COMPANY LAW

UNIT 3: SHARE CAPITAL

Prospectus (Sec.23 to Sec.38)
As per section 2(70) of Companies Act, 2013 - a prospectus means any document
described or issued as a prospectus and includes a red herring prospectus or a shelf
prospectus or any notice, circular, advertisement or other document inviting offers from
the public for the subscription or purchase of any securities of a body corporate.
• Prospectus must be carefully drafted because it is the basis on which public decides to
subscribe. It acts as a window through which potential investor can look into the
soundness of the company's venture.
• The companies making public offer are required to comply with the regulations made
by SEBI in this regard. Every prospectus must state such information and set out such
reports on financial information as maybe specified by SEBI. It must be duly dated and
signed by all the directors of the company.
• Prospectus after vetting ( critical examination) by SEBI shall be filed with the Registrar.
This copy for registration must be accompanied with the written consent of the
expert(whose report is to be published in the prospectus) and also the written consent
of directors, auditors, bankers, legal advisors , brokers etc. of the company to act in
that capacity. Thereafter only can prospectus be issued to public.
• The prospectus must be issued within 90 days of the date on which a copy thereof is
delivered for registration.
Offer of securities by Issue House ( DEEMED
PROSPECTUS/PROSPECTUS BY IMPLICATION )(Sec.25)
If a company issues its securities to an Issue House which then offers the same to
public by means of an advertisement/document of its own then such an
advertisement or document will be deemed to be prospectus by implication if
• that offer to public is made by Issue House within 6 months after allotment or
• at the date of offer to public, the whole consideration in respect of the securities
had not been received by the company
So in such case the responsibility of company, its directors and promoters' remains
the same as that in case of direct issue of prospectus by a company.
Offer of sale of shares by certain members (DEEMED PROSPECTUS)(Sec.28)
Where certain members of the company ,in consultation with board of directors,
propose to offer some of their holdings to the public then they can do so and any
document by which such offer to public is made shall be deemed to be prospectus.
Thus the company, and its directors are liable the same way as they would have
been in case of prospectus directly issued by the company.
Sec.31- Shelf Prospectus
Many a times, companies and financial institutions like IDBI,ICICI etc. raise money from
public frequently in a series. For them , issuing a fresh prospectus everytime they hit the
market will be a time consuming and expensive exercise. In order to minimise such a
burden, the concept of 'Shelf Prospectus' is introduced. It is a prospectus which is issued
when securities are to be offered for subscription in one or more issues over a certain
period without the issue of further prospectus. Sec.31 provides that
• A company has to file Shelf prospectus with the registrar at the stage of first offer of
securities only.
• Shelf Prospectus shall be valid for one year and so when a company makes subsequent
offer of securities during the validity period, it need not file a fresh prospectus with
registrar. Rather the company has to just file an Information Memorandum containing
material facts relating to changes in financials that have occurred between the earlier
issue and present issue.
• An Information Memorandum shall be issued to the public along with the Shelf
Prospectus.
• An updated Information Memorandum and Shelf Prospectus together shall constitute
the prospectus.
Sec.32. Red herring Prospectus
It means a prospectus which does not include complete particulars about the quantum of
securities offered and the prices of the securities. The reason is that company doesnt want to
offer shares at a predetermined price .Rather it wants to elicite demand for its securities and
assess the price offered by potential investors . Sec.32 provides that
• A company proposing to make an offer of securities is required to file with the registrar of
companies a Red herring prospectus atleast three days before the opening of the subscription
list and the [Link] red herring prospectus contains all mandatory details except the issue
price and quantum of securities. It states that the issue price will be decided through book
building process.
• The issuer specifies the number of securities to be issued and the priceband for the bids. It
then invites bids from prospective investors. It engages book runners i.e merchant bankers and,
syndicate members, with whom orders/bids are to be placed. On the close of the book running
period, the book runners evaluate the bids on the basis of demand at various price levels and
as per price- demand analysis, decide the final price. The issue then gets frozen at that price.
Allocation is made to successful bidders and rest get refund orders.
• Once the offer of securities is closed, a final prospectus stating therein -the quantum of
securities , final price of securities and other details which were not included in Red herring
prospectus- is filed with the SEBI and Registrar of Companies.
Sec.33 Abridged Prospectus
Abridged Prospectus means a memorandum which contains such salient features of a
prospectus as may be specified by SEBI. It contains similar information as is there in a
prospectus but in a concise and precise manner so that cost of public issue of capital may
be reduced.
• Every security application form must be accompanied by abridged prospectus and full
prospectus is to be furnished only if requested by any person.
• Abridged Prospectus need not accompany the application forms in the following cases:
✓ In the case of bonafide underwriting agreement
✓ Where securities are not offered to public(eg. Private placement cases)
✓ Where offer is made to existing members/debentureholders
✓ Where securities are in all respects similar with those previously issued and dealt in a
recognised stock exchange.
• Incase of noncompliance of above provisions, a company shall be punishable with a fine
of Rs. 50,000 for each default.
MISLEADING PROSPECTUS
A prospectus forms the basis of contract between the company and the investor
and therefore it must disclose all material facts very accurately. A prospectus
containing false information, or ambiguous information or contains
misstatement or an ommission of material facts is a misleading prospectus. In
that case ,a misled investor( i.e. original allottee of shares who had relied on the
prospectus to subscribe the securities and not a buyer in the open market) is
entitled to various remedies against those who misled him.(Case- Peek vs Gurney)
Here prospectus containing a false statement was issued by Gurney( defendant
director) on behalf of the company . "A" relying on the prospectus applied and was
allotted shares. Later, he sold 2000 shares to Peek(plaintiff). After some time, the
company was wound up and Peek was asked to pay £ 100000 as contributory. Peek
asked the directors to indemnify him as prospectus was misleading. It was held
that directors were not liable to Peek as he was not original allottee and that they
could not be made liable ad-infinitum for all subsequent dealings.
MISLEADING PROSPECTUS
• False statement -McConnell vs Wright case- Here the Prospectus stated that the company
