirming the despatch
and publication of the notice (Rule 3 (5)).

 Where the Tribunal is satisfied that the debt or claim of every creditor has been discharged
or determined or has been secured or his consent is obtained, it may dispense with the
requirement of giving of notice to creditors or publication of notice under this rule or both
(Rule 3(6)).

Rules 4 Representation by Central Government, Registrar etc. under sub-section (2) of

section 66:
If the authorities or the creditors of the company referred to in clause (i), clause (ii) and clause (iii)
of sub-rule (1) of rule 3 desire to make any representation under sub-section (2) of section 66, the
same shall be sent to the Tribunal within a period of three months from the \ date of receipt of
notice and copy of such representation shall simultaneously be sent to the company and in case no
representation has been received within the said period by the Tribunal it shall be presumed that
they have no objection to the reduction.

Rule 5 Procedure with regard to representations and objections received:

(1) The company shall submit to the Tribunal, within seven days of expiry of period upto
which representations or objections were sought, the representations or objections so
received along with the responses of the company thereto.
(2) The Tribunal may give such directions as it may think fit with respect to holding of any
enquiry or adjudication of claims or for hearing the objection or otherwise.
(3) At the hearing of the application, the Tribunal may, if it thinks fit, give such directions as
may deem proper with reference to securing the debts or claims of creditors who do not
consent to the proposed reduction, and the further hearing of the petition may be adjourned
to enable the company to comply with such directions.

Section 66 (3): The Tribunal may, if it is satisfied that the debt or claim of every creditor of the
company has been discharged or determined or has been secured or his consent is obtained, make
an order confirming the reduction of share capital on such terms and conditions as it deems fit:

Proviso to Section 66(3) provides that:–

No application for reduction of share capital shall be sanctioned by the Tribunal unless the
accounting treatment, proposed by the company for such reduction is in conformity with the
accounting standards specified in section 133 or any other provision of this Act and a certificate to
that effect by the company’s auditor has been filed with the Tribunal.

- 82 -
Publication of The Order of the Tribunal [Section 66(4)]
The order of confirmation of the reduction of share capital by the Tribunal under Section 66(3) shall be
published by the company in such manner as the Tribunal may direct.

Deliver a Copy of Order of Tribunal to Registrar – Section 66(5)

The company shall deliver a certified copy of the order of the Tribunal under subsection (3) and of
a minute approved by the Tribunal showing:
(a) the amount of share capital;
(b) the number of shares into which it is to be divided;
(c) the amount of each share; and
(d) the amount, if any, at the date of registration deemed to be paid-up on each share,

to the Registrar within thirty days of the receipt of the copy of the order, who shall register the
same and issue a certificate to that effect.
Section 66 (6) Nothing in this section shall apply to buy-back of its own securities by a company
under section 68.

Rule 6 Order on application and Minute thereof:

(1) Where the Tribunal makes an order confirming a reduction, the order confirming the
reduction and approving the minute may include such directions or terms and conditions as
the Tribunal deems fit .
(2) The order confirming the reduction of share capital and approving the minute shall be in
Form No. RSC - 6 on such terms and conditions as may be deemed fit.
(3) The Certificate issued by the Registrar under sub-section (5) of section 66 shall be in Form
No. RSC -7.

**************

Liability of members on reduction

According to Section 66 (7) the extent of the liability of any past or present member of the
company (on call /contribution) on the reduction of the share capital shall not exceed the
difference between:
- Amount paid or deemed to be paid-up and
- Amount of share as fixed by the scheme of the reduction

e.g.: FV of share is: 10/- per share. Called up and paid up Rs. 7/- per share.
Co has reduced its capital and made share fully paid up: i.e. Rs. 7/- per share.

Q: what is the liab of member after reduction per share??

FV reduced to Rs. 7/- per share and already paid Rs. 7/-. So liab is NIL.

Q: what is the liab of member after reduction per share??

FV reduced to Rs. 9/- per share and already paid Rs. 7/-. So liab is Rs. 2/- per share.

- 83 -
Section 66 (8): However, when any creditor’s name entitled to object to the reduction was not
entered in the list of creditors because he was ignorant of the proceeding, or he was ignorant about
the nature and effect of the proceeding, and company is unable to pay his debts/ claim after
reduction the liability of the member shall be:

(a) Every person who was member at the date of registration of order shall be liable to an amount
not exceeding that he would have been liable if the winding up proceeding had commenced
before such registration.
(b) If the company is wound up, the court may, settle the list of contributors.

**********

Difference between the Reduction of share capital & Diminution of share capital

Diminution (section 61(1)(e): Cancellation of share, which have not been taken or agreed to be
taken by any person. The diminution of share capital is not to be treated as reduction of share
capital. There is difference between diminution and reduction of share capital.

Difference between Reduction and Diminution of Share capital:

(a) Reduction may be for paid-up capital but cancellation is not for paid-up capital
(b) For reduction special resolution is required but for diminution only ordinary resolution is
required.
(c) For reduction - court confirmation required, but for diminution no need for confirmation from
court only ordinary resolution.
(d) For reduction the Company may use the word “and reduced”, but for diminution – no such
kind of provision.
(e) Reduction of share capital is a lengthy procedure, but diminution only notice to the registrar in
30 days for registration.
*************

Reduction of share capital without sanction of the Court / TRIBUNAL

The following are cases which amount to reduction of share capital in general sense but no
confirmation by the Court is required:
(a) Surrender of shares
(b) Forfeiture of shares
(c) Diminution / cancellation of capital
(d) Redemption of redeemable preference shares.
(e) Purchase of shares of a member by the Company on the order of Tribunal under Section
242.
(f) Buy-back of its own shares under Section 68.

************

- 84 -
 ALTERATION OF SHARE CAPITAL

Here we are talking about alteration in capital clause of MOA

According to Section 61 (1), if authorised by AOA, a limited Company having share capital
can alter its share capital in the following manner by passing an Ordinary Resolution:

Sec 61 does not apply in case of alteration in share capital of an UNLIMITED CO. having
share capital. That means an unlimited co having share capital can alter its share capital as
per its AOA.

(a) Increase in share capital by issuing new share.

e.g.: ASC is 10 Lacs and Called up n PUC is 10 Lacs. So if co wants to issue further
shares then, co needs to increase its ASC by altering the clause 5 of MOA.

(b) Consolidate and dividing (all or any) share capital in to share of larger denomination. e.g. by
consolidating 10 shares of Rs. 10/- each into 1 share of Rs. 100/- each.

In case of consolidation there in no increase in share capital. Only to increase the FV of

the share as to reduce the number of shares.

e.g.: presently the ASC is 10 Lacs divided into 1 Lac shares of Rs. 10/- each.

Co decides to go for consolidation: to make FV of Share from Rs. 10/- to Rs. 100/-

Altered capital: ASC Rs. 10 Lacs divided into 10,000 shares of Rs. 100/- each

(c) Converting fully paid-up share in to stock or reconversion in to share of any denomination.

Stock is denominated by value not by numbers. E.g, I have a stock of Rs. 100000 in the
co. stock can be transferred in any fraction and value unlike share.

Stock holders shall enjoy all the rights like shareholders. Dividend, voting

IMP: stock cannot be issued directly. It is only the conversion of fully paid up shares
into stock

(d) Sub-dividing of share (all or any) in to share of smaller amount. However, after sub-division
proportion of paid-up and unpaid amount should be remained same. e.g. one share of Rs. 100/-
and the paid up amount is Rs. 60/-. Sub-division into 10 shares of Rs. 10/- each and paid up
will be Rs. 6/-.

Is vice-versa of consolidation.

e.g.: presently the ASC is 10 Lacs divided into 1 Lac shares of Rs. 10/- each.

- 85 -
 Co decides to go for sub division: to make FV of Share from Rs. 10/- to Re. 1/-

Altered capital: ASC Rs. 10 Lacs divided into 10,00,000 shares of Re. 1/- each

Another example:
Co needs 100/- per share.
FV 10/- premium is Rs. 90/-

Rs. 10/- will go to share capital and rs. 90/- will go to Sec premium account.

Advise to the co.: go for sub division: that means to have the FV of share to Re. 1/- .
FV Re. 1/-
Premium: Rs. 99/-

(a) Cancel the share, which have not been taken or agreed to be taken by any person. To reduce
the amount of share capital by the share so cancelled. Cancellation of share shall not be
deemed to be the reduction of share capital as per section 66 of the Act.

Cancellation of shares not issued by the co yet.

e.g. the ASC of the co is Rs. 10 Lacs divided into 1 lac Eq shares of Rs. 10/- each.

Out of which co has issued only 20000 shares and the PUC is Rs. 2 lacs.

That means 80000 shares are unissued and can be issued by the co. at any time.

Co decides to cancel the unissued capital. Now new ASC shall be Rs. 2 Lacs divided to 20000
shares of 10/- each.

Section 61 (1) (b): 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 on an
application made in the prescribed manner (This proviso came into force w.e.f. 01.06.2016).

For the purpose of alteration as per section 61 of the Act only Ordinary Resolution is required in
the general meeting of the shareholders. No approval of Central Government or no confirmation
from the court is required for this purpose.

As per Section 64 of the Act the share capital of the Company shall automatically increase in the
following situations:
1. Where the Central Government (CG) has directed the Company under section 62(4) that
any debenture or loan or any part thereof shall be converted into shares in the Company on
such terms and conditions as are considered reasonably.
2. Where, in pursuance to option attached to debentures issued or loan raised by the
Company, any PFI propose to convert such debentures or loans into shares, then on
application of such PFI, the CG may direct that the conditions contained on the MOA of

- 86 -
 such Company shall stand altered and the nominal share capital shall stand increased by an
amount of the value of the shares into which such debentures or loan or part thereof has
been converted.

As per Section 64 (1) of the Act states that when:

(a) a company alters its share capital in any manner specified in sub-section (1) of section 61;
(b) an order made by the Government under sub-section (4) read with sub-section (6) of
section 62 has the effect of increasing authorized capital of a company; or
(c) a company redeems any redeemable preference shares: or
(d) a company not having share capital increases number of its members (inserted by notification
dated 19.07.2016).

