Chapter 8 Shares and Share Capital SHARE(S) Definition A share in a company is one of the units into which the total capita OF the company is divided. For example : If the capital of the company is & 10,000 ang i, divided into 1,000 units of ¥ 10 each, each unit of 10 shall be called a share oid company. Section 2(84) of the Companies Act defines a share "as a share in i share capital of a company, and includes stock." But this definition fails to explain the true nature of a share. In the case of Commissioner of Income-tax vs. Standarg Vacuum Oil Company, the Supreme Court of India defined a share thus, "By a share in a company is meant not any sum of money but an interest measured bya sum of money and made up of diverse rights conferred on its holders by the articles of the company which constitute a contract between him and the company,” Thus a share is a fractional part of the capital of the company which forms the basis of ownership of certain rights and interests of a subscriber in the company. It is not a sum of money but an interest or right measured in a sum of money to participate in the profits made by a company, or in the assets of the company when it is wound up. The member does not own an identified part of the company's undertaking. His interest is something he owns. Shareholders are not, in the eyes of law, part-owners of the undertaking, which is something different from the totality of the shareholdings (2.7 Perumal vs. John Deavin 2), The ownership of the assets rests in the corporate body, and not in the members composing it. A share secures to its owner certain rights and liabilities, e.g, right to dividend, right to vote and liability to pay unpaid balance, if any, and to be bound by the provisions of the Articles and Memorandum. Legal Nature of a Share Ashare is regarded as goods in India (Arjun Prashadvs. Central Bank of Ind) ‘As per Section 44, the shares of any member or debentures in a company shall ‘(1966), 1 Comp. L.J. 187 (S.C.). “A.LR., 1960, Mad. 43. *A.LR., 1965, Pat. 32., spares and share Capital 109 » property, transferable in the manner provided by the Articles of the company: may be observed that "a share is not a movable property in the same way in which @ pale of cloth or a bag of wheat is movable property. Such commodities are prought into existence by any legislative enactment; in fact, no legislative by itself can call them into being..... but a share ina company belongs to fferent category of property. It is incorporeal in nature and it consists of undle of rights and obligations" (Viswanathan & Another vs. East India & Sugar Factories Ltd.'). As such, the shares cannot be transferred by mere delivery as in the case of movable property, e.g, furniture, but are transferred in the manner provided in the Companies Act and the articles of the company which may lay down certain restrictions in this respect. Each share in a company having a share capital must have a nominal value. Again, each share must bear a distinctive number, but this requirement of distinctive number shall not apply to the shares held with a ‘depository’ (Sec. 45). nade totally ail merely aD! pstilleries stock ‘As the term "stock" is used in the definition of a share given in Section 2(84), we shall now see the meaning of this term. Stock in a company means ‘a bundle of fully paid shares put together for convenience so that it may be divided into any amount and transferred into any fractions and sub-divisions without regard to the original face value of the shares.’ A company cannot issue stocl conversion— (a) if shares are fully pai toconvert shares into stock. The conver by the members. Stock may be reco! resolution. A stockholder enjoys the same rights and privileges as thal (Sec. 61). If a company has conve shares, the company must, wi the Registrar, who shall register company's Memorandum (Sec. 64). k originally and the stock can only be obtained by id, and (b) the Articles empower the company sion requires passing of an ordinary resolution nverted into shares again by an ordinary it of a shareholder rted any shares into stock or reconverted any stock into ithin thirty days after doing so, give notice thereof to the same and make necessary alterations in the Stock vs. Share The main points of difference between shares and stock are as follows : (1) A company cannot make an original issue of stock, only shares when fully paid up can be converted into stock, whereas shares can be issued originally direct to the shareholders. (2) The shares may be fully paid up or partly paid up but the stock must always be fully paid up. (1957), 27 Comp. Cas. 175. a ” "For details of a ‘depository’, refer to the Chapter on “Depository System.,- 7 ‘ Dany ) 110 - of a fixed denomination whereas the . always of 4 © Se 5) The shares are # ve 3) tion. itis dis , uch fixed dene distinctive number by which it is di UNgUishey from suc js a ais ‘ ’ 5 ca) A share Nas 6 peld with a ‘depository’ whereas the stoc, ha pg hares except when | “ share gesimte number capital with the Registrar is compulsory /s) Registration of share CaF si i a (3 Rese ctock can be issued only after Nato relay 1 ty shares whereas a after passing a special resolution in case the a, rane pen an notice of conversion with the Registrar. pe a ) me a visible into any amount required and as such may be transten, (6) fractional amounts whereas a share can be transferred in its Entire ty asia Jes only. This difference, however, seldom exists in practice, Se Fes ws. prescribe the minimum amount of stock transferable, * SHARE CAPITAL The term share capital denotes the amount of capital raised or to be Taiseq the issue of shares by a company and is used in many expressions, The usual different expressions of share capital found in the capital structure of a com, popularly known as ‘kinds of share capital." These kinds are: 1, Authorised Capital. It is the maximum amount of share capital Stated ina company's memorandum which the company is, for the time being, authorised to raise. As the memorandum is registered with the Registrar, it is also called the ‘Registered capital’. Again, as the actual issued capital of the Company is usually different (/.e. less) from the authorised capital, it