had acquired certain property, which it had not at that time , acquired. The statement was
held false and gave investors the right to proceed against the directors of the company
though the property was subsequently acquired by the company a few days after the
allotment of shares.
• Ambiguous statement-Smith vs Chadwick case- Here the Prospectus stated that the 'present
value of turnover ' is £ 10 lakhs per annum. This statement is capable of two interpretations
- 'actual produce 'or 'capable of producing'. It was held that statement is ambiguous.
• Misstatement of material facts- Henderson vs Lacon case-Here the Prospectus of a company
stated that "the directors and their friends have subscribed a large portion of the capital and
they now offer to the public the remaining shares". Actually each director had subscribed
only ten shares. The statement was held to be misleading.
• Ommission of material facts-Rex vs Kylsant case - Here the Prospectus stated that dividends
varying from 5% to 8% had been regularly paid over by the company over a long period up to
the date of prospectus. This statement created an impression that the company was in good
financial position. However the truth was that the company had been incurring huge trading
losses during these years and dividends were paid only out of accumulated earnings .So the
prospectus was deemed to be misleading not because what it stated but because what it
failed to disclose.
 Circumstances when prospectus is not considered
misleading
• Prospectus containing a general commendation ( praise) , or any opinion or expectation is not
misleading because opinions can differ and expectations may not be [Link]. the statement that due
to honest and efficient management, the company is expected to progress by leaps and bounds, is
only a statement of opinion and will give no right of recession. Similarly if the prospectus says that
the company is very efficient and progressive and is going to make its place in top 200 companies is a
general commendation and its inclusion in prospectus does not make it misleading.
• Prospectus containing misstatement of some immaterial fact. eg. if address of the registered office
has been given as 256 , Asaf Ali Road in place of 265 Asaf Ali Road , or suppose name of director was
incorrectly written as Monica Arya instead of Monika Arya ,the prospectus will not be treated
misleading.
• Prospectus containing existence of some promise. If the prospectus of a company asserts the
existence of some promise, the prospectus does not become false just because that promise was
[Link]. -Shiromani Sugar Mills Limited vs. Debi Prasad- Here the prospectus stated that" the
management agents with their friends , promoters and directors have already promised to subscribe
shares worth six lakh rupees." But they actually subscribed much lesser number of shares. It was held
that there was no misrepresentation of facts and the prospectus was not misleading.
• Prospectus containing misrepresentation of law (and not of fact). The person deceived by it will have
no [Link]. if a prospectus states that its shares will be issued at a discount of 20%, whereas
Sec.53 prohibits issue of shares at discount, it is misrepresentation of law and a person deceived by it
will have no remedy.
REMEDIES AVAILABLE TO A MISLED INVESTOR
• Remedies against the company (Under Indian Contract Act,1872)
✓ Recission of Contract
✓ Claiming damages for fraud
• Remedies against individual directors/experts etc( Under Companies Act,2013)
✓ Criminal Liability (Sec.34)
✓ Civil Liability (Sec.35)
Remedies against the company
Rescission of Contract - Under Indian Contract Act, a contract induced by a misstatement of
material fact, whether innocent or fraudulent, is voidable at the option of the aggrieved party.
Hence, the misled allottee is entitled to rescind his contract , return the shares and receive back
his money. But to succeed in a suit for rescission, he has to prove that prospectus was issued by
company; it contained misrepresentation of facts; misrepresentation was material and he had
actually relied upon the statement in question while applying for shares. However this right of
rescission gets lost in the following cases-
• Lapse of time- if subscriber fails to take action within reasonable time
• Affirmation- eg. attempts to sell shares, accepts dividend, pays calls, attends meetings etc.
• Liquidation- if company goes into liquidation before the subscriber commenced legal
proceeding for rescission (this is because any payment to him on rescission would injure the
interest of creditors )
Suit for damages - If the subscriber proves that the misstatements were made fraudently (and
not innocently )and that he had actually been deceived, he can additionally claim damages by
way of interest. Thus, this right can be exercised only after rescission of contract and the allottee
cannot both retain the shares and claim damages from company. Further,the right to claim
damages also gets lost in the same circumstances as stated above in which right to rescission
gets lost. Ordinary damages shall be the difference between the price at which shares were
allotted and the present market value.
Remedies against the individuals viz. directors, promoters,
experts etc.
These remedies are available to the subscriber whether he rescinds his contract or not. These remedies
are generally resorted when the misled investor does not want to rescind the contract or is unable to
rescind the contract because of loss of right of rescission. Thus the misled subscriber can retain the
shares and at the same time hold liable the persons guilty of issuing misleading prospectus.
[Link] liability in case of misleading prospectus -Where a prospectus contains an untrue or
misleading statement, every person authorising its issue shall be punishable for fraud u\s 447 and so
will be punished with prescribed fine\imprisonment. But the alleged person can escape liability if he
proves
• that the statement was immaterial or
• that he believed on reasonable grounds that it was true.
[Link] liability in case of misleading prospectus -If any person subscribes the securities by relying on
any statement in prospectus which is misleading/untrue and as a result incurs a loss, then he shall be
compensated by the company and the following persons (viz. directors\promoters\experts in respect of
only their own untrue statement). But the alleged person(s) can escape liability if he proves that-
• he withdrew his consent to act as director before the prospectus was issued and it was issued without
his consent or
• that the prospectus was issued without his consent and on becoming aware of its issue, he gave public
notice that it was issued without his consent or knowledge or
• that the statement was in fact made on the authority of a competent expert and the expert had given
his consent and not withdrawn it.
OTHER OFFENCES RELATING TO PUBLIC ISSUE
Sec.36 Punishment for fraudulently inducing persons to invest money
Any person who ,knowingly or recklessly, makes any statement\promise\forecast which is
false\deceptive\misleading in order to induce another person to enter into any agreement for
acquiring\disposing\subscribing\underwriting securities\making profit from fluctuations in share prices\obtaining
credit facilities from any bank or financial institution etc. shall be guilty of fraud and liable for action under section
447 .Thus sec.36 is a generic provision that would cover all misstatements or fraud or reckless conduct outside the
prospectus but made in connection with a public offer of securities.

