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Chapter 4
Share Capital and Debentures
(Chapter of the Companies Act, 2013 consisting of Sections 43 to 72, the Companies
(share capital and Debentures) Rules, 2014 and the National Company Law Tribunal
(Procedure for Reduction of share capital)Rules, 2016)
Unit I: Basic Concepts with respect to Shares
1. INTRODUCTION TO SAHRES [Section 2(84)]

Definition of ‘Share’ means a share in the share capital of a company and includes stock.
‘share’ [Section
2(84)]
Meaning of A share is the smallest unit into which the share capital of a company is
‘Share’ divided.

2. CLASSIFICATION OF CAPITAL (Section 2)

1. Authorised  ‘Authorised capital’ or ‘nominal capital’ means such capital as is
capital authorised by the memorandum of a company to be the maximum
amount of share capital of the company [Section 2(8)].
 Simply speaking, ‘authorised capital’ means the maximum capital that
can be issued by a company during its lifetime. A company cannot issue
capital exceeding the authorised capital. In case the company intends
to issue capital exceeding the authorised capital, it has to first increase
the authorised company Under Section 94(1)(a).
 The amount of authorised capital is stated I the company clause of
memorandum.
 At the time of registration of the company, the company has to pay
fees to CG which is calculated with respect to authorised capital.
Similarly, at the time of increasing the authorised capital, the company
has to pay fees to CG which is calculated as difference between the
increased authorised capital and existing authorised capital.
 Authorised capital is also called as registered capital or nominal capital.
2. Issued  ‘Issued capital’ means such capital as the company issues from time to
capital time for subscriptions [Section 2(50)].
 Simply speaking, ‘issued capital’ is that part f authorised capital which
ha been, for the time being, issued by the company.
 It includes the share capital issued for cash as well as for consideration
other than cash.
3. Subscribed  ‘Subscribed capital’ means such part of the capital which is for the time
capital being subscribed by the members of a company [Section 2(86)].
 Simply speaking, ‘subscribed capital’ is that part of issued capital which
has been subscribed to by the members.
4. Called up  ‘Called-up capital’ means such part of the capital, which has been called
capital for payment [Section 2(15)].
 Simply speaking, ‘called up capital’ is that part of subscribed capital
which has been, for the time being, called by the company.

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5. Paid-up  Paid-up share capital’ or ‘share capital paid-up’ means such aggregate
capital amount of money credited as paid-up as is equivalent to the amount
received as paid-up in respect of shares issued and also includes any
amount credited as paid-up in respect of shares issued and also
includes any amount credited as paid-up in respect of shares of the
company, but does not include any other amount received in respect of
such shares, by whatever name called [Section 2(64)].
 Simply speaking, paid-up means that portion of called up capital, which
has been, for the time being, paid by the members.
 It can be arrived at by deducting calls in arrears from the called up
capital.

3. KINDS OF SHARE CAPITAL (Section 43)

May, 2007: Explain in brief “Equity Share Capital” and “Preference Share Capital”
May, 2018: Can equity shares with differential voting rights be issued? If yes, state the
conditions under which such shares may be issued.
(A) Provisions of the Act.
1. Kinds of Share capital shall be of 2 kinds, namely:
Share (a) Preference share capital; and
Capital (b) Equity shares capital –
(i) With voting rights; or
(ii) With differential rights as to dividend, voting or otherwise, in
accordance with such Rules as may be prescribed by CG.
2. Preference Share capital carrying a preferential right with respect to dividend and
share repayment of capital is termed as preference share capital.
capital
(i) Preferential  In a case where a dividend is declared by the
right as to company, the preference shareholders shall have a
payment of preferential right to payment of dividend.
dividend  Such preferential right as t payment of dividend may
be –
(a) With respect to a fixed rate; or
(b) With respect to a fixed amount; or
(c) Free of Income-Tax; or
(d) Subject to Income-Tax
(ii) Preferential In the case of winding up of the company or of
right as to repayment of capital, the preference shareholders shall
repayment have a preferential right to the repayment of the
of capital amount of share capital paid-up.
Share capital shall be deemed to be preference share capital whether or
not it is entitled to either or both of the following rights:
(i) Participation Right to participate with the equity shares capital, in the
in surplus surplus profits in the case of payment of dividend.
profits
(ii) Participation Right to participate with the equity shares, in any
in surplus surplus which may remain after the entire share capital

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assets is repaid in the case of a Winding Up.

3. Equity Share capital which is not preference share capital is termed as equity
shares shares capital.
4. Applicability Section 43 applies to all companies, whether public or Private.

(B) Provisions contained in Rule 4 of the Companies (Share capital and Debentures) Rule,
2014
1. Legal (a) Issue of shares with differential rights must be authorised by the
requiremen articles.
ts for issue (b) Issue of shares with differential rights must be authorised by passing
of shares ‘OR’, ‘OR’ shall be passed by postal ballot, if the provisions of Section
with 110 are applicable to the company.
differential (c) The voting power in respect of shares with differential rights of the
rights company shall not exceed 74% of total voting power including voting
power in respect of equity shares with differential rights issued at any
point of time.
(d) The company has not defaulted in filing Financial Statements and
Annual Returns for immediately preceding 3 following years.
(e) The company has no subsisting default with respect to –
(i) Payment of declared dividend; or
(ii) Repayment of matures deposits or interest on deposits; or
(iii) Redemption of debentures or interest on debbentures; or
(iv) Redemption of preference shares.
(f) The company has not defaulted in –
(i) Repayment of any term loan from a public financial institutions or
State level financial institution or scheduled Bank or interest
payable thereon; or
(ii) Dues with respect to statutory payments relating to its employees;
or
(iii) Crediting the amount in Investor Education and Protection Fund.
(g) The application has not been penalized by Court or Tribunal during the
last 3 years, of any offence under –
(i) The Reserve Bank of India Act, 1934; or
(ii) The Securities and Exchange Board of India Act, 1992; or
(iii) The Securities Contracts Regulation Act, 1956; or
(iv) The Foreign Exchange Management Act, 1999; or
(v) Any other special Act, under which such company is being regulated
by any sectorial regulator.
2. No The company shall not convert its existing equity shares capital with voting
conversion rights into equity shares capital carrying differential voting rights and vice-
verse.
3. Nature of The holders of the equity shares with differential rights shall enjoy all other
rights rights such as bonus shares, rights shares etc., which the holders of equity
shares are entitled to, subject to the differential rights with which such
shares have been issued.
4. Disclosures The Register of Members maintained Under Section 88 shall contain all the
in register relevant particulars of the shares with differential rights issued along with

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of members details of the shareholders.

5. Disclosers The explanatory statement to be annexed to the notice of the general
in meeting in pursuance of Section 102 or of a postal ballot in pursuance of
explanatory Section 110 shall contain the prescribed particulars.
statement
6. Disclosures The Board of Directors shall disclose in the Board’s Report for the financial
in register year in which the issue of equity shares with differential rights was
of members completed, the prescribed details.
7. Shares The equity shares with differential rights issued by any company as per the
issued provisions contained in the Companies Act, 1956 and the Rules made
under the thereunder, shall also be regulated as per the provisions contained in
Companies Section 43 of the Companies Act, 2013 and Rule 4 of the companies (share
Act, 1956 Capital and Debentures) Rules, 2014.
(C) Provisions contained in Notification No. G.S.R. 464(E) dated 5th June, 2015
The provisions of Section 43 shall not apply to a Private company whose memorandum or
articles so provide.

4. DIFFERENCE BETWEEN PREFERENCE SHARES AND EQUITY SHARES

Basis of
Preference Shares Equity Shares
Distinction
1. Definition The shares which carry a The shares other than preference
preferential right as to payment of shares are called equity shares.
dividend and repayment of capital
are called as preference shares.
2. Time of Dividend on preference shares is Equity shares are paid dividend only
payment of paid in priority to equity shares. when dividend has been paid on
dividend preference shares.
3. Amount or The dividend on preference shares The whole of the profits of the
rate of is paid at a fixed rate, or a fixed company after payment or
dividend amount is paid as dividend preference dividend belong to the
equity shareholders. Thus, the
dividend on equity shares varies
with amount of profits.
4. Time of In Winding Up, repayment of In Winding Up, equity capital is
repayment of preference capital is first made, i.e. repaid only after preference capital
capital in priority to repayment of equity has been fully repaid.
capital.
5. Voting Rights The holder of preference shares The holders of equity shares have a
have no right to vote in any general right to vote in every general
meeting, except in certain cases meeting.
specified Under Section 47.
6. Redemption Preference shares are always Equity shares are always
of shares redeemable. No company can issue irredeemable, i.e. no company can
irredeemable preference shares. redeem the equity shares during its
lifetime.
7. Entitlement The preference shareholders are The equity shareholders are

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to bonus not entitled to bonus or right entitled to bonus and right shares.
shares and shares.
right shares
8. Accumulation If dividend is not declared in a Since the equity shareholders are
of arrears of particular year, such dividend gets not entitled to any fixed
dividend accumulated and is to be paid in rate/amount of dividend, if
future year(s), except in case of dividend is not declared in any year,
non-cumulative preference shares. such dividend lapses and therefore,
the equity shareholder has no right
to receive the dividend not declared
in any past year.

5. NATURE OF SHARES (Section 44)

The shares and debentures shall be –
(a) Movable property
(b) Transferable in the manner provided by the articles of the company.

6. NUMBERING OF SHARES (Section 45)

 Every share shall be distinguished by its distinctive number.
 Exception – Shares held in depository system shall not have distinctive numbers.

7. SHARE CERTIFICATE (Section 46 read with Section 56)

Nov. 2011: What is the law and procedure for issuing a duplicate share certificate under the
provisions of the Companies Act, 2013 in case the original share certificate is last or
destroyed?
1. Applicability Issue of share certificate is mandatory for every company having share
capital, whether public or private.
2. Meaning A share certificate is a prima facie evidence of the fact that the person
named therein is the owner of such number of shares as are specified
therein.
3. Legal (a) Every certificate shall specify the shares to which it relates and the
requirements amount paid-up thereon.
(b) Every certificate shall be signed by 2 Directors and the Company
Secretary, wherever the company has appointed a Company
Secretary.
(c) In case the company has a common seal, it shall be affixed in the
presence of persons required to sign the certificate.
(d) In case of One Person Company, it shall be sufficient if the certificate
is signed by a Director or the Company Secretary or any other
person authorised by the Board for the purpose.
(e) A Director or the Company Secretary shall be deemed to have signed
the share certificate if his signature is printed thereon as facsimile
signature by means of any machine, equipment or other mechanical

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means such as engraving in metal or lithography or digitally signed,

but not by means of rubber stamp, provided that the Director shall
be personally responsible for permitting the affixation of his
signature thus and the safe custody of any machine, equipment or
other material used for the purpose.
4. Rules by CG CG may by Rule, prescribe –
 Manner of issue of share certificate
 Manner of issue of duplicate share certificate
 Form of share certificate
 Particulars to be entered in the Register of Members
 Other matters.
5. Duplicate (a) A duplicate share certificate can be issued if –
Share (i) It is provided that share certificate has been lost or destroyed; or
Certificate (ii) It is defaced, mutilated or torn and is surrendered to the
company.
(b) In case of unlisted companies, the duplicate share certificate shall be
issued within 3 months of submission of complete documents with
the company.
(c) In case of listed companies the duplicate share certificate shall be
issued within 45 days of submission of complete documents with the
company.
6. Shares held in Where the shares are held in dematerialized form, the records of the
dematerialized depository (i.e. register of beneficial owners) shall be the prima facie
form evidence of the title of the person named therein and the number of
shares specified therein.
7. Time limits for In case of allotment of securities to Within 2 months incorporation
delivery of the subscribers to memorandum
certificate If case of any allotment of shares Within 2 months of allotment
(Section 56) In case of any allotment of Within 6 months of allotment
debentures
In case of transfer or transmission Within 1 month of receipt of
of securities transfer deed or intimation of
transmission.
8. Estoppel Estopped as to title The company cannot deny the
created by a validity of title of a bonafide
share person whose name is specified in
certificate the share certificate.
Estoppel as to amount paid-up The company cannot deny against
a bonafide person that the amount
specified as being paid-up on the
shares, has not actually been paid-
up.