is also known as ‘Nominal’ capita 2. Issued Capital. It means the nominal value of that Part of the authorised capital which is allotted for cash or for consideration other than cash and includes shares subscribed by the signatories to the memorandum. It may be noted that the term ‘Issued Capital’ is often defined as "the nominal value of that part of the authorised capital which is offered for subscription.” The Phrase ‘offered for Subscription’, has been dropped and other necessary modifications have been Made in the Customary definition to meet the following objections : () that, the Customary definition which connotes only the nominal value o a ——- ubscription does not provide any useful information toan ae taken as the wit by the company because it is this amount which ; dunt fund out of which the creditors are to be paid, even me time being may be less than this ammount. Moreo" ‘ means that part of the share capital which has Pe pany are actually issued or allotted (ii) that, the following tyy offered for Subscrintian -> share Capital nares and Share pita 111 schares issued to the + (/) subscribers emer y r . aeration other than cash; bers to the memorandum, and (i) vendors . nares reserved and allotted to the saatised financial institutions; a coo the ‘Bonus Issue’. These allotments, therefore, cannot be included under ‘Issued Capital’ as traditionally defined. | . Subscribed Capital. It means the paid up valueof that part of the authorised capital which is allotted for cash or for consideration other than cash and includes the shares subscribed by the signatories to the memorandum. Thus, in a company where shares are fully paid up, the ‘Subscribed Capital’ would be equal to the ssued Capital’. The ‘Subscribed Capital’ sub-heading is of significance only if the shares are partly paid up or certain ‘calls’ on shares are unpaid or some shares have been forfeited for non-payment of the ‘call money’. In any of these situations the ygsued Capital’ denotes the nominal value of shares actually allotted and the ‘subscribed Capital’ denotes the paid up capital of the company. It is under the above heads that Schedule III to the Companies Act, 2013 requires the share capital of a company to be exhibited in its Balance Sheet. However, some other terms relating to share capital are in prevalence, as such it will be proper to deal with them in brief here. Called up Capital is that part of the allotted share capital which has been called up by the company. Uncalled capital is that part of the allotted share capital which has not been called up by the company. Paid up capital is equal to called up capital minus calls in arrears. It is the amount actually paid up by the shareholders towards the share capital of the company. (employees of the company, and (4) Reduction of Share Capital (Sec. 66) With a view to ensuring that the company's assets (cushion of safety to the creditors) are not freely distributed to the shareholders, the reduction of share pital is closely guarded under the Companies Act. It is permitted for legitimate Purposes only. For instance, a company may be allowed the reduction of share apital (1) to write off lost capital—capital unrepresented by any tangible asset owing to heavy trading losses or unsound investments, or (2) to pay off surplus @pital—capital which cannot be employed profitably. Sometimes a company may find itself over-capitalised, that is, its rate of earnings may be less than the average fate of return in similar other companies. In such a case it may genuinely decide for eduction of share capital as a corrective step for improving its rate of earnings Vis-a-vis other companies in the same industry by accepting pro-rata surrender of shares by members. ; Assuming that the purpose of ; limited by shares or a company limited by a its issued share capital by adopting © Companies Act. But no such reduction sI reduction of share capital is legitimate, a company guarantee and having share capital may the procedure laid down in Section 66 of hall be made if the company is in arrearsoe N payment of any deposits accepted wu it, either before a, nt of the Companies Ac t, or the interest Payable | rat procedure is to be followed for effect there “UNG a in the Fe sncemen cedure. The following > capital : | hare capil n effecting the reduction of capita) a ist Firstly, & special resolutiol ’ t S should be filed with the Registrar within thirty dye Bi Pasg, ed hh of s and a copy thereof e resolution. ; the secondly, a petition to the Tribunal for an order confirming the : capital must be made. The Tribunal shall give notice of the petition eto y ies, to the Securities and Exchange Sal Cent Government, Registrar of Companit i th (SEBI) in case of listed companies, and to the creditors of the company, Thee shall take into consideration, the representations, if any, made to it inte burg within a period of 3 months from the date of receipt of the notice. iS behag Thirdly, the Tribunal will satisfy itself that the interests of the cregit different classes of shareholders, if any, are not affected adversely by = any bunal will see : (a) that sufficient notice has beep reduction of capital. The Tri to every person whose interests may be affected by the alteration; (6) that objecting creditor has either been paid in full or his consent has been obtaine ~ (c) that the proposed reduction of share capital is fair and equitable to all kinds shareholders. If the Tribunal is satisfied in all respects, it may make an es confirming the reduction of share capital on such terms and conditions as it think. Fourthly, the order of confirmation of the reduction of share capital by the Tribunal shall be published by the company in such manner as the Tribunal may direct. Finally, a certified copy of the Tribunal's confirmation order and changed memorandum must be filed with the Registrar for registration, within 30 days of the receipt of the copy of the order, The Registrar shall then register the same and issue a certificate of registration. Reduction will take effect from the date of registration. Methods of reduction. So far as the methods of reducing the share capital dopt any method are concerned, the Companies Act leaves the company free to