Securities Class Action (Sec.37). This section provides that a suit may be filed by any person(individual private suit)
or groups of persons(class action suit) who have been affected under section34\35\36 by any misleading statement
or inclusion or ommission of any matter in the prospectus. Funding of class action suits could be out of Investor
Education and Protection Fund. A class action allows a number of claimants with a common grievance against a
company to file a lawsuit against it. Claimants can pool their resources, share attorney's services and save time and
costs of litigation. The scale of economies associated with class actions seem especially critical to those individuals
who have limited resources or small claims that render individual lawsuits expensive and unfeasible.

Sec.38 Punishment for personation

If , for acquiring shares, any person applies to a company in a fictitious name or makes multiple applications in
different names or combinations of names\surnames, then he shall be guilty of fraud under section 447*. Thus he
maybe liable to imprisonment and fine. To warn public against indulging in such practices, it is provided that this
provision should be prominently reproduced in every prospectus and every securities application form. If a person
is convicted under this section, the court may order disgorgement ( recovery)of gains made by this person and
seizure and disposal of securities in possession of the person. The amount received through disgorgement or
disposal of securities shall be credited to Investor Education and Protection Fund u\s 125.
Sec.42 Private Placement
It means any offer of securities or invitation to subscribe securities to a select group of persons identified by the
Board of the company
• Proposed offer must be approved by a special resolution of shareholders
• Company can issue securities through Private Placement Offer cum Application
• Offer be made to such identified persons ≤ 200 (excluding QIBs and employees under ESOPs)
• If offer is made to > 200 persons it, be deemed as public offer & provisions as applicable to prospectus will apply
• Money payable on subscription shall only be through cheque/demand draft / banking channels but not by cash
• Securities to be allotted ≤ 60 days from receipt of application money else money + interest be refunded to them
• Application money be kept in a separate bank a/c in a scheduled bank & be utilised only for allotment/repayment
• Co. making private placement not to release any advertisement/utilise any media to inform public about the offer
• Co. to file with ROC a Return of Allotment giving details about names ,addresses of allottees ,shares allotted etc.
• Contravention of any of the provisions of this section, would subject the company, its promoters and directors to a
penalty which may extend to amount raised through private placement or 2 crore rupees, whichever is lower and
the company shall refund all monies with interest @12% per annum to subscribers within 30 days of order
imposing penalty.
BOOK BUILDING
Bookbuilding is a method of offering shares to investors in which the price at which shares are to be offered is
discovered through a bidding process. Instead of announcing the offerprice of securities in advance , bids (within the
specified price range) are invited from the potential investors itself and then the final price is worked out.
Bookbuilding is seen as an alternative to fixed price issue mechanism. Book building process-
• The issuer company going for a public issue nominates lead merchant bankers as ‘Book runners’.
• The company files a copy of red herring prospectus with SEBI atleast 3 days before the opening of the offer.
• The issuer company specifies the number of securities to be issued and the priceband for the bids
• The issuer company also appoints syndicate members with whom orders are to be placed by the investors. The
syndicate members input the orders into an ‘electronic book’ and this process is called bidding.
• The book normally remains open for a period of 5 days. Bids should be within the range specified. Bids can be
revised by the bidders before the book closes.
• After the closure of book building period, book runners evaluate the bids on the basis of demand at various price
levels and decide the final price keeping in mind the number of securities which are to be allotted.
• The issue gets frozen on that price .Securities are allotted to successful bidders and the rest get refund orders.
Advantages
✓ It helps the company to realize the true value for its equity or what investors perceive the intrinsic value of
the company to be
✓ It co. gets an insight into its credibility factor among the investors which can be gauged by the demand
generated for its shares
Limitations
✓ Suitable only for the issuer companies which are fundamentally strong and well known to the investors
✓ This system works efficiently in mature market condition where the investors are well informed of various
factors affecting the market price of the securities.
Book Building Process
BOOK BUILDING EXAMPLE
• PRICE RANGE FOR BIDDING-(Rs.200- Rs.240)
• Shares to be offered by the company- 100,000
Price Shares Demanded Cumulative Demanded
200 30000 179000
205 27000 149000
210 22000 122000
215 21000 100000
220 18000 79000
225 17000 61000
230 16000 44000
235 15000 28000
240 13000 13000
245 REJECTED
(beyond price range)
Since the company will be able to sell 100000 shares easily at a price of Rs. 215 each, this price
will be frozen . Those who were willing to buy shares at a price more than 215 will be rather
happy
ALLOTMENT OF SECURITIES (Sec.39 – Sec.40)

