Faculty : CA Rachna Parakh Dubey

Chapter - 4
Share And Debentures
Section 2(84) : Definition of Shares
Section 43 : Kinds of S/C
Section 46 : Share Certificate
Section 47 : Voting Rights : Equity & Preference
Section 48 : Variation in Share holder’s Right
Section 49 : Calls on Uniform Basis
Section 50 : Calls in Advance
Section 52 : Shares issued at Premium
Section 53 : Shares issued at Discount
Section 54 : Sweat Equity Shares
Section 55 : Preference Shares
Section 56 : Transfer of Securities
Section 57 : Punishment of personation
Section 58 : Refusal to transfer of securities
Section 60 : Publication of issued & subscribed share capital
Section 61 : Alteration of Share capital
Section 62 : Further Issue of Shares
Section 63 : Bonus Shares
Section 64 : Registration of Alteration with ROC
Section 66 : Reduction of Share Capital
Section 67 : Co. not to give financial assistance for purchase
Section 68 :Buy Back
Section 69 :CRR
Section 70 : Prohibition of of Buy-Back
Section 71 : Debentures
Section 72 : Nomination Facility
SECTION 52: Shares Issued at a Premium

Meaning: When shares are issued on above face value, the excess amount collected is called premium.
It is pure profit of company and company with good marketing value issues such shares.

Section 52 lays down 5 uses of share premium:-

Issue of fully paid Writing off discount Buy-back under

Bonus shares and expenses on Section 68
issue of securities

Writing off preliminary Writing off premium

expenses payable on redemption

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 Any other use is considered as reduction of capital.

 It cannot be used for dividend distribution.
 Differential premium can be charged on different issue.
 There is no maximum limit of premium amount.
 It is part of Reserves and Surplus & it is credited to ‘Securities Premium’ Account.

Section 53: Shares Issued at Discount

 A company shall not issue shares at a discount, except in the case of an issue of sweat equity
shares given under section 54.

 Any share issued by a company at a discount shall be void.

 Debentures still can be issued at discount.
 Penalty:
Company
Liable to refund all monies
received with interest @12%
p.a. from the date of issue of
such shares to the persons to
whom such shares have been
issued.
Officer in default
 An amount equal to the
amount raised through the
issue of shares at a discount
or
 five lakh rupees, whichever is
less

It is clear for the reading of section 52 and 53 that these restrictions are only on issue of shares; it
could be equity or preference but not on any debt related products like bonds or debentures.

Section 54: Sweat Equity shares

Sweat Equity shares means such equity shares as are issued by company to its directors or employees
either free or at a discount for providing Intellectual Property Right (IPR), Technical knowhow or any
value addition, present or future. Such shares can be given to permanent employees of company
including the employees of holding subsidiary.

Conditions:-
 Such shares must be authorized by AOA.
 The issue is authorised by a special resolution passed by the company.
 The notice should contain explanatory statement with details like:
 Class of employees to whom shares are issued;
 Issue price;
 Market Value;
 Consideration Receive;
 No. of shares being offered.
 Such shares should be of class, already issued.
 Shares should be ‘Pari Passu’ (equal right) with other shares.
 Listed companies should follow SEBI guidelines & other companies should follow CG guidelines.

Section 55: Preference shares – Issue and Redemption

Preference share are the shares issued with two preferential rights:
i) Priority in repayment of principle at the time of winding up and

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ii) Priority in dividend at fix rate.

Types of Preference Shares

On the basis of On the basis of On the basis of

dividend conversion redemption

- Cumulative - Convertible (mandatorily or

- Redeemable
- Non-cumulative optionally; partially or fully)
- Irredeemable
- Participatory - Non - convertible
- Non- participatory

Statutory requirements:-
 Issue must be authorized by AOA.
 Issue must be approved by a Special Resolution passed at a general meeting.
 Notice must be accompanied by explanatory statement.
 There should not be any subsisting default in repayment of earlier preference shares or their
dividend.
 Maximum tenure of preference shares is 20 years. However, infrastructure companies can issue
preference shares upto 30 years. Subject to condition that after the end of 20 years company shall
give option of redemption of 1/10th shares each year, to its shareholders.
 Redemption: Only fully paid up shares can be redeemed. Preference shares must be redeemed on
the due date from past profits or from proceeds of fresh issue. However, if company is unable to
redeem, it may take consent of 3/4th shareholders of that class & apply to tribunal seeking approval.
However, the dissenting shareholders may claim their money being refunded.

•Unable to redeem/pay Dividend ?