at following three methods which a company likes. Section 66(1), however, specifies th may adopt for reducing its share capital : . (a) It may reduce the liability of members on any shares not fully paid-UP y the extent of uncalled capital; or ible (b) It may write off the lost capital, e.9,, capital unrepresented by any 212 assets; or ots! (c) It may pay off any paid-up share capital which is in excess of the " the company. he cpt ag the f reducing ced It is to be remembered that the above mentioned ways are given only as illustrations. The share capical of a company may is willing? any other way e.g,, cancellation of fully paid-up sha aah res which the hole?! * ania get cancelled for the benefit of the company, wili al go result in reductO” gl Tt must, however, be noted that "forfeiture of shares" for non-pay™” es and Share Capital 113 i redemption of redeemable preference shares" are not treated as a reduction a " pare capital, although each of these powers is strictly guarded under the Act!. ne sn for not treating these as reduction of capita/is that by resorting to any ‘etnese acts, the fund, out of which creditors are to be paid does not diminish. uthels buy-back of its own securities by a company under Section 68 is not treated jc resuction of share capital (Sec. 66(6)]. * Liability of members in respect of reduced shares [Sec. 66(7)(8)]. After ne reduction of capital, a member of the company (past or present) is liable only to nay the difference between the reduced nominal value of a share and the amount paid per share. However, the member's liability to pay the original nominal value of the shares can be restored in one case. If any creditor, entitled to object to the reduction of capital is omitted from the list of creditors, and after the reduction the company iS unable to pay his debts, the Tribunal may, to meet the claim of such a creditor, order the members to pay that amount on their shares which they would have been liable to pay before the reduction. ae 1088 KINDS OF SHARES There may be different kinds of shares in any company with varying rights as to dividends and voting, etc. The following chart gives the classification of different kinds of shares : SHARES Preference Equity fl With Voting With differential Rights Rights as to Dividend and Voting Cumulative Non-Cumulative Participating Convertible Redeemable or or Non-Participating Non-Convertible Participating Convertible Redeemable or Non-Participating or Non-Convertible ‘For these, authority of articles, board of directors’ resolution and notice to Registrar is required,me a Co, py, different Kinds of shares, a sail now sve these erence Shares er nes « enjoy preferential rights (a) as to the Payment gp 4 juring the life of the company, and (b) as to the return ont ® suo ap of the company [Sec. 43]. If any shares carry Only one of pia : we a nights, they will be treated as equity shares. The holder oft 1 . oys only a preferential right over the equity shareholder, He yyy er ‘ta fixed rate e.g, 13%, if a dividend is declared, » M "eth 1, the preference shareholder, who, after all,isa sharehoiqt® the snie from iis investment if a distributable profit within the m, wailable. His right is not. to dividend but to Preferential treatm, in 15 distributed."* Voting rights of preference shareholders. The Preference Shareholg ev joy normal voting rights like the ‘equity shareholders with Voting righ nto are, however, entitled to vote in the following two cases [Sec. 47(2)); . (2) When any resolution directly affecting their rights is to be Passed, 1 worth noting here that any resolution for winding up of the company or for i repayment or reduction of its equity or preference share Capitalis to be Tegarded ag a resolution directly affecting the rights of the preference shareholders ang therefore they are entitled to vote on such a resolution. (4)When the dividend due (whether declared or Rot) on their preference shares or part thereof has not been paid for a period of two years or more. It may be observed that when the dividend due on their Preference shares has remained unpaid for a period of 2 years or more, the preference shareholders become entitled to vote on all the resolutions placed before the Company at any general meeting. The Act further provides that where a preference shareholder has a right to vote on any resolution in accordance with the provisions mentioned above, bis voting right on a ‘poll’ (a method of Voting) shall be in the same proportion as the Capital paid up in respect of Preference shares bears to the total paid up equity pital of the company [Sec, 47(2)). Kinds of preference shares, There may be different kinds of preference shares depending upon the terms of issue which are either defined in the Arties Association or in the Prospectus of the company. A company may issue the followin types of preference shares : P the compete Preference Shares. They carry the right to camistne ear Pany fails to pay the dividend ina particular year, The accumula "ends shall be nu. if any dividend is declared in subsequent years; Pref on his ys Rh is ny ahi lent if any Palmer's Company Law, 21st ed., p. 293,> nd Share Carina 115 Lf the company goes in i payable unless eith pany goes inte liquidation, vi b er the jyision to this effect or such dividends have been poate pall th near jeclared dividends shall be payable, even if the Articles ees eee at ean left, after sa mn fuilthe preference and equity share caj oy ” aii preference shares are always presumed to be cumulative unl rl “atated i? the Articles or the terms of issue. imeneonsy . Non-cumulative a shares, Such shares do not carry the right serxetve idend in a particular year, if the company fails to declare iyidend in previous year or years. Tf no dividend is paid in any particular year, it ny dV jend is paid to the equity shareholders proars of dividends are rr 4 und japses _— 3, participating preference shares, These are preference shares and Share Capital bt Restriction on Purchase by a Company of its Own Shares According to Section 67 of the Companies Act, 2013, it is not open to a company, whether public or private, to purchase its own shares, for it involves a permanent reduction of capital which is not