MEANING OF ALLOTMENT
A prospectus issued by a company is merely an invitation to offer. When the potential investor
makes an application for securities, it is an offer from the applicant. The BOD of the company can
accept or reject this offer. When the BOD make an allotment of shares, it implies offer is
accepted and a binding contract takes place between the applicant and the company .
Thus, allotment means the appropriation out of the previously unappropriated capital of the
company, of certain number of share \debentures to an applicant by company. It is for this
reason that reissue of forfeited shares is not regarded as allotment of shares as these shares are
not fresh shares ,rather these are second hand shares.
The provisions governing allotment of securities may be studied under two heads
• General Provisions ( under Indian Contract Act)
• Special Provisions (under the Companies Act)
General provisions(applicable to both private as Special Provisions( applicable to only public companies going for public
well as public companies) offer)
Allotment must be made by proper authority i.e. by resolution of Section 26 (4)- requires Registration of Prospectus with ROC before it is issued to public
BOD or Allotment Committee
Allotment must be made within proper time- i.e specified time or Section29- requires public offer of securities to be in dematerialized form only
otherwise reasonable time
Allotment must be communicated- i.e. communication of Section39 – states allotment requirements
acceptance must be by the prescribed mode or otherwise by Sec39(1) -No allotment unless minimum subscription as stated in prospectus and application
ordinary mode of transmission( like post) money is duly received by the [Link] cheque or other instrument. (SEBI has prescribed that
minimum subscription must atleast be 90% of the offer)
Sec 39(2)- Minimum application money payable shall be 5%of nominal value of security or such
other percentage specified by SEBI (which is minimum 25% of nominal value)
Sec39(3)- If minimum subscription and application money is not received within 30 days from date
of issue of prospectus or such other period as specified by SEBI, the whole amount received shall
be returned within prescribed time i.e. 15 days from closure of issue otherwise interest @15% p.a.
will be charged from the officers in default for the delayed period.
Allotment must be absolute and unconditional-allotment must Section 40- Listing requirements
be made on the same terms as stated in application for shares. If Sec40(1)- Every company , before making public offer ,shall have to apply to one or more
there is a variation , there is no contract. Case- Raman Bhai vs recognised stock exchanges and obtain permission for listing.
Ghasiram-Here the applicant while applying for shares put a Sec40(2)-Prospectus of such company shall also state the names of all such stock exchanges where
condition that he be appointed as cashier for the allotment of it has applied for listing.
shares. Shares were allotted to him but he was not appointed as Sec40(3)-All application money received to be kept in a separate bank account in a scheduled bank
cashier. It was held that this allotment was not valid as and not to be used for any other purpose except adjustment towards allotment, if listing
acceptance was not as per the terms of the offer and the permission granted or repayment of money , if allotment not done.
applicant was not bound by the allotment.
Effect of of non compliance of general provisions Effect of non compliance of special provisions.
Allotment is null and void Non compliance of sec.26 or 29 or 39 - prescribed fine is imposed on co.+ every defaulting officer.
Non Compliance of Sec 40- Listing Requirement) – here the allotment void .Also the company
is punishableUnwivietrhsiftiyne ranging between ₹5 lakhs to ₹ 50 lakhs and every defaulting officer with
Return of Allotment( Sec.39(4))
Whenever any public or private company , makes any allotment of securities, it has to file with the registrar a Return of
Allotment within such time and in such manner as is prescribed by Rule12 of Companies (Prospectus and Allotment of
Securities )Rules,2014-
• The company must file a duly dated and signed Return of Allotment with ROC within 30 days of allotment.
• The Return shall have particulars of allottees viz. names, addresses, occupations, no. of securities allotted, amount paid etc.
• If securities are allotted for consideration other than cash, relevant contracts of sale/services must also be attached to it.
• In case of bonus issue, a copy of resolution authorizing issue of bonus shares should be attached to the Return of Allotment.
• Incase of default in above provisions ,the company and its defaulting officer shall be liable to prescribed penalty.
Payment of Underwriting Commission (Sec.40(6))
An underwriting contract is an agreement entered before the shares are brought before the public , that incase the public does
not take up the whole of them or the number mentioned in the agreement, the underwriter , will for an agreed commission, take
an allotment of such part of the shares as public has not applied for. Underwriting is a device used by companies to make sure
that the necessary capital comes forth even if the proposed issue gets a poor public response. Further, underwriting of securities
instils confidence into the mind of prospective investors as they know that underwriters underwrite only when they find that the
company is sound and has good prospects. Underwriting is paid on all shares covered under the contract even if there is
oversubscription. As per Rule 13 of Companies (Prospectus and Allotment of Securities )Rules,2014 the following conditions
must be satisfied before paying underwriting commission-
• The payment of commission must be authorised by AOA.
• Rate of commission can not exceed 5% in case of shares and 2.5% in case of debentures, of the price at which they are issued.
• Further, the rate of commission cannot exceed the rate of underwriting commission ( if any) specified in AOA
• The rate of commission agreed must be disclosed in the prospectus.
• A copy of underwriting contract should be delivered to the registrar at the time when prospectus is delivered for registration.
 SHARES (ISSUE, BUYBACK etc.)
SHARE- As per Sec.2(84),Share means 'share in the share capital of a company and includes a stock'. A share in a company
is one of the units into which the total capital of the company is divided. A share secures to its owner certain rights and
liabilities e.g. right to dividend, right to vote etc., liability to pay call etc. A share is regarded as' goods' in India i.e.
moveable and marketable but these are transferable in a manner provided in the Companies Act.
STOCK- A stock is different from share in the sense that a company cannot originally issue stock. Only fully paid up shares,
if authorized by AOA, can be converted into stock. The benefit of this conversion is that stock can be transferred in
fractional value whereas fractional transfer is not possible in case of shares. Eg. 10 shares of face value of Rs. 100 each if
converted into stock of Rs.1000 can now be transferred in any amount say as stock of Rs.625 or stock of 450 or 760 etc.
There may be different kinds of shares in any company - Equity Shares and Preference Shares.
Equity Shares are the shares which have residual right in the matter of dividend and repayment of capital at the time of
winding up. They get dividend only after the preference shareholders have been paid their fixed dividend and similarly at
the time of the winding of the company, they are entitled to return of capital only after preference holders have been paid.
A company may issue the following types of equity shares-
✓ Equity Shares with voting rights ( Ordinary Equity)- These shares carry normal voting rights on them .
✓ Equity Shares with differential rights ( Special Equity)-These carry differential rights as to dividend, voting or otherwise.
Preference shares are those which enjoy preferential rights (a) as to payment of dividend at a fixed rate during the life of a
company and (b) as to return of capital on the winding up of the company. The preferential shareholders do not enjoy
normal voting rights like the equity shareholders with voting rights. They are entitled to vote only in the following cases-
(a) When any resolution directly affecting their rights is to be passed. e.g. resolution for winding up of the company
(b) When the dividend due on their preference shares has remained unpaid for 2 years or more ,then they become entitled
to vote on ALL the resolutions placed before general meeting.
 Equity Shares with differential rights
Conditions that must be satisfied-
• The AOA of the company must authorize the issue of shares with differential rights
• An Ordinary Resolution authorizing issue of such shares must be passed by shareholders in the general meeting.
• Resolution passed by shareholders must specify a) the rate of voting right and b) rate of additional dividend on them
• Holders of equity shares with differential voting rights shall be entitled to bonus/rights shares of the same class only.
• The company should not have defaulted in filing financial statements and annual returns in the last 3 FYs
• The company should not have defaulted in the payment of declared dividends to shareholders \ interest obligation on
debentures\ interest on deposits\payment of interest on term loans borrowed from banks or financial institutions\
redemption of preference shares or debentures\ repayment of matured deposits\ repayment of term loans etc.
• The company should not have defaulted in payment of statutory dues relating to its employees to any authority etc.
Example- Tata Motors in 2008 introduced equity shares with differential voting rights .In this issue every 10 of such shares
carried only one voting right but would get 5 percentage points more dividend than declared on each of the ordinary shares.
Advantages of equity shares with differential voting rights
• Small shareholders, who hardly exercise voting rights, find such shares attractive as these offer more rate of dividends.
• Management of the co. also finds it attractive as it can raise capital without diluting/reducing its control in the company .
Issue of Shares at Premium(Sec.52), at Discount (Sec.53)
When a company issues shares at a price higher than their face value, it is called issue of shares
at premium. The company is free to make such an issue but there are certain restrictions on use
of the premium amount so collected. The Securities Premium Account may be used for-
✓ Issue of fully paid Bonus shares
✓ Writing off the preliminary expenses of the company
✓ Writing of commission/discount/expenses on any issue of shares or debentures of the company
✓ Buyback of shares
✓ Providing Premium payable on redemption of preference shares or debentures of the company.
Similarly, when a company issues shares for consideration less than their par value, it is called
issue of shares at a discount. Sec.53 prohibits issue of shares( except sweat equity shares) at a
discount. Thus , except sweat equity shares, no shares can be issued at a discount.
Sweat equity shares (Sec.54) are such equity shares which are issued by the company to its
employees\ directors at a discount\for consideration other than cash for providing their
knowhow \ IPRs \ value additions. The company may issue sweat equity if the following
conditions are satisfied -
• The shares must be of a class already issued.
• Passing of SR authorising such issue in the general meeting .
• The resolution must specify the number of shares, their current market price, consideration, discount
offered, names of directors\ employees who would be issued such shares.
• The issue of sweat equity must also conform to SEBI Guidelines ( in case of listed shares) or prescribed
CG Rules (in case of unlisted shares)
ESOPs( Employee Stock Option Plans)Sec.62(1)(b)
A company can make further issue of shares to its employees under the scheme of ESOPs. It is an
instrument used by companies to attract, retain and motivate its employees. Here option is given to the
directors, officers and employees of a company which gives them a right to purchase or subscribe for, the
shares of a company at a future date at a predetermined price which is usually lower than the market
price .
• The scheme of ESOPs must conform to SEBI Guidelines( in case of listed companies) or prescribed CG
Rules (in case of unlisted companies)
• ESOPs are given to permanent employees( whether working in India or abroad) and to directors(
whether whole- time or part- time) of the company
• Independent Directors or employees who are promoters or belong to promoters group are not
eligible for ESOPs
• The company should get Special Resolution passed by shareholders for approval of ESOP Scheme.
• The explanatory statement annexed to the notice for general meeting shall contain particulars like
total no. of stock options granted, exercise price, lock in period etc.
• The option granted shall not be transferable to any other person
• The employees will not have right to dividend or right to vote etc .until option is exercised by them
and shares are issued.
• The company shall maintain an ESOP Register to enter the particulars of options granted in it.
• The details of ESOPs must also be disclosed in Directors Report
Sweat Equity vs Employees Stock Option Plans
SWEAT EQUITY SHARES EMPLOYEE STOCK OPTION PLANS