•Take consent of 3/4th majority

•Approval of Tribunal

•Issue FURTHER preference shares

•Forthwith pay to dissenting

 If the redemption is done out of profits, company must create CRR (Capital Redemption Reserve) of
a sum equal to the nominal amount of the shares to be redeemed. It is a specific reserve can be
used for issue of Bonus shares only.
Extra point if you write to note down any please do –

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Section 63: Issue of Bonus Shares

Bonus shares are the shares allotted to existing equity shareholders, either free of cost (issue of fully
paid up bonus shares) or conversion of partly paid up shares into fully paid shares.
Example: 1:3 bonus issue means an existing shareholder will get one extra free share for every three
shares already held by him/her.
Statutory Requirements:-
 It must be authorized by AOA.
 It shall be approved by an Ordinary Resolution passed at a general meeting.
 The issue must be recommended by the Board.
 Sources:
 Capital Redemption Reserve
 Securities Premium
 General Reserve (Free Reserve)
 It cannot be given out of Revaluation Reserve.
 There should not be any subsisting default in repayment of Preferences share’s principal &
dividend, bank loan’s principal and interest, employee’s dues like bonus/gratuity/PF.
 If company has any existing partly paid up shares, they must be 1ST made fully paid up before issue
of new shares.
 Bonus once declared cannot be withdrawn.
 Bonus cannot be declared in lieu of dividend.

Section 62: Further issue of share capital – Rights Issue; Preferential Allotment

 Every company must first offer to its existing equity shareholders, any further issue of shares it
brings.
 This is done through the letter of offer. The letter of offer must be dispatched 3 days before the
opening of issue by registered post/ Speed post/e-mail.
 It must contain a notice specifying the number of shares offered and giving 15 to 30 days time to the
shareholders to accept or reject the offer.
 It must also contain a notice that every shareholder has the right to renounce. However, if
shareholders decline the offer, the Board may allot the shares in the interest of the company to any
other person.
Example: 1:8 rights issue means an existing investor can buy one extra share for every eight
shares already held by him/her. Usually the price at which the new shares are issued by way of
rights issue is less than the prevailing market price of the stock to encourage subscription.
 Following rights need not be given to existing shareholders:

New shares may be offered to outsiders in the following cases:

Consent of Shares issued to Conversion of 62(4) CG's Loan

shareholders in GM by employees [ESOP] existing debentures converted into
passing SR. Requires: SR in /Loan into equity. equity.
GM.

 Consent of SH/GM :- Issue price is decided by Registered Values.

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 ESOP :- Requires GM/SR.
 Section 62(4): Loans by CG: If CG has granted any loan to the company and considers it necessarily
in public interest looking into financial condition of company (outstanding principal, O/s interest &
other necessary matters). It may convert the loan into equity. This order can be passed even if initial
terms did not contain such condition.
However, if equity shareholders do not accept the same; they may file appeal to tribunal
within 60 days of such conversion.
After giving opportunity of being heard to both CG and Company, tribunal shall pass its order
which shall be final and binding upon all the parties. If no appeal is filed, the MOA shall stand
automatically be altered as per CG’s order.

Offer
Mr. A [Equity S/H]

Directors
Mr. A declines

Company gives it's to Mr. B Mr. B Accepts

(Preference shareholders)

 These shares can be issued to preference shareholders as well provided such issue is authorized by
a special resolution of the company and are issued on such conditions as may be prescribed.

Section 43: Share Capital Types

Section 2(84) of the Companies Act, 2013 defines share as a share in the share capital of a company
and includes stock.
Justice farwell:-
Borland Trustees Case
Share is not just a sum of money, it is a bundle of rights & obligations.

with voting rights

Equity share capital

with differential rights
as to dividend, voting or
Kinds of share capital otherwise

w.r.t.payment of
Preference share capital dividend and repayment
carries preferential right
of capital at time of
winding up

Shares with differential voting rights: are equity shares having lesser rights with respect to various
matters like dividend etc.
Conditions of issue:

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 The issue must be authorized by AOA.
 General Meeting/Ordinary Resolution ( if the company is listed then postal ballot u/s110).
 The post issue of differential shares can be maximum 74% of equity share capital.
 No default should be pending regarding filing financial reports or annual return with ROC in past
3 years.
 No default should be pending in repayment of principal/interest of debenture holders, deposits,
preference shareholders, Bank Loan or PFI, employee dues of Bonus, PF, gratuity & declared
dividend.
Even if the company does the repayment of the dues, it cannot issue differential shares
upto 5 years from the end of year in which the default is made good.
 The company should not have been penalized by any court or tribunal in the previous 3 years for
any offence is SEBI/ FEMA/ SCRA/ RBI Act or any other special Act.
Current equity shares cannot be converted into differential equity shares.

Section 46: Share certificate

 Share certificate is a Prima-facie evidence of ownership. It is a document declaring that the person
named these in is the owner of specified number of securities of the company.
It has two implications

An Estoppel as to title An Estoppel as to payment

Company cannot deny ownership If the company has issued a share

of a person whose name is certificate specifying that
mentioned in share certificate. Any particular payment has been
person who has relied on share received on those shares then it
certificate & has purchased any cannot later deny the same.
securities from a non-owner,
company will have to reimburse
the loss suffered

Duplicate Share Certificate:

 If the share certificate is lost, mutilated, destroyed, defaced or torn or stolen; shareholder can
apply to company for duplicate share certificate in prescribed form with prescribed fees along
with indemnity bond stating that he shall reimburse any loss cause to company due to issue of
duplicate share certificate.
 Company shall record the fact on share certificate and the register of share holder maintained u/s
88.