The Company shall file Form No. SH 7 with ROC within 30 days of such alteration, increase or
redemption of preference shares along with fees as per the Rules.

The Fee paid to ROC for registering the increase of capital is a capital expenditure of the
company.

Section 64(2): where any Company fails to comply with the provisions of section 64 (1), such
company and every office who is in default shall be liable to a penalty of Rs. 1000/- for each day
during which the default continues, or Rs. 5 Lacs, whichever is less (substituted by the
Companies (Amendment) Act, 2019 w.e.f. 02nd November, 2018).

**********

- 87 -
ALLOTMENT OF SHARES – means allotment of un-allotted shares – which have not been
issued/ allottedby the co. yet.

Power to allot share always lies with the BOD.

 Allotment is the appropriation of shares out of the previously un-appropriated capital of

the company of a certain number of shares to a person.
 Allotment is an appropriation of shares to a particular person by the directors or the managing
body of the company.
 That is why, if the shares, which have been forfeited, are
reissued, cannot call it an “allotment”. Because reissue of
forfeited shares is an allotment of already allotted shares.
 The allotment is an acceptance of an offer to take shares by an applicant and like any other
acceptance it must be communicated.
 When an allotment has been made by passing a resolution by the Board of Directors and notice
of such allotment has been given to the allottee, it creates a binding contract between the
Company and the allottee.

************

Judicial Pronouncement relating to allotment

1. An allotment may be valid even if some defect was there in the appointment of directors
but which was subsequently discovered. (Royal British Bank v. Turquand)
2. An allotment by a Board irregularly constituted may be subsequently ratified by a regular
Board [Portugese Consolidated Copper Mine]
3. A director who has joined in an allotment to himself will be estopped from alleging the
invalidity of the allotment [Yark Tramways Co. v. Willows];
4. Grant applied for certain shares in a company, the company dispatched letter of allotment
to him which never reached him. It was held that he was liable for the balance amount due
on the shares. [Household Fire And Carriage Accident Insurance Co. Ltd. v. Grant]
5. There can be no proper allotment of shares unless the applicant has been informed of the
allotment [British and American Steam Navigation Co. Re.]

Provisions relating to allotment of securities – Companies Act 2013

Allotment of Securities − Conditions

Section 39(1) states that no allotment of any securities of a company offered to the public for
subscription shall be made unless 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 instrument.

Minimum Subscription – Section 39

“Minimum Subscription” is the amount which in the opinion of the Board of directors, must be
raised by the issue of share capital for following expenses:

- 88 -
 1) The purchase price of the property purchased or to be purchased;
2) Preliminary expenses;
3) Underwriter Commission;
4) Repayment of money borrowed for the above-mentioned purposes;
5) Working capital of the company;
6) Any other expenditure (nature and purpose) and the estimated amount in each cases.

SEBI has prescribed that a Company should receive minimum subscription of 90% of the issue
amount including development on underwriter’s subscription before making allotment.

Minimum Application Money [Section 39(2)]

The amount payable on application on every security shall not be less than 5% of the
nominal amount of the security or such other percentage or amount, as may be specified by
the Securities and Exchange Board by making regulations in this behalf.

Money to be returned if minimum application money is not received

If 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 the Securities and Exchange Board, the amount so received shall be
returned within 15 days from the closure of the issue. 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 15% p.a.

Return of allotment - Section 39

Whenever, a company makes allotment of securities, the company is require to submit a
report in prescribed Form No. PAS 3 called ‘Return of Allotment’, to ROC within
30 days of allotment of shares.
The return must state that:
In case shares are allotted in cash -
(i) The number and nominal amount of the shares allotted;
(ii) The names, addresses and occupations of the allottees and
(iii) The amount, if any, paid or due and payable on each shares.

But the company must not show shares as having been allotted for cash, if cash has not been
actually received by it.

In case shares are allotted other than cash (consideration is – Property, goods, services etc.)
(i) A written contract constituting title to the allottee to the shares
(ii) The contract of sale
(iii) The number and nominal amount of shares allotted and the consideration for which they
are allotted.
(iv) When a contract is not reduced to writing, the company shall furnish along with the Form
PAS-3 complete particulars of the contract stamped with the same stamp duty as would
have been payable if the contract had been reduced to writing.
(iv) Further a report of a registered valuer in respect of valuation of the consideration shall also
be attached along with the contract.

- 89 -
In the case of issue of bonus shares:
A copy of the resolution passed in the general meeting authorizing the issue of such shares shall be
attached to the Form PAS-3.

***********

CALLS ON SHARES

 Call, in general means a demand on shareholders to make payment of unpaid amount on the
shares held by them.
 As per Section 49, call on the same class of shares must be made on uniform basis. For
example: Same nominal value shares on which different amount paid, shall not deemed to fall
under same class.
 There cannot be discrimination between shareholders of the same class as regards amount and
the payment of call.
 As per Section 179 (3)(a), call shall be made by Board of directors through a resolution passed
at their meeting.
 A call can also be made by a liquidator in the course of the winding up of the company

Regulation 13 to 18 of Table F of Schedule 1, contains the following provision in relation to

calls-
 The Board may from time to time make calls upon the members in respect of amount unpaid
on their shares. Whether on account of Nominal value or by way of premium.
 A call shall not exceed 25% of the “Nominal Value” of the share.
 A call shall not made payable at less than 1 month from the date fixed for the payment of last
call. However, companies may have their own articles and raise the limit.
 Each member shall make payment of calls at time 0061nd place specified in notice. However,
notice shall not require payment at a time earlier than 14 days notice from the date of receipt
of notice.
 A call may be revoked or postponed at the discretion of the Board [regulation 13(3)].
 A valid call notice at least 14 days must state
(i) Amount of call,
(ii) Date upto which it shall be paid and
(iii) Time & place of payment.
 The joint-holders of a share shall be jointly and severally liable to pay all calls.
 In case of calls-in-arrears, the defaulting Shareholder shall pay an interest @ 10% p.a. or at
such lower rate as the Board may determine.
 The Board may in its discretion waive the payment of interest wholly or partly.
 A call shall be deemed to be made when resolution for this purpose is passed by the Board.
 Call may be required to be paid by installment if authorized by Board.
 If the terms of issue of share specify the amount, time and place for payment of allotment
money and call money, it shall be deemed to be a call duly made and payable on the dates
specified.

**********

- 90 -
 CALLS IN ADVANCE

 As per Section 50(1) - a company authorized by its articles may receive calls-in-advance from
any of its members.
 However, as per section 50 (2) the member shall not be entitled to exercise any voting rights
w.r.t. money paid by him in advance until it becomes payable.
 The Board of Directors may receive the calls in advance from any member willing to advance
the same.
 It also provides that, company may pay interest upto 12% on the calls received in advance,
unless the company in general meeting otherwise decides
 Where the interest is agreed to be paid then it may be paid out of the Capital of the Company if
profits are not available.
***********

FORFEITURE OF SHARES
Forfeiture means depriving a person of his property as penalty for some act or omission.
Ordinarily forfeiture of shares can take place only for the non-payment of calls due to a company,
but articles may also provide other ground for the forfeiture of shares [Naresh Chandra Sanyal
V. Calcutta Stock Exchange Association Limited].

The company may forfeit the share for non-payment of call on shares if the following provisions
are contain in the Table F regarding the forfeiture of shares are followed-
 If a member fails to pay call on due date, the Board of Director (i.e. Board) may serve a notice
on him to pay call along with interest.
 The notice must state the day (not less than14 days from the date when the notice is serviced)
by which payment is required to be made.
 In the notice it must be stated that in the event of non-payment of call, by the date specified in
the notice, share will be liable to be forfeited.
 If the member still does not make the payment, the Board of Director after passing the
resolution can forfeit the shares.
 Forfeited shares may be re-issued / disposed of on such terms and manner as the Board thinks
fit.
 The Board may cancel the forfeited shares on such terms as think fit.
 A person whose shares are forfeited shall cease to be a member of the Company. However, he
shall remain liable to pay to the Company.
 A duly verified declaration in writing by the director / secretary / manager shall be conclusive
evidence for forfeiture of share on the date stated in the declaration.

Consequence of forfeiture:
(a) Person ceases to be a member
(b) Liable to pay all money due, in spite of the forfeiture of shares.
(c) If the company receives the money due, the liability of the person ceases.

Re-issue of forfeited shares:

(a) Forfeited shares may be re-issued/disposed of on such terms and manner as the Board thinks
fit.
(b) The company can execute a transfer of shares and may receive the consideration thereof.
(c) The transferee shall be the registered shareholder of such shares.

- 91 -
(d) Any irregularity or invalidity in forfeiture or re-issue of shares shall not affect the title of the
transferee.
(e) If the shares are re-issued at a price more than the face value, the excess of the proceeds of sale
is not payable to the former owner, if the articles provide otherwise.
(f) The excess of the proceeds so retained shall constitute a premium and must therefore be
transferred to the securities premium account.

**********

SHARES CERTIFICATES

 The shares / debenture shall be movable property, transferable in the manner provided by the
AOA.
 Each share shall be distinguished by its appropriate number (except when share are held by
depository).
 Section 46(1)-
(i) Share Certificate shall be 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. (Inserted by the Companies (Amendment) Act, 2015 as notified on 26.05.2015)
(ii) It shall be prima facie evidence of title of the member of shares mentioned in the
certificate.

 A duplicate/ renewed certificate may be issued if it is proved that certificate is lost or

destroyed, or defaced or mutilated or torn and surrender to the company (Section 46 (2)).

Rule 5 of Companies (Share Capital and Debentures) Rules, 2014, relating issue of
Certificates

Issue of Share / Debenture Certificate: [Section 56 (4)]

 Every Company shall issue certificates of all securities allotted / transferred or transmitted
within:
o Within 2 months of incorporation of company in case of subscribers to the memorandum
o Within 2 months from the date of allotment of shares
o Within 1 month after application of registration of transfer / transmission received
o Within 6 months from the date of allotment of debentures

 Where 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 [sub-section
(4)].

Section 56 (6) Penalty-

Where any default is made in complying with the above provisions, the company shall be
punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs 5 lakh
and every officer of the company who is in default shall be punishable with fine which shall not be
less than Rs 10,000 but which may extend to Rs. 1,00,000.