8. VOTING RIGHTS OF SHAREHOLDERS (Section 47)

1. Voting rights  Every equity shareholders shall have a right to vote on every
of equity resolution placed before the company.
shareholders  On a poll, the voting right of every equity shareholders shall be in

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proportion to his share in the paid-up equity share capital of the

company.
2. Voting rights  Every preference shareholder shall have a right to vote –
of preference (a) On such resolutions which directly affect his rights;
shareholders (b) On any resolution for the Winding Up of the company; and
(c) On any resolution for the repayment or reduction of share
capital.
 On a poll, the voting right of every preference shareholder shall be in
proportion to his share in the paid-up preference share capital of the
company.
 If the dividend on any class of preference shares is not paid for 2
years or more, then even preference shareholder of such class shall
have a right to vote on every resolution placed before the company.
3. Proportion of If the equity shareholders as well as preference shareholders have a
voting rights right to vote on any resolution, then, the voting rights of equity
shareholders and preference shareholders shall be in the same
proportion which the paid-up equity share capital bears to the paid-up
preference share capital.
4. Applicability  Section 47 applies to all companies, whether public or private.
 However, the provisions of Section 47 shall not apply to a Private
company whose memorandum or articles so provide [Notification
No. G.S.R. 464(E) Dated 5th June, 2015].

9. VARIATION OF SHAREHOLDERS’ RIGHTS (Section 48)

1. Authorization The rights attached to the shares of any class may be varied –
make variation (a) If power to make the variation is contained in the memorandum or
articles;
(b) If such variation is not prohibited by the terms of issue of such
shares, in case no such power is contained in the memorandum or
articles.
2. Consent The rights attached to the shares if any class may be varied –
required for (a) With the consent in writing of the holders of not less than 3/4th of
variation the issued shares of that class; or
(b) By means of a special resolution passed at a separate meeting of the
holders of the issued shares of that class.
3. Consent of  If variation of rights of one class of shares affects the rights of any
shareholders other class of shares, then the consent in writing of the holders of
of other class not less than 3/4th of the issued shares of such other clas shall also
also required be required.
4. Rights of Who can make Holder(s) of such class of shares who –
dissenting an application to  Hold not less than 10% shares of such class; and
shareholders the Tribunal?  Had not consented to such variation or had not
to make an voted in favour of the special resolution for such
application to variation.
the Tribunal Time limit for The application shall be valid only if its is made
making within 21 days after the date when the consent was
application given or the special resolution was passed.

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Effect of Variation shall not have any effect unless confirmed

application by the Tribunal
Orders of  The Tribunal may cancel or confirm the
Tribunal variation.
 The order of the Tribunal shall be binding on the
shareholders.
 The company shall, within 30 days, file the order
of the Tribunal with the Registrar.

10. CALLS ON SHARES OF SAME CLASS TO BE MADE ON UNIFORM BASIS (Section 49)
1. Uniform call A call shall be made uniformly on all the shares falling under the same
class.
2. Meaning of The shares on which different amounts have been paid-up shall not be
‘Same Class’ deemed to the shares falling under the same class.

11. CALLS IN ADVANCE (Section 50)

Meaning of ‘Calls A member on his own, pay to the company whole or a part of the
in Advance’ amount remaining unpaid on the shares held by him, even if no part of
that amount has been called up. Such amount is referred to as ‘Calls in
Advance’.
Power to accept Specific power is required in the articles to accept the calls in advance.
calls advance
Interest on ‘calls  The company is liable to pay interest on calls paid in advance.
in advance’  The interest is payable whether or not the company has any profits,
i.e. the interest may be paid out of capital.
 The interest shall be paid at such rate as may be specified I the
articles.
 The rate of interest on calls in advance shall be such as may be
agreed between the Board and the member paying calls in advance,
but not exceeding 12% per annum (Regulation 18 of Table F).
Voting Rights A member is not entitled to any voting rights in respect of ‘calls in
advance’ until that amount has been called up.
Other Rights  The amount paid as calls in advance is non-refundable.
 The liability of the members to pay the future calls is extinguished to
the extent of calls paid in advance by him.
 In the event of Winding Up of the company, the amount paid as calls
in advance along with interest shall be repaid before repayment of
capital to the members, but after all the creditors have been paid
off.

12. PAYMENT OF DIVIDEND IN PROPORTION TO AMOUNT PAID-UP (Section 51)

Nov. 1999, Nov. 2005, Nov. 2018: Rights and liabilities of the members in respect of calls paid
in advance (Section 50 and 51)
P. 4.12A: ‘Sunrise Limited’, is authorised by its articles to accept the whole or any part of the
amount of remaining unpaid calls from any member although no part of that amount has

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been called up. ‘X’ a shareholder of the Sunrise Limited, deposits in advance the remaining
amount due on his shares without any calls made by ‘Sunrise Limited’.
Referring to the provisions of the Companies Act, decide the rights and liabilities of Mr. X,
which will arise on the payment of calls made in advance.
OR
Moonstar Limited, is authorized by its articles to accept the whole or any part of the amount
of remaining unpaid calls from any member although no part of that amount has been called
up. ‘A’ a shareholder of the Moonstar Limited, deposits in advance the remaining amount due
on his shares without any calls made by Moonstar Limited.
OR
PQR Limited had issued 10000 shares of Rs. 10 each, on which company called up Rs. 7.50 per
share. However, Mr. C, a shareholder of PQR Limited deposited in advance the remaining
amount due on his shares without any calls made by PQR Limited.
Referring to the provisions of the Companies Act, 2013, state the ights and liabilities of Mr. C,
which will arise by the payment of calls made in advance.
Answer:
Acceptance of calls in - Since Sunrise Limited / Moonstar Limited has express
advance by Sunrise Limited provision in the articles authorizing it to accept calls in
/Moonrise Limited is valid advance;
(Section 50) - Since the power to receive calls in advance has been
exercised for the benefit of the company.
Rights and liabilities of X /  X / A shall not be entitled by any voting rights in respect of
A. ‘calls in advance’ until the call becomes presently payable
(Section 50).
 The dividend is paid on the nominal value of a share.
However, sunrise Limited / Moonstar Limited shall pay
dividend in proportion to the paid-up capital held by each
member, if the articles so provide (Section 51).
 Interest on calls in advance shall be paid to X / Aof such rate
as may specified in the articles.
 X / A becomes on unsecured creditor of the company.
 The amount paid as calls in advance is non-refundable.
 The liability of X / A to pay the future calls is extinguished to
the extent of calls paid in advance by him.
 In case of surplus in winding up, before repayment of
capital to the members, the amount paid as calls in advance
along with interest shall be repaid to X / A.
Nov. 2018: A company declares a dividend of 10%. Whether the dividend is payable as a
proportion of nominal value or paid-up value? (Section 51).
P. 4.12B: Karan was holding 5000 equity shares of Rs. 100 each of M/s Future Limited A final
call of Rs. 10 per share was not paid by Karan M/s. Future Limited declared dividend of 10%.

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Examine with reference to relevant provisions of the Companies Act, 2013, the amount of
dividend Karan should receive.
Answer:
Karan holds  Shares of nominal value of Rs. 5 Lakhs having a paid-up
Karan is entitled to receive value of Rs. 4.5 Lakhs.
a dividend of Rs. 45,000.  If the articles of M/s Future Limited contain a provision that
the dividend shall be paid in proportion to the paid-up value
of each share or if M/s Future Limited has adopted
Regulation 83 of Table F.

13. ISSUE OF SHARES AT PREMIUM (Section 52)

May, 2011 Whether shares at premium can be issued by a company? What are the purposes
for which the share premium account can be used under the provisions of the Companies Act,
2013?
May, 2012: Explain the provisions of the Companies Act, 2013, relating to the utilization, by a
company of the amount standing to the credit of Securities Premium Account.
May, 2018: WW Limited has an authorised share capital of 1,00,000 equity shares of Rs. 100
per share and an amount of Rs. 3 Crores in its Share Premium Account as on 31-03-2017. The
Board of Directors seeks your advice about the application of share premium account for its
business purposes. Please give your advice.
No condition  No provision is required in the articles to issue the shares at premium.
for issue of  The Companies Act, 2013 does not prescribe any restriction or condition
securities at regarding issue of shares at premium.
premium
 Where a company issues any shares at a premium, the amount of
premium received shall be transferred to the ‘Securities Premium
Account’.
Utilization of The ‘Securities Premium Account’ can be used for the following purposes.
premium (a) Issuing fully paid bonus shares to the members of the company.
(b) Writing off the preliminary expenses of the company.
(c) Writing off the expenses of or commission paid or discount allowed on,
issue of shares or debentures of the company.
(d) Providing for the premium payable, on the redemption of any redeemable
preference shares or debentures of the company.
(e) For buy back of shares Under Section 68.
Utilization of In case of such class of companies, as may be prescribed and whose financial
premium in statement comply with the accounting standards prescribed for such class of
case of companies Under Section 133, the ‘Securities Premium Account’ can be used
certain for the following purposes:
companies (a) Issuing fully paid bonus shares to the members of the company.
(b) Writing off the expenses of or commission paid, or discount allowed on,
issue of equity shares of the company.
(c) For buy back of shares Under Section 68.

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Utilization of Where ‘Securities Premium Account’ is used for any purpose other than the
Premium for purposes permitted under the Act, then, the provisions of the Act a are
other applicable to reduction of share capital shall apply, as if the ‘Securities
Purposes Premium Account’ were the paid-up share capital of the company.
Issue of The provisions of the Act w.r.t. transfer of premium received on issue of
securities for securities to ‘Securities Premium Account’ and utilization of ‘Securities
cash or Premium Account’ shall apply irrespective of the fact that the securities have
otherwise, is been issued for cash or for consideration other than cash.
immaterial

14. PROHIBITION ON ISSUE OF SHARES AT DISCOUNT (Section 53)

May, 2004: Can a company issue shares or discount?
Nov, 2012: Whether a company may issue shares at discount?
Nov, 2018: A company cannot have issue shares at a discount as per Section 53 of the
Companies Act, 2013. Explain the exception to this provision. If any, with reference to
Companies Act, 2013.
1. Prohibition  Issue of shares at a discount at a discount is prohibited.
 The prohibition applies to all companies, whether public or private.
2. Issue to be  Any issue of shares at a discount shall be void.
void
3. Consequences  The company and every officer who is in default shall be liable to a
of penalty up to the amount raised through the issue of shares at a
contravention discount or Rs. 5 Lakhs whichever is less.
of Section 53  The company shall also liable to refund all monies received with
interest at the rate of 12% per annum to the persons to whom such
shares have been issued. The interest shall be payable from the date
of issue of such shares to the date of refund.
4. No prohibition  Issue of sweat equity shares does not fall within the purview of
on issue of Section 53.
sweat equity  A company may issue sweat equity shares by complying with Section
shares 54.
5. No prohibition Notwithstanding anything contained in this Section, a company may
on issue of issue shares at a discount to its creditors when its debt is converted into
shares at a shares in pursuance of any statutory resolution plan or debt
discount in restructuring scheme in accordance with any guidelines or directions or
case of regulations specified by the Reserve Bank of India Act, 1934 or the
conversion of Banking (Regulation) Act, 1949.
debt.

15. ISSUE OF SWEAT EQUITY SHARES (Section 2(88) and Section 54]

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Nov, 2003: Explain the meaning of the term ‘Sweat Equity’. What are the provisions of the
Companies Act, 2013 relating to issue of ‘Sweat Equity’?
May, 2005: Explain briefly the meaning of sweat equity shares and the steps that a company
has to take for issue of such shares.
May, 2008: A Public Company proposes to issue ‘Sweat Equity shares’ to its employees.
Referring to provisions of Companies Act, 2013 state the conditions required to be fulfilled by
the company.
(A) Meaning of sweat equity shares
Concept of sweat Sweat equity shares are issued by a company to its directors or
equity shares employees as a reward to them for their contribution and efforts
towards the creation of intellectual property rights for the company.
Definition of Sweat ‘Sweat Equity shares’ means such equity shares as are issued by a
Equity shares company to its Directors or employees –
[Section 2(88)] (a) At a discount; or
(b) For consideration, other than cash,
For providing their know-how or making available rights in the nature
of intellectual property rights or value additions, by whatever name
called.