Covered u/s 54 of Companies Act,2013 Covered u/s 62(1)(b) of Companies Act, 2013

Here shares are allotted to the directors/ employees of the co. Here options are granted to the employees/ directors. If option
is exercised by them, then only shares are allotted to them

These shares can be issued at a discount (i.e. price lower than Shares under an ESOP scheme can be purchased at a
face value) . predetermined price which is generally lower than the market
price.

Sweat equity may be issued for consideration other than cash Consideration for purchase of shares under ESOP scheme is
eg. making available value addition, IPRs, knowhow only cash/ money

Sweat equity can be issued to promoters ESOPs cannot be issued to promoters or promoters group
Rights Issue and Bonus Issue
RIGHTS ISSUE\SHARES( Sec.62) BONUS ISSUE\SHARES(Sec.63)

Whenever a company, proposes to increase its subscribed capital by Whenever a company having large undistributed profits issue fully paid
allotment of further shares, the offer must first be made to the present up shares to their existing shareholders ,free of charge, they are known
equity shareholders. Such shares are called Rights Shares as Bonus Shares.

Rights Shares are to be paid for by existing shareholders . Shareholders don't have to pay anything on bonus shares .

Rights shares are offered at a price decided by the directors of the Bonus shares are totally free of charge. No price is charged on them.
company.

Rights shares bring cash into the company. Bonus shares don't bring any cash into co.

Rights shares may be partly paid. Bonus Shares are always fully paid up.

The shareholder has right of renunciation of the rights offer in favour of There is no right of renunciation in case of bonus shares.
his nominee.

Rights Issue must comply with minimum subscription requirements. Bonus Issue need not comply with minimum subscription requirements.