allowed except when the capital of the company is legally reduced in pursuance of Sections 66 or Section 242. Under Sections 66, it is provided inter alia that a special resolution and sanction of the Tribunal are needed for any reduction of share capital. Section 242 provides that a company can buy its ‘own shares to relieve an oppressed part of members with a view of prevention of oppression under the order of the Tribunal, Any reduction of capital contrary to these Sections is illegal and uitra vires since the preservation of capital is one of the most important aims of the Act, hence the restriction on purchase of its own shares by a company has been laid down under Section 67. Further, to make the restriction really effective sub-section (2) provides that no public company can give any financial assistance in any shape, whether by means of loan or guarantee, towards the purchase of its own shares or of its holding company, except in the following cases : (1) Where a loan is made by a banking company in the ordinary course of its business. (2) Where provision of money is made under a scheme(e.g., a pension scheme) approved by company through special resolution and in accordance with such requirements as may be prescribed, to enable trustees to buy fully paid shares in the company or its holding company, to be held for the benefit of the employees of the company. (3) Where loans are made by a company to employees, other than its directors or key managerial personnel, to enable them to buy fully paid shares in the company or its holding company, to be held by them as beneficial owners. The amount of loan cannot exceed the employee's salary for a period of six months, It may, however, be noted that the above sub-section does not prohibit financial assistance by a private company to any person, whosoever, for purchasing shares in it. If a company should contravene the above provisions, the company shall be punishable with fine which shall not be less than & 1 lakh but which may extend to 225 lakh and every officer who is in default shall be punishable with imprisonment upto 3 years and with fine ranging from @ 1 lakh to % 25 lakh. Buyback of Own Securities Section 67 of the Companies Act does not allow companies to purchase their own shares, for it involves permanent reduction of share capital. The Companies Act permits the reduction of share capital for legitimate purposes only by adopting the procedure? laid down in Section 66, so that company’s assets (cushion of safety ‘For detailed procedure, refer to Side-heading : “Reduction of Share Capital”, discussed earlier in this chapter.ipa, a od to the shareholder ly distributed to creditors) are not freely dian Corporate Sector, in its to the has been a demand by India per ee rmit a company to porary vith international Practices, to pen pe ; come 68 to 70 of the Companies Act, 2073 Contain provision. verre, a ne to buyback their shares subject to certain restriction, a rationale for the buyback of shares is that assuming nig gy; Utior company’s future earnings subsequent to the buyback, the TEDUI Chase which are cancelled, reduces the number of shares Outstanding ang thu: the EPS (earnings per share) which in turn will push up Thus, there is enhancement of shareholders wealth as a Our Ouy bac 4 Shy tr Xd the Further, a cash rich company may buyback its own Equity shares at thE marge fate as a means of better Investment. Again, the buyback Strategy may De see increase the Percentage stake of the existing Management in the Company Usirc company's money thereby Preventi Ing the company from GOING oUt oF it contig due to hostile take-over bids, It may be relevant to state that 'Y Suarded under th isi The salient features of the lows : Sec. 68(1)].4 Company wn share other specifieg SECurities out of () its free reserves; or ecified Securities OF other Specified Securities shall pe a Proceeds Of an earlier issue of the Same kind of shares or a other In other wor S, equity shares can be redeemed Preference Shares or debenture Ssue but Not sue, 1 ANY Of the three qual to z One tak, this rities Premium means those reserves Which are free for Aistribution a he Thus, “free reser vec! balance to the credit Of the Securities Premium Account ™yr es and Share Capital » ghar (2) Transfer of certain sum to “Capital Redemption Reserve Account” _ 69]. Where a company purchases its own shares out of “free reserves” “then asum equal to the nominal value of the shares so purchased must be tran: sferred to the “capital Redemption Reserve Account” and its details must be disclosed in the Balance Sheet. As per Section 69(2), the “Capital Redemption Reserve Account” may be applied by the company for the issue of fully paid bonus shares. Section 69 provides the rationale behind the provisions relating to ‘buyback of own shares’. “Preservation of subscribed share capital” for the benefit of creditors has always been one of the basic objectives of Company Law. This Section, therefore, attempts to keep intact the equity share capital by not allowing its outright redernotion through the buyback operation. It only allows the replacement of bought ‘back share capital either by “Capital Redemption Reserve Account” (where shares are purchased out of ‘free reserves’ or ‘securities premium account’), or by the ‘proceeds of any fresh issue of shares or other specified securities’. (3) Conditions to be fulfilled before resorting to buyback [Sec. 64/2), (3)and (4)]. Before a company proceeds to buyback its own shares or other specified securities, the following conditions must be fulfilled : () There should be a provision in the Articles of Association authorising buyback of securities. (i) A special resolution must be passed in the general meeting of the company authorising the buyback. However, no special resolution is required where : (a) the buyback is upto 10% of the total paid-up equity capital and free reserves of the company; and (b) such back has been authorised by the Board of Directors by means of a resolution passed at its meeting. (ii) The notice for convening the general meeting at which the special resolution is proposed to be passed should be accompanied by an explanatory statement stating—(a) a full and complete