(B) Conditions for issue of sweat equity shares

1. Nature of shares Sweat equity shares must belong to a class of shares already issued by
the company.
2. Authorization  Issue of sweat equity shares must be authorised by passing SR.
for issue  SR pasted by the company shall specify the following particulars:
(a) Number of shares
(b) Current market price
(c) Consideration, if any
(d) The class of Directors or employees to whom sweat equity
shares are to be issued.
3. Compliance of Listed companies – Shall comply with the regulations made by SEBI in
Rules of this behalf.
Regulations Unlisted Companies – Shall comply with the Rules prescribed by CG.

(C) Provisions applicable to sweat equity shares.

1. Same provisions  The rights, limitations, restrictions and provisions, as are applicable
applicable to equity shares, shall apply to the sweat equity shares.
 The holders of sweat equity shares shall rank pari passu with the
holders of other equity shares.
2. Over-riding  The provisions of Section 54 shall apply notwithstanding anything

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effect contained in Section 53.

(D) Provisions contained in the Companies (Share Capital and Debentures) Rules, 2014,
w.r.t. Sweat Equity Shares.
1. Issue of Sweat equity shares can be issued by a company only to its Directors or
sweat employees. For this purpose, the expression ‘employee’ means –
equity (a) A permanent employee of the company who has been working in India
shares to or outside India; or
whom? (b) A Director of the company, whether a whole time Director or not; or
(c) An employee or a Director as defined (a) or b99 above of a subsidiary,
in India or outside India, or a holding company of the company.
2. Meaning of The expression ‘value additons’ means actual or anticipated economic
/Value benefits derived or to be derived by the company from an expert or a
Additions’ professional for providing know-how or making available rights in the
nature of intellectual property rights, by such person to whom sweat
equity is being issued for which the consideration is not paid or included in
the normal remuneration payable under the contract of employment, in
the case of an employee.
3. Time limit SR authorizing the issue of sweat equity shares shall be valid for making the
for making allotment within a period of not more than 12 months from the date of
allotment passing SR.
4. Lack in The sweat equity shares issued to Directors or employees shall be locked in
period / non-transferable for a period of 3 years from the date of allotment, and
the fact that the share certificates are under lock-in and the periof of expiry
of lock in shall be stamped in bold or mentioned inany other prominent
manner on the share certificate.
5. Limits on (a) The company shall not issue sweat equity shares for more than 15% of
sweat the existing paid-up equity shares capital in one FY or shares of the
equity issue value of Rs. 5 Crores, whichever is higher;
shares (b) At any time, the sweat equity shares shall not exceed 25% of the paid-
up equity capital of the company.
(c) A stamp company, as defined in notification number G.S.R. 180(E)
Dated 17th February, 2016 issued by the Department of Industrial Policy
and Promotion, Ministry of Commerce and Industry, Government of
India, may issue sweat equity shares not exceeding 50% of its paid-up
capital up to 5 years from the date of its incorporation or registration.

16. REDEEMABLE PREFERENCE SHARES (Section 55)

(A) Conditions for issue of redeemable preference shares.
1. Term of  Issue of irredeemable preference shares is prohibited.
preference  The term of preference shares shall not exceed 20 years.
shares
 The term of preference shares may exceed 20 years, subject to the

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following conditions:
(a) Such preference shares are issued for Infrastructure project as
specified under Scheduled VI.
(b) The company shall redeem, at the option of such preference
shareholders, on an annual basis, such percentage of
preference shares as may be prescribed.
2. Power in Authorization in the articles is required to issue the preference shares.
Articles
3. Compliance of The conditions prescribed by CG under the Companies (Share Capital
Rules and Debentures) Rules, 2014 must be complied with.

(B) Conditions for redemption of preference shares.

1. Power in No authorization is required in the articles to redeem the preference
Articles shares .
2. Fully paid Preference shares can be redeemed only if they are fully paid-up.
shares
3. Sources of (a) Out of the profits available for dividend.
redemption (b) Out of a fresh issue of shares made for the purpose of such
redemption.
4. Premium In case of prescribed class of companies In any other cas, -
payable on whose financial statement comply with
redemption AS prescribed Under Section 133, -
(i) Premium payable on redemption Premium payable on
shall be provided for out of the redemption may be
profits of the company; provided for –
(ii) In case of preference share capital (a) Out of the profits of the
issued before the Commencement of company; or
this Act, premium payable on (b) Out of securities
redemption may be provided for – premium account.
(a) Out of the profits of the
company; or
(b) Out of securities premium
account.
5. Creation of CRR (a) Creation of CRR is mandatory, if the preference shares are
redeemed out of profits.
(b) Amount to be transferred to CRR out of profits of the company =
National value of preference shares redeemed out of profits.
6. Utilization of  CRR may be utilised only for the preference shares are redeemed
CRR out of profits.
 All the provisions of the Act relating to reduction of share capital
shall apply to CRR, as if CRR were the paid-up capital of the
company.

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7. Notice to The notice of redemption of preference shares is to be given to ROC –

Registrar - Within 30 days;
- In the prescribed form;
- Along with a copy of altered memorandum (Section 64).

(C) Provisions contained in the Rules.

1. Condition for (a) The issue of preference shares must be authorised by passing ‘SR’
issue of in GM.
preference (b) At the time of such issue of preference shares, there must not be
shares any subsisting default with respect to –
(i) The redemption of preference shares (whether issued before or
after the Commencement of this Act; or
(ii) Payment of dividend due on any preference shares.
2. Conditions for A company may issue preference shares which are redeemable after a
issue of period of 20 years, if the following conditions are satisfied:
preference (i) The company is engaged in infrastructural projects,
shares (ii) The period of redemption shall not exceed 30 years,
redeemable (iii) The company shall redeem a minimum 10% of such preference
after 20 years shares every year beginning from the 21st year or earlier, on
proportionate basis, at the option of the preference shareholders.
3. Compliance A company intending to list its preference shares on a recognised Stock
with SEBI Exchange shall issue the preference shares in accordance with the
Regulations relevant regulations made by SEBI.

17. PROHIBITION ON PERSONATION OF SHAREHOLDER (Section 57)

1. Prohibition on  If any person deceitfully personates as an owner of any security,
personation and thereby –
 Obtains or attempts to obtain any such security; or
 Receiver or attempts to receive any money due to any such
owner.
 He shall be punishable Under Section 57.
2. Punishment for Imprisonment  Minimum; 1 year  Maximum: 3 years
contravention Fine  Minimum: Rs. 1 Lakh  Maximum: Rs. 5 Lakhs

18. ALTERATION IN CAPITAL CLAUSE OF MEMORANDUM (Section 61)

Nov, 2017: A Limited has an Authorised Capital of 10,00,000 equity shares of the face value of
Rs. 100/- each. Some of the shareholders expressed their opinion in the Annual General
Meeting that it is very difficult for them to trade in the shares of the Company in the share
market and requested the Company to reduce the face value of each share to Rs. 10/- and
increase the number of shares to 1,00,000. Examine whether the request of the shareholders
is possible and if so, how the Company can alter its share capital as per the provisions of the
Companies Act, 2013.

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Applicability Section 61 applies to all Limited companies having a share capital.

Nature of (a) Increase its authorised share capital by such amount as it may
alterations in think fit.
capital clause (b) Consolidate and divide its share capital into shares of a larger
amount than it existing shares
However, if the consolidation and division results in charges in the
voting percentage of shareholders, the approval of the Tribunal
shall be required.
(c) Covert, its fully paid-up shares into stock, and reconvert stock into
fully paid-up shares of any denomination.
(d) Sub-drive its shares into shares of smaller amount subject to the
condition that, after such alteration, the proportion of the amount
paid-up on shares and the amount remaining unpaid on shares
shall remain same as was before such alterations.
(e) Cancel shares which have not been taken or agreed to be taken by
any person, and diminish the amount of its share capital by the
amount of the shares so cancelled.
Examples Example 1: The authorised share capital of A Limited consists of
1,00,000 shares of Rs. 10 each. The company has already issued
1,00,000 shares. The company intends to issue fresh share capital
amounting to Rs. 20 Lakhs. before issuing the fresh shares, the
company has to first increase the authorised capital Under Section
61(1)(a).
Example 2: The authorised share capital of B Limited consists of
1,00,000 shares of Rs. 10 each, fully paid-up. The company may
consolidate and divide the shares Under Section 61(1)(b) such that the
share capital becomes 10,000 shares of Rs. 100 each, fully paid-up.
Example 3: The share capital of C Limited consists of 1,00,000 shares of
Rs. 10 each, fully paid-up. The company may convert its fully paid
shares into stock Under Section 61(1)(c). On such conversion, C
Limited, shall have a stock of Rs. 10 Lakhs. afterwards, C Limited may
reconvert stock into shares.
Example 4: The authorised share capital of D Limited consists of
1,00,000 shares f Rs. each, Rs. 5 paid-up. The company may sub-divide
its shares into shares of smaller amount Under Section 61(1)(d) such
that the share capital becomes 10,00,000 shares of Rs. 1 each, Rs. 0.5
paid-up.
Example 5: The authorised share capital of E Limited consists of
1,00,000 shares of Rs. 10 each. The company issues the whole of the
share capital to the public. However, the public subscribes to 96,000
shares only. The company may cancel the balance 4,000 shares which
have not been subscribed to by the public.
Requirements for (a) Authorization is required in the articles.
alteration of capital (b) OR is required to be passed in the GM.
(c) The notice of alteration of share capital is to be given to ROC –
- Within 30 days;
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- In the prescribed form;

- Along with a copy of altered memorandum (Section 64)
- It must be noted that alteration of capital does not require
confirmation by the Court, CG. Tribunal or any other authority.
Cancellation vis-à- Cancellation of shares (also termed as diminution of capital) shall not
vis reduction be deemed to be reduction of share capital.
Alteration vis-à-vis ‘Alteration of capital’ is different from ‘diminution of capital (also
diminution called as ‘cancellation of capital’). ‘Alteration of capital’ is a wider term
than ‘diminution of capital’.

Nov, 2017: Legal requirements for reducing the nominal value of shares (Section 61)
P. 4.18A: A Limited has an Authorised Capital of 10,00,000 equity shares of the face value of
Rs. 100/- each. Some of the shareholders expressed their opinion in the Annual General
meeting that it is very difficult for them to trade in the shares of the Company in the share
market and requested the company to reduce the face value of each share tor s 10/- and
increase the number of shares to 1,00,00,000. Example whether the requet of the
shareholders is possible and if so, how the company can alter its share capital as per the
provisions of the Companies Act, 2013,
Answer:
It is possible to - If the articles of the company authorise it to do so; and
reduce the nominal - If the company passes on ordinary resolution;
value to Rs. 10 per The notice of such alteration shall be given to the Registrar, within 30
share. days, along with a copy of altered memorandum.

19. STOCK (Section 61)

Meaning Stock means a bundle of shares expressed in a lump sum. It means the
aggregate of fully paid-up shares of a member into one fund.
Original issue not  A company cannot make an original issue of stock.
permissible  Section 61 authorises a company to convert its fully paid shares
into stock.
Conversion of (a) The application is authorised by the articles in this behalf.
shares into stock (b) The company passes an ordinary Resolutions.
conditions (c) The notice of conversion of shares into stock is to be given to RO
within 30 days, in the prescribed form along with a copy of altered
memorandum (Section 64).
Effects of  ‘Share’ includes stock.
conversion of  The register of members shall show the amount of stock held by
shares into stock each member instead of the shares previously held by each
members.
 The conversion of shares into stock does not affect in anyway the
rights of a member.
 The stock can be transferred in the same way as the shares can be

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transferred with the only difference that stock can be transferred

in fractions.
Reconversion of For reconversion of stock into shares, the company shall comply with
stock into shares the same conditions as are required to be complied with at the time of
conversion of shares into stock.

20. DISTINCTION BETWEEN SHARES AND STOCK

Basis of
Shares Stock
Distinction
1. Nature A share represents the smallest Stock mean a bundle of shares
unit into which the capital of the expressed in the lump sum. It
company is divided. means the aggregate of fully paid-
up shares of a member merged into
one fund.
2. Time of issue Shares can be issued in the firs A company cannot issue the stock
instance, i.e. original issue of ab initio, i.e. a company cannot
shares can be made. must be an original issue of stock
shares, if fully paid, may be
converted into stock.
3. Paid-up Shares may be fully paid or partly Stock shall always be fully paid.
Value paid.
4. Nominal A share has a nominal value. Stock has no nominal value.
Value
5. Transfer in Shares cannot be transferred in Stock can be transferred in
fractions factional amount fractional amounts.
6. Distinctive Every share has a distinctive Stock has no distinctive numbers.
number number (except in depository
system)
7. Authorization No authorization in the articles is A company my convert its fully
for issue required for issue of shares. paid-up shares into stock only if it is
authorised by the articles in this
behalf.