Certificate of shares (where shares are not in demat form) - Rule 5(1)
(1) Where a company issues any share capital, no certificate of any share or shares held in the
company shall be issued, except-

- 92 -
(a) in pursuance of a resolution passed by the Board; and
(b) on surrender to the company of the letter of allotment or fractional coupons of requisite
value, save in cases of issues against letters of acceptance or of renunciation, or in cases of
issue of bonus shares:

If, the letter of allotment is lost or destroyed, the Board may impose such reasonable terms, if any,
as to seek supporting evidence and indemnity and the payment of out-of-pocket expenses incurred
by the company in investigating evidence, as it may think fit.

Share Certificate Format [Rule 5(2)]

Every certificate of share or shares shall be in Form No. SH.1 or as near thereto as possible and
shall specify the name(s) of the person(s) in whose favor the certificate is issued, the shares to
which it relates and the amount paid-up thereon.

Signing of share Certificates: Rule 5 (3) – as amended by The Companies (Share Capital and
Debentures) Amendment Rules, 2018

As per Rule 5 (3) of the Companies (Share Capital and Debentures) Rules, 2014, every certificate
shall specify the shares to which it relates and the amount paid-up thereon and shall be signed by
two directors or by a director and the company secretary, wherever the company has appointed
company secretary:

Provided that in case the company has a common seal it shall be affixed in the presence of persons
required to sign the certificate.

Explanation. - For the purposes of this sub-rule, it is hereby clarified that:

(a) in case of an One Person Company, it shall be sufficient if the certificate is signed by a
director and the company secretary or any other person authorised by the Board for the
purpose.
(b) a director or Company Secretary (the word Company Secretary added by the
Companies (Share Capital and Debentures) Amendment Rules, 2019 dated
16.08.2019) shall be deemed to have signed the share certificate if his signature is printed
thereon as facsimile signature by means of any machine, equipment or other mechanical
means such as engraving in metal or lithography or digitally signed, but not by means of
rubber stamp, provided that the director or Company Secretary (the word Company
Secretary added by the Companies (Share Capital and Debentures) Amendment
Rules, 2019 dated 16.08.2019) shall be personally responsible for permitting the
affixation of his signature thus and the safe custody of any machine, equipment or other
material used for the purpose.

Splitting of share certificate:

Original share certificate number: 0145 dated 15.08.2016 for 10000 shares dist. No. 26001-36000

Now shareholder is transferring 1000 shares to X. the Co. will split the share certificate:
1. 9000 shares 26001-35000 share certificate no. 0228 dated 14.07.2020 in lieu of share
certificate no. 0145 dated 15.08.2016

- 93 -
 2. 1000 shares 35001-36000 share certificate no. 0229 dated 14.07.2020 in lieu of share
certificate no. 0145 dated 15.08.2016

Particulars of Share certificates to be entered in the Register of Members [Rule 5(4)]

The particulars of every share certificate issued shall be entered in the Register of Members
maintained in accordance with the provisions of section 88 along with the name(s) of person(s) to
whom it has been issued, indicating the date of issue.

Legal Effect of Share Certificates:

Once the share certificate is issued it bunds the Company in the following two ways:
1. Estoppel as to title: Company declares that the person named in the certificate is the
registered holder of the shares and it cannot afterwards allege that person is not entitled to
those shares. But, if the forged certificate is issued then there is no estoppel.
2. Estoppel as to payment: If the certificate states that the shares are fully paid-up, the
company is estopped as against the bona fide purchaser from alleging that the amount stated in
the certificate has not been paid [Bloomenthal versus Ford]. But, if the person knows that the
statement in the share certificate is not true, he has no right to claim estoppel against the
company

**********

WHETHER SHARE CERTIFICATE AN OFFICIAL PUBLICATION

The question whether a share certificate is an official publication within the meaning of Section
12(3)(c) was considered by the Department of Company Affairs (Now, Ministry of Corporate
Affairs) and the Department has clarified vide Circular No. 3/73[8/10(47)]/72-CL-V dated
3.2.1973 as follows:

“It will be seen that in terms of Section 44, the shares in a company are movable property
transferable in the manner provided in the articles of the company.

Section 44 provides that a certificate under the common seal of the company specifying any share
held by any member shall be prima facie evidence of the title of the member to such share.

Thus, shares are movable property transferable in the manner provided in the articles of the
company and that the share certificates are certificates of title and are movable property but are
not publications in the nature of prospectus, balance sheet, profit and loss account, notice or
advertisement.

The conclusion reached, therefore, is that the share certificate is not an official publication within
the meaning of Section 12(3)(c).

*************

ISSUE OF DUPLICATE SHARE CERTIFICATE

- 94 -
Rule 6 of Companies (Share Capital and Debentures) Rules, 2014 relating to issue of duplicate
certificates

 Rule 6 confers the right to obtain the duplicate share certificate when the original certificate is
lost or destroyed or has become mutilated.
 Rue 6 provides that a certificate may be renewed or duplicate of a certificate may be issued if
such certificate is proved to have been lost or destroyed, or having been defaced or mutilated
or torn is surrendered to the company.
 No share certificate shall be issued either in exchange for those which are sub-divided or
consolidated or in replacement of those which are defaced, torn, mutilated or worn out, or
where the cages in the reverse of the certificate for recording transfers have been fully utilised,
unless:
o the consent of the Board is given (in case of loss or destruction of certificate);
o the certificate in lieu of which it is being issued is surrendered to the company and is
cancelled;
o payment of fees for issue of duplicate certificate is made by the shareholder (not exceeding
Rs. 50 per share certificate);
o proper evidence and indemnity to the satisfaction of the company is furnished;
o out-of-pocket expenses estimated to be incurred by the company in investigating the
evidence, as the Board may think fit, are deposited with the company, in case of lost or
stolen share certificates the cost of public notice shall also be borne by the member;

 the words “Duplicate issued in lieu of Share Certificate No. .../Sub-divided/

Replaced/Lost/Consolidation of share (as the case may be)” are rubber stamped on its face and
also on the counterfoil. The word ‘Duplicate’ may either be rubber stamped or punched;
 Mutilated, defaced or torn certificates surrendered shall be defaced by a ‘cancellation’ mark
and destroyed after three years with the authority of Board.
 Once a duplicate certificate is issued, the original certificate becomes extinct.
 In case unlisted companies, the duplicate share certificates shall be issued within a period of
three months and in case of listed companies such certificate shall be issued within 45 days,
from the date of submission of complete documents with the company respectively.

Register of renewed and duplicate share certificates

The particulars of every duplicate share certificate issued shall be entered forthwith in a Register
of Renewed and Duplicate Share Certificates maintained in Form No.SH.2 indicating against the
name(s) of the person(s) to whom the certificate is issued, the number and date of issue of the
share certificate in lieu of which the new certificate is issued, and the necessary changes indicated
in the Register of Members by suitable cross-references in the “Remarks” column.

The register shall be kept at the registered office of the company or at such other place where the
Register of Members is kept and it shall be preserved permanently and shall be kept in the custody
of the company secretary of the company or any other person authorized by the Board for the
purpose.

All entries made in the Register of Renewed and Duplicate Share Certificates shall be
authenticated by the company secretary or such other person as may be authorised by the Board
for the purposes of sealing and signing the share certificate.

Issuing duplicate share certificates to defraud

- 95 -
Section 46 (5) If a company with intent to defraud issues a duplicate certificate of shares, the
company shall be punishable with fine which shall not be less than five times the face value of the
shares involved in the issue of the duplicate certificate but which may extend to ten times the face
value of such shares or rupees ten crores whichever is higher and every officer of the company
who is in default shall be liable for action under section 447, for fraud.

Personation of Shareholder
Section 57 of the Companies Act provides that if any person deceitfully personates as an owner of
any security or interest in a company, or of any share warrant or coupon issued in pursuance of
this Act, and thereby obtains or attempts to obtain any such security or interest or any such share
warrant or coupon, or receives or attempts to receive any money due to any such owner:

he shall be punishable with imprisonment for a term which shall not be less than one year but
which may extend to three years and with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees.

************

TRANSFER OF SHARES / DEBENTURES [SECTION 56]

Section 56 of the Act puts an obligation on the Company to not to transfer the shares / debentures
of the Company unless proper instruments of transfer duly stamped executed by the transferor and
transferee is submitted to the Company within 60 days of execution along with certificate relating
to the shares / debentures or if no such certificate is in existence, then along with the related letter
of allotment of securities.

Section 56 (1) –
- Proper instrument of transfer (Share Transfer Deed)
- Share transfer deed should be duly stamped
- Executed by transferor and transferee
- Specify the name, address and occupation of transferee
- Along with certificate / letter of allotment

However, nothing in section 56(1) shall prejudice any power of the company to register, on receipt
of an intimation of transmission of any right to securities by operation of law from any person to
whom such right has been transmitted - (Section 56(2).

Rule 11(1) and (2) of Companies (Share Capital and Debentures) Rules, 2014
An instrument of transfer of securities held in physical form shall be in Form No.SH.4 and every
instrument of transfer with the date of its execution specified thereon shall be delivered to the
company within sixty days from the date of such execution.

Form No. SH-4, share transfer deed

Where instrument of transfer signed by both transferor and transferee is lost then
- On application of transferee duly stamped (as required in case of share transfer deed)
- Company may register the transfer.

- 96 -
- On such terms as to indemnify as the Board may think fit.
- The Company may require the submission of indemnity bond also.

Time Limit for Delivery of certificates

Section 56(4)(3) states that every company, unless prohibited by any provision of law or any order
of court, tribunal or other authority, deliver the certificates of all securities allotted, transferred or
transmitted, within a period of one month from the date of receipt by the company of the
instrument of transfer or as the case may be of the intimation of transmission, in case of transfer or
transmission of shares.

Application for partly paid-up share: Section 56 (3) read with Rule 11(3) of Companies
(Share Capital and Debentures) Rules, 2014-
Application for partly paid-up share if made by transferor
- Transfer shall not be registered, unless
- Company give notice to the transferee in the Form No. SH 5 and
- Transferee makes no objection within 2 weeks from the receipt of the notice.