disclosure of all material facts of the buyback; (5) the necessity for the buyback; (c) class of securities to be purchased; (a) the amount involved, and (€) the time-limit for completion of the buyback. (iv) The amount involved in buyback should not exceed twenty-five per cent of the total paid-up capital and free reserves of the company. But if the equity shares are to be bought back, the amount involved should not exceed twenty-five per cent of company’s total paid up equity capital in that financial year. The implication of this is that a more strict norm has been prescribed for the buyback of equity shares. (V) After the buyback, the ratio of the debt to the capital and free reserves ‘For the purposes of Section 68, “free reserves” include balance to the ee Securities Premium Account” [Explanation to Sec. 68).hould not be more than 2:1, However, the Central Noher ratio of the debt for a class or classes of con includes all amounts of unsecured and secured de (¥) The shares or other specified securiti should be fully paid-up. . (1) The buyback of shares or other Specified securities that i recognised stock exchange should be j I Governmen Npanies, The XDre Pre me bts, a les which are SOUght to be bp - OUgh vay the date of Passing of the special Directors in that regard. (ix) The time gap between two buybacks shoul (4) Methods of buyback [Sec, 68(5)]. The have been Provided : (a) Id be Minimum one Year, following Methods of buybag, from the existing shareholders or Security-holders on a Proportionate basis. or ‘ (0) from the open market!; or (co) by Purchasing the securities issued to employees of the company Pursuant toa ‘scheme of stock option’ or ‘sweat equity?, (5) Declaration of solve ency [Sec, 68(6)]. Before buyback the Company is ‘For details of this method, refer to the ni *Under the ‘scheme of stock option’, a company grants to the optionee (employees, Officers or directors of the Company or of its holding company or Subsidiary company, if any), an option to purchase all or any part of the Specified number of equity shares at the Option Exercise Price per share (which is usually much lower than the fair Market Value per share), subject to the terms and conditions of the “Employees Stock Option Plan” (ESOP) (Sec. 2(37)]. The basic objective of ESOP is to provide. equity based incentive to key employees and directors of the company with a view to induce them to remain with the company and to encourage them to increase their efforts to make the company’s business more successful. °AS per Section 54 of the Companies Act, 2013, “sweat equity shares” means equity issued by the company to employees or directors at a discount (at a price less than shares ice) or for consideration other than cash for providing their know-how or making Li i a in the nature of intellectual property rights. (For details refer to the side- ee cuae of Sweat Equity Shares” discussed earlier in this Chapter), few lext side-heading : “Buyback Methods.”spares and Share Capital 5 125 nas to be signed by at least two directors, one of whom should be the managing girector, any. In the case of a company whose shares are not listed on any recognised stock exchange, the Declaration is not to be filed with SEBI yrecoane (6) Physical destruction of securities (Sec. 68(7)]. ‘After completion of the buyback operations, the securities must be extinguished and physically destroyed wwthin seven days of the last day of completion of buyback. (7) Further issue after buyback (Sec. 68(8)]. Where a company has resorted to the buying back of its securities, it cannot make a further issue of the same kind of securities within a period of six months from the date of completion of buyback, except by way of bonus issue or in discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares. It may be observed that this restriction applies only to the type of securities bought back. The company is free to issue other types of securities. (8) Register of bought back securities [Sec. 68(9)]. A register has to be maintained containing the particulars of the bought back securities, including the consideration paid for them, the date of cancellation and physically destroying them and such other particulars as may be prescribed. (9) Return of buyback [Sec. 68(10)]. After completion of the buyback operations, the company has to file a return in the prescribed form with the Registrar of Companies and SEBI within thirty days of such completion. In the case of a company whose shares are not listed on any recognised stock exchange, the return is not to be filed with SEBI. (10) Penalty [Sec. 68(11)]. In case of default in complying with the aforestated provisions of this Section and rules made by SEBI under it, 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. Prohibition for buyback in certain circumstances [Sec. 70}. No company shall buyback : (4) through any subsidiary company including its own subsidiary companies ; or (d) through any investment company or group of investment companies ; or (Qifa default is subsisting in repayment of deposits or interest due thereon, redemption of debentures or preference shares, or payment of dividend, or repayment of any term loan or interest thereon to any financial institution or bank. However, buyback is not prohibited, if the default is remedied and a period of 3 years has lapsed after such default ceased to subsist. Further, no company is allowed to ‘buyback’ if the company has not complied 92 (filing of annual return), Section 123 (declaration with the provisions of Section wa Vr ; of dividend), Section 127 (failure to distribute dividend within 30 days of declaration) and Section 129 (preparation of Financial Statement in accordance withN 126 om anys schedule III). , Buyback Methods It would be desirable to discuss in brief the various methods Of buyp, yDack before). These are : (stateg (1) Tender method. This method has been described in sub. Section 68 as “buyback from the existing securityholders on a ee (5) of In this method the company fixes and announces a price at Michie basigy buyback a specified number of shares from its shareholders, If the a ees offered for buyback by the shareholders at the stated price is More th; so shar sought to