21. REDUCTION OF SHARE CAPITAL (Section 66)

May, 2013: Can a company Limited by shares of guarantee and having share capital reduce its
share capital?
1) Modes of reduction of capital
Reduction in unpaid The company may extinguish or reduce the liability on any of its shares
capital in respect of share capital not paid-up.
Cancellation of lost Either with or without extinguishing or reducing liability on any of its
paid-up capital shares, cancel any paid-up share capital which is lost, or is
unrepresented by available assets.
Paying off excess Either with or without extinguishing or reducing liability on any of its
shares, pay off any paid-up share capital which is in excess of the

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paid-up capital wants of the company.

2) Examples of reduction of capital

Reduction in unpaid  A company has issued 10,000 equity shares if Rs. 10 each, Rs. 6
capital paid-up.
 The company may resolve to reduce the nominal value of its shares
to Rs. 6 each. When such reduction becomes effective, the
member will not be required to pay the balance liability of Rs. 4 per
share. This is called as extinguishment of liability in respect of share
capital not paid-up.
 However, if the company passes a resolution to reduce the nominal
value of its shares to Rs. 7 each, the members will not be required
to pay Rs. 3 since the nominal value of every share shall stand
reduced to Rs. 7. This is called as reducing liability in respect of
share capital not paid-up.
Cancellation of lost  A company’s paid-up capital consists of 10,000 equity shares of Rs.
paid-up capital 10 each fully paid-up. The company has accumulated losses
amounting to Rs. 80,000.
 The company may write off whole of the loss of Rs. 80,000 against
capital.
 If the liability is extinguished, the share capital of the company
shall hence forth consist of 10,000 equity shares of Rs. 2 each fully
paid-up.
 If the liability is not extinguished, the share capital shall consist of
10,000 equity shares of Rs. 10 each, Rs. 2 paid-up.
 However, the company may write off only a part of such loss, say
Rs. 70,000 against capital.
Paying off excess  A company has 10,000 equity shares of Rs. 10 each fully paid-up.
paid-up capital  The company finds that available funds are in excess f the needs of
the company. The company may return back a portion of paid-up
share capital, say Rs. 4 on every share.
 If the liability is extinguished, the share capital of the company
shall consist of 10,000 equity shares of Rs. 6 fully paid-up.
 If the liability is not extinguished, the share capital shall consist of
10,000 equity shares of Rs. 10 each, Rs. 6 paid-up.

3) Legal requirements for reduction of capital.

Special resolution Reduction of share capital requires passing of a special resolution.
No default w.r.t. Reduction of share capital shall not be effected if the company has
deposits defaulted in –
(a) Repayment of any deposits accepted by it, either before or after
the Commencement of this Act; or
(b) Payment of interest payable on such deposits.
Confirmation of the Confirmation of the Tribunal is also required for effecting the

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Tribunal reduction of share capital. For obtaining the confirmation of the

Tribunal, the company shall make an application to the Tribunal.
Tribunal shall  The Tribunal shall give notice of such application to –
secure the interest (a) CG;
of creditors (b) SEBI, in the case of listed company;
(c) The Registrar; and
(d) The creditors of the company.
 The Tribunal shall take into the representations, if any, made to it,
within 3 months from the date of receipt of notice given y the
Tribunal, by –
(a) CG
(b) SEBI, in the case of listed company;
(c) The Registrar; and
(d) The creditors of the company.
 If the Tribunal does not receive any representation, within 3
months from the date of receipt of notice given by the Tribunal,
from CG, SEBI, the Registrar or any creditor of the company, then,
it shall be presumed that they have no objection to the reduction.
 The Tribunal may make an order confirming the reduction of share
capital if it is satisfied that every creditor of the company –
(a) Has given his consent; or
(b) Has been discharged; or
(c) Has been given security.
 The Tribunal may impose such terms and conditions while
confirming the reduction of share capital as it may deem fit.
 The Tribunal shall not confirm the reduction of share capital unless
–
(a) The accounting treatment proposed by the company for
reduction of share capital is in conformity with the accounting
standards in Section 133 or any other provision of this Act; and
(b) A certificate to that effect is given by the company’s auditor
and such certificate has been filed with the Tribunal.
 The order of confirmation of the reduction of share capital shall be
published by the company in such manner as may be directed by
the Tribunal.
Registration of  Where the reduction of share capital is confirmed by the Tribunal,
order of the the Tribunal shall approve a minute stating –
Tribunal and (a) The amount of share capital;
minute approved (b) The number of shares into which the share capital is to be
by the Tribunal divided;
(c) The amount of each share; and
(d) The amount, if any which shall be deemed to be paid-up on
each share.
 The company shall deliver to ROC for registration –
(a) A certified copy of the order of the Tribunal; and
(b) A certified copy of the minute approved by the Tribunal.
 The Registrar shall register the order of the Tribunal and the
minute produced before him. He shall issue a certificate of
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registration of reduction of share capital.

Effect of reduction  A member of the company (whether past or present) shall not be
of share capital on liable for the payment of my calls exceeding the amount of
members. difference, if any, between the nominal amount of shares held by
him (as per the order of reduction passed by the Tribunal) and the
amount deemed to be paid up on his shares (as per the order of
reduction passed by the Tribunal).
 Where the name of any creditor entitled to object to the reduction
of share capital is, by reason of his ignorance of the proceedings for
reduction of share capital, not entered in the list of creditors, and
after such reduction, the company commits a default, within the
meaning of Section 6 of the Insolvency and Bankruptcy Code, 2016,
in respect of the amount of his debt or claim, then –
(a) Every person, who was a member of the company on the date
of the registration of the order for reduction by the Registrar,
shall be liable to contribute to the payment of that debt or
claim, an amount not exceeding the amount which he would
have been liable to contribute if the company had commenced
Winding Up on the day immediately before the said date, etc.
(b) If the company is Winding Up, the Tribunal may on the
application of any such creditor and proof of his ignorance as
aforesaid, if it thinks fit, settle a list of person so liable to
contribute, and make and enforce calls and orders on the
contributors settled on the list, as if they were ordinary
contributories in a Winding Up.
Punishment for  If any officer of the company –
contravention (a) Knowingly conceals the name of any creditor entitled to object
to the reduction of share capital;
(b) Knowingly misrepresents the amount of the debt or claim of
any creditor; or
(c) Abets or is privy to any such concealment or misrepresentation.
 If a company fails to publish the order of confirmation of the
reduction of share capital in the manner directed by the Tribunal, it
shall be punishable as follows:
(a) Minimum fine: Rs. 5 Lakhs;
(b) Maximum fine: Rs. 25 Lakhs.
Non-applicability The provisions of Section 66 shall not apply to buy-back of its own
securities by a company.

4) Provisions contained in the Rules for reduction of capital.

Form of application An application to the Tribunal to confirm a reduction of share capital
of a company shall be in Form No. RSC-1 and shall be accompanied
with a fees of Rs. 5,000.
Documents to be The application to the Tribunal shall be accompanied with the
attached to the following documents:

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application (a) A list of creditors duly certified by the Managing Director or in his
absence, by 2 Directors, as true and correct, which is made as on a
date not earlier than 15 days prior to the date of filing of an
application showing the details of the details of the creditors of the
company, class-wise, indicating their names, addresses and
amounts owed to them.
(b) A certificate from the auditor of the company to the effect that the
list of creditors referred to in clause (a) is correct as per the records
of the company verified by the auditor.
(c) A certificate by the auditor and Declaration by a Director of the
company that the company is not, as on the date of filing of the
application, in the repayment of the deposits or the interest
thereon.
(d) A certificate by the company’s auditor to the effect that the
accounting treatment proposed by the company for the reduction
of share capital is in conformity with the accounting standards
specified in Section 133 of any other provision of act.
Company to allow  Copies of the list of creditors shall be kept at the registered office
inspection and of the company.
extracts  Any person desirous of inspecting the same may, at any time
during the ordinary hours of business, inspect and take extracts
from the same on payment of Rs. 50 for inspection and for taking
extracts on payment of Rs. 10 per page to the company.
Notice by the The Tribunal shall, within 15 days of submission of the application to it
Tribunal to CG, ROC of the application for reduction of capital, give notice (seeking their
etc. representations and objections, if any), or direct that notice be given
to –
(i) CG (in Form No. RSC – 2)
(ii) Registrar (in Form No. RSC – 2)
(iii) SEBI (in Form No. RSC – 2), if the company is a listed company
(iv) The creditors of the company (in Form No. RSC – 3)
Notice to the  The notice shall be sent, within 7 days of the direction given by the
creditors Tribunal (or such other period as may be directed by the Tribunal),
to each creditor whose name is entered in the list of creditors
submitted by the company about the presentation of the
application.
 The notice shall state the amount of the proposed reduction of
share capital and the amount or estimated value of the debt or the
contingent debt or claim or both for which such creditor’s name is
entered in the said list, and the time within which the creditor may
send his representations and objections.
Publication of  The Tribunal shall give directions for the notice to be published, in
notice in Form No. RSC – 4 within 7 days from the date on which the
newspapers directions re given, in English language in a leading English
newspaper and in a leading vernacular language newspaper, both
having wide circulation in the State in which the registered office of

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the company is situated, or such newspapers as may be directed by

the Tribunal and for uploading on the website of the company (if
any) seeking objections from the creditors and intimating about
the date of hearing.
 Such notice shall state the amount of the proposed reduction of
share capital, and the places, where the aforesaid list of creditor
may be inspected, and the time as fixed by the Tribunal within
which creditors of the company may send their objections.
 The objections, if any, shall be filed in the Tribunal within 3 months
from the date of publications of the notice with a copy served on
the company.
Filing of affidavit The company or the person who was directed to issue notices and the
with the Tribunal publication in the newspaper shall, as soon as may be, but not later
than 7 days from the date of issue of such notices, file an affidavit in
Form No. RSC – 5 confirming the dispatch and publication of the
notice.
Giving of notice or Where the Tribunal is satisfied that the debt or claim of every creditor
publication of has been discharged or has been secured or his consent is obtained, it
notice may be may dispense with the requirement of giving of notice to creditors or
dispensed with publication of notice or both.
Representation by If CG, SEBI, Registrar or any creditor desires to make any
CG, SEBI, Registrar representation, the same shall be sent to the Tribunal within a period
and Creditors of 3 months from the date of receipt of notice and copy of such
representation shall simultaneously be sent to the company and in
case no representation has been received within the said period by the
Tribunal it shall be presumed that they have no objection to the
reduction.
Procedure with  The company shall submit to the Tribunal, within 7 days of expiry
regard to of period up to which representations or objections were sought,
representation and the representations or objections so received along with the
objections received responses of the company thereto.
 The Tribunal may give such directions as it may think fit with
respect to holding of any inquiry or adjudication of claims or for
hearing the objection or otherwise.
 At the hearing of the application, the Tribunal may, if it thinks fit,
give such directions as may deem proper with reference to
securing the debts or claims of creditors who do not consent to the
proposed reduction and the further hearing of the petition maybe
adjourned to enable the company to comply with such directions.
Order of Tribunal  Where the Tribunal makes an order confirming the reduction of
and minute, and capital, the order confirming the reduction and approving the
certificate by the minute may include such directions or items and conditions as the
Registrar Tribunal may deem fit.
 The order confirming the reduction of share capital and approving
the minute shall be in Form No. RSC – 6.
 Where a certified copy of the order of the Tribunal and minute

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approved by the Tribunal is filed by the company with the

Registrar, the Registrar shall register the same and issue a
certificate in Form No. RSE – 7.