Transfer of Demat Shares:

In India the Depository Act, 1996 has been passed and now shares can be Demat, which are kept
by the Depository (like NSDL), by this, shareholders do not get the physical form of share
certificates, and have to open an account (called Demat account) with the depository participants
(which is a bank attached to the Depository) and gets an cheque book and pass book. Thus, shares
are trade electronically and there is no chance of loss of shares certificates. As per section 108, the
procedure of transfer of shares shall not apply to transfer of securities affected by the transferor
and the transferee both of whom are entered as beneficial owners in the records of a depository.

In case of trading/transfer of Demat share, the seller and buyer both must have Demat account,
which is allotted a unique international number and whenever share are sold or purchased, such
account number is also to be given to the concerned share broker and entries for the sale and
purchase are reflected in the Demat account of both seller and buyer and ultimately records are
updated by the depository and buyer names are recorded by the depository as the beneficial
owners of the shares. The company takes the information about the shareholders from the
depository whenever required by the company.

***********
Refusal of transfer / transmission

Section 58 (1) – [Private Company]

 This section applies to private company.
 the private company can enforce the restriction contained in the article regarding transfer of
shares.
 If a company refuses to register transfer or transmission
- Of share / debenture
- When refuse was in pursuance of any power under its article or otherwise.
- Send notice of refusal to both transferor and transferee.
- And give reason of refusal.
- Notice must be given within 30 days from the date of delivery of instrument of transfer
or intimation of transmission.

- 97 -
 Section 58(3) - Appeal to Tribunal (As of now application to be made to CLB with fees of
Rs. 500/-).
– Transferor / transferee / person gives intimation for transmission
– May appeal to Tribunal against refusal or
– If company fails to register the transfer or
– Send notice.

 Section 58 (3) – Time of Appeal

- Within 30 days from the receipt of notice of refusal.
- Within 60 days from the date when instrument of transfer/ intimation of transmission
delivered to the company (if no notice is sent by the company).

 Tribunal may accept or dismiss the appeal.

 The Tribunal may direct to register the transfer / transmission.
 The company is bound to comply the order of Tribunal within 10 days from the receipt of
order.
 Tribunal may at its discretion make following order:
- Interim order including injunction or stay.
- Order as to cost.
- Order for payment of dividend or allotment of bonus or right shares.

If a person contravenes the order of the Tribunal, he shall be punishable with imprisonment for a
term which shall not be less than 1 year but which may extend to 3 years and with fine which shall
not be less than 1 lakh rupees but which may extend to 5 lakh rupees. [Section 58 (6)]

Section 58(4): Refusal of transfer by Public Company

- The provisions of this section are applicable to public companies only
- Shares of public company are freely transferable
- Therefore, it cannot refuse the transfer of its shares by virtue of any power it might be having
in its AOA. Rather no such power is relevant any more.
- However, public companies may refuse to transfer the share in pursuance of any law (e.g.
SICA, FERA (Now FEMA), SEBI Guidelines etc).
 Wherever the company has refused without sufficient cause, the appeal may be made by
transferee to Tribunal and it shall order the company to register the transfer of shares. (As of
now application to be made to CLB with fees of Rs. 500/-).
 Section 58 (4) – Time of Appeal
- Within 60 days from the receipt of notice of refusal.
- Within 90 days from the date when instrument of transfer/ intimation of transmission
delivered to the company (if no notice is sent by the company).

Registration of transfer of shares in contravention of SEBI act or SICA or any other law:
- Wherever a transfer is made in contravention of SEBI Act or SICA or any other law for time
being in force, then an appeal can be made to Tribunal.
- The depository, company, participant or the investor or SEBI may make appeal.
- On receiving appeal Tribunal may pass such order, as it may deem fit and direct to depository
or company to rectify its register or records.

Tribunal may make such an interim order on application made to it as to suspend the voting rights.
- However, during the pending of application share / debenture can be further transferred and
voting right shall also be available to transferee unless such right are suspended by Tribunal.

- 98 -
Recent Judgments related to Transfer of Shares:
1. The company has no power to divide and allot shares amongst joint share holders of shares
unless a proper instrument duly stamped was lodged in accordance with provision of Section
108 of the Companies Act, 1956 [Dr. Rajiv Das versus The United Press Limited (CLB
decided on September 4, 2001)].
2. Refusal to register share transfer on suspicion that the employee if admitted as a member will
attend general meetings of the company and may create nuisance by raising irrelevant issues
and also obtain access to the records to the company as a shareholder is not a valid reason.
[Appeal to the CLB No. 27, of 1975 dated 17th August, 1976, Shri Nirmal Kumar v.
Jaipur Metal and Electrical Limited].

3. To return the instrument of transfer by the company on the grounds to furnish the information
by transferee like details relating to group, if belong to particular group, consideration paid for
the shares, sources of income and income tax returns for the last three years. In such
circumstances even though registration of transfer of shares has not been refused but it shall
deemed to be refusal. Such grounds were held as not valid for the refusal for the transfer of
shares and company was directed to register the transfer of shares [T.S. Prem Kumar versus
Tamil Nadu Mercantile Bank Limited (CLB decided on May 11, 2001].
4. The public company can refused to register the transfer of shares only on the grounds
mentioned in section 111A(3) of the Companies Act, 1956. Where a company refused to
transfer the shares in the name of a person who was dismissed from the company’s services, it
was held that refusal was without sufficient cause [ P.R. Gokhale versus Tamil Nadu
Mercantile Bank Limited (CLB) May 11, 2001].
5. In Shri T.N. Kuriakos v. Premier Tyres Ltd., decided on 13.6.1983 (CLB), the appeal against
the refusal by the respondent company to register transfer of shares was allowed by the
Company Law Board (Now Tribunal) on the ground that the refusal of the respondent to
register transfer of shares in favour of the appellant was based on the decision of the Transfer
Committee, a sub-committee of the Board of directors and not that of the Board of directors as
such, and, therefore, the said decision was not a valid and legal decision.

**********

STAMP DUTY PAYABLE AND AFFIXATION/ CANCELLATION OF STAMPS

 Before the transfer is lodged with the company, it should be duly stamped.
 The transfer of securities attracts stamp duty under the Indian Stamp Act, 1899 (Act 2 of
1899). Only the Central Government can levy stamp duty on share transfers. Stamps at the
rate of 25 paise for consideration of Rs.100/- or part thereof is payable.

The stamp duty payable on transfer of debentures is, however, governed by Article 62(b) of
Schedule I to the Indian Stamp Act, 1899, and also varies from State to State.

In this case, the duty would be:

(a) The duty applicable where the deed is executed, or
(b) The duty applicable where the registered office of the company is situated, whichever is
higher.

***********
Transmission of Shares – Section 56 (2):

- 99 -
It takes place when shares are transferred under the operation of law, either on the death of
the registered shareholder or on his being adjudged as insolvent. Transmission of share also
takes place when the holders is a company that gone into liquidation.

Section 56(2) of the Act provides that nothing in the section 56 (1) shall prejudice the powers of
the company to register, on receipt of an intimation of transmission of any right to securities by
operation of law from any person to whom such right has been transmitted.

It follows that, for such transmission, instrument of transfer is not required, and, merely an
application addressed to the company by the legal representative is sufficient.

Regulations 23 to 27 of Table F of Schedule-I contains the provisions related to the Transmission

of shares.

According to these regulations:

 the legal representatives are entitled to the shares held by deceased member and the company
must accept the evidence of succession e.g., a succession certificate or letter of
administrations or probate or any other evidence properly required by the Board of directors.
 He is, however, not a member of the company by reason only of being the legal owner of the
shares.
 But he may apply to be registered as a member.
 On the contrary, instead of being registered himself as a member, he may make such transfer
of the shares as the deceased or insolvent member could have made.
 The Board of directors also have the same right to decline registration as they would have had
in the case of transfer of shares before death.
 But if the company unduly refuses to accept a transmission, the same remedies are available
to the legal representative as in the case of a transfer namely, an appeal to the Tribunal under
Section 58.

*********

Nomination of shares: [section 72 read with Rule Rule 19 of Companies (Share Capital and
Debentures) Rules, 2014]
Sub-section (1)- every shareholder/ debenture holder may, any time, nominate on Form No. SH
13 in the prescribed manner, a person to whom his shares/debentures shall vest in case of his
death.
Sub-section (2)- in case of joint holding, joint holder may together nominate a person to whom all
rights in the shares/debenture shall vest in the event of death of all the joint holders.
Sub-section (3)- Notwithstanding anything contained in any other law or in any disposition
(whether testamentary i.e. will or otherwise), where a nomination is done, the nominee shall on the
death of shareholder/debenture holder or all joint holders as the case may be, become entitle to all
the right in those share/debentures, unless the nomination is cancelled or varied in the prescribed
manner.
Sub-Section (4)- where nominee is minor, shareholder/ debenture holder may appoint a person (as
guardian), who will be entitled to shares during minority, in event of death of the holder.

Difference between Share transfer and transmission:

1. Transfer of share is the voluntary act of the parties whereas transmission takes places because
of operation of law like due to death or insolvency.

- 100 -
2. Transfer take place against the consideration whereas no consideration in case of transmission.
3. Transfer of share can be affected through the valid execution of ‘share transfer deed’, whereas
no such instrument of transfer is required in case of transmission. Transmission is recorded by
the company on the basis of evidences and no stamp duty is payable on transmission of shares.
4. After the transfer of shares, the liability of the transferor (generally) ceases whereas liability
continues in case of transmission of shares.

************
Blank Transfers:
A bank transfer is an instrument of transfer signed by the transferor in which the name of the
transferee and the date of the transfer are not filled. The ownership of shares in a company is
generally transferred from one person to another by the execution of a ‘transfer instrument’ or
‘transfer deed’ or simply ‘transfer’.

In blank transfer, the seller only fills in his name and signs it, the buyer’s name & signature and
the date of sale is not filled in the transfer form. This will enable the buyer to sell the shares again
to a subsequent buyer without filling his name and signature. The process of purchase and sale can
be repeated any number of times with the blank deed and if any transferee want he can fill in his
name and date and get the shares registered in his own name.