be bought back, then shares shall be bought from eng 2 Whats proportionately. act Shareholde, (2) Open market purchases, U i A the folowing weve : pl Inder this method, buyback is esorted to jn (4) Stock exchange purchase method. This is the mo: method of buyback of securities. In this method the company ae ee the stock exchange at the prevailing market price till it reaches the maximum number of shares it had originally decided to buyback and the market price does Not exceed the predetermined maximum price at which the buyback shall be made. As per the SEBI regulations the promoters and the Persons in control of the company are not Permitted to offer their shares for buyback under this method, and the buyback of shares shall be made only on stock exchanges with electronic trading facility. (4) Dutch auction method. This method has been described as “Reverse Book-building Process for Buyback” in SEBI regulations. In this method the company makes an offer to the shareholders to buyback its specified number of shares at a specified offer price range, say € 75 to = 100 per share. The shareholders are invited to make a bid quoting a price (within the offer price range) and the number of shares offered for buyback. Based on the bids received from the shareholders, the company selects the offered price from lowest price onwards at which the cumulative number of shares offered equals or exceeds the maximum number of shares the company proposes to buyback. Keeping in view this ‘highest price accepted’, the company fixes the ‘final buyback price’ within the range of ‘minimum offer price’ and the ‘highest price accepted’ which shall be paid to all the shareholders whose shares have been accepted for buyback. Power of Government to Convert Loans into Equity Capital Section 62(4)(5) have empowered the Government to direct the conversions of its loans or debentures into Equity Share Capital of the company, on such terms and itions as appear to that Government to be reasonable in the circumstances of cone even if the terms of issue of such debentures or loans do not include a a n option for such conversion. The power is to be exercised only Bok iF the ca! term providing for ayr res and Share Capital 127 Shal inversion sen owing goed resus o areca in the public interest, e.g, the undertaking the loan, etc. ere the company makes default in repayment of ra SE ae tems and conditions of such conversion regard shall be had e as the case may b te Company, the terms of the issue of the debentures or loans, y be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary. i a ssaiincalervaprie proposed by the Government are not acceptabl the a ee 60 days, from the date of receiving the said order, prefer an appeal to the Tribunal and the decision of the Tribunal shall be final. le to FURTHER ISSUE OF SHARE CAPITAL A company may require additional funds for financing its expanding business and for this purpose it may decide to make a further issue of shares under one of the following two conditions : (A) When the share capital already issued is capital of the company and the proposed further issue of shares is within of the authorised capital. (8) When the share capital already issued is equa/to the authorised capital of the company and the intended further issue of shares is therefore, beyond the limits of the authorised capital. Under both these conditions, Jess than the authorised the limits further issue of shares is possible only if the company is authorised by its Articles to do so. If the Articles do not provide for it then Articles must, first of all be altered to that effect by passing a special resolution. In addition to the authority of Articles, Board of Directors’ resolution is required when the proposed further issue is within the limits of authorised capital. But, when the authorised capital is to be increased to accommodate the intended further issue then, as per Section 61, 2 sanction of the shareholders by means of an ordinary resolution must be obtained for increasing the authorised capital after the Board's resolution. It must be noted that if the Articles provide that a special resolution would be required, the company must passa special resolution instead of an ordinary resolution. The “Issue of Capital and Disclosure Requirements Regulations, 2009" issued by the Securities and Exchange Board of India (SEB!) regarding ‘rights issues’ must also be complied with in case of listed companies. Manner of Allotment of Further Issue of Shares (Right Shares) Section 62 lays down the manner in which further issue of shares, whether equity or preference, are to be allotted, so that there should be an equitable distribution of shares without disturbing the established equilibrium of shareholding128 ‘ oMmany oy that whenever a com, ny. The Section provides ; PANY (public 4. in ST oom to increase its subscribed capital by allotment of fae Wel. prnvate) equity or preference), the following conditions must be fulfilleg Shane (wi 1) Offer must be made to the present equity shareholders on PO-ray . a proportion to their present shareholdings. "aba “ (2) The pro-rata offer is to be made by giving a notice Specifying the ny shares offered and limiting the time Not being less than 15 day number of days as may be prescribed and not exceeding 30 da hy \ ry 5 OF such 4! YS from the day Mt the offer within which the offer, if not accepted, shall be deemeq to have ley declined; Pn (3) The member must also be given the right of renuncia favour of his nominee, unless the articles provide otherwise, After the expiry of the time specified in the notice or on recei from the shareholder that he declines to accept the shares, tl may dispose of them in such manner as they think most bene! It may be observed that by virtue of Section 62(1), shareholders of a company have a prior right of allotment in on an any further issue of shares. It is for this reason that sl also termed as Issue of Right Shares. Looking at it from the it can be said that the Section gives a Right of Pre-emption to them. The Section aims at curbing the temptation on the part of the directors to sidetrack the shareholders and to allot the shares to their friends and relatives whenever the shares are expected