Rights issue is made when a company needs funds to meet the growth Bonus issue is made when a company doesn't want to distribute its
and diversification requirements of the company. profits and reserves by way of dividends but retains them and converts
them into shares.
I
It is also known as RIGHT OF PRE-EMPTION. It is known as CAPITALISATION OF UNDISTRIBUTED PROFITS
Rights Issue and Bonus Issue
RIGHTS ISSUE ( Sec.62) BONUS ISSUE(Sec.63)
CONDITIONS TO BE SATISFIED CONDITIONS TO BE SATISFIED
• Approval by shareholders not required for rights [Link] • Bonus issue must be authorised by AOA, resolution of BOD
must be made to present equity shareholders on a pro rata and ordinary resolution of shareholders in a general
basis. meeting
• Notice must be issued to shareholders specifying the • Fully paid bonus shares can be issued by company out of its
number of shares offered and the period of offer (time free reserves or securities premium account or the capital
limit for exercising this right must be not less than 7 days redemption reserve account
and not more than 30 days from date of offer) • The company issuing bonus shares must not have defaulted
• If offer is not accepted during this period ,it will be deemed in payment of debts ( eg. interest ,principal) or statutory
to be declined. In case the members declines or is deemed dues of employees ( eg. gratuity, bonus, contribution to PF)
to have declined the offer, the board of directors can • If on the date of allotment of bonus shares, company has
dispose them off as they think most beneficial to the partly paid up shares, they must be first of all made fully
company. paid.
• The member shall be given the right of renunciation of
• Listed companies must also comply SEBI ( Issue of Capital
offer in favour of his nominee
and Disclosure Requirements) Regulations, 2009 for bonus
• Listed companies must also comply SEBI(Issue of Capital issue
and Disclosure Requirements) Regulations, 2009 for rights issue
Buyback of shares (Sec.68,69, 70)
It means repurchasing of shares by the company that issued them. The Companies
Act through Sec.68 to 70 permits companies to buyback its shares subject to
certain restrictions.
Rationale for Buyback
• Enhancement of shareholders wealth- When shares are bought back and
cancelled, it reduces the outstanding number of shares thus improving earning
per share, EPS
• Better investment alternative- A cash rich company looking for investment
alternatives may prefer to buyback its own shares at the market rate rather than
investing in shares of some unknown company.
• Ownership consolidation- Through buyback, the existing management can
increase its percentage stake and thereby avert any hostile takeover bid.
Provisions relating to Buyback
Funds out of which buy back can be financed [Sec.68(1)] - A company may buyback its shares\ securities out of
• a) its free reserves or
• b) securities premium account or
• c) proceeds of issue of any shares or specified securities (but not of same kind of shares/securities)- This implies
that equity shares can be redeemed out of an earlier preference shares or debentures issue but not out of earlier
equity shares issue.)
Conditions to be fulfilled before resorting to buyback [Sec. 68(2), 68(3),68(4)]
• The AOA must authorise buyback of securities
• Passing of SR by shareholders in general meeting- ( However no SR is required where buyback is up to 10% of (
total paid up capital + free reserves of co.) and is authorised by Boards' Resolution)
• The notice convening general meeting to contain explanatory statement containing details of buyback
including justification for buyback, securities to be purchased, amount involved and time limit for completion of
buyback
• The shares or securities to be bought back should be fully paid up.
• The amount involved in buyback must not exceed 25% of ( total paid up capital + free reserves of co.)
• After the buy back, the ratio of( debt) to (capital + free reserves) should not exceed 2:1.
• The buyback operations must be completed within 12 months of passing of SR.
• The time gap between two buybacks must be minimum 1 year.
• Buyback must be in accordance with SEBI regulations in case shares are listed or with CG rules (in case shares
are unlisted).
Methods of buyback [68(5)]
1. From existing shareholders or securities holders on a proportionate basis- Tender
Method - Here the company fixes and announces the price and quantity of shares
which it wishes to buyback. If number of shares offered by shareholders at that
stated price exceeds the required quantity, shares will be bought on pro rata basis.
2. From open market under
✓ Stock Exchange Purchase Method -Here, the company buys shares through stock
exchange till it reaches maximum number of shares it had originally decided to buyback
and the market price does not exceed the predetermined maximum price for buyback.
✓ Dutch Auction Method- Here, the company announces the quantity of shares to be
purchased and offer price range ,say ₹80 to ₹100 . The company then invites bids from
shareholders within that price range and analyses those bids. The company selects the
offered price from lowest price onwards at which the cumulative number of shares
offered equals or exceeds the required quantity of shares it announced to buyback. This
is the final buyback price and is paid to all shareholders whose shares have been
accepted for buyback.
3. From employees of the company whom it had issued securities under the' scheme of
stock option' or 'sweat equity '
OTHER PROVISIONS RELATING TO BUYBACK
• Declaration of Solvency [Sec.68(6)] - Before buyback, the company is required to file with ROC and SEBI a declaration of
solvency duly signed and verified by an affidavit from the board of directors that the company is capable of meeting its
liabilities and will not be rendered insolvent within a period of one year.
• Physical destruction of securities[ 68(7)]- After completion of buyback operations, the securities must be extinguished and
physically destroyed within 7 days of completion of buyback.
• Restriction on further issue after buyback [68(8)]- Where a company has bought back its securities it cannot make a further
issue of same kind of securities within a period of six months from date of completion of buyback.
• Register of bought back securities [Sec.68(9)]- The company has to maintain a register containing the following particulars
relating to buyback such as consideration paid, date of cancellation or physical destruction of shares etc.
• Return of Buyback[68(10)]- Within 30 days of completion of buyback, the company has to file a return in prescribed form
with ROC and SEBI containing all relevant information regarding buyback .
• Transfer of certain sum to Capital Redemption Reserve [Sec.69] - In case a company purchases its own shares out of its free
reserves or securities premium account, an amount equal to nominal value of shares purchased must be transferred to CRR
.The CRR is a special type of reserve which is treated as share capital for reduction of capital purposes and can be utilised only
for issue of bonus shares.
• Prohibition for buyback in certain circumstances[Sec.70] - A company is prohibited from buying back in cases below
✓ through any subsidiary company \ or its own subsidiary company \or any investment company
✓ if it has defaulted in repayment of its deposits\term loan\ redemption of preference shares or any interest\ dividend thereon.
✓ it has not complied with provisions relating to filing of annual return (Sec.92) or declaration of dividend (Sec.123), timely
payment of dividend(Sec.127) or preparation of Financial Statements in prescribed form (Sec.129)
• Penalty- In case of non compliance of the above provisions, the company shall be punishable with fine ranging from ₹ 1 lakh to
3 lakh and officers in default shall be punishable with imprisonment up to 3 years and\or fine ranging from 1 lakh to 3 lakh .
CALLS & SHARE FORFEITURE
Companies generally instead of demanding the full face value of shares in one go, demand it in instalments as per
their capital requirements i.e. on application, on allotment, on first call and on second or final call.
A call may be defined as a ' demand made by the company on its shareholders, to pay whole or part of the balance
remaining unpaid on each share, after the allotment of shares, at any time, during its lifetime.‘
The unpaid amount of the share is like a debt due from a member to the company but the liability to pay it does
not arise until a valid call has been made by the company.
REQUISITES OF A VALID CALL-
• Call must be authorised by a valid resolution of BOD-The call resolution must specify the amount, the date and
the place of payment.
• Call must be made on uniform basis on all shares of same class- Discrimination should not be made between
shareholders of same class as regards the amount and time of payment of call.
• Call must be made bonafide in the best interest of company-Call must be made only when the company is in
need of funds . The directors should not misuse the power to make calls for their personal benefits.
• Call must conform to the provisions of AOA- Call must be made strictly as per the provisions of AOA of the
company. But incase AOA are silent on this issue, then Regulation 13 of Table F shall apply which states that
✓ The maximum amount per call shall be 25% of face value of share
✓ Atleast 1 months' gap should be there between two successive calls
✓ Members be given atleast 14 days' prior notice stating amount, time & place of call
✓ The directors have the discretion to revoke or postpone a call
Forfeiture of shares
Forfeiture means confiscation of the shares of a shareholder by way of penalty for
the nonpayment of any call . Instead of taking a legal action against the defaulter to
recover the call money, companies prefer to resort to forfeiting the shares. A company
does not have a statutory right to forfeit shares and so they expressly insert a clause
on forfeiture in their AOA to get the authority. If the AOA permit for forfeiture of
shares, then it shall be as per the AOA. If Articles are silent, then forfeiture shall be as
per the relevant Regulations (i.e. Regulations 28-34) of Table F of Schedule I -
• Shares are generally forfeited against nonpayment of call but AOA can provide for
