Course: Legal Aspects of Business

Group-5 Members:
• Ayush Ranjan Singh (22A1HP145)
• Moulina Bandyopadhyay (22A2HP152)
• Dhruv Ramrakhyani (22A1HP154)
• Tejasvi Saini (22A2HP157)
• Muskan Malhotra (22A2HP159)
• Shorya Agarwal (22A2HP408)
• Souptik Nag (22A2HP414)
• Bhavya Kalia (22A2HP418)
• Prasad Dhanya Kumar Barmecha (22A2HP419)
• Ronit Rathi (22A2HP426)
OUTLINE
Types of Shares
 Equity Capital refers to the capital
collected by a company from its
What is Equity Share owners and other shareholders in
Capital exchange for a portion of
ownership in the company.
Benefits of
Equity Share

• Fair Liquidity
• Profitability
• Control on Management
 Preference Share Capital
• Preference share capital with reference to any company limited by
shares, means that part of the issued share capital of the company
which carries or would carry a preferential right with respect to
1. Payment of dividend
2. Repayment of capital, in case of winding up of the company.
 Types of Preference Share Capital
(Part-1)
• Cumulative Preference Shares- Gives shareholders the right to enjoy
cumulative dividend payout by the company even if they are not making any
profit.
• Non - Cumulative Preference Shares- Do not collect dividends in the
form of arrears. In the case of these types of shares, the dividend payout takes
place from the profits made by the company in the current year.
 Types of Preference Share Capital
(Part-2)
• Redeemable Preference Shares- Can be repurchased or redeemed by
the issuing company after the expiration of a fixed period or after giving the
prescribed notice as desired by the company.
• Non-Redeemable Preference Shares- Can’t be redeemed or
repurchased by the issuing company at a fixed date. These shares can be
repurchased during winding up of the company.
 Types of Preference Share Capital
(Part-3)
• Participating Preference Shares- Help shareholders demand a part in
the company’s surplus profit at the time of the company’s liquidation after the
dividends have been paid to other shareholders.
• Non-Participating Preference Shares- These shares do not benefit
the shareholders the additional option of earning dividends from the surplus
profits earned by the company, but they receive fixed dividends offered by the
company.
 Types of Preference Share Capital
(Part-4)
• Convertible Preference Shares- Convertible preference shares are
those shares that can be easily converted into equity shares after a fixed period
according to the terms and conditions of their issue.
• Non-Convertible Preference Shares- Non-Convertible preference
shares are those shares that cannot be converted into equity shares.
 Issue of Shares (Part-1)
• Authorised Share Capital.
• Issued Capital: Aggregated Face value of the company’s shares offered for
subscription by the general public or by a private placement in case of a private
limited company.
• Subscribed Capital: Substantial portion of the issued capital which has been
subscribed for by all the investors including the public.
• Called-up Capital: It is the total amount of issued capital for which the shareholders
are required to pay.
• Paid-up Capital: The amount of share capital paid by the shareholder in aggregate.
• ESOP (Employee Stock Ownership Plan): An employee owner scheme that provides
a company’s workforce with an ownership interest in the company.
 Issue of Shares (Part-2)
• Sweat Equity: Equity shares issued by a company to its directors or employees
at a discount, or for consideration other than cash, for providing their know-
how or making available rights in the nature of capital IPRs or value addition
to the company.
• Right Issue: A preferential subscription right that entitles a companies existing
security holders to buy additional securities directly from the company in
proportion to their existing holding, within a fixed time period.
• Bonus Shares: Additional shares given to current shareholders without any
additional cost in proportion to their holdings.
• Private Placement: Way of raising capital not through a public offering, but
through a private offering, mostly to a small number of chosen investors.
 What is Buy-Back of Shares?
• It is a process by which a company re-purchases its shares and other specified securities
from its shareholders
• Specified securities includes employee stock option or other securities as may be
notified by the central govt. from time to time
• Section 68 of the companies act, 2013 empowers a company to purchase its own shares
or other specified securities
• Section 69 of the companies act, 2013 gives the accounting treatment of the proceeds
of Buy-Back
• It is done at a price higher than the market price
• It is a way of returning money to its investors
• It is a reduction in a company’s share capital
• It is usually done when the management considers that the shares are undervalued
• It increases the EPS
• Section 70 of the companies act, 2013 imposes restriction on Buy-Back of shares in
certain circumstances
Restrictions on Buy-Back of Shares
According to section 70 of the companies act, 2013, a company should not
Buy-Back its securities or other specified securities, directly or indirectly-
a) through any subsidiary company including its own subsidiary companies
b) through any investment company or group of investment companies
c) if there is any default in payment of deposits or interest due,
redemption of debentures/preferences shares or payment of dividend
d) when the company has defaulted in filing of Annual Return, declaration
of dividend & financial statements
 Sources of Buy-Back of Shares?
• Pursuant to section 68 (1) of companies act, 2013, a company
whether public or private, may purchase its own shares or specified
securities out of following sources:

01 02 03
ITS FREE RESERVES THE SECURITIES THE PROCEEDS
PREMIUM OF THE ISSUE OF
ACCOUNT ANY SHARES
 Conditions of Buy-Back of Shares
• It must be authorized by its articles
• A special resolution passed at the AGM is needed to authorize Buy-Back.
However, if the Buy-Back is up to 10% of the total Shareholders fund, the BOD
may authorize the company for such Buy-Back.
• Only one such Buy-Back can be done in a financial year
• Buy-Back of shares should not exceed 25% of the total shareholder's fund
• It should not exceed 25% of its paid-up Equity capital in any financial year
• Post Buy-Back, the Debt-Equity ratio should not fall below 2:1
• The Shares and the specified securities should be fully paid-up
• Listed companies must follow the SEBI guidelines and prescribed guidelines in
case of others
• Shares must be physically destroyed within 7 days of completion of Buy-Back
• No fresh issue is allowed within 6 months from Buy-Back, except by way of issue
of Bonus Shares, ESOPs, Sweat Equity and conversion of debt/preference shares
into equity
 Modes of Buy-Back
Section 68(5) states that the securities can be bought back:
• From the existing shareholders or security holders on a proportional
basis
• From the open market
• By purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.
 Other Formalities of Buy-Back
• The company which has been authorized by a special resolution shall, before the
buy-back of shares, file with the Registrar of Companies a letter of offer in
Form No. SH-8, along with the fee.
• Under Section 68(6) provides a Declaration of Solvency is required to be filled
by the company with the Registrar in the prescribed Form SH-9 signed by at
least two directors of the company, one of whom shall be the managing
director, if any, and verified by an affidavit before the buy-back is implemented
to guarantee its solvency for at least a year after the completion of buy-back.

A company after completion of buy-back is required to extinguish and physically

destroy its securities within 7 days of the last day on which the buyback process is
completed. [U/s 68(7)]
 Methods for Buy-Back of Shares
A) Fixed Price Tender Offer:
• Shareholders have the option to sell or hold the fixed number of shares,
offered by the company at a fixed price.
B) Buying from the open market:
• The company buybacks its own shares from the market, repurchase program
happens for an extended period as a large block of shares needs to be bought.
 Procedure of Buy-Back of Shares
1) Notice of the meeting to be accompanied by the explanatory statement
2) Declaration of solvency
3) Completion of Buy-Back
4) Extinguishment of securities
5) Register of bought buy backs is to be maintained by the company
6) Filling of return to be made with the registrar and SEBI (in case of listed
company) within 30 days of completion.
 Advantages of Buy-Back of Shares
• Buyback may increase the confidence of the investors.
• Buyback assists a company in reducing its extensive share of capital that is not
needed for the time being and helps the company to make use of its large sum
of free reserves.
• Buyback of shares can lead to an increment in the returns on equity.
• Helps the company by providing protection against takeover from other
companies.
• Buyback involves low-cost transaction and the quickest way of reducing share
capital.
• It acts as an outstanding tool for financing re-engineering.
Disadvantages of Buy-Back of Shares
• Buyback overlooks all the profitable alternatives which can be used by the
company.
• Innocent investors get trapped when news of buyback comes into the
market, giving them wrong signals about the future price of the company.
• It creates a negative image in the minds of long-term investors who are
looking for capital appreciation due to company growth.
 Who is a Director of a Company?
• Individuals who perform the
directing function irrespective
of the label attached to them
• Section 2(34) merely provides
that director means a
director appointed to the
board of a company
Upper and Lower limit of No. of Directors

• MINIMUM
• 3, in case of Public Company

Section • 2, in case of Private Company

• 1, in case of One Person Company

149 (1) • MAXIMUM

• 15
• But can be more than 15 after a special
resolution
 • Not a previously banned
director.
• Not a minor under 16 years of
Eligibility of a Director age.
• Not any person declared to be
bankrupt or insolvent.
Terms of Appointment
• Should have a director Identification number (DIN)
• Every individual appointed for the post as a director must provide their DIN and
statement that he or she is capable of appointment as a director under the
Companies Act, 2013
• Should have a Digital Signature Certificate (DSC)
• Should provide their approval to fulfill as a director on Form DIR-2 before or
after his or her appointment
• A person may not be capable of authorization as a director, if he or she is not
registered under Section 164(1) of the Companies Act, 2013
• Can't hold directorship of more than twenty companies at one period including
any other directorate role.
Share Qualification
of a Director

• Every director should have a specific

number of percentages of share.
• The director must buy the mandatory
number of shares within two months
of being nominated.
• The qualified share price cannot be
more than ₹5000 unless the nominal
value of the name outperforms the
share value.
 DISQUALIFICATION OF DIRECTORS
Section 164 (1)

INDIVIDUAL DISQUALIFICATIONS :

❑ Person of unsound mind

❑ Undischarged Solvent

❑ Applied to be adjudicated as insolvent and application pending

❑ Order disqualifying him has been passed by court or tribunal

❑ Convicted of offense, at least 6 months sentence, 5 years have not passed

 DISQUALIFICATION OF DIRECTORS
Section 164 (1)

❑ Has not been allotted DIN

❑ Unpaid calls either alone and jointly beyond 6 months

❑ Convicted of offense dealing with Related Party Transactions during the last 5 years
 DISQUALIFICATION OF DIRECTORS
Section 164 (1)

COMPANY DISQUALIFICATIONS :

❑ Has not filed Financial Statements or Annual Returns for continuously 3 years

❑ Failed to repay deposits, or interest, or redeem debenture, or any declared

dividends continually for one year. Disqualified for 5 years

“Any private company may by its articles provide for any disqualification for appointments as a director in
addition to the ones provided under Section 164 (1)”
 Types of Director

Based on
• Executive Director
Functions • Non-Executive Director
Performed
• Additional Director
Based on • Alternate Director
Appointment • Casual Vacancy Director
• Nominee Director
 Miscellaneous
Types of Director

Small
Residential Women
Shareholders
Directors Directors
Directors