to fetch a handsome Premium. Exceptions. Under sub-clauses (b) and (c) of sub-section (1), provides that further shares aforesaid may be offered to any person: two cases : (a) when the offer of further shares is made to employees under a "scheme of employees’ stock option", subject to special resolution passed by the company and Subject to such conditions as may be prescribed; or (4) when the offer of further shares is made to any persons (including equity shateholders and employees) at a price which is determined by the valuation report of a registered valuer, if it is authorised by a special resolution and is made subject to the compliance with the applicable provisions of Section 42 with regard to private Placement and any other conditions as may be prescribed. Tt may, however, be noted that the above restrictions on further issue of share capital do not apply to the increase of subscribed capital of a company caused by the exercise of an option by convertible debentures or loans, as per the terms of issue, provided the terms of issue are duly approved by a special resolution of the company [Sec. 62(3)]. It may be recalled th share capital are applicabl tion of the Offer pt of earlier intima he board of directors ficial to the Compan the existing equity Preference to Other uch @ further issue jg angle of shareholders the Section S, in the following lat the aforesaid provisions relating to further issue of le to all companies. ‘The meaning of the expression "scheme of employees’ stock option" has already bee" explained in a footnote in the present chapter.spares and Share Capital 129 ISSUE OF BONUS SHARES A bonus Issue Occurs where the coy ay ‘ Mpany 7 reserves by way of dividend, but retains them ea es not dis new fully paid shares. The shares so issued are eae they istribute its Profits and N Proportion to their existing fe the holders of existing equity shares receive lave been Paid for out of the accumulated ‘capitalisation of undistributed Profits’. It reserve account’ under Section 55(4 an o 5 . ' Son 5) an be apts tart eo A bonus issue must not be confused with a ‘right issue’. In the a of bonus issue no payment is made by the shareholders but instead the company applies its profits and reserves for that Purpose, whereas payment is made entirely by shareholders subscribing fresh Capital in the case of ‘rights issue’. A bonus issue is usually made by a company intending to bring its ‘issued Capital’ more into line with the true worth of its undertaking, so that its annual net profits may not appear to be unduly high as compared with its Paid up capital. On the other hand, a ‘rights issue’ is made by a company for implementing its expansion, diversification and modernisation schemes. Again an ‘issue of bonus shares’ should also be distinguished from an ‘issue of shares as donation’. Whereas an allotment of fully paid up bonus shares in accordance with the provisions of the Act and the Articles is Perfectly valid, an allotment of fully Paid up shares as donation to a charitable trust is not valid in law. The reason being that in case of allotment of bonus shares, accumulated reserves are converted into capital and they represent equivalent assets on the other side of the Balance Sheet, whereas in case of allotment of shares as donation, there is no payment in money's worth which implies issue of shares at 100% discount whereas Section 53 prohibits issue of shares at a discount. . — Section 63 of the Companies Act, 2013 contains provisions regarding issue of bonus shares. Under sub-section (1), the Section provides that a company may 'ssue fully paid-up bonus shares to its members, out of : () its free reserves; (7) the securities premium account; or tt (iii i jon reserve account. ates (i the evra bonus shares shall be made by capitalising reserves created by the revaluation of fixed assets. king an issue Conditions for issue of bonus shares [Sec. 63(2)(3)]. For making May be recalled that the ‘capital redemption130 Compan, of bonus shares, the following concltion's must be complied with . "ay, (1) tices of Associaton must authorise captasation of ts yy for the purpose of issuing bonus shares, Sor Fee (2) Suitable resolution by the Board of Directors Must be Passeq (3) Formal approval of the shareholders in a general Meeting must (4) The company has not defaulted in payment of interest or pri of fixed deposits and debt securities (debentures) issued by it. (5) The company has not defaulted in respect of the Payment of stat of the employees such as contribution to provident fund, Gratuity ang rat tgs (6) The partly paid-up shares, if any existing on the date of allotme ie shares, must be made fully paid-up. nt of bongs (7) The company must comply with such other conditions aS may be presen (8) The bonus shares shall not be issued in lieu of dividend, scribe, It is worth noting that a listed public company is also required to comply the conditions set out in "SEBI (Issue of Capital and Disclosure Requirement Regulations, 2009" for issue of bonus shares. As per the said Regulations * additional conditions for issue of bonus shares are : (/) the bonus issue shall Made out of securities premium collected in cash only, and (//) once the ecision to make a bonus issue is announced, the company shall not have the OPtON of changing the decision. Nes Secy INCipal in re SHARE CERTIFICATE Definition. A share certificate, issued by the company under its common seal, if any, or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary, specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares [Sec. 46(1), as amended by the Companies (Amendment) Act, 2015]. A share certificate is not a ‘document of title’, for, the rights under it are not transferable by a mere endorsement and/or delivery of the certificate. In order to transfer shares evidenced by a share certificate an ‘instrument of transfer’ duly completed must be lodged with the company for approval by the Board of Directors. Issue. The power to issue share certificate is to be exercised by the directors in Board meetings only [Sec. 179(3)]. A share certificate must be isued/despatet to the allottee within two months after the date of allotment or within one mon after the application for