any additional ground for forfeiture.
• The defaulting member should be served proper notice giving him reasonable time
to pay due call together with interest for the delayed period and informing him that
incase he fails to pay by the certain date, his shares will be forfeited.
• If the member still does not comply with the notice, the BOD will pass a formal
resolution of forfeiture and his shares will be forfeited. The forfeited shares shall be
sold / reissued on such terms and manner as the Board thinks fit.
• The power of forfeiture is a power of trust which must be exercised bona fide for the
good of the company and not for personal reasons like relieving a friend from
liability or settling scores with the shareholder whom directors dislike.
Effects of forfeiture
• On forfeiture, the defaulting shareholder ceases to be the member of the company
and his name is removed from the register of members
• He loses his claim to the paid up amount on his shares.
• If AOA so provide, he will also remain liable for the unpaid calls ( just like an ordinary
debtor of the company) for a period of 3 years from the date of forfeiture as articles are
in the nature of contract between company and member. But the company cannot
recover from him more than the difference between the amount payable on such
shares at the time of forfeiture and the amount received from its subsequent holders .
• Forfeiture of shares does not result in reduction of capital as these shares are reissued
Reissue of Forfeited Shares
• Forfeited shares can be issued at par, premium or discount. But discount on reissue of a
share cannot exceed the amount forfeited on such shares
• Reissue can be done only after suitable resolution of the board of directors .
• After the reissue, the new holder becomes the shareholder of the company and his
name will be entered in register of members
• Reissue of forfeited shares is regarded as sale and not as allotment and therefore there
is no need to file Return of Allotment with the ROC with respect of reissued shares.
Surrender of shares
Surrender of shares means the return of shares by the shareholder to the
company for cancellation voluntarily. The legal effects of surrender as well as
forfeiture are similar. The amount already paid on such shares is also confiscated
and these can also be reissued in same way. There is no provision for surrender in
the Companies Act or Table F. However , AOA may allow surrender of shares . But
in that case ,BOD can accept surrender of only partly paid shares and that too
where their forfeiture is justified i.e where a call has been made and amount
remains unpaid after the due date. Surrender of fully paid shares is out of
question.
SURRENDER VS FORFEITURE
• Surrender is a shortcut to forfeiture, which is a lengthy process.
• Surrender involves the initiative of the shareholder whereas forfeiture is at the
initiative of the company.
Transfer of securities
A transfer of securities takes place where the registered security holder transfers by sale or otherwise his
securities to another person voluntarily. Securities shall be moveable goods transferable in the manner
prescribed by the Companies Act and the Articles of Association (and not by mere delivery as in case of
furniture etc.)
Procedure of transfer of securities through Transfer deeds
• Provisions of AOA relating to transfer of shares must be followed. Transfer of securities can be done by
registered shareholder or a legal representative of the deceased.
• Oral transfers are not recognised by the Act. An instrument of transfer, in prescribed form, should be
executed. It should be duly filled, dated, stamped and signed by both the transferor and transferee.
• Along with the transfer form attach - the relative share certificate + copy of PAN cards
• The complete set of transfer form should be delivered at company's head office for registration within
60 days from the date of execution
• In case the transfer relates to partly paid up shares, the company must give notice of this fact to the
transferee and can register the transfer only if transferee makes no objection .
• The transfer form is then presented to the BODs for approval . If approved. the company registers the
transfer i.e. strikes off the transferor's name from Register of Members and enters the name of
transferee in its place
• An endorsement is made on the back of the shares, recognising the transferee as the new holder of it
and the same is issued to transferee within one month of the date of lodgement of transfer.
Transmission of shares
It means transfer of property\ title in securities by operation of law i.e. in case of death\
insolvency\ lunacy of a security holder , the securities get assigned respectively to the legal
representative\ official receiver\ guardian appointed by court . The person becoming entitled to
shares on transmission shall have the same rights as to dividend and other privileges as were
there with original member.
There are two alternatives open to the legal representative. He can opt for any of them. If he
does not opt any of these alternatives the company will send a notice to him asking about his
choice and unless he intimates his decision, the company will freeze these shares and withhold
the payment of dividend, bonus etc on them.
OPTIONS
1. He may get himself registered as a security holder. For this ,he has to make a Request
Application + attach relevant Share Certificates+ copy of Death Certificate + attach Succession
Certificate to the company. In case company is satisfied with the genuineness of the documents,
it will delete name of deceased security holder from Register and enter the name of legal
representative in the Register + issue new share certificate in his name .
2. He may decide to transfer the securities. For this he will have to follow the usual procedure of
transfer i.e fill Instrument of Transfer + attach relevant Share Certificates+ copy of Death
Certificate + attach Succession Certificate to the company. If the company is satisfied with the
documents, it will register the transfer.
Distinction between transfer and transmission
• Transfer of securities is deliberate act of parties where as transmission takes place by operation of law on death\ insolvency\
lunacy of a security holder.
• Transfer of securities requires execution of a formal instrument of transfer whereas transmission requires an evidence of
entitlement ( succession certificate).
• Except when transfer is by way of gift, there must be presence of adequate consideration whereas no consideration is required
in case of transmission
• In case of transfer, stamp duty on market value of securities is payable whereas no stamp duty is payable in case of
transmission of shares.
RESTRICTIONS ON TRANSFER IN CASE OF PRIVATE COMPANIES- Shares of a public company are freely transferable and BOD
cannot refuse to register transfer of their shares but in case of private companies, right to transfer shares must necessarily be
restricted by its AOA. However, absolute restriction , even in case of private companies ,is void and inoperative. Actually the
purpose behind restrictions on transferability of shares of private companies is to maintain personal contact among members.
Therefore, AOA of private companies usually contain restriction in the form of pre-emption clause which states that the
intending transferor must in the first instance offer shares to the existing members of the company . Under the AOA, the BOD of
a private company can also refuse to register a transfer on the following grounds eg. partly paid up shares are to be transferred
to a pauper/minor /unsound mind person or that transferee is a person with whom directors of company have personal
animosity or where call is unpaid against shares to be transferred or where company has lien on the shares as the transferor is
indebted to it or instrument of transfer contains some irregularity i.e not signed\ stamped etc.
If a company refuses to register the transfer \ transmission of securities, it must send a notice of refusal to the parties
concerned and state in it the reasons for refusal. The parties may then file an appeal with the Tribunal against such refusal ,
within prescribed time. The Tribunal after hearing them, may either dismiss the appeal or may order the company to register the
transfer \ transmission within 10 days of receipt of order. Further, it may direct the company to rectify the register and also
damages to the aggrieved party.
D-MAT\Depository System
The transfer of securities in physical form suffers from many limitations such as
• Huge cost because of postal charges, stamp duty, paper- work, stationery, odd lots
• Inconveniences associated with transportation , despatch ,safe custody of securities
• Bad deliveries due to faulty compliance of paperwork ,mismatch of signatures etc.
• Risks involved due to theft, forgery, mutilation of certificates
• Undue delays due to procedural lags , frequent following up with company\ brokers etc.
In order to remove the above shortcomings associated with physical delivery of securities
,the Government of India has enacted the Depositories Act, 1996 to provide for legal
framework for setting up of Depositories and effecting transfers of securities through
book entry only.
Depository System - It is a system whereby the transfer of securities takes place by
means of book entry in the ledgers of the Depository and not through transfer deeds and
physical movement of [Link] is also known as" Scripless Trading System ". The main
objective of this system is is to minimize paperwork involved with the ownership, trading
and transfer of securities. The depository system works very much like a banking system.
Similarities between a banking system & depository system
BANK DEPOSITORY
• Holds funds in accounts • Holds securities in accounts
• Transfers funds between accounts on the instruction of • Transfers securities between accounts on instruction of
account holders account holders
• Facilitates transfer of funds without having to handle • Facilitates transfer of securities without having to handle
money securities
• Accountable for safe keeping of the money • Accountable for safe keeping of securities
• Eg. PNB, SBI • Eg. NSDL, CDSL