22. DIFFERENCE BETWEEN REDUCTION OF CAPITAL AND DIMINUTION OF CAPITAL

May, 2004: Diminution of capital does not constitute reduction of capital within the
provisions of the Companies Act, 2013. Comment
Nov. 2006: Distinguish between ‘Reduction of Share Capital and ‘Diminution of Share Capital’.
Nov. 2015: Diminution of share capital does not constitute a reduction within the meaning of
Companies Act, 2013. State in what respect they differ from each other.
Basis of
Reduction of capital (Section 66) Diminution of capital (Section 61)
distinction
Cancellation of shares Under Section
61 does not anyway affect the issued
1. It means reduction of issued capital
capital. It results in diminution of
authorised capital.
(a) Cancellation of paid-up capital Cancellation of shares which have
which is lost or is unrepresented not been taken or agreed to be taken
by the assets of the company. by any person
2. Method
(b) Return of capital which is in
excess of needs of the company.
(c) Reduction in unpaid capital.
3. Interest of Interest of creditors are affected. Interests of creditors are not
creditors affected.
(a) The consent of creditors must be The creditors have no right to object
obtained; or and therefore there is no need to
4. Consent of (b) The creditors must be obtain the consent of creditor.
creditors discharged; or
(c) Creditors must be furnished with
security
5. Approval Approval of the Tribunal is required Approval of the Tribunal is not
of Tribunal required
6. Nature of SR is required OR is required
resolution
Reduction may or may not result in Diminution of capital always results
7. Effect on
alteration of capital clause of in alteration of authorised capital
memoran
memorandum resulting in an alteration in capital
dum
clause of memorandum.

23. RIGHT SHARES OR RIGHT OF PRE-EMPTION (FURTHER ISSUE OF SHARES) (Section 62)
Nov., 2017: Shyam Daly Limited a daly products manufacturing company wants to set-up a
new processing and at Jaipur. Due to paucity of funds, the existing shareholders are not
willing to fund for expansion. Hence, the company approached XYZ Limited for subscribing to
the shares of the company for expansion purposes. Can Shyam Daly Limited issue shares only
to XYZ Limited under the provisions of the Companies Act, 2013? If so, state the conditions.

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1. Applicability  Section 62 applies to all companies having a share capital.

of Section  Section 62 applies when a company proposes to issue further shares.
62
2. Offer of Nature of  Further shares shall be offered to the existing equity
further right shareholders in proportion to the paid-up share capital
shares to held by them.
existing  Every existing shareholder shall have a right to –
shareholder (a) Accept the offer of shares offered to him; or
s (i.e. Rights (b) Decline the offer of shares offered to him; or
Sahres) (c) Resource the shares offered to him in favour of
any other person (unless the articles restrict such
right).
Letter of offer  Further shares shall be offered to the existing
shareholders by sending to each of them, a letter of
offer.
 The letter of offer shall be dispatched to all the
existing shareholders by –
(a) Registered post; or
(b) Speed post; or
(c) Electronic mode; or
(d) Courier; or
(e) Any other mode having proof of delivery
 The letter of offer shall be dispatched to all the
existing shareholders at least 3 days before the
opening of the issue.
 The letter of offer shall specify –
(a) The number of shares offered;
(b) The time (minimum 15 days, and maximum 30
days) within which the offer may be accepted
(however, in case of a Private company, if 90% of
the members give their consent in writing or in
electronic mode, the periods lesser than ‘minimum
15 days’ and ‘maximum 30 days’ shall apply, as per
Notification No. G.S.R. 464(E) Dated 5th June,
2015);
(c) A statement that if the offer is not accepted with
the time specified in the letter of offer, the offer
shall be deemed to have been declined; and
(d) A statement that every shareholder has a right to
renounce the shares offered to him to any other
person (unless the articles restrict such right).
Disposal of The shares which remain unsubscribed by the existing
shares, if shareholders, may be disposed off by the Board of
offer is not Directors in such manner which is not disadvantageous to
accepted the shareholders and the company.
3. Offer of Further shares may be offered to the employees, if such further shares are
further offered –
shares to (a) Under Employees ‘Stock Option Scheme’;

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employees (b) Under an authority of SR passed by the company; and

(c) By complying with such conditions as may be prescribed.
However, in case of a Private company, instead of ‘SR’, an ‘OR’ shall be
sufficient [Notification No. G.S.R. 464(E) Dated 5th June, 2015).
4. Offer of Further shares may be offered to any persons (whether or not those
further persons include the existing shareholders or employees, and whether
shares to these shares are issued for cash or for consideration other than cash), if –
any person (a) The price of such shares is determined by the valuation report of a
registered values subject to compliance with the applicable provisions
of Chapter III (viz. Prospectus and Allotment of Shares consisting of
Section 23 to 42) and any other conditions as may be prescribed;
(b) It is authorised by SR passed by the company; and;
(c) Conditions as may be prescribed, are complied with.
5. Allotment Nothing in Section 62 shall restrict the power of the company to allot
of shares on shares on account of conversion of loans or debentures into shares,
account of provided that –
conversion (a) The terms of issue of such debentures or the terms of raising such loan
of loans or contained a term regarding conversion of debentures or loan into
deb into shares; and
shares (b) The terms of issue of such debentures or the terms of raising such loan
were approved, before the issue of such debentures or raising loan, by
passing SR.
6. Allotment Order of the Any Government may make an order that –
of shares on Government  Debentures, issued to that Government by a company;
account of directing or
conversion conversion  Loans obtained from that Government by a company
of loans or Shall be converted into shares in the company.
debentures Terms of (a) The Government may make such an order even if the
into shares conversion term of issue of such debentures or loans do not
Consequent contain any provision for conversion.
upon order (b) The terms of conversion of such debentures or loans
of the shall be such as may appear reasonable to the
Governmen Government.
t (c) In determining the terms and conditions of conversion,
the Government shall have due regard to –
(i) The financial position of the company;
(ii) The terms of issue of debentures or loans, as the
case may be;
(iii) The rate of interest payable on such debentures or
loans; and
(iv) Such other matters as it may consider necessary.
Continuous The order for conversion can be made only if the
for making Government is of the opinion that it is necessary in the
order of public interest to make an order of conversion of loans or
conversion debentures into shares.
Alteration of If – The order of the Government has the effect of
memorandum increasing the authorised share capital of the
company.

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Then – The memorandum of the company shall stand

altered and the authorised share capital of the
company shall stand increased by the amount of
debentures or loans converted into the shares.
Appeal by the (a) If the terms and conditions of such conversion are not
company to acceptable to the company, the company may prefer
the Tribunal an appeal to the Tribunal.
(b) The Tribunal may, after having the company and the
Government, pass such orders as it may deem fit.

May, 2001, May, 2007, May, 2017: Can a public company refuse to offer further shares to an
existing shareholder who already holds 40% equity shares? (Section 62).
P. 4.23A: DJA Company Limited is holding 40% of total equity shares in MR Company Limited.
the Board of Directors of MR Company Limited (incorporated on 01-01-1998) decided to raise
the paid-up equity shares by issuing further shares and also decided not to offer any shares
too DJA Company Limited on the ground that it was already holding a high percentage of
shares in MR Company Limited. Articles of Association of MR Company Limited. provides that
the new share be offered to the existing shareholders of the company. On 01-09-2014 new
shares were offered to all the shareholders except DJA Company Limited. Referring to the
provisions of the Companies Act, 2013 examine the validity of decision of Board of Directors
of MR Company Limited. of not offering any further shares to DJA Company Limited.
[CA (IPC) May 2001]
OR
VRS Company Limited is holding 45% of total equity shares in SV Company Limited. The Board
of Directors of SV Company Limited (Incorporated on January 1, 2004) decided to raise the
share capital by issuing further Equity shares. The Board of Directors resolved not to offer any
shares to VRS Company Limited on the ground that it was already holding a high percentage
of the total number of shares already issued, in SV Company Limited. The Article of
Association of SV C[n Limited provide that the new shares be offered to the existing
shareholders of the company. On March 01, 2014 new shares were offered to all the
shareholders except VRS Company Limited. Referring to the provisions of the Companies Act,
2013 examine the validity of the decision of the Board of Directors of SV Company Limited of
not offering only further shares to VRS Company Limited. [CA (IPC) May 2007]
OR
ABC Company Limited is holding 46% of total equity shares in SVS Company Limited. The
Board of Directors of SVS Company Limited (Incorporated on January 1st, 2014) decided to
raise the share capital by issuing further Equity shares. The Board of Directors resolved not to
offer any shares to ABC Company Limited on the ground that it was already holding a high
percentage of the total number of shares already issued, in SVS Company Limited. The
Articles of Association of SVS Company Limited provides that the new shares be offered to
the existing shareholders of the company. On March 1st, 2014 new shares were offered to all
the shareholders except ABC Company Limited. Referring to the provisions of the Companies
Act, 2013 examine the validity of the decision of the Board of Directors of SVS Company
Limited of not offering any further shares to ABC Company.
Answer:

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The decision of the Board - Since the refusal to offer shares to DJA Company Limited /
is not valid VRS Company on the ground that it is already holding a high
percentage of shares, is not a valid ground as per Section 62.

Nov, 2017: Conditions for issue of further shares by Shyam Dairy Limited to XYZ Limited.
(Section 62).
P. 4.23B: Shyam Dairy Limited, a dairy products manufacturing company wants to set-up a
new processing unit at Jaipur. Due to paucity of funds, the existing shareholders are not
willng to fund for expansion. Hence, the Company approached XYZ Limited for subscribing to
the shares od the Company for expansion purposes. Can Shyam Dairy Limited Issues shares to
XYZ Limited under the provisions of the Companies Act, 2013? If so, state the conditions.
Answer:
Shyam Dairy Limited can - If a special resolution outside the issue of shares to XYZ
issue further shares to Limited is passed to GM of Shyam Dairy Limited; and
XYZ Limited - The shares are issued to XYZ Limited at a price as is
determined by the valuation report of a registered valuer.

24. ISSUE OF BONUS SHARES – LEGAL REQUIREMENTS (Section 63)

Nov, 2017: MN Limited is engaged in the manufacture of consumer goods and has got a good
brand value. Over the years, it has built a good reputation and its balance sheet as at March
31, 2017 shows the following position:
Answer:
Authorised share capital Rs. 2,50,00,000
(25,00,000 equity shares of face value of Rs. 10/- each
Issued, subscribed and paid-up capital Rs. 1,00,00,000
(10,00,000 equity shares of face vale of Rs. 10/- each, fully paid-up)

Free Reserves Rs. 3,00,00,000

The Board of Directors are proposing to declare a bonus issue of 1 share for every 2 shares
held by the existing shareholders. The Board wants to know the conditions and the manner of
issuing bonus shares under the provisions of the Companies Act, 2013. Advise.
1. Power in Articles Authorization in the articles is required to issue bonus shares
2. Recommendation  Bonus shares can be issued only if the Board recommends such as
of the Board issue.
 A company which has once announced the decision of its Board
recommending a bonus issue, shall not subsequently withdraw
the same (Rule 7 of the Companies (Share capital and
Debentures) Rules, 2014.
3. Ordinary Issue of bonus shares is possible only if the authorization to issue the
Resolution bonus shares is obtained by passing an OR in the GM.
4. Sources of Issue  Bonus shares may be issued out of –
(a) The free reserves; or
(b) The Securities Premium Account; or
(c) The Capital Redemption Reserves Account.

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 Bonus shares shall not be issued by capitalizing the reserves

created by the revaluation of assets
5. No default in Bonus shares can be issued only if the company has not defaulted in
debts payment principal sum or interest on the fixed deposits or debt
securities issued by it.
6. No default in Bonus shares can be issued only if the company has not defaulted in
Statutory Dues payment of statutory dues of the employees, such as contribution to
provident fund, gratuity and bonus.
7. Compliance with Conditions prescribed by CG in respect of issue of bonus shares must
prescribed be complied with.
conditions
8. Issued to Existing Bonus shares can be issued only to the existing members of the
Members company.
9. Fully Paid Shares Bonus shares must be fully paid-up.
10. Existing shares to If there are any partly paid shares, they must be made fully paid-up
be fully paid-up before the issue of bonus shares.
11. Not to be in lieu Bonus shares shall not be issued in lieu of dividend.
of dividend
Nov. 2018: Whether issue of bonus shares in the ratio of 1:3 or 1:2 is permissible? (Section
63)
P. 4.24A: ABC Limited has following balances in their balance sheet as on 31st March, 2018;
1) Equity shares capital (3 Lakhs equity shares of 10/- each) 30,00,000
2) Free Reserves 5,00,000
3) Securities Premium Account 3,00,000
4) Capital Redemption Reserve Account 4,00,000
5) Revaluation Reserve 3,00,000
Directors of the company seeks your advice in following cases:
(i) Whether company can give bonus shares in the ratio of 1:37?
(ii) What if company decided to give bonus shares in the ratio of 1:2?
Answer:
(i) ABC Limited can issue - Since it requires issue of bonus shares of Rs. 10 Lakhs (since
bonus shares in the of bonus shares in the ratio of 1:3 means issue of 1 bonus
ratio of 1:3 share for every 3 shares held by every member);
- Since, in this case, the sources available with the company for
issue of bonus shares are sufficient, i.e. Rs. 13 Lakhs (Free
reserves + securities premium account + capital redemption
reserve account).
(ii) ABC Limited cannot - Since it requires issue of bonus shares of Rs. 15 Lakhs;
issue bonus share in - Since, in this case, the sources available with the company for
the ratio of 1:2 issue of bonus shares are not sufficient (i.e. Rs. 12 Lakhs) as
against Rs. 15 Lakhs required for issue of bonus shares.