the registration of the transfer/transmission is received by the company [Sec. 56(4)]. - shares A shareholder is entitled to have one share certificate in respect of isthe registered in his name trom the company free of charge, certifying that he . holder of the specified number of shares in the company. In case shares are share sy _ More than one person jointly with others, company shall issue only one iov pues and Share Capital erin ate (0 the holder first named in the 131 ronser of 8 share certificate shall appear well as in the share certificate with the introduction of the ‘Depository « pare certificates for the shares registered Rae ee company should intimate the det, Register of Members in the the name ¢ the Register of Meme fe name of every "15 Of the Company stem" there bs no need to iesue we cue Of the ‘depository’ ine vod “pyadiately on allotment of such shares (Sec. 5 (ay) Tees ne poma facie evidence of interest of the rena a Legal effects. The legal effects of the such sare share 4, to the depository of the depository Sec. 46(4)]. ertificate are mainly two 1) Estoppel as to title t ean atre ‘0 the shares, 4 share certificat i endence x Le, ‘Oppes the company from denying th See epeay te shares nose name 'S mentioned therein, provided fe enue = nares in good faith (42, notice of forgery), for value and under a eee 4 " (2) Estoppel as to payment. If th i on the shares have been received, the compen ate states thatthe full amount purchaser of shares for value, from alleging that feo eee ai fone fae Thus, in Bloomenthal vs. Ford’, ‘B' lent money to a ee nie ree fully paid up shares should be allotted to him as collateral security, The omy ' issued 10,000 shares of £ 1 each to him with a certificate in which they were described as fully paid. In fact, nothing has been paid on these shares but ‘B’ had no notice of this fact. Subsequently the company was wound up and B's name was put on the list of contributories. Upon coming to know this fact, 'B’ applied to have his name removed from the list of contributories. It was held that ‘B’ must succeed and the company and its liquidator were estopped from denying that the shares were fully paid. Issue of duplicate s! new duplicate share certificate in place of original certifical (a) is proved to have been lost or destroyed, or (6) having been defaced or multilated or torn is surrendered to the company (Sec. 46(2)]. In case the original s certificate may be obtained on sur company. But where the original sI duplicate is issued in accordance with prescribe some terms and conditions a certificate can be issued unless the Boa! "Depository system." hare certificate. The directors are empowered to issue te if such certificate : hare certificate is defaced, multilated or torn, 2 duplicate | one for cancellation to the rendering the original hare certificate is lost, stolen or destroyed, the the provisions of the Articles which generally indemnity, etc. No duplicate to evidence and rd of Directors have passed a resolution to For details refer to the Chapter on Section 46(1). (1897), A.C. 156.x oN 1 Compa : bay toffect. A nominal fee is usually charged, as per articles, for SUCH certifi. nat offe - ‘ ew certificate shall also be duly sealed, if company has any seal and « ©The new © ‘ fi ‘| the word 'DUPLICATE’ shall appear across the face of such share Certificate aq Ita. company with intent to defraud issues a duplicate Certificate of company shall be punishable with fine which shall not be less than five tj *5, the face value of shares involved but which may extend to ten times the * the such shares or © 10 crores whichever is higher and every officer of Meg who is in default shall be liable for action for fraud under Section 447 As per Section 447, as amended by the Companies (Amend any person who is found to be guilty of fraud involving an amoun\ lakh or 1% of the turnover of the company, whichever is lower, with imprisonment for a term ranging from 6 months to 10 yea lable to fine which shall not be less than the amount involved may extend to three times the amount involved in the fraud. Question involves public interest, the term of imprisonment shall Not be less than 3 years. However, where the fraud involves an amount less than Z 10 lakh or 1% of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to 5 years or with fine which may extend to & 20 lakh or with both. face val the ¢ [Sec, ment) Act, aot) t Of at least » tb shall be Punisha . FS and shall also in fraud, but Which Where the fraug in Pan, Penalty for personation of shareholder (Sec. 57 deceitfully personates a shareholder or the owner of any security, and thereby obtains or attempts to obtain any such share certificate or any such security 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 ranging from % 1 lakh to @ 5 lakh. ’). If any person falsely or QUESTIONS What is the nature of ‘share’ in a Company? Distinguish between share and stock. Write note on issue of shares at a premium. How is the amount of premium on shares to be applied by a company? Discuss. Distinguish between : (a) Equity share and Preference share, (b) Right shares and Bonus shares, ) (4) What is a preference share and when a preference shareholder is entitled to vote Discuss, w (0) Discuss the Procedure for reduction of share capital. ied “hat do you mean by redeemable Preference shares? What conditions must be co”? with by a company in relation to the redemption of preference shares? Discuss. 5.nares and Share Capital 133 (a) ‘A company cannot purchase its own shares.’ (2) Discuss the conditions to be fuffiled by a omen noe erent shares’ under the Companies Act, 2013. semen state the provisions of the Companies Act, 2013 governing the buy-back of shar company. Fe bate p ? . Soe Explain the provisions of the Companies Act, 2013 regarding further issue of shares. When can a company offer such shares to outsiders? Discuss. , What are Bonus Shares? When are they issued? State the legal provisions in relation to the issue of Bonus Shares. 7 _ What is a share certificate? What are the legal effects of the issue of share certificate? What are the circumstances under which a duplicate share certificate can be issued, and subject to what conditions? Discuss.