Difference between Share warrant and Share Certificate:-

Sr. SHARE CERTIFICATE SHARE WARRANT

No.
1) A share certificate is a prima facie A share warrant is a bearer document.
evidence of document of title.

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2) It can be Issued by Public & Pvt.
Company.
3) Can be issued for fully paid & partly paid
up shares.
4) The holder of share certificate is normally
a member of a company.
5) Share certificate is not negotiable.
6) Stamp duty is payable on transfer of
share specified in share certificate.
7) In order to qualify as a director, the
person should acquire shares in his own
name.
8) The holder of a share certificate can
present a petition for winding up.
Section 47: Voting Rights
Voting Rights of members are distributed as follows:
Equity Shareholders
 They have equal voting rights on all matters.
 If voting by show of hands then one person, one vote.
 Voting right on Poll/E-voting/Postal Ballot : Value based
voting proportionate to paid up equity share capital.
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It can be Issued only by Public Company.
Can be issued only with respect of fully paid up
shares.
The bearer of share warrant can be member only
if the articles provide.
It is negotiable.
No stamp duty is payable on transfer of a share
warrant.
This is not applicable to share warrants.
Cannot present a petition for winding up.
Preference Shareholders
They normally don’t have voting
rights. However, they can vote in
following cases:
(a) Matters that directly affect
them,
(b) Reduction of capital,
(c) Winding up of company or
(d) If dividend is pending for 2
years
They get voting rights in all matters.
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Voting Rights

Equity Shares Preference Shares

On every resolution
In proportion of
place before the
paid up capital
company

Differential Voting Dividend not paid

Rights for 2 years
Normal

As defined in
In proportion of Article/ Terms of
paid up capital issue Winding up

Directly affecting
interest

Section 48: Variation of Shareholder’s Rights

Condition for varying rights:

 The holder of atleast 3/4th of the issued shares of the class whose rights are to be varied must give
their consent in writing or a special resolution must be passed at a separate meeting of holders of
the issued shares of that class.
 Variation in rights must be authorized by MOA or AOA.
 In the absence of any such provision in the MOA or AOA, such variation shall not be prohibited by
terms of issue of that class.
 Any dissenting holder, holding atleast 10% of class of shares, can apply to tribunal for cancellation
of variations within 21 days of passing of resolution.
 Tribunal will either allow variation or disallow the variation if it is satisfied that the variation would
unfairly prejudice the shareholders.
 The decision of the tribunal shall be final.
 The order passed by the tribunal is to be filed with ROC within 30 days of the date of order.

Section 49: Calls on uniforms Basis

 Calls should be made on uniform basis from all shareholders of particular class by serving a valid
notice.

 Only the Board has a power to make call through by passing Board Resolution in Board Meeting
and this power cannot be delegated & should be used in bonafide interest of the company.
 An interval of one month is required between two successive calls and not more than 25% of
nominal value of shares can be called at one time.
 In the event of non-payment or Calls in Arrear, company may do forfeiture.

Procedure for forfeiture:

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 Forfeiture must be Authorised by Aritcles.
 It must be in bonafide interest of the company.
 Notice must be given to defaulting shareholders before forfeiture by clear mentioning that
forfeiture will be done in the event of non-payment.
 Minimum 14 days time must be given.
 Thereafter Board shall conduct the meeting and shall pass resolution for forfeiture. The power of
forfeiture must be used by Board in the bonafide interest of the company not arbitrarily.

Effect of forfeiture:
 Cessation of membership: Once shares are forfeited membership shall be lost and all rights shall
be extinguished. However, he shall remain liable as a contributory to pay the balance calls in the
event of winding up, if his shares are not re-issued prior to winding up.
 Cessation of liability: Once forfeited shares are re-issued & company received full money in
respect of those shares, the Liability of original shareholder shall be ceased.
Forfeited shares becomes the property of the company & may be re-issued by the Board as board
deems fit in the interest of the company.

Calls in Advance Section 50

 Calls in advance can be accepted only if permitted by articles.

 Calls in Advance do not give any extra voting rights.

 Interest may be paid on calls in advance, if permitted by Articles (Maximum upto 12%).
 Calls in advance cannot be refunded & can only be adjusted in the subsequent calls and will be
refunded during winding up in priority.
It is not a part of shares capital; it is treated as current liabilities.

Extra point if you write to note down any please do –

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Section 56: Transfer & Transmission

(a) Transfer: Transfer means voluntarily transfer of ownership from one person to another.

Procedure:
 Following documents must be submitted at registered office of company within 60 days of
transfer along with:-
 Instrument of Transfer effected on a stamp paper
 Original share certificate/ letter of allotment
 Form no. SH-4 along with prescribed fees.
 If the shares are fully paid up, company shall affect the transfer, change the register of
members’ maintained u/s 88 & issue fresh shares certificate to transferee within 30 days.
 If the shares are partly paid up & the share transfer form is not signed by transferee then
company shall send notice to transferee and the transferee gives no objection to the transfer
within two weeks from the receipt of notice for balance call, thereafter company shall record
the transfer.