25. DISTINCTION BETWEEN RIGHT SHARE AND BONUS SHARES

Basis distinction Right Shares Bonus Shares
1. Authorization Issue of right shares does not Articles may contain a specific
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require any authorization in the power empowering the company to

articles issue bonus shares.
When right shares are allotted, the When bonus shares are allotted,
2. Consideration company receives the issue price the company does not receive any
of shares money from the shareholders.
3. Shares For issue of right shares, it is not a For issue of bonus shares, it is a
already held precondition that the shares held precondition that the shares held
to be fully by the existing shareholders should by the existing shareholders should
paid-up be fully paid-up. be fully paid-up.
Consideration for right shares, like Bonus shares must always be fully
4. New shares any other issue of shares, is paid-up.
to be fully generally paid in installments, i.e.
paid-up by way of calls. Thus, right shares
may be partly paid-up.
The existing shareholder has a No existing shareholder has a right
5. Right to
right to renounce the shares to renounce the bonus shares.
renounce
offered to him.
26. NOTICE TO BE GIVEN TO REGISTRAR FOR ALTERATION OF SHARE CAPITAL, etc. (Section 64)
1. When is notice The company shall give notice ROC in case of –
required? (a) Alteration of share capital as per Section 61;
(b) Increase in the authorised share capital Consequent to the order
of the Government as per Section 62;
(c) Redemption of preference shares as per Section 55;
(d) Increase in the number of members by a company not having a
share capital.
2. Procedure of  The notice shall be given to ROC within 30 days;
giving notice  The notice shall be given in the prescribed form, viz. Form No. SH
– 7,
 A copy of altered memorandum shall also be filed with ROC.
3. Consecutive of The company and every officer who is in default shall be liable to a
contravention penalty of Rs. 1,000 for each day during which such default
continues, or Rs. 5 Lakhs, whichever is less.

27. PURCHASE BY A COMPANY OF ITS OWN SHARES (Section 67)

Prohibition on  No company (whether public or Private) shall buy its own shares.
buying own shares  However, the right of the company to redeem the preference
shares shall not be affected.
Giving Financial General  No public company shall give financial assistance
Assistance for Rate for purchase of its own shares or of its holding
purchases of shares company.
 The restriction applies to every kind of financial
assistance, whether it is direct or indirect, and
whether it is given by way of a loan, guarantee,
provision of security or otherwise.
Exceptions (a) Lending of money by a banking company in the
(Financial ordinary course of its business.
Assistance (b)

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is  The provisions of money by a company

permitted)  I accordance with any scheme
 Approved by company through special
resolution, and
 In accordance with such requirements as may
be prescribed,
 For the purchase of fully paid-up shares in the
company or its holding company,
 Being a purchase of shares by the trustee,
 For the benefit of the employees
(c)
 The giving of loans by a company
 To persons in the employment of the company
 Other than its Directors or key managerial
personnel,
 For an amount not exceeding their salary or
wages for a period of 6 months,
 With a view to enabling them to purchase fully
paid-up shares I the company or its holding
company.
Exemption to Private As per Notification No. G.S.R. 464(E) Dated 5th June, 2015, the
Companies provisions of Section 67 shall not apply if the following conditions are
satisfied:
(a) The company is a Private company.
(b) No other body corporate has invested any money in the share
capital of such Private company.
(c) The borrowings of such Private company from banks or financial
institutions or anybody corporate is less than twice its paid-up
share capital or Rs. 50 Crores, whichever is lower.
(d) Such a Private company is not in default in repayment of such
borrowings subsisting a the time of making any transaction Under
Section 67.

Nov, 2010: Whether a loan of Rs. 2 Lakhs can be given to finance manager for purchase of
own shares? (Section 67)
P. 4.27A: The Board of Directors of XYZ Private Limited a subsidiary of SRN Limited, decides to
grant a loan of Rs. 2 Lakhs to P, the Finance Manager of the company getting salary of Rs.
30,000 per month, to buy 400 partly paid-up equity shares of Rs. 1,000 each of XYZ Limited.
Examine the validity of Board’s decision with reference to the provisions of the Companies
Act.
Answer:
XYZ Private Limited shall be - Since it is a subsidiary of a public company [Section 2(7)].
treated as a public
company
The Board’s decision is not - Since the loan of Rs. 2 Lakhs given to the Finance Manager
valid. exceeds his 6 month’s salary;

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- Since the loan is given for purchase of partly paid shares.

Nov, 2015: Whether a loan of Rs. 4 Lakhs can be given to Human Resource Manager for
purchase of own shares? (Section 67).
P. 4.27B: MNO Private Limited, a subsidiary of PQR Limited. Decides to give a loan of Rs.
4,00,000 to the HR (Human Resource) Manager, who is not a Key Managerial Personnel (KMP)
of MNO Private Limited, drawing salary of Rs. 30,000 per month to buy 500 partly paid-up
Equity shares of Rs. 1,000 each in MNO Private Limited. Examine the validity of company’s
decision under the provisions of the Companies Act, 2013.
Answer:
MNO Private Limited - Since it is subsidiary of a public company [Section 2(71)].
shall be treated as a
public company
The decision of MNO - Since the loan of Rs. 4 Lakhs given to the Human Resources
Private Limited is not Manager exceeds his 6 months’ salary;
valid - Since the loan is given for purchase of partly paid shares.
28. BUY-BACK OF SECURITIES (Section 68)
Nov, 2004: Whether a Company can buy-back its own shares? Explain in brief the provisions
of Companies Act, 2013 relating to the sources of funds and conditions for buy-back of own
shares by the company.
May, 2007: German Pharmaceuticals Limited is a zero debt company having 10 Lakhs Equity
shares of Rs. 10 each. The Directors desire to buy back its own shares. Can it do so? If so how?
Nov, 2007: ADJ Company Limited decides to buy-back its own shares. Advise the company’s
Board of Directors about the sources out of which the company can buy back its own shares.
Wheat conditions are attached to the buyback scheme of the company in accordance with
the provisions of the Companies Act, 2013? Explain.
May, 2008: DJA Company Limited desirous of buying back of all its equity shares from the
existing shareholders of the company, seeks your advice. Examining the provisions of the
Companies Act, 2013 advice whether the above buy back of equity shares of the company is
possible. Also state the sources out of which by back of shares can be financed.
Nov, 2013: Whether a company can buy-back its own shares? Discuss the legal provisions as
regards to the conditions for buy-back on contained in the Companies Act, 2013.
(A) Sources of buy-back
1) A company may buy-back its own or other specified securities out of –
(a) Free Reserve; or
(b) Securities Premium account; or
(c) Proceeds of fresh of shares or other specified securities.
2) However, the buy-back shall not be made out of the proceeds of an earlier issue of
same kind of shares or other specified securities.
(B) Conditions for buy-back
1. Power in Articles Authorization in the articles is required for buy-back

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2. Resolution for Case I: The buy back is authorised by Case II: The buy back is
buy-back and passing SR authorised by passing in BM
limits on buy- only
back
3.  The buy-back shall not exceed The buy-back shall not
25% of aggregate of paid-up exceed 10% of the aggregate
capital and free reserves. of paid-up equity capital and
free reserves.
 The buy-back of equity share in
any FY shall not exceed 25% of its
total paid-up equity capital in that
FY.
 Notice of GM. in which SR is to be
passed shall be accompanied by
an explanatory statement, stating
–
(a) All material facts;
(b) Necessity for buy-back;
(c) Class of securities to be
bought-back;
(d) Amount to be invested under
the buy-back;
(e) Time limit for completion of
buy-back.
4. Debt Equity Ratio  The ratio of debt (secured as well as unsecured debt) owed by the
company must not be more than twice the aggregate of paid-up
capital and free reserves after such buy-back.
 CG may, by order, notify a higher ratio for any class of companies.
5. Fully Paid Shares All the securities for buyback must be fully paid-up.
6. Time period for (a) The offer for buy-back shall remain open for a period of not less
which offer shall than 15 days and not exceeding 30 days from the date of dispatch
remain open of the letter of offer.
(b) However, if all members of a company agree, the offer for buy-
back may remain open for a period less than 15 days.
7. Completion of The buy-back shall be completed within 1 year of passing the
buy-back resolution for buy-back (whether SR or the Board resolution).
8. Buy-back from The buy-back may be –
whom? (a) From the existing shareholders on a proportionate basis; or
(b) From the open market; or
(c) By purchasing the shares issued to employees by way of stock
option or sweat equity.
9. Declaration of  The company shall file with the Registrar a Declaration of
solvency solvency stating that it will not be rendered insolvent within next
1 year.
 In case of a listed company, Declaration of solvency shall also be
filed with SEBI.
10. Extinction of The company shall extinguish and physically destroy the shares
shares bought-back within 7 days of completion of buy-back.
11. Prohibition on Further offer of buy-back shall not be given within 1 year of closure

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further buy-back of preceding of buy-back.

12. Prohibition on The company shall not make further issue of same kind of securities
further buy-back within next 6 months, except by way of –
(a) Bonus shares; or
(b) Issue of shares 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.
13. Register of shares The company shall maintain a register containing the following
bought-back particulars:
(a) The securities bought back
(b) The consideration paid for the securities bought-back
(c) The date of cancellation of securities
(d) The date of extinguishing and physically destroying the securities
(e) Any other particulars, as may be prescribed.
14. Other Listed Companies – Shall comply with the regulations made by SEBI.
compliances Unlisted Companies – Shall comply with the rules prescribed by CG.
15. Return of buy-  After completion of buy-back, the company shall, within 30 days,
back file a return containing such particulars relating to buy-back as
may be prescribed.
 The return shall be filed with
– ROC – In case of unlisted companies
– ROC and SEBI – In case of listed companies
16. Disclosures in In case of Private companies and unlisted public companies, the
explanatory explanatory statement to be annexed to the notice of GM shall
statement contain the following disclosures:
(a) The date of BM at which the proposal for buy-back was approved
by the Board
(b) The objective of buy-back.
(c) The class of securities intended to be purchased under the buy-
back.
(d) The number to be adopted for the buy-back.
(e) The price at which the buy-back of securities shall be made
(f) A report addressed to the Board of Directors by the company’s
auditors stating that –
(i) They have inquired into the company’s state of affairs;
(ii) The amount of payment for the securities is in their view
properly determined;
(iii) That the audited accounts on the basis of which calculation
with reference to buy back is done is not more than 6 months
old from the date of offer document; which are subjected to
limited review by the auditors of the company.
(iv) The Board of Directors have formed the opinion that the
company, having regard to its state of affairs, shall not be
rendered insolvent within a period of 1 year, and that such
opinion is based on reasonable grounds.
17. Meaning of For the purpose of Section 68 –
certain terms (a) The term ‘specified securities’ includes ‘employees stock option’
or other securities as may be notified by CG;

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(b) The term ‘free reserves’ includes securities premium account.