Blank transfer lent itself to certain abuses like:

a. Avoidance of transfer stamps;
b. Concealment of identity of the real beneficial owners behind their nominees;
c. Evasion of tax by suppression of ‘secret’ profit invested in holdings on blank transfers.

********
Surrender of shares:
When a shareholder of a company voluntarily gives up his shares, it is said to have surrendered
them to the company. The Companies Act does not contain any provision relating to surrender and
Table F does not confer any power to the company to accept the surrender of shares. If the
company accepts the surrender of share, it may amount to purchase by the company it own shares
that are hit by section 67 (prohibition of purchase of own share) and section 68 (Buy-back).
Further, acceptance of surrender of shares amount to reduction of share capital, which is not valid
unless approved by the court.

The articles of the company may empower the director to accept the surrender of shares. The
courts too recognize the surrender of share as it relieves the director from formalities of forfeiture
of shares. Surrendered shares can be reissued in the same way as forfeited shares.

**********

Forged Transfers:
An instrument of transfer of shares on which the signature of the transferor is forged is called
forged transfer.

Consequences of a forged transfer-

1. A forged transfer is a nullity. It does not give the transferee concerned any title to the shares.
2. Right to restore the name in the register of member: If the company acts on a forged
transfer and removes the name of the real owner from the Register of members then the

- 101 -
 company is bound to restore the name of the real owner in the register and to pay him any
dividends, which he ought to have received.
3. Innocent buyer has no right to be registered as shareholder: If by forgery, a person obtains
certificate of transfer of shares from a company and transfers the shares to another person for
value acting in good faith, such another person does not get a good title to the shares so
transferred, because a forged transfer is a nullity. But the company shall be liable to
compensate such another person, as the company had issued a certificate to transferor and was
therefore estopped from denying the liability accruing from its own act.
4. The company can recover the loss from transferee: The transferee must take care that he is
not getting a certificate from the company on a forged transfer, because in that case the
transferee shall be liable to indemnify the company against the consequences of the damages,
which may have to be paid, by the company to the true owner.

************

TRANSPOSITION OF NAME
1. In the case of joint-shareholders, one or more of them may require the company to alter or
rearrange the serial order of their names in the register of members of the company.
2. In this process, there will be need for effecting consequential changes in the share
certificates issued to them.
3. If the company provides in its articles that the senior-most among the joint-holders will be
recognised for all purposes like service of notice, a copy of balance sheet, profit and loss
account, voting at a meeting etc., the request of transposition may be duly considered and
approved by the Board or other authorised officer of the company.
4. Since no transfer of any interest in the shares takes place on such transposition, the
question of insisting on filling transfer deed with the company, may not arise.
5. Transposition does not also require stamp duty.
6. The Stock Exchange Division of the Department of Economic Affairs has clarified that
there is no need of execution of transfer deed for transposition of names if the request for
change in the order of names was made in writing, by all the joint-holders.
7. If transposition is required in respect of a part of the holding, execution of transfer deed
will be required.

********

- 102 -
 COMPANY’S LIEN ON SHARES

 Articles 9 to 12 of Table F of Schedule I to the Act carry the rules as to lien.

 These articles are not compulsory.
 A company may adopt its own articles regarding the subject matter of lien as also regarding
any money due to it from the shareholder either originally or subsequently by a special
resolution.
 The fact to be noted is that unless the articles provide for a lien, a company has no inherent or
prima facie right of lien on the shares of members [Canara Bank Ltd. v. Tribhuvandas Jetha
Bhai].
 But in the case of listed company, one of the requirements is that the articles of the company
shall provide that the fully paid shares will be free from all lien, while in the case of partly
paid shares, the company’s lien, if any, will be restricted to monies called or payable at a
fixed time in respect of such shares [Rule 19(2)(ii) of the Securities Contracts (Regulation)
Rules, 1957].
 In a lien the company shall have first and paramount lien on the shares of each member for his
debts and liabilities to the company.
 Such a provision is fully effective for private as well as public companies [Allen v. Gold Reefs
of West Africa Ltd.]
 Where lien is acquired by a subsequent amendment of the articles, it will not allow the
company to upset any rights which might have been acquired.
 But otherwise the right of a lien subsequently brought in, shall be binding on all the members
even if they became shareholders before the alteration [Allen v. Gold Reefs of West Africa
Ltd.]

**********

- 103 -
 MEMBERSHIP OF COMPANY

Whose name is mentioned in the register of members (ROM) maintained by the co.

As per Section 2 (55) of the Act a person may acquire the membership of a Company:
1. By subscribing of the memorandum a person shall be deemed to have agreed to become
members of a company, and on its registration, shall be entered as members in its register of
members.
2. By agreeing in writing in writing to become a member and whose name is entered as members
in its register of member. The agreement in writing may be -
- by application and allotment
- by taking transfer of shares
- by transmission of shares
- By acquiescence or estoppels - A person is deemed to be a member of a company if he
allows his name, without sufficient cause, to be on the register of members of the company
or otherwise holds himself out or allows himself to be held out as a member. In such a
case, he is estopped from denying his membership. He can, however, escape his liability
by taking prompt action for having his name removed from the register of members on
permissible grounds.
3. By holding equity share capital of a company whose name entered as beneficial owner in the
records of the depository shall be deemed to be a member of the concerned company.

Accordingly, there are two important elements which must be present before a person can acquire
membership of a company viz., (i) agreement to become a member; and (ii) entry of the name of
the person so agreeing, in the register of members of the company. Both these conditions are
cumulative [Balkrishan Gupta v. Swadeshi Polytex Ltd.].

Can a minor become a member?

To become a member, there must be an agreement. To make an agreement there must be
contractual capacity. As per section 11 of the Indian Contract Act, 1872, a minor is not a
competent party to enter into contract. Further, in the case of Mohri Bibi versus Dharmdas
Ghose (1903) I.L.R. 30 Cal. 539, it was held that contract with the minor is void.

When a company allots shares to a minor on his application, without knowing that he is minor.
Then the Company can rescind the contract / allotment and strike the name of the minor off the
register of members and refund the money received for allotment of share.

Whether the company can compel to minor to restore to benefit (like dividend) received by him?

It is matter for the Court to decide. A minor has no right to cheat some one. As per section 33 of
the Specific Relief Act, 1963, the court has discretion to require a minor to return the benefits
obtained under void contract.

When a minor is allowed to become a member of a company?

The Punjab and Haryana High Court held that there is no legal bar to minor becoming a member
of a company by acquiring shares (by way of transfer) provided the shares are fully paid up and no
further obligation or liability is attached to them [Devan Singh Minerva Films Ltd.]

- 104 -
The Company Law Board held that fully paid up share could be transferred in the name of minor
when his lawful guardian signed the application Nandita Jain V Bennet Coleman & Company
Ltd.

Whether following can become the member of a company:

1. Company: A Company is a legal person and is competent to contract. It can become member
in any other Company and it must be authorised by its MOA to invest in the other Company..
2. Limited Liability Partnership, being an incorporated body under the statute, can become a
member of a company.
3. Partnership Firm: A partnership firm is not a separate legal entity, and legal person it cannot
be registered as a member of a company. However, as per section 8, a firm can be a member in
a company registered under section under section 8.
4. Insolvent/ bankrupt: An insolvent may be a member of a company, as long as he is on the
register of member. He is entitled to vote. But, an insolvent is incompetent to enter into
contract therefore, cannot become member by acquiring shares.
5. Section 25 – section 8 Company: a Company registered under section 25 / section 8 of the
Act can become the member of another Company if it is authorised by its MOA.
6. Foreigners: A foreigner can become member of an Indian Company subject to the provisions
of the FEMA, 1999. In the event of war he will become alien enemy and his power of voting
and his rights to receives notices wail be suspended.
7. Pawnee: A Pawnee cannot be treated as a member of the Company. It is only Pawnor who
continues to be a member of the Company and can exercise the rights of a member.
8. Bankrupt: A bankrupt may be a member of a Company as long as he is on the register of
members. He is entitled to vote.
9. Receiver: A receiver whose name is not entered in the register of members cannot exercise
any of the membership rights attached to the share
10. Trade Union: A trade union registered under Trade Union Act can be registered as member of
the Company and can hold shears in its own name.

Joint Membership
It is possible for a Company to issue shares in the name of two or more persons jointly. Every
joint holder of a share is a member of the Company but for the purpose of counting joint holders
will be counted as one member. The following are the provisions related to the joint holders:
 Not more than three names should be included in an application (as per standard listing
agreement)
 Only one share certificate will be issued.
 All the joint holders are jointly and severally liable to pay calls
 The first named shareholder will be entitled to vote.
 A document may be served in the name of first named joint holder in the absence of nay
instructions given be the joint holders.
 Dividend will be paid in the name of first named joint holder unless written instructions has
been given to the Company.
 Transfer of share will be valid if all the joint holders sign transfer deed.
 Joint holders may together nominate a person to whom all the rights in the shares of the
Company shall vest in the event of death of all joint holders.
 For the purpose of counting the maximum number of members in case of a private Company
joint holder will be counted as one member and also in case of making application under
section 397 or 398 of the Act, joint holders will be counted as one member.

Registration of Shares in the name of Public Office

- 105 -
The Companies Act, 2013 contains no provisions with regard to the registration of shares in the
name of a public office. Shares cannot, therefore, be registered in the names of public offices like
the Collector of Central Excise or the Commissioner of Income-tax etc.

Cessation of Membership / Termination of membership:

1. By transfer and transmission of share
2. By forfeiture of share, valid surrender or enforcement right of lien
3. By redemption of preference of share
4. By rescission of contract of membership or to take share on ground of fraud or
misrepresentation
5. When share are sold by the Company to enforce s a lien
6. When member become insolvent and official receiver / assignee disclaims the shares or
transfer them.
7. Member is a company, and company goes into liquidation.
8. When share warrants have been issued in exchange of fully paid up shares.

Expulsion of a Member
The Article of Association of a Company cannot provide for the expulsion of a member as such a
power is opposed to the fundamental principles of the Company Jurisprudence and is ultra vires
the company.

According to Section 6 of the Companies Act, 2013, the Act overrides the Memorandum and
Articles of Association and any provision contained in these documents repugnant to the
provisions of the Companies Act, is void.