Different conditions Period of the delivering the certificates

In the case of subscribers to the
memorandum;
In the case of any allotment of any of its
shares
In the case of a transfer or transmission of
securities
In the case of any allotment of debenture
Within 2 months from the date of
incorporation
Within a period of two months from the date of
allotment
Within a period of one month from the date of
receipt by the company of the instrument of transfer
or the intimation of transmission
Within a period of six months from the date of
allotment

(b) Transmission: Transmission means transfer of ownership of security through operation of Law.
 Transfer of shares to legal heir of deceased member.
 Transfer of shares to official assignee during insolvency.
This can be done by a simple application without payment of stamp duty.

(c) Difference between Transfer & Transmission

Sr. Transfer of shares Transmission of shares

No.
1 It is affected by a voluntary act of parties by It means the transfer of title of shares by the
way of a contract. operation of law.
2 It takes place for consideration. No consideration is involved.
3 The transferor has to execute a valid There is no prescribed instrument of
instrument of transfer. transfer.
4 As soon as transfer is complete, the liability of Original liability of shares continues to
the transferor ceases. exist.
5 Stamp duty is payable on the market value of No need to pay stamp duty.
shares.

(d) Default in compliance of the provisions: Where any default is made in complying with the
provisions of sub-sections (1) to (5), the company shall be punishable with fine varying from

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25,000 rupees to 5 lakh rupees and every officer of the company who is in default shall be
punishable with fine with the minimum of 10 thousand rupees extending to 1 one lakh rupees.
Section 57: Punishment for Personation of shareholder

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 obtain any such security or
interest, such person shall be punishable with imprisonment not less than 1 year but which may extend
to 3 year and with fine not less than ₹ 1 lakh but which may extend to ₹ 5 lakh.

Section 58: Refusal to Transfer Securities

Whenever application is filed to transfer the securities u/s 56, company must either allot the securities
to the transferee or it shall send notice of refusal within 30 days, along with the reasons for the same.
 In case of private company, Transferee has right to file application with tribunal within 30 days of
receiving notice. If no notice is received from company then transferee can Suo-Moto file
application within 60 days of filling application for transfer.
 In case of public company, transferee can file an application within 60 days of receiving notice. If
no notice is received then he may file application within 90 days of filling the application for
transfer.
 The tribunal shall give opportunity of being heard to concern parties & shall pass its order, which
shall be final and binding upon all the parties.
 If the decision is in favour of transferee, tribunal shall immediate order rectification of register u/s
59 within 10 days of order along with reimbursement of any expenses, damages suffered by the
transferee.
 In case of any application relating to share transfer, application is to be filed in State where R.O. is
located.
 If a person contravenes the order of the Tribunal he shall be punishable with imprisonment
for a term not less than 1 year but may extend to 3 years and with fine not less than 1 lakh
rupees which may extend to 5 lakh rupees.

Section 61: Alteration of Share Capital

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Alteration of capital refers to change in capital clause of the MOA in the following manner:-

Increase its Sub-division Consolidation Diminution or Conversion of

Authorised of shares of Shares cancellation of shares into stock or
share Capital unsubscribed capital stock into shares

Procedure:-
 It must be Authorised by AOA.
 The capital clause of the MOA shall be changed.
 It shall be approved by Ordinary Resolution passed at a general meeting.
 Notice should be accompanied with explanatory statement including reasons for alteration.
 Section 64 requires that ROC should be notified within 30 days along with the copy of altered
MOA with the prescribed fees.
 The cancellation of shares shall not be deemed to be a reduction of share capital.
 Alteration is simple process & involvement of tribunal is not there.

Section 64: Notice to be given to Registrar for Alteration of Share Capital

 Where–
 a company alters its share capital in u/s 61, or
 an order made by the Government under section 62(4) has the effect of increasing
authorised capital of a company; or
 a company redeems any redeemable preference shares,
the company shall file a notice in the prescribed form with the Registrar within a period of 30 days
of such alteration or increase or redemption, as the case may be, along with an altered
memorandum.

 In default: Company and every officer in default shall be liable to a penalty of ₹ 1,000 for each
day during which such default continues, or ₹ 5 lakhs whichever is less."

Extra point if you write to note down any please do –

Section: 66 Reduction of Share Capital

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Reduction of share capital means following changes:

Cancellation of uncalled Paying off capital in excess Cancellation of shares capital not
portion of subscribed capital. of needs of company. represented by available assets.