Nov, 2002, Nov, 2016: Whether decision to buy-back 30% of equity shares capital by
passing on ordinary resolution and out of proceeds of earlier issue of equity shares is
valid? (Section 68)
P. 4.28A: ABC Company Limited at a general meeting of members of the company passes
an ordinary resolution to buy-back 30% of its equity shares capital. The article of the
company empower the company for buy-back of shares. The company further decides
that the payment for buy-back be mode out of the proceeds of the company’s earlier
issue of equity shares. Explaining the provisions of the Companies Act, and stating the
sources through which the buy-back of companies own shares be executed, examine:
(i) Whether company’s proposal is in order?
(ii) Would you Answer be still the same in case the company, instead of 30%, decides to
buy-back only 20% of the equity shares capital?
Answer:
(i) The proposal of the - Since the company has passed OR instead of SR, as
company to buy-back required Under Section 68;
in shares is not valid - Since the company proposes to buy-back 30% of the
equity shares capital which exceeds the statutory ceiling
of 25% of total paid-up equity capital;
- Since the company proposes to buy-back out of the
proceeds of an earlier issue of some kind of shares, which
is prohibited Under Section 68.
(ii) The decision to buy- - Since buy-back by passing OR is volative of Section 68;
back 20% of equity - Since buy-back out of the proceeds of an earlier issue of
shares capital shall some kind of shares is prohibited Under Section 68.
not be valid
Nov, 2018: Whether special resolution is required for buy-back of share capital of Rs. 4.5
Lakhs out of total share capital of Rs. 50 Lakhs.
P. 4.28B: X gen Limited has a paid-up equally capital and free reserves to the extent of Rs.
50,00,000. The company is planning to buy-back shares to the extent of Rs. 4,50,000. The
company approaches you for advice with regard to the following:
(i) Is specified resolution required to be passed?
(ii) What is the time limit for completion of buy-back?
(iii) What should be ratio of aggregate debts to the paid-up capital and free reserves after
buy-back?
Answer:
(i) Special resolution is - Since the buy-back shall not exceed 10% of aggregate of
not required to be paid-up equity shares capital and free reserves.
passed
(ii) The buy-back has to - Within 1 year of passing the resolution for buy-back.
be completed
(iii) Debt equity ratio - The ratio of debt [secured as well as unsecured debt]

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owed by the company must not be more than twice the

aggregate of paid-up capital and free reserve after such
buy-back.

29. TRANSFER OF CERTAIN SUMS TO CAPITAL REDEMPTION RESERVE ACCOUNT (Section 69)
Mandatory When is creation of CRR When buy-back is made out of –
creation of CRR mandatory? (a) Free reserves; or
[Section 69(1)] (b) Securities premium account
Amount of CRR An amount equal to nominal value of
shares bought back shall be transferred
to CRR.
Disclosures Details of transfer to CRR be disclosed in
the balance sheet.
Utilization of CRR CRR can only be used for issue of fully paid bonus shares to the existing
[Section 69(2)] members.

30. PROHIBITION OF BUY-BACK IN CERTAIN CIRCUMSTANCES (Section 70).

Nov, 2014: Elucidate the circumstances in which a company cannot buy-back its own shares
as per the provisions of the Companies Act, 2013. M/s Growmore Pharma Limited is planning
to buyback of its shares during the current year but the company has default in the payment
of term loan * interest thereon to its bankers. The company seeks your advice as to how and
when the company can buy back its shares under these circumstances as per the provisions of
the Companies Act, 2013.
Publication in case No company shall directly or indirectly buy-back its own shares of other
of defaults in specified securities, if default is made by the company in –
payments (a) Repayment of deposits or interest payable thereon
(b) Redemption of debentures
(c) Redemption of preference shores
(d) Payment of dividend to any shareholder
(e) Repayment of any term loan or interest payable thereon to any
financial institution or bank.
However, the buy-back is not prohibited, if the default is remedied and
a period of 3 years has lapsed after such default ceased to subsist.
Other prohibition No company shall directly or indirectly buy-back own shares or other
specified securities –
(a) Through any subsidiary company including its own subsidiary
companies; or
(b) Through any investment company or group of investment
companies.
Prohibition in case No company shall, directly or indirectly buy-back its own shares or other
of non-compliance specified securities if it has not complied with the provisions of –
(a) Section 92 (Filing of annual return);
(b) Section 123 (Provisions relating to Declaration of dividend); or
(c) Section 127 (Payment of dividend within 30 days); or
(d) Section 129 (Provision relating to financial statement)

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31. NOMINATION OF SECURITIES (Section 72)

Nov, 2003: Examine the provisions of the Companies Act regarding ‘Nomination’ in case of
transmission of shares.
1. Applicability (a) All companies
(b) Nomination is optional
2. Nomination by  Any holder of securities may make a nomination.
whom?  Where securities are held by two or more persons jointly,
nomination can be made by all the joint holders acting collectively.
3. Who can be a  Any person may be named as a nominee.
nominee?  A minor may be named as a nominee, if some other person is
appointed in the prescribed manner (viz. by filing Form No. SH – 13)
to become entitled to the securities in the event of death of the
older of securities during minority of the minor.
4. Requirements (a) Nomination shall be valid only if it is made in prescribed manner
of valid (b) Nomination shall be valid only if it is made in prescribed Form (Form
nomination No. SH – 13).
5. Time limit for The nomination may be made any holder of securities at anytime.
nomination
6. Variation or  At anytime, a nomination may be –
cancellation (a) Cancelled in the prescribed manner (viz. By filing Form No. SH –
14); or
(b) Varied in the prescribed manner (viz. By filing Form No. SH – 14).
7. Consequences  In case of death of the holder of securities, all the rights in the
in case of securities shall vest in the nominee.
death  In case of securities held by two or more persons jointly, all the
rights in the securities shall vest in the nominee only if all the joint
holders die.
 No person other than the nominee shall be entitled to any right in
the securities, notwithstanding anything contained in –
(a) Any other law for the time being in force; or
(b) Any will made by the holder of security.

Unit II: Miscellaneous with respect to Shares

32. FORFEITURE OF SHARES (Regulations 28 to 34 of Table E)
May, 2003: What are the conditions and procedure where under shares may be forfeited
under the Companies Act, 2013?
1. Legal Authorization Specific provision in the articles is required.
requirements Reason for Shares of a member may be forfeited on the ground of
for Forfeiture forfeiture non-payment of call.
Call Made A valid call must have been made by the company, and it
remains unpaid.
Notice of  Before effecting forfeiture the company is required to
forfeiture give notice of forfeiture to the defaulting shareholder.
 The notice must clearly specify –
(i) The last day up to which the unpaid calls can be
paid;

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(ii) The amount payable by the shareholder.

(iii) A clear warming that the shares shall be forfeited
in case of non-payment of calls within the time
specified in notice (not being less than 14 days)
Non- The shareholder defaults in payment of the amount due
payment by within the period specified in the notice.
shareholder
Resolution The shares stand forfeited only when the Board passes a
for forfeiture resolution effecting forfeiture.
Compliance Forfeiture is in the nature of penal proceedings.
of articles Therefore, forfeiture is valid only if the provisions of the
articles are strictly complied with
Bonafide Forfeiture must be bonafied and in the interest of the
company
2. Effects of (a) A person whose shares are forfeited ceases to be a member.
Forfeiture (b) The amount already paid by the defaulting shareholder stands
forfeited.
(c) The forfeiture of shares does not amount to reduction of share
capital.
3. Judicial  Where the articles authorised the Directors to delegate any of their
Decisions powers to any committee of the Board, it was held that a resolution
for forfeiture passed by such committee was valid [Bhagwati Prasad
Vs. Shrimani Sugar Mills Limited].
 A call which does not fix the time of payment cannot support a
forfeiture (Viswanath Prasad Jalan Vs. Holy Land Cinetone Limited).
 Where forfeiture was made by the Board for the purpose of enabling
a favoured member to escape from his liability, it was held to be
collusive and abuse of power and also a fraud on other shareholders,
and was therefore held to be invalid (Re, Esparto Trading Co.)

33. SURRENDER OF SHARE

 A voluntary return of shares to the company by a shareholder is called as surrender of
shares.
 A company may accept surrender of shares provided has been made in such circumstances
which justify the forfeiture of such shares.

34. LIEN ON SHARES

1. Conditions for Specific provision in the articles is necessary to exercise lien on
exercising lien shares.
2. Effects of exercise If the shares are subject to lien, such shares cannot be sold by the
of lien shareholder.
3. Loss of lien Lien if lost if the shareholder whose shares are subject to lien applies
for transfer of such shares and the company registers such transfer of
shares. In this case, the transferee’s title to such shares shall be free
from any lien.

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35. DEPOSITORY SYSTEM (OR) DEMATERILISATION OF SHARES

1. Meaning of  A depository is a custodian that holds securities of the investors
depository and for the benefit of investors. As a bank holds money for the
depository customers, the depository holds securities for the investors in
participant electronic form. Presently, there are two depositories, viz.
National Securities Depository Limited (NSDL) and Central
Depository Services Limited (CDSL).
 An investor can open securities account with a depository. As and
when the investor intends to transfer the securities, he can do so
by giving instructions to the depository to effect such transfer.
 A depository operates through its branches, which are called as
depository participants. A depository participants acts as a link
between the depository and the investors.
2. Meaning of  Where shares are held in dematerialized form, the name of the
registered holder, depository is entered in the register of members maintained by
beneficial owner the company.
and member  But, a depository is only a registered holder of shares, he is not
the beneficial owner.
 The investor, who is the actual owner of shares, is termed as the
beneficial owner of shares, and his name is entered in the register
of beneficial owners maintained by he depository.
 The term ‘member’ means the concerned beneficial owner, and
not the depository
3. Transfer of shares  The transfer of shares is effected by the depository. The
depository effects the transfer when it receives an authorization
from the beneficial owner.
 Transfer of shares takes place without any execution of transfer
deed.
 Transfer of shares takes place without any delivery of share
certificate.
 Consequent to transfer of shares made by the depository, the
changes take place in the beneficial owners. All such changes are
immediately given effect to by the depository in the register of
beneficial owners maintained by him.
 No request, application or intimation is required to be given to
the company in case of transfer of shares under depository
system.
 The depository is required to serve to the company the records of
beneficial owners, as and when required by the company.
4. Benefits of Fast Under physical form, the transfer of shares can take
depository up to 1 month. Under depository system, the shares
system are transferred by the depository immediately on
receipt of the transaction.
Economical The transfer of shares proves economical since
printing, safe custody and dispatch of transfer deed
and share certificate is not required.
Paperless The share certificates are not required to be issued
working under the depository system. Also, transfer deed is

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not required to be exceucted. This ensures savings

of paper.
Savings of There used to be a lot of human efforts in effecting
Human Efforts transfer of shares under physical form. Under
depository system, the transfer of shares takes
place in electronic form, thus saving a great deal of
human efforts.
Overcoming Under physical system, frauds used to take place
Frauds due to circulation of forged share certificates.
Under depository system, this problem has come to
an end since the practice of issue of share
certificates has been put to an end.
Saving of No stamp duty is payable where shares are
Stamp Duty dematerialized or transferred in dematerialized
form. This helps the investors in minimizing the
costs of transfer and at the same time promotes the
business in the stock market.

36. ISSUE OF EMPLOYEE STOCK OPTIONS

(A) Provisions contained in the Act.
Definition of ‘Employees’ stock option’ means the option given to the directors,
‘Employees’ Stock officers or employees of a company or of its holding company or
option subsidiary company or companies, if any, which gives such Directors,
officers or employees, the benefit or right to purchase, or to
subscribe for, the shares of the company at a future date at a pre-
determined price.

(B) Provisions contained in Rule 12 of the Companies (Share Capital and Debentures) Rules,
2014 w.r.t. stock options
1. Requirement of The issue of Employee Stock Option Scheme shall be approved by the
SR shareholders of the company by passing SR.
2. Exercise Price A company granting option to its employees pursuant to Employees
Stock Option Scheme will have the freedom to determine the
exercise price inconformity with the applicable accounting policies, if
any.
3. Time Gap There shall be a minimum period of 1 year between the grant of
options and vesting of option.
4. Lock in The company shall have the freedom to specify the lock-in period for
the shares issued pursuant to exercise of option.
5. Eligibility An employee shall be for grant option under the Employees Stock
Option Scheme, only if he is –
(a) A permanent employee of the company who has been working in
India or outside India; or
(b) A Director of the company, whether a whole time Director or not
but excluding an independent Director; or
(c) An employee as defined in clauses (a) or (b) of a subsidiary, in

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India or outside India, or of a holding company of the company,

but does not include –
(i) An employee who is a promoter or a person belonging to the
promoter group; or
(ii) A Director who either himself or through his relative or
through anybody corporate, directly or indirectly holds more
than 10% of the equity shares of the company.
However, in case of a startup company, as defined in Notification
No. G.S.R. 127(E), Dated 19th February, 2019 issued by the
Department for Promotion of Industry and Internal Trade,
Ministry of Commerce and Industry Government of India,
Government of India, the conditions mentioned in Sub-Clause (i)
and (ii) shall not apply up to 10 years.