Depository- It is an organisation where securities of an investor are held in electronic form and securities transactions are
carried out by means of book entry through the medium of a Depository Participant. The depository must be formed and
registered as a company under the Companies Act and must also seek registration with SEBI by fulfilling prescribed conditions.
Following are the important Depositories in India and companies can enlist their shares with either or both of them-

1. National Securities Depository Limited(NSDL)- operational since November, 1996

2. Central Depository Services Limited ( CDSL)- operational since February, 1999
Depository Participant(DP)- They are the agents of the depository and act as a crucial link \ interface between the investors and
the depository. As per SEBI Guidelines, financial institutions, banks, stock brokers, stock exchange, clearing house etc. can
become DP on obtaining a Certificate of Registration after following prescribed conditions under "SEBI( Depositories and
Participants) Regulations, 1996" and having adequate infrastructure. If depository is like a bank, a DP is like branch of that bank.
Processes in Depository System
Account Opening- Any investor who wants to avail services of a Depository cannot
open demat account directly with the depository .It has to open a demat account
with the depository participant of the depository. Steps are
• Investor should fill up an Account Opening Form and submit it to DP along with
copies of proof of identity(POI) and proof of address (POA) as specified by SEBI.
He should also sign an agreement with DP wherein the rights and duties of
investor as well as DP are specified.
• DP will verify the documents with originals and if in order, it will open the demat
account in the system and give the investor - Beneficiary Owner Identification
Number(BOID), copy of agreement and schedule of charges.
• One account is sufficient for holding the dematerialized shares of various
companies. However, one can open more than one account with the same DP
and also with different DPs.
Processes in Depository System
Dematerialization- It is a process by which physical certificates of securities of an investor
are converted into an equivalent number of securities in electronic form and credited
into his account with the DP. Normally, this whole process takes 30 days . Steps are
• Investor should fill up Dematerialization Request Form (DRF) provided by the DP in this
regard and submit it to DP along with the respective share certificates.
• The DP then intimates Depository about the dematerialization request of the investor,
and surrenders the DRF and the share certificates to the concerned company .
• The company will cancel the share certificates of that investor and substitute in its
Register of Members, the name of the Depository as Registered Owner of those shares
and inform the Depository accordingly.
• The Depository ,then enters the name of the investor concerned in its records as
Beneficial Owner and the no. of shares held by him. The Depository will inform the DP
electronically.
• The DP will credit the client's demat account with equivalent no. of shares of that
company ,which the investor will hold in electronic form. He will also issue a statement
of transactions to the client.
Processes in Depository System
Payment\ Credit of dividends\ interest\ Bonus\ Rights shares. Steps are
• The company declaring dividend\ interest\ Bonus\ rights obtains the details of the beneficiary owners
and their holdings as on the record date from the Depositories.
• On the basis of information provided, the company issues them warrants for dividends\ interest .
• Bonus\ Rights shares will be credited by the company to their demat accounts with the depository ,
directly.
Selling \ Buying dematerialized shares - It is possible when both the parties - buyer as well as seller of
securities - have demat account and the sale\ purchase was through a stock broker. Further ,for
transfering shares held in demat form, no transfer deed and no stamp duty is required. Steps are
• The client has to send to his DP a Delivery Instruction Slip ( DIS) in case of sale \ Receipt Instruction
Slip (RIS) in case of purchase of securities. These slips are duly signed and contain the details of
securities sold or purchased.
• The DP will convey the information to the Depository electronically.
• The Depository will register the transfer of the security in the name of the transferee only after it is
satisfied that payment for such transfer has been made. It will debit the account of the transferor and
credit the account of the transferee with the number of shares transferred.
• The DP will also make appropriate book entries in its records to effect the transfer of securities.
• The client will be provided with the updated statement of accounts within 15 days of the transaction.
Processes in Depository System
Rematerialization- It is a process by which securities held in demat form are
converted into an equivalent number of securities in physical form. This process is
completed within a period of 30 days .Steps are:
• Investor should fill up Rematerialisation Request Form (RRF) to the DP
• The DP will forward the request to the Depository after verifying that client has
the necessary securities in balance.
• The depository will forward the same to the company
• The company issues security certificates to the investor , substitutes the name of
investor as registered owner in place of the depository and sends electronic
confirmation to the depository
• The depository updates the account , intimates the DP who then informs the
client about changes in his account balance due to rematerialization of his shares.
Features of the Depository System
• Scope of Depository System-
✓ Public offer of shares has to be in Demat form
✓ Shares of unlisted public companies have to be converted into Demat form for enabling transfer of shares
✓ Shares of a private company ( except Small Company) shall be transferred /subscribed to in Demat form only
• Dematerialization of securities not compulsory- Investor has the option to hold securities either in physical form
or in dematerialized form. Investors holdings securities in dematerialised form can convert them in physical form
through rematerialisation.
• Securities shall be fungible – Securities in electronic form have no distinctive identifiable number. All the shares
would be identical and can be exchanged for one another.
• Ownership bifurcated into Registered Owner and Beneficial Owner- On the dematerialization of securities, the
Depository would appear as a registered owner in the books of the issuer company whereas the investor would
be beneficial owner in the records of the Depository . It means that all the economic benefits like
dividends,interest, bonus,etc will be enjoyed by the investor only
• Securities would become freely transferable- In the demat mode, transfer of shares takes place freely through
electronic book entry system and the companies enjoy no discretion in effecting transfer of securities. Further, the
concept of market lot is also eliminated as market lot becomes one share.
• No stamp duty - In case of depository system, there is no need of any transfer deed or stamp duty on
transactions of sale\ purchase .
Benefits of Depository system \ Dematerialization (STEEL)
Safety
• No risk of loss of securities due to theft/ fire/ mutilation /loss in transit / forgery etc.
• No need of maintaining bank vaults for safe custody of share certificates
Transparency
• DP provides the updated statement of accounts to their clients on a regular basis
• Bonus\ Rights shares credited directly by company in shareholders demat account
Efficiency
• Change of address recorded with the DP gets registered with all companies in which investor holds securities
electronically eliminating the need to inform each of them separately
• Transmission formalities for securities held in demat account can be completed by submitting documents( like
death certificates, succession certificate etc.) to the DP alone and no need of corresponding with each of the
companies.
Economy
• No stamp duty payable on transfer of securities
• Chances of bad deliveries is eliminated as securities cannot be fake or forged.
Liquidity
• Share transfers can be effected immediately without any need to follow up with brokers \ company\ registrar etc.
• Abolition of odd lots as market lot is one share. Shares in any numbers can be bought\ sold.