Procedure:
 It must be authorized by AOA.
 It shall be approved by a special resolution passed at a general meeting.
 Explanatory statement must be enclosed explaining reasons.
 Application shall be filed with tribunal. Tribunal shall instruct to publish newspaper
advertisement regarding such reduction and inviting objections from affected parties.
 Tribunal shall call meeting with in 3 months & give notice to CG, ROC, SEBI and Creditors. If no
objection is received, tribunal shall pass its order. Auditor will have to furnish a certificate that
accounting treatment is done as per Accounting standards as prescribed u/s 133.
 The company shall deliver a certified copy of the order of the Tribunal and of a minute
approved by the Tribunal to the Registrar within thirty days of the receipt of the copy of the
order.
 Nothing in this section shall apply to buy-back of its own securities by a company under
section 68.
 The tribunal may order the company to write the word “and reduced” after its name in balance
sheet upto 5 years.
 If the name of creditor who is entitled to object is not entered in the list of creditors, and if
company is not able to pay the creditor after reduction of capital then every person who was a
member of the company as on the date of order for reduction by the Registrar, will be liable to
contribute the payment of such debt or claim, an amount equal to unpaid amount of his shares.
 If a company fails to comply with the provisions of this section, it shall be punishable with fine
which shall not be less than ₹ 5 lakhs but which may extend to ₹ 25 lakhs.
 If the company or any officer in default deliberately conceals name of any creditor, he shall be
liable u/s 447.
 Imprisonment = 6 month – 10 years
 Penalty = 3 times of amount involved
 If public interest is involved = Minimum imprisonment – 3 years.

Alteration Reduction
1 Section 61 Section 66
2 Ordinary Resolution SR (Special Resolution)
3 Tribunal Permission is not required. Tribunal Permission is
required.
4 5 types of alteration. 3 types of reduction.
5 Shareholder’s rights are not affected. Rights are affected.
6 Auditor’s certificate is not required. Auditor’s certificate is
required.

Section 67: Restriction on purchase by company or giving of loans by it for purchase of its
shares

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 A company cannot buy its own shares by giving financial assistance to any person.

 No public company shall give directly or indirectly any financial assistant by means of loan or
guarantee or providing security to any person to purchase its own shares or shares of its holding
company.
 However, the exceptions are:-
 Such loan can be given in the ordinary course of business by a company whose principal
business is money lending (banking company).
 Employees (excluding directors, KMP) can be given 6 months’ salary advance to purchase shares
of company or holding company to help as a beneficial owner. However, such shares shall not
have voting rights. The shares to be subscribed must be fully paid shares
 Company can give financial assistance to trustees’ or employees under the scheme approved by
shareholders in General meeting through Special Resolution.

BUY BACK OF SECURITIES [Sections 68- 70]

Section 68: Procedure / rule Section 69: Making of CRR Section 70: Prohibition

Section 68: Power of company to purchase its own securities

Section 68 of the Companies Act, 2013 provides the power of a company to purchase its own securities
subject to certain conditions.

(A) Conditions for buy-back:

 Board meeting / Board Resolution.
 It must be authorized by its AOA.
 Buy back of shares must be approved by a special resolution passed at a general meeting.
 Explanatory statement must be enclosed with notice, containing following details:
 All material fact related to Buy Back
 Necessity for Buy-back
 The source of Buy-back
 The class of share being bought back
 Amount invested
 Time limit for completion of Buy-back

(B) Sources of Buy-back: A company can purchase its own shares or other specified securities. The
purchase should be out of:

Free Reserves Fresh issue but not of same class Securities Premium (section 52)

(C) Limit of Buy-back :-

 25% of [paid up capital (+) free reserves] in one year (When shareholders do so). However
if board does buy-back in Board meeting then limit is 10%.

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 Post issue, Debt Equity Ratio should be 2:1 (maximum). However, CG may prescribe the
higher Ratio for prescribed class of companies.
 All Shares should be fully paid up.
 Listed companies should follow the SEBI guidelines & other companies should follow CG’s
guidelines.
 There can be only one buy-back in one year.
 Buy-back of shares cannot be made out of the proceeds of an earlier issue of the same kind
of shares.
(D) Share may be purchased from:
 Existing equity shareholders
 Open market
 Employees (ESOP)
(E) Declaration of Solvency: BOD shall file declaration of solvency with SEBI & ROC that they have
made full enquiry in the affairs of the company & company is capable of meeting its liability & will
not be rendered insolvent within one year.
(F) Cooling period – 6 months. Company shall not issue same class of shares for 6 months (Except:
Bonus & conversion).
(G) Time Limit of completion: Buyback shall be completed within 12 months from the date of
passing the special resolution or a resolution passed by the Board at general meeting
authorising the buy-back.
(H) Procedural compliance:
 Within 7 days of compliance of buy back, company shall physically destroy the securities.
Thereafter, it shall make the register of Buy-back.
 Company shall file return of buy-back within 30 days with ROC.
(I) Penalty for Default: If a company makes default in complying with the provisions of this section,
the company shall be punishable with fine which shall not be less than ₹ 1 lakh but which may
extend to ₹ 3 lakh and every officer of the company who is in default shall be punishable with
imprisonment upto 3 years or with fine which shall not be less than ₹ 1 lakh but which may
extend to ₹ 3 lakh, or with both.

Extra point if you write to note down any please do –

Section 69: Making of Capital Redemption Reserve [CRR]

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Where a company purchase its own shares out of free reserves or securities premium a/c then a sum
equal to nominal value of shares so purchased shall be transferred to CRR and details of such transfer
shall be disclosed in the balance sheet.