The Department of Company Affairs has, therefore, clarified that 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.

***********

Register of Members (ROM) – Section 88

Section 88 of the Companies Act, 2013 lays down:
(1) Every company shall keep and maintain the following registers in such form and in such
manner as may be prescribed, namely:—

(a) register of members indicating separately for each class of equity and preference shares held
by each member residing in or outside India
(b) register of debenture-holders; and
(c) register of any other security holders.

Every company shall keep in one or more books, a register of its members, and enter therein the
following particulars:
(b) the name and address, and the occupation, if any, of each member;
(c) in the case of a company having a share capital, the shares held by each member,
distinguishing each share by its number except where such shares are held with a depository,
and the amount paid or agreed to be considered as paid on those shares;
(d) the date at which each person was entered in the register as a member; and
(e) the date at which any person ceased to be a member.

- 106 -
The register of members is a prima facie evidence of its contents, including that of membership. It
provides evidence whenever the question arises whether a person is or is not a member.

Rule 3 of Companies (Management and Administration) Rules, 2014

Every company limited by shares shall from the date of its registration maintain a register of its
members in Form No. MGT 1.

Note: proviso substituted vide notification dated 23.09.2016

“Provided that in the case of a company existing on the commencement of the Act, the particulars
as available in the register of members maintained under the Companies Act, 1956 shall be
transferred to the new register of members in Form No.MGT-1 and in case additional information,
required as per provisions of the Act and these rules, is provided by the members, such
information may also be added in the register as and when provided.”

In the case of existing companies, registered under the Companies Act, 1956, particulars shall be
compiled within six months from the date of commencement of these rules.

Register of Debenture Holders or any other Security Holders

Every company which issues or allots debentures or any other security shall maintain a separate
register of debenture holders or security holders, as the case may be, for each type of debentures or
other securities in one or more books in Form No. MGT.2.

Rule 5 of Companies (Management and Administration) Rules, 2014

The entries in the registers maintained under section 88 shall be made within seven days after the
Board of Directors or its duly constituted committee approves the allotment or transfer of shares,
debentures or any other securities, as the case may be.

Place of keeping and inspection of the Registers - Rule 5

The registers shall be maintained at the registered office of the company unless a special
resolution is passed in a general meeting authorising the keeping of the register at any other place
within the city, town or village in which the registered office is situated or any other place in India
in which more than one-tenth of the total members entered in the register of members reside.

The entries in the registers maintained under section 88 and index included therein shall be
authenticated by the company secretary of the company or by any other person authorised by the
Board for the purpose, and the date of the board resolution authorising the same shall be
mentioned.

The entries in the foreign register shall be authenticated by the company secretary of the company
or person authorised by the Board by appending his signature to each entry.

Index of Members
Section 88(2) of the Companies Act, 2013 requires that every register maintained under section
88(1) shall include an index of the names included therein.

Rule 6 of Companies (Management and Administration) Rules, 2014

Index of names to be included in Register

- 107 -
Every register maintained under sub-section (1) of section 88 shall include an index of the names
entered in the respective registers and the index shall, in respect of each folio, contain sufficient
indication to enable the entries relating to that folio in the register to be readily found:

Provided that the maintenance of index is not necessary in case the number of members is
less than 50
The company shall make the necessary entries in the index simultaneously with the entry for
allotment or transfer of any security in such Register. Inspection must be allowed of the Index in
the same manner as applicable to the register of members.

**********
Foreign Register
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, debenture holders, other
security holders or beneficial owners residing outside India.”

If a company does not maintain foreign register of members or debenture-holders or other security
holders or fails to maintain them in accordance with the provisions of section 88(1) or section
88(2), the company and every officer of the company who is in default shall be punishable with
fine which shall not be less than Rs. 50,000/- but which may extend to Rs. 3 Lacs and where the
failure is a continuing one, with a further fine which may extend to Rs. 1,000/- for every day, after
the first during which the failure continues. [Section 88(5)]

A foreign register is deemed to be a part of the company’s principal register and it should be kept
in the same manner as the principal register and be likewise open to inspection.

A duplicate of such register should be maintained at the registered office in India and all entries
made in the foreign register should be made in the duplicate register at the registered office as
soon as possible.

***********

Rule 7 of Companies (Management and Administration) Rules, 2014

 A company which has share capital or which has issued debentures or any other security may,
if so authorised by its articles, keep in any country outside India, a part of the register of
members or as the case may be, of debenture holders or of any other security holders or of
beneficial owners, resident in that country (hereafter in this rule referred to as the "foreign
register").
 The company shall, within thirty days from the date of the opening of any foreign register, file
with the Registrar notice of the situation of the office in Form No.MGT.3 along with the fee
where such register is kept; and
 in the event of any change in the situation of such office or of its discontinuance, shall, within
thirty days from the date of such change or discontinuance, as the case may be, file notice in
Form No.MGT.3 with the Registrar of such change or discontinuance.

- 108 -
 A foreign register shall be deemed to be part of the company's register (hereafter in this rule
referred to as the "principal register") of members or of debenture holders or of any other
security holders or beneficial owners, as the case may be.
 The foreign register shall be maintained in the same format as the principal register.
 A foreign register shall be open to inspection and may be closed, and extracts may be taken
there from and copies thereof may be required, in the same manner, mutatis mutandis, as is
applicable to the principal register, except that the advertisement before closing the register
shall be inserted in at least two newspapers circulating in the place wherein the foreign
register is kept.
 If a foreign register is kept by a company in any country outside India, the decision of the
appropriate competent authority in regard to the rectification of the register shall be binding.
 The company shall—
o transmit to its registered office in India a copy of every entry in any foreign register
within 15 days after the entry is made; and
o keep at such office a duplicate register of every foreign register duly entered up from
time to time.

*********

Inspection of ROM – Section 94 (2) read with Rule 14 of Companies (Management and
Administration) Rules, 2014
The registers and indexes be open during business hours, subject to reasonable restrictions, as the
company may impose, so that not less than two hours in each day are allowed for inspection:
(a) of any member debenture holder, other security holder or beneficial owner without fee; and
(b) of any other person, on payment of a fee of Rs. 50/- for each inspection.

Any such member or other person may:

(a) make extract from any register and index without fee or additional fee, as the case may be;
(b) require a copy of such register and index or copy of any part thereof, on payment of a fee as
may be specified in the Articles of Association of the company but not exceeding Rs. 10 for
each page.

Such copy or entries or return shall be supplied within seven days of deposit of such fee.

Consequences if inspection is refused

According to Section 94(4), if any inspection or the making of any extract or copy required under
this section is refused, the company and every officer of the company who is in default shall be
liable, for each such default, to a penalty of Rs. 1,000/- for every day subject to a maximum of Rs.
1 lakh rupees during which the refusal or default continues.

Further section 94(5) provides that “the Central Government (Power delegated to Regional
Director vide notification dated 31.03.2015) may also, by order, direct an immediate inspection
of the document, or direct that the extract required shall forthwith be allowed to be taken by the
person requiring it.”

Register prima facie evidence

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

- 109 -
A register of members is prima facie evidence of the truth of its contents. Accordingly, 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 or a competent court outside India specified by the Central Government by
notification, in respect of foreign members or debenture holder residing outside India for
rectification of the register under Section 59 of the Act to take his name off the register, failing
which the doctrine of holding out will apply.

*********
Closing of Register of Members
Section 91 of the Companies Act, 2013 read with Rule 10 of Companies (Management and
Administration) Rules, 2014contains guidelines for closing the register of members.

A company may, after giving not less than 7 days previous notice by advertisement in some
newspaper, close the register of members or the register of debenture holders for any period or
periods not exceeding in the aggregate 45 days in each year, but not exceeding 30 days at any one
time.

Penalty: On every the company and every officer of the company who is in default shall be liable
to a penalty of Rs. 5000 for every day subject to a maximum of Rs. 1 lakh during which the
register is kept closed..”

The provisions contained in Section 91 of the Companies Act, 2013) are permissive and not
mandatory. The section has application only when a company desires to close its register of
members and in such a situation, the requirements of the section are to be complied with.

***********
Preservation of Registers, etc
Rule 15 of Companies (Management and Administration) Rules, 2014
 The register of members along with the index shall be preserved permanently and shall be
kept in the custody of the company secretary of the company or any other person authorized
by the Board for such purpose; and
 The register of debenture holders or any other security holders along with the index shall be
preserved for a period of 8 years from the date of redemption of debentures or securities, as
the case may be, and shall be kept in the custody of the company secretary of the company or
any other person authorized by the Board for such purpose.
 Copies of all annual returns prepared under section 92 and copies of all certificates and
documents required to be annexed thereto shall be preserved for a period of eight years from
the date of filing with the Registrar.
 The foreign register of members shall be preserved permanently, unless it is discontinued and
all the entries are transferred to any other foreign register or to the principal register.
 Foreign register of debenture holders or any other security holders shall be preserved for a
period of eight years from the date of redemption of such debentures or securities.
 The foreign register shall be kept in the custody of the company secretary or person
authorised by the Board.
**********

- 110 -
 DECLARATION BY PERSONS NOT HOLDING BENEFICIAL INTEREST IN ANY
SHARE – SECTION 89

Beneficial interest in a shares, for the purpose of section 89 and 90, includes, directly or indirectly,
through any contract, arrangement or otherwise, the right or entitlement of a person alone or
together with any other person to:
(i) exercise or cause to be exercised any or all of the rights attached to such share; or
(ii) receive or participate in any dividend or other distribution in respect of such share.

Section 89 of the Companies Act, 2013 read with Companies (Management and Administration)
Rules, 2014 makes it obligatory on the part of a person, whose name is entered in the register of
members of a company as the holder of a shares in that company but who does not hold
beneficial interest in such shares to make a declaration to the company in Form No. MGT – 4
specifying the name and other particulars of the person who holds the beneficial interest in such
shares [Sub-section (1)].

When any change occurs in the beneficial interest in such shares, the registered owner shall,
within a period of thirty days from the date of such change, make a declaration of such change to
the company in Form No. MGT - 4 [Subsection (3)].