Section 70: Prohibition for buy-back in certain circumstances

 Company cannot do buy-back if there is any subsisting default in repayment of:

 Deposits or interest payment thereon;
 Debenture or interest payment thereon;
 Preference-shares or payment of dividend to any shareholder;
 Term Loan or interest payable thereon.
to any financial institutions or banking company.
 No Company can directly/indirectly purchase its own shares:
 through any Subsidiary including its own subsidiary companies; or
 through any Investment Company or group of investment companies; or
 If the company has not complied with the provisions of:
 Section 92 (Annual Report)
 Section 123 (Declaration of dividend)
 127 (Punishment for failure to distribute dividends)
 Section 129 (Financial Statements)
 Even if the default is rectified, the company cannot do buy-back upto 3 years.

Debentures Section – 71

Section 2(30): Debentures

Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt,
whether consisting a charge on the company’s assets or not.

Kinds of Debentures

On the basis of On the basis On the basis of On the basis of On the basis
convertibility of Security Redemption Registration of Charge

 Non- convertible  Unsecured ( No  Irredeemable  Registered  Pari Passu

 Partly convertible charge on assets)  Redeemable  Bearer charge (equal)
 Fully convertible  Secured (charge [10 Years (max.)  Datewise
 Optional convertible on Assets) infrastructure charge.
co. upto 30
years.

Features:
 Debentures include borrowed funds & bind the company for fix repayment on pre-decided date
along with fix rate of interest.
 The interest is a charge against profit of company.
 Debentures have no voting rights.

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Shares & Debentures

Basis Shares Debentures

1. Meaning These are owners funds of These are borrowed funds of
company company.
2. Represent It represents capital of company. It represents debts.
3. Status of holders Owners. Creditors.
4. Form of Return Shareholder get dividend. Debenture holders get interest.
5. Payment of Dividend can be paid to Interest can be paid even if there is
return shareholders only out of profits. no profit.
6. Security for No Yes
payment
7. Voting Rights They have voting rights. They do not have voting rights.
8. Conversion They can’t be converted into They can be converted into shares.
debentures.
9. Repayment in They are paid after payment of all They get priority over shares, so
event of winding the liabilities. they are repaid before shares.
up.

Statutory Requirements:

 BM/BR
 The issue of debentures shall be approved by a special resolution passed at a general meeting.
[Section 180 & Section 184 need to be complied with.]
 Prospectus need in case money is taken from the public.
 Debenture trustee: It is compulsory to appoint debentures trustee whose name should be
mentioned in the prospectus. Any person who is indebted to company or who has given any loan to
company should not be appointed as debenture trustee.
 Debenture trust Deed: It must be executed within 60 days of allotment, signed by debenture
trustee & the directors of company & it contains terms of issue.
 Debenture Redemption Reserve (DRR):

S.no. TYPE OF COMPANY Public issue or DRR DRI

Private
Placement
1 AIFI & Banking Co. Both N/A N/A
2 PFI u/s 2(72) Both N/A N/A
3 Listed NBFC/HFC Public Issue N/A 15%
Pvt. Placement N/A 15%
4 Other Listed Co. Public Issue N/A 15%
Pvt. Placement N/A 15%
5 Unlisted NBFC/HFC Both N/A 15%
6 Other Unlisted Co. Both 10% 15%

 No fixed date but it must be created before redemption.

 It is a Specific Reserve
 It can be created in installments. Higher DRR can be created.
 DRI (Debenture Redemption Investment):
 Apart from DRR co. shall deposit minimum 15% of the nominal value of debentures maturing
during the year. [Not Total]

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 Due date is on or before the 30th day of April in each year.
 Where to invest?
– deposits with any scheduled bank;
– in securities of the Central Government or of any State Government;
– in securities mentioned in section 20 of the Indian Trusts Act, 1882;If Payment is
not done on due date:
 Above investments cannot be charged for securing any loan etc. Also it should be used only
for redemption of debentures.
 Also it should not at any time fall below 15% of the amount of the debentures maturing
during the year ending on the 31st day of March of that year;
 In case of partly convertible debentures, Debenture Redemption Reserve shall be created in
respect of non-convertible portion of debenture.

 Default in Payment:
 If company does not pay the principal or interest on due date or debenture trustee observes
that assets of the company are insufficient to discharge the principal/interest, they may file
petition to tribunal.
 After giving opportunity of being heard to company, tribunal can reserve on further
debentures also it may instruct the company to pay the amount forth with or it may impose
any restrictions.

 Punishment for Default in compliance of order of the Tribunal: Every officer in default shall
be punishable with imprisonment upto 3 years or with fine which shall not be less than ₹ 2 lac
but which may extend to ₹ 5 lac or with both.

Section 72: Power to Nominate

 Every holder of a security may at any time nominate a person to whom the securities shall vest in
the event of his death, in the prescribed form and with prescribed fees.

 If the nominee is a minor, the security holder may appoint another person who shall be nominee in
case of death minor during his minority.
 In case of joint shareholders, they may either appoint single or separate nominee for their
respective share. The share will be transferred to nominee in case of death of all joint partners.

Extra point if you write to note down any please do –

Important Questions

Q.1 VRS Company Ltd. is holding 45% of total equity shares in SV Company Ltd. The Board of
Directors of SV Company Ltd. (incorporated on January 1, 2017) decided to raise the share

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capital by issuing further Equity Shares. The Board of Directors resolved not to offer any shares
to VRS Company Ltd. on the ground that it was already holding a high percentage of the total
number of shares already issued, in SV Company Ltd. The Articles of Association of SV Company
Ltd. provides that the new shares be offered to the existing shareholders of the company. On
March 1, 2017 new shares were offered to all the shareholders except VRS Company Ltd.
Referring to the provisions of the companies Act, 2013 examine the validity of the decision of the
Board of Directors of SV Company Limited of not offering any further shares to VRS Company
Limited.
[Hint: SV Ltd.’s decision not to offer any further shares to VRS Co. is not valid]

Q.2 The Directors of Mars India Ltd. desire to alter capital clause of memorandum of Association of
their company. Advise them, under the provision of the companies Act, 2013 about the ways in
which the said clause may be altered.
[Hint: Explain the provision of section 61]

Q.3 Ramesh, who is a resident of New Delhi, sent a transfer deed, for registration of transfer of
shares to the company at the address of its Registered Office in Mumbai. He did not receive the
shares certification even after the expiry of four months from the date of dispatch of transfer
deed. He lodged a Criminal Complaint in the Court at New Delhi. Decide, under the provisions of
the Companies Act, 2013, whether the Court at New Delhi is competent to take action in the said
matter?
[Hint: The jurisdiction binding on the company is that of the state in which the
registered office of the company is situated. Hence, in the given case the Delhi court is
not competent to take action in the matter.]

Q.4 Mr. "Y", the transferee, acquired 250 equity shares of BRS Limited from Mr. "X", the transferor.
But the signature of Mr. "X", the transferor, on the transfer deed was forged. Mr. "Y" after getting
the shares registered by the company in his name sold 150 Equity shares to Mr. "Z" on the basis
of the share certificate issued by BRS Limited. Mr. "X" and "Z" were not aware of the forgery.
State the rights of Mr. 'X', 'Y' and 'Z' against the company with reference to the aforesaid shares.
[Hint: X has the right against the company to get the shares recorded in his name.
However, neither Y nor Z have any rights against the company even though they are
bona fide purchasers. But as Z acted on the faith of share certificate issued by company,
he can demand compensation.]

Q.5 Data Limited (listed on Stock Exchange) was incorporated on 1st October, 2018 with a paid-up
share capital of ₹ 200 crores. Within this small time of 4 moths it has earned huge profits and
has topped the charts for its high employee friendly environment. The company wants to issue
sweat equity to its employees. A friend of the CEO of the Company has told him that they cannot
issue sweat equity shares as 2 years have not elapsed since the time company has commenced
its business. The CEO of the company has approached you to advise them about the essential
conditions to fulfilled before the issue of sweat equity shares especially since their company is
just a few months old. RTP MAY 2019
[Hint: Data Limited can issue Sweat equity shares because no such time limit of 2 years is
specified under section 54]

Q.6 Walnut Limited has an authorized share capital of 1,00,000 equity shares of ₹ 100 per share and
an amount of ₹ 3 Crores in its Share Premium Account as on 31-3-2018. The Board of Directors
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seeks your advice about the application of share premium account for its business purposes.
Please give your advice. RTP MAY 2019
[Hint: Explain provision of section 52]

Q.7 OLAF Limited, a subsidiary of PQR Limited, decides to give a loan of ₹ 4,00,000 to the Human
Resource Manager, who is not a Key Managerial Personnel of OLAF Limited, drawing salary of ₹
30,000 per month, to buy 500 partly paid-up Equity Shares of ₹ 1000 each in OLAF Limited,
Examine the validity of company's decision under the provisions of the Companies Act, 2013.
[Hint: Explain provision of section 67 with exceptions.
The company’s (OLAF Ltd.) decision is invalid due to two reasons: (i) The amount of loan
being more than 6 months’ salary; (ii) shares are partly paid up]

Q.8 Mars India Ltd. owed to Sunil ₹ 1,000. On becoming the debt payable, company offered Sunil 10
shares of ₹ 100 each in full settlement of the debt. The said shares were fully paid and were
allotted to Sunil. Examine the validity of this allotment is the light of the provisions of the
Companies Act, 2013.
[Hint: Explain the provision of section 62.
Mars India Ltd is empowered to allot the shares to Sunil in settlement of its debt to him.]

Q.9 What are the provisions of the companies Act, 2013 relating to the appointment of 'Debenture
Trustee' by a company? Whether the following can be appointed as 'Debenture Trustee:
(i) A shareholder who has no beneficial interest.
(ii) A creditor whom the company owes ₹ 499 only.
(iii) A person who has given a guarantee for repayment of amount of debentures issued by the
company?
[Hint: (i) appointed as a debenture trustee; (ii) cannot be appointed as a debenture
trustee; (iii) cannot be appointed as a debenture trustee]

Q.10 Mr. Nilesh has transferred 1000 shares of Perfect Ltd. to Ms. Mukta. The company has refused to
register transfer of shares and does not even send a notice of refusal to Mr. Nilesh or Ms. Mukta
respectively within the prescribe period. Discuss as per the provisions of the Companies Act,
2013, whether aggrieved party has any right(s) against the company for such refusal?
RTP MAY 2018
[Hint: Explain provision of section 58.
In the present case Ms. Mukta can make an appeal before the tribunal and claim
damages.]