Sub-section (2) of the Section 89 makes it obligatory for any person who, holds or acquires
beneficial interest in a share of a company to make a declaration to the company specifying the
nature of his interest, the particulars of the person in whose name the shares stand registered in the
books of the company and such other particulars as may be prescribed in Form No. MGT – 5.

Provided that where any change occurs in the beneficial interest in such shares, the beneficial
owner shall, within a period of thirty days from the date of such change, make a declaration of
such change to the company in Form No. MGT - 5 [Subsection (3)].

Where any declaration under section 89 is received by the company, the company shall make a
note of such declaration in the register of members and shall file, within a period of thirty days
from the date of receipt of declaration by it, a return in Form No. MGT - 6 with the Registrar in
respect of such declaration with fee.

Provided that nothing contained in this rule shall apply in relation to a trust which is created, to set
up a Mutual Fund or Venture Capital Fund or such other fund as may be approved by SEBI.

REGISTER OF SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY – SECTION 90

(as amended by the Companies (Amendment) Act, 2017 notified on 13.06.2018

Section 90 (1): 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

- 111 -
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:

Provided that the Central Government may prescribe a class or classes of persons who shall not be
required to make declaration under this sub-section.

The Companies (Significant Beneficial Owners) Rules, 2018 as amended by the Companies
(Significant Beneficial Owners) Amendment Rules, 2019 dated 08.02.2019

Rule 2 (b) “control” means control as defined in clause (27) of section 2 of the Act.

Rule 2 (c) "form" means the form specified in Annexure to these rules;

Rule 2 (d) “majority stake” means;-

i. holding more than one-half of the equity share capital in the body corporate; or
ii. holding more than one-half of the voting rights in the body corporate; or
iii. having the right to receive or participate in more than one-half of the distributable dividend
or any other distribution by the body corporate;

Rule 2 (e) “partnership entity” means a partnership firm registered under the Indian Partnership
Act, 1932 (9 of 1932) or a limited liability partnership registered under the Limited Liability
Partnership Act, 2008 (6 of 2009);

Rule 2 (f) “reporting company” means a company as defined in clause (20) of section 2 of the Act,
required to comply with the requirements of section 90 of the Act;

Rule 2 (g) “section” means a section of the Act;

Rule 2 (h) “significant beneficial owner” in relation to a reporting company means an individual
referred to in subsection (1) of section 90, who acting alone or together, or through one or more
persons or trust, possesses one or more of the following rights or entitlements in such reporting
company, namely:
i. holds indirectly, or together with any direct holdings, not less than ten per cent. of
the shares;
ii. holds indirectly, or together with any direct holdings, not less than ten per cent. of
the voting rights in the shares;
iii. has right to receive or participate in not less than ten per cent. of the total
distributable dividend, or any other distribution, in a financial year through indirect
holdings alone, or together with any direct holdings;
iv. has right to exercise, or actually exercises, significant influence or control, in any
manner other than through direct holdings alone:

Explanation I. – For the purpose of this clause, if an individual does not hold any right or
entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a
significant beneficial owner.

- 112 -
Explanation II. – For the purpose of this clause, an individual shall be considered to hold a right
or entitlement directly in the reporting company, if he satisfies any of the following criteria,
namely:
i. the shares in the reporting company representing such right or entitlement are held
in the name of the individual;
ii. the individual holds or acquires a beneficial interest in the share of the reporting
company under subsection (2) of section 89, and has made a declaration in this
regard to the reporting company.

Explanation III. – For the purpose of this clause, an individual shall be considered to hold a right
or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in
respect of a member of the reporting company, namely:-

i. where the member of the reporting company is a body corporate (whether

incorporated or registered in India or abroad), other than a limited liability
partnership, and the individual:
(a) holds majority stake in that member; or
(b) holds majority stake in the ultimate holding company (whether incorporated
or registered in India or abroad) of that member;

ii. where the member of the reporting company is a Hindu Undivided Family (HUF)
(through karta), and the individual is the karta of the HUF;

iii. where the member of the reporting company is a partnership entity (through itself
or a partner), and the individual:
(a) is a partner; or
(b) holds majority stake in the body corporate which is a partner of the partnership
entity; or
(c) holds majority stake in the ultimate holding company of the body corporate
which is a partner of the partnership entity.

iv. where the member of the reporting company is a trust (through trustee), and the
individual:
(a) is a trustee in case of a discretionary trust or a charitable trust;
(b) is a beneficiary in case of a specific trust;
(c) is the author or settlor in case of a revocable trust.

v. where the member of the reporting company is,-

(a) a pooled investment vehicle; or
(b) an entity controlled by the pooled investment vehicle,

based in member State of the Financial Action Task Force on Money Laundering and the
regulator of the securities market in such member State is a member of the International
Organization of Securities Commissions, and the individual in relation to the pooled
investment vehicle:
(A) is a general partner; or
(B) is an investment manager; or
(C) is a Chief Executive Officer where the investment manager of such pooled
vehicle is a body corporate or a partnership entity.

- 113 -
Explanation IV: Where the member of a reporting company is,
(i) a pooled investment vehicle; or
(ii) an entity controlled by the pooled investment vehicle, based in a jurisdiction which does not
fulfil the requirements referred to in clause (v) of Explanation III, the provisions of clause (i) or
clause (ii) or clause (iii) or clause (iv) of Explanation III, as the case may be, shall apply.
Explanation V: For the purpose of this clause, if any individual, or individuals acting through any
person or trust, act with a common intent or purpose of exercising any rights or entitlements, or
exercising control or significant influence, over a reporting company, pursuant to an agreement or
understanding, formal or informal, such individual, or individuals, acting through any person or
trust, as the case may be, shall be deemed to be ‘acting together’.

Explanation VI: For the purposes of this clause, the instruments in the form of global depository
receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall
be treated as ‘shares’.

Rule 2 (i) “significant influence” means the power to participate, directly or indirectly, in the
financial and operating policy decisions of the reporting company but is not control or joint
control of those policies

Rule 2A - Duty of the reporting company:

(1) Every reporting company shall take necessary steps to find out if there is any individual who
is a significant beneficial owner, as defined in clause (h) of rule 2, in relation to that reporting
company, and if so, identify him and cause such individual to make a declaration in Form No.
BEN-1.
(2) Without prejudice to the generality of the steps stated in sub-rule (1), every reporting
company shall in all cases where its member (other than an individual), holds not less than ten
per cent. of its;-
(a) shares, or
(b) voting rights, or
(c) right to receive or participate in the dividend or any other distribution payable in a
financial year,

give notice to such member, seeking information in accordance with sub-section (5) of section 90,
in Form No. BEN-4.

Rule 3: Declaration of significant beneficial ownership under section 90

(1) On the date of commencement of the Companies (Significant Beneficial Owners) Amendment
Rules, 2019, every individual who is a significant beneficial owner in a reporting company,
shall file a declaration in Form No. BEN-1 to the reporting company within ninety days from
such commencement.
(2) Every individual, who subsequently becomes a significant beneficial owner, or where his
significant beneficial ownership undergoes any change shall file a declaration in Form No.
BEN-1 to the reporting company, within thirty days of acquiring such significant beneficial
ownership or any change therein.

Explanation: Where an individual becomes a significant beneficial owner, or where his

significant beneficial ownership undergoes any change, within ninety days of the commencement
of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, it shall be deemed
that such individual became the significant beneficial owner or any change therein happened on

- 114 -
the date of expiry of ninety days from the date of commencement of said rules, and the period of
thirty days for filing will be reckoned accordingly.

Section 90 (2): Every company shall maintain a register of the interest declared by individuals
under sub-section (1) 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.

Section 90 (3): The register maintained under sub-section (2) shall be open to inspection by any
member of the company on payment of such fees as may be prescribed.

Rule 5: Register of significant beneficial owners:

(1) The company shall maintain a register of significant beneficial owners in Form No. BEN-3.
(2) The register shall be open for inspection during business hours, at such reasonable time of not
less than two hours, on every working day as the board may decide, by any member of the
company on payment of such fee as may be specified by the company but not exceeding fifty
rupees for each inspection.

Section 90 (4) 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.

Section 90 (4A) Every company shall take necessary steps to identify an individual who is a
significant beneficial owner in relation to the company and require him to comply with the
provisions of this section (Section 90 (4A) inserted by the Companies (Amendment) Act, 2019
dated 31.07.2019 effective from 15.08.2019).

Rule 4: Return of significant beneficial owners in shares

Upon receipt of declaration under rule 3, the reporting company shall file a return in Form No.
BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the
date of receipt of such declaration by it, along with the fees as prescribed in Companies
(Registration offices and fees) Rules, 2014”.

Section 90 (5): A company shall give notice, in the prescribed manner, to any person (whether or
not a member of the company) whom the company knows or has reasonable cause to believe:

(a) to be a significant beneficial owner of the company;

(b) to be having knowledge of the identity of a significant beneficial owner or another person
likely to have such knowledge; or
(c) to have been a significant beneficial owner of the company at any time during the three
years immediately preceding the date on which the notice is issued,

and who is not registered as a significant beneficial owner with the company as required under this
section.

Section 90 (6): The information required by the notice under sub-section (5) shall be given by the
concerned person within a period not exceeding thirty days of the date of the notice.

- 115 -
Rule 6: Notice seeking information about significant beneficial owners.-
A company shall give notice seeking information in accordance with under sub-section (5) of
section 90, in Form No. BEN-4.

Section 90 (7): The company shall,—

(a) where that person fails to give the company the information required by the notice within
the time specified therein; or
(b) where the information given is not satisfactory,

apply to the Tribunal within a period of fifteen days of the expiry of the period specified in the
notice, for an order directing that the shares in question be subject to restrictions with regard to
transfer of interest, suspension of all rights attached to the shares and such other matters as may be
prescribed.

Section 90 (8): On any application made under sub-section (7), the Tribunal may, after giving an
opportunity of being heard to the parties concerned, make such order restricting the rights attached
with the shares within a period of sixty days of receipt of application or such other period as may
be prescribed.

Section 90 (9): The company or the person aggrieved by the order of the Tribunal may make an
application to the Tribunal for relaxation or lifting of the restrictions placed under sub-section (8),
within one year from the date of such order. (Section 9 substituted by the Companies
(Amendment) Act, 2019 dated 31.07.2019 w.e.f. 02.11.2018.)