Q.11 Harsh purchased 1000 shares of Singhania Ltd. from Pratik and sent those shares to the
company for transfer in his name. The company neither transferred the shares nor sent any
notice of refusal of transfer to any party within the period stipulated in the Companies Act, 2013.
What is the time frame in which the company is supposed to reply to transferee? Does Harsh,
the transferee have any remedies against the company for not sending any intimation in relation
to transfer of shares to him? (4 Marks) MAY-2018

[Hint: Provision of section 58]

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 Faculty : CA Rachna Parakh Dubey
Q.12 Xgen Limited has a paid-up equity capital and free reserves to the extent of ₹
50,00,000. The company is planning to buy-back shares to the extent of ₹ 4,50,000. The
company approaches you for advice with regard to the following:
(i) Is special resolution required to be passed?
(ii) What is the time limit for completion of buy-back?
(iii) What should be ratio of aggregate debts to the paid-up capital-and free reserves after buy-back?

(3 Marks) MAY 2018

[Hint: (i) No, special resolution will not be required as the buyback is less than 10% of the
total paid-up equity capital and free reserves; (ii) 1 year from the date of passing of the
resolution by the Board; (iii) 2:1]

Q.13 Can equity share with differential voting rights be issued? If yes, state the conditions under
which such shares may be issued. (6 Marks) MAY2018
[Hint: Provision of section 43]

Q.14 ABC Ltd. has following balances in their Balance Sheet as on 31st March, 2018:
₹
(1) Equity shares capital (3.00 lakhs equity shares of ₹ 10 30.00 lacs
each)
(2) Free reserves 5.00 lacs
(3) Securities Premium Account 3.00 lacs
(4) Capital redemption reserve account 4.00 lacs
(5) Revaluation Reserve 3.00 lacs
Directors of the company seeks your advice in following cases:

(i) Whether company can give bonus shares in the ratio of 1:3?
(ii) What if company decide to give bonus shares in the ratio of 1:2? (2 Marks)NOV 2018
[Hint: (i) For issue of 1:3 bonus shares, there will be a requirement of ₹ 10 lakhs (i.e., 1/3
x 30.00 lakh) which is well within the limit of available amount of ₹ 12 lakhs. So, ABC
Limited can go ahead with the bonus issue in the ratio of 1:3.
(iii) the company cannot go ahead with the issue of bonus shares in the ratio of 1:2, since the
requirement of ₹ 15 Lakhs is exceeding the available eligible amount of ₹ 12 lakhs]

Q.15 Which fund may be utilized by a public limited company for purchasing (buy back) its own
shares? Also explain the provisions of the Companies Act, 2013 regarding the circumstances in
which a company is prohibited to buy back its own shares.
(5 Marks) MAY 2019
[Hint: Provision of section 68 ]
RTP MAY 2018

Q.16 Kavish Ltd., desirous of buying back of all its equity shares from the existing shareholders of the
company, seeks your advice. Examining the provisions of the Companies Act, 2013 discuss
whether the above buy back of equity shares by the company is possible. Also , state the sources
out of which buy-back of shares can be financed?
[Hint: A company is allowed to buy back a maximum of 25% of the aggregate of its paid-
up capital and free reserves.]

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RTP NOV 2018

Q.17 Earth Ltd., a Public Company offer the new shares (further issue of shares) to persons other than
the existing shareholders of the Company. Explain the conditions when shares can be issued to
persons other than existing shareholders. Discuss whether these shares can be offered to the
Preference Shareholders?
[Hint: Explain provision of section 62. Shares can be offered to the preference
shareholders]

Q.18 Growmore Limited’s share capital is divided into different classes. Now, Growmore Limited
intends to vary the rights attached to a particular class of shares. Explain the provisions of the
Companies Act, 2013 to Growmore Limited as to obtaining consent from the shareholders in
relation to variation of rights.
[Hint: Explain provision of section 48]

Q.19 Heavy Metals Limited wants to provide financial assistance to its employees, to enable them to
subscribe for certain number of fully paid shares. Considering the provision of the Companies
Act, 2013, what advice would you give to the company in this regard?
[Hint: Explain provision of section 67]
RTP NOV 2019

Q.20 K Limited, a subsidiary of Old Limited, decides to give a loan of ₹ 4,00,000 to the Human
Resource Manager, who is not a Key Managerial Personnel of K Limited, drawing salary of ₹
30,000 per month, to buy 500 partly paid-up equity Shares of ₹ 1000 each in K Limited. Examine
the validity of company's decision under the provisions of the Companies Act, 2013.
[Hint: Explain provision of section 67 with exceptions.
The company’s (K Ltd.) decision is invalid due to two reasons: (i) The amount of loan
being more than 6 months’ salary; (ii) shares are partly paid up]

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Faculty : CA Rachna Parakh Dubey

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