Provided that if no such application has been filed within a period of one year from the date of
order under sub-section (8), such shares shall be transferred without any restriction, to the
authority constituted under section 125 (5) i.e. IEPF authority.

Section 90 (9A) The Central Government may make rules for the purposes of this section.
(Section 90 (9A) inserted by the Companies (Amendment) Act, 2019 dated 31.07.2019 w.e.f.
15.08.2019).

Section 90 (10): If any person fails to make a declaration as required under sub-section (1), he
shall be punishable with imprisonment for a term which may extend to one year or with fine which
shall not be less than one lakh rupees but which may extend to ten lakh rupees or with both and
where the failure is a continuing one, with a further fine which may extend to one thousand rupees
for every day after the first during which the failure continues.

Rule 7: Application to the Tribunal

The reporting company shall apply to the Tribunal:

i. where any person fails to give the information required by the notice in Form No. BEN-4,
within the time specified therein; or

ii. where the information given is not satisfactory, in accordance with sub-section (7) of section
90, for order directing that the shares in question be subject to restrictions, including:
(a) restrictions on the transfer of interest attached to the shares in question;
(b) suspension of the right to receive dividend or any other distribution in relation to the shares
in question;

- 116 -
 (c) suspension of voting rights in relation to the shares in question;
(d) any other restriction on all or any of the rights attached with the shares in question.

Rule 8: Non-Applicability
These rules shall not be made applicable to the extent the share of the reporting company is held
By:
(a) the authority constituted under sub-section (5) of section 125 of the Act;
(b) its holding reporting company:

Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.

(c) the Central Government, State Government or any local Authority;

(d) (i) a reporting company, or
(ii) a body corporate, or
(iii) an entity,

controlled by the Central Government or by any State Government or Governments, or partly by

the Central Government and partly by one or more State Governments;

(e) Securities and Exchange Board of India registered Investment Vehicles such as mutual funds,
alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure
Investment Trust (In VITs) regulated by the Securities and Exchange Board of India,

(f) Investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and
Development Authority of India, or Pension Fund Regulatory and Development Authority

Section 90 (11): If a company, required to maintain register under sub-section (2) and file the
information under sub-section (4) or required to take necessary steps under sub-section (4A)
(added by the Companies (Amendment) Act, 2019 dated 31.07.2019 w.e.f. 15.08.2019), fails to
do so or denies inspection as provided therein, the company and every officer of the company who
is in default shall be punishable with fine which shall not be less than ten lakh rupees but which
may extend to fifty lakh rupees and where the failure is a continuing one, with a further fine which
may extend to one thousand rupees for every day after the first during which the failure continues.

Section 90 (12): If any person wilfully furnishes any false or incorrect information or suppresses
any material information of which he is aware in the declaration made under this section, he shall
be liable to action under section 447.

***********

RIGHTS OF MEMBERS
When once a person becomes a member he is entitled to exercise all the rights of a member until
he ceases to be a member in accordance with the provisions of the Act. The appointment of a
receiver, the attachment of the shares, the pledge of the shares or taking over of the management
of a company will not alter the position.

The rights of a member are as follow:

1. To receive copies of abridged balance-sheet and profit and loss account in the case of a
listed company and balance-sheet and profit and loss account otherwise;
2. To receive copy of contract for the appointment of the managing director/manager;

- 117 -
 3. To receive notices of the general meetings of the company;
4. To inspect statutory registers/returns and get copies thereof on payment of prescribed fee;
5. Right to attend meetings of the shareholders and exercise voting rights at these meetings
either personally or through proxy;
6. To receive share certificates as title of their holdings;
7. To transfer shares;
8. To resist and safeguard against increase in his liability without his written consent;
9. To receive dividend when declared;
10. To appoint directors;
11. To share the surplus assets on winding up;
12. Right of dissentient shareholders to apply to court;
13. Right to be exercised collectively in respect of making application to the Central
Government for investigation of the affairs of the company and for appointment of
Government directors;
14. Right to make application collectively to the Tribunal for oppression and mismanagement

********

LIABILITY OF MEMBERS
A member is liable to pay the full nominal values of the shares he holds in a company as and when
called up by the company. A member is also liable both under civil law and under criminal law for
any misrepresentation, fraud etc. which may, at any stage during his membership, be detected by
the company, of which he may be proved guilty in securing the shares in the company and/or
having the acquisition, transfer or transmission thereof registered in his name in the books of the
company.

The liability of the members becomes unlimited if the number of members falls below the
statutory limits i.e., seven in a public company and two in a private company (Section 45).

If a member ceased to be member of a company within one year prior to the commencement of the
winding up of the company he is liable to pay on the shares which he held to the extent of the
amount unpaid thereon, if:
(i) on the winding up, debts exist which were incurred while he was a member, and
(ii) the present members are not able to satisfy the contribution required from them in
respect of their shares.

Variation of Member’s Rights

Section 48 (1) of the Companies Act, 2013 lays down that 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 the class.

Further, the variation of rights of shareholders can be effected only:

(i) if provision with respect to such variation is contained in the Memorandum or Articles of
association of the company; or
(ii) 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.

- 118 -
However, if variation by one class of shareholders affects the rights of any other class of
shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained
and the provisions of this section shall apply to such variation.

Rights of Dissentient Members

Section 48 (2) of the Companies Act confers certain rights upon the dissentient shareholders.

Where the rights of any class of shares are varied, the holders of not less than ten per cent of the
shares of that class, being persons who did not consent to or vote in favour of the resolution for the
variation, can apply to the Tribunal to have the variation cancelled.

Where any such application is made to the Tribunal, the variation will not be effective unless and
until it is confirmed by the Tribunal.

The above application shall be made within 21 days after the date on which the consent was given
or the resolution was passed, as the case may be, and may be made on behalf of the shareholders
entitled to make the application by such one or more of their number as they may appoint in
writing for the purpose.

***********
Difference between Member and Shareholder:
Though, generally shareholder is the member of the company also but it is not always necessary.
There may be a case when a person is a member but not a shareholder or vice versa. For instance-
1. In the guarantee company there are members but no shareholders.
2. In the company having share capital, a shareholder is also the member of the company as his
name appears in the register of member.
3. Holder of the share warrant is not a member of the company but a shareholder only, as his
name is removed from the register of members.
4. A legal representative of a deceased member is a shareholder only until his name is entered
into register of member.
5. When shares are transfer, transferor remains member of the company until in place of his
name transferee’s name is entered into the register of member.

***************

Rectification of a Register of Members

The register of members contains the all the details of the members of the Company such as name,
address, occupations etc. the pe4rson whose name is entered in the register of members will be
considered to be a member of the Company although he may not have shares in the Company and
vice versa.

For the purpose of rectification in the register of members an application has to be made to
Tribunal as per section 59 of the Act. The following person can make an application to Tribunal
for rectification of register –
(a) Aggrieved person.
(b) Any member of the company.
(c) The company.

- 119 -
The application can be made for the following reasons / grounds:
(i) Without sufficient cause name of any person was entered in the register of the member.
(ii) Without sufficient cause name of any person is omitted from the register of member.
(iii) Default or unnecessary delay to enter in the register, the fact that the person has become
member or ceased to be a member.
(iv) Refusal to register the transfer / transmission

The Tribunal may, after hearing the parties to the appeal for rectification of register of members
either dismiss the appeal or direct that the transfer or transmission shall be registered by the
company within 10 days or direct for rectification of records of the depository or the register and
in the latter case also direct the company to pay damages if any, sustained by the party aggrieved.

Penalty:
On Company: Fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 5 Lacs.

Every officer of the company who is in default: Imprisonment for a term which may extend to
one year or with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 3 lakhs,
or with both. [Section 59(5)]

It is pertinent to note that though the time limit for filing an application for rectification of register
of members has not been specified in the Act, the provisions of Article 137 of the Limitation Act
would apply and in consequence, the application for rectification must be made within three years
from the date on which the right occurs.

**********

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.

Democracy means the rule of people, by people and for people. In that context the shareholders
democracy means the rule of shareholders, by the shareholders, and for the shareholders in the
corporate enterprise, to which the shareholders belong.

Precisely it is a right to speak, congregate, communicate with co-shareholders and to learn about
what is going on in the company. 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.

Under Section 179 of the Companies Act 2013 a general power has been conferred on the Board
of directors. The section provides that “Subject to the provisions of this Act, the Board of directors
of a company shall be entitled to exercise all such powers and to do all such acts and things, as the
company is authorised to exercise and do.”

- 120 -
SHAREHOLDER’S AGREEMENT - SHA
 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.
 SHA creates personal obligation between the members signing such agreement however, such
agreements do not become a regulation of the company in the way the provisions of Articles
are.

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, 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 agreements [Blount v. Taft].

While shareholders’ agreements are enforceable in England regardless of whether they have been
incorporated in the articles of association of the company, in India courts have either refused to
recognize clauses in shareholders agreements or, even when consistent with company legislation,
enforced such clauses only if they have been incorporated in the articles of association of the
company. There is a series of rulings where the courts have upheld that in case of any conflict
between the Articles and the SHA, the former will always prevail.

The decisions on shareholders’ agreements are not uniformly inclined in a direction. The High
Court decisions are limited in their applicability as they are susceptible to disagreements by other
High Courts, thereby conferring limited precedential value. It is difficult to come to clear and crisp
answers as to enforceability of shareholders’ agreements.

************

VETO POWER
Meaning of the term – “veto”

A veto – Latin for "I forbid" – is the power to unilaterally stop an official action, especially the
enactment of legislation. A veto may give power only to stop changes, thus allowing its holder to
protect the status quo.

- 121 -
The Companies Act, 2013 introduced various provisions to essentially bridge the gap towards
protection and welfare of the minority shareholders under Companies Act, 1956. As per the
Companies Act, 1956, shareholders who hold the majority of shares, rule the company. This
majority principle is recognised in a land mark case Foss vs. Harbottle. The decision taken by the
majority shareholders was binding on the minority. Now this principal has been replaced and
minority shareholders have been given greater power under Companies Act, 2013.

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".

************

- 122 -