Unit III: Transfer and Transmission of Shares

37. TRANSFERABILITY OF SHARES – INTRODUCTION (Section 44)
Nature of shares General The shares and debentures are movable property, i.e.

provisions goods
 The shares and debentures shall be transferable in the
manner specified in the Act and the articles.
Specific  The shares in a public company are freely transferable.
Provisions  A Private company may impose reasonable restriction
on transferability of shares. However, a Private
company cannot impose absolute prohibition on
transferability of shares.
Modes of Transfer Voluntary transfer of shares from one person to another.
transfer of Transmission When a person becomes entitled to shares by opertio of
ownership law, it is termed as transmission.

38. REQUIREMENTS FOR TRANSFER OR TRANSMISSION OF SECURITIES (Section 56)

1. Transfer Deed  The application for transfer f securities must be made in the form
prescribed for this purpose (viz. Form No. SH – 4).
2. Execution of  The transfer deed shall be stamped and dated.
Transfer Deed  The transfer deed shall be executed (viz. Signed) by the transferor
and the transferee.
3. Submission of  The transfer deed (after stamping, dating and signing) shall be
documents submitted to the company within 60 days of execution.
 Certificate relating to the securities shall also be submitted along
with transfer deed. However, if the certificate relating to the
securities is not in existence, then, the letter of allotment shall be
submitted.
 The transfer deed may be submitted to the company by –
(a) The transferor; or
(b) The transferee
4. Situation In case the transfer deed is –
where transfer  Lost; or

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deed is lost or  Delivered to the company after 60 days of its execution, the
delivered after company may register the transfer of shares after obtaining such
60 days indemnity as the Board may deem fit.
5. Right of the When is notice required?  The company is required to give
transferee to notice to the transferee only if both
object to the the following conditions are satisfied
transfer (a) The transfer deed is submitted
to the company by the
transferor.
(b) The shares are partly paid-up.
 The notice shall be given by the
company to the transferee in the
manner prescribed (viz. in Form No.
SH – 5).
6. Provisions  No transfer deed is required for transfer of shares, where the shares
w.r.t. shares are held in dematerialized form.
held in  Where securities are issued by a company in dematerialized form,
dematerialised the company shall intimate the details of allotment to the
form depository, immediately after allotment.
 If any transfer of shares is effected by any depository or depository
participant with an intention of shares is effected by any depository
or depository participant with an intention to defraud any person, it
shall be liable Under Section 447.
7. Transmission Where any person acquires any right to securities by operation of any
of shares in law, the company may register the transmission of shares in favour of
favour of Legal such person if the company receives intimation of transmission from
Representativ such person, and in such a case no transfer deed shall be necessary.
e Thus, in case of death of holder of any security, his legal representative
becomes entitled to the securities by operation of law. The legal
representative is required to submit to the company an intimation of
transmission of securities. On receipt of such intimation of transmission,
the company is required to register the transmission of securities in the
name of the legal representative. Until the shares are registered by the
company in the name of the legal representative, the legal
representative shall not be entitled to voting rights or any other right in
respect of such security.
8. Transfer of In case of death of holder of any security, the transfer of such security
securities by by the legal representative of the deceased shall be valid –
legal  Even though the legal representative is not the holder of such
representative security;
 As if the legal representative were the holder of such security.
Thus, on receipt of a transfer deed signed by the legal representative,
the company is required to register the transfer of shares in the name of
the transferee named in the transfer deed.
9. Time limits for In case of allotment of securities to Within 2 months of
delivery of the subscribers to memorandum Incorporation
certificate In case of any allotment of shares Within 2 months of Allotment
relating to In case of any allotment of Within 2 months of Allotment

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securities debentures
In case of transfer or transmission Within 1 month of receipt of
of securities transfer deed or intimation of
transmission.

39. REFUSAL TO REGISTER TRANSFER OR TRANSMISSION OF SECURITIES BY A PRIVATE COMPANY

AND APPEAL AGAINST REFUSAL (Section 58)
Refusal to register Compulsory issue Where a Private company refuses (Whether in
the transfer or of notice pursuance of any power of the company under its
transmission by a articles or otherwise) to register –
Private company - The transfer of any securities; or
[Section 58(1)] - The transmission of any securities (viz. The right
to any securities by operation of law).
It shall give a notice of such refusal.
Notice to whom? The notice shall be given to –
 Transferor and the transferee; or
 Person giving intimation of transmission.
Time limit for The notice shall be given within 30 days from the
sending notice date on which the transfer deed or the intimation of
transmission was delivered to the company.
Contents of Notice shall contain the reasons for refusal to
notice register the transfer or transmission.
Appeal against Appeal to whom?  The appeal may be filed before the Tribunal.
refusal Appeal by  Transferee; or
whom?  Person giving intimation of transmission.
Time Limit  The appeal may be filed within 30 days of
receipt of notice of refusal.
 In case, no notice of refusal is sent by the
company, the appeal may be filed within 60
days of delivery of the transfer deed or the
intimation of transmission.
Order of Tribunal  The Tribunal shall hear the parties to the appeal.
[Section 58(5)]  The Tribunal may dismiss the appeal.
 The Tribunal may, by order, direct that the transfer or transmission
shall be registered by the company. The company shall comply with
such order within 10 days of the receipt of the order of the Tribunal.
 The Tribunal may direct the company to pay damages, if any,
sustained by any party aggrieved.
Punishment for Contravention of order of Tribunal is punishable with –
contravention  Imprisonment: Minimum 1 year; Maximum 3 years; and
[Section 58(6)]  Fine; Minimum Rs. 1 Lakh; Maximum Rs. 5 Lakhs

40. FREE TRANSFERABILITY OF SECURITIES IN A PUBLIC COMPANY AND APPEAL AGAINST

REFUSAL (Section 58)
Free  The securities in a public company shall be freely transferable.
transferability of  Any contract or arrangement between two or more persons in

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securities [Section respect of transfer of securities shall be enforceable as a contract.

58(2)]
Appeal against Appeal to whom?  The appeal may be filed before the Tribunal
refusal [Section Appeal by  Transferee; or
58(4)] whom?  Person giving intimation of transmission
Time Limit  The appeal may be filed within 60 days or
refusal
 In case, notice of refusal is not received from
the company, the appeal may be filed within 90
days of delivery of the transfer deed or the
information of transmission.
Ground of appeal  The appeal may be preferred on the ground that
the public company has, without sufficient
cause, refused to register the transfer or
transmission of securities.
Order of Tribunal  The Tribunal shall hear the parties to the appeal.
[Section 58(5)]  The Tribunal may dismiss the appeal.
 The Tribunal may, by order, direct that the transfer or transmission
shall be registered by the company. The company shall comply with
such order within 10 days of the receipt of the order of the Tribunal.
 The Tribunal may direct the company to pay damagers, if any,
sustained by any party aggrieved.
Punishment for Contravention of order of ‘Tribunal is punishable with –
contravention  Imprisonment; Minimum 1 year; Maximum 3 years; and
[Section 58(6)]  Fine: Minimum Rs. 1 Lakh; Maximum Rs. 5 Lakhs.

Nov. 2015, May, 2018: Remedies available to the transferor or transferee in case of refusal by
the company to transfer shares (Section 58).
P. 4.40A: A company refuses to register transfer of shares made by Mr. X for Mr. Y. the
company does not even send a notice of refusal to Mr. X or Mr. Y respectively within the
prescribed period. Has the aggrieved party any right(s) against the company for such refusal?
Advise as per the provisions of the Companies Act, 2013. [Nov. 2015]
OR
Hansh purchased 1000 shares of Singhania Limited, from Prajik and sent those shares to the
company for transfer in his name. the company neither transferred the shares not sent any
notice of refusal of transfer to any party within the period stipulated in the Companies Act,
2013. What is the time frame in which the company is supposed to reply to transfere? Does
Harsh, the transferee have any remedies against the company for not sending any intimation
in relation to transfer of shares to him? [May, 2018].
Answer:
The company has - Since; in case of refusal by a company to transfer the shares, the
contravened sec 58 company is required to send notice of refusal to the transferor
and the transferee within 30 days of receipt of transfer deed;
Rights against - Mr. Y is entitled to file an appeal to the Tribunal against the
company’s refusal refusal of the company to transfer the shares.

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- Mr. X has no right to appeal against the refusal of the company to

transfer the shares.
Order of the Tribunal - The Tribunal may direct the company to register the transfer of
shares.
- The company shall comply with the order of Tribunal within 10
days.
- The Tribunal may direct the company to pay damages, if any,
sustained by any party aggrieved.

41. RECTIFICATION OF REGISTER OF MEMBERS (Section 59)

Right to appeal for Right conferred Right to appeal for rectification of register of
rectification of Under Section 59 members maintained by the company.
register of Grounds for Without sufficient cause –
member [Section appeal (i) The name of any person is entered in the
59(1)] register of members; or
(ii) The name of any person is omitted from the
register of members; or
(iii) Default or unnecessary delay is being made in
entering in the register of members, the fact of
any person having become a member; or
(iv) Default or unnecessary delay is being made in
entering in the register of members, the fact of
any person having ceased to be a member.
Who may (i) The person aggrieved; or
appeal? (ii) Any member of the company; or
(iii) The company
Appeal to whom?  The appeal shall be filed with the Tribunal
 In case of foreign members or Debenture
holders residing outside India, the appeal shall
be filed in a competent Court outside India as
may be specified by CG by notification.
Order of Tribunal  The Tribunal shall hear the parties to the appeal.
[Section 59(2)]  The Tribunal may dismiss the appeal.
 The Tribunal may, by order, direct rectification of the records of the
depository or the register of members.
 The Tribunal may direct the company to pay damages, if any,
sustained by any party aggrieved.
Right to transfer  Section 59 shall not restrict the right of a holder of securities, to
not restricted transfer such securities.
[Section 59(3)]  Any person acquiring such securities shall be entitled to voting rights
unless the voting rights have been suspended by an order of the
Tribunal.
Application to Applicability of Section 59(4) is attracted where the transfer of
Tribunal to set Section 59(4) securities is affected by the company, but such
right the transfer was in contravention of the provisions of –
contravention of  The Companies Act, 2013; or

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any law [Section  The Securities Contracts (Regulation) Act, 1956;

59(4)] or
 The Securities and Exchange Board of India Act,
1992; or
 Any other law for the time being in force.
Right conferred Right to make an application for rectification of
Under Section registers records, and to set right the
59(4) contravention.
Application by  The company
whom?  The depository
 The depository participant
 The Securities and Exchange Board
 The holder of the securities
Application to The application shall be made to the Tribunal.
whom?
Order of Tribunal The Tribunal may direct the company or the
depository to set right the contravention and rectify
its register or records.

42. DIFFERENCE BETWEEN TRANSFER AND TRANSMISSION OF SHARES

May, 2016: In what ways is ‘transmission of shares’ different from ‘transfer of shares’?
May, 2018: Distinguish between transfer and transmission of shares.
Basis Transfer of shares Transmission of share
1. Voluntary Act Transfer of shares is a Transmission takes place because of
or not Voluntary Act of parties operation of law, i.e., where a person
becomes entitled to the shares held by
a deceased member by reason of
being his legal representative.
2. Execution of The execution of a valid No transfer deed is required if the
transfer deed transfer deed is necessary. person entitled to such shares agrees
to become a member of the company.
3. Payment of Stamp duty is payable where No stamp duty is levied in case of
stamp duty shares are transferred by a transmission of shares.
member
4. Consideration Transfer of shares is generally Transmission of shares takes place
made for some consideration. without any consideration.

43. FORGED TRANSFER

Meaning of forged The term ‘forged transfer’ means transfer of shares made on the basis
transfer of a transfer deed on which the transferor’s signatures are forged.
Effect of forged A forged transfer is void ab initio, i.e. nullify, i.e. without any legal
transfer effect.
Rights of Parties (a) The transferee is not legally entitled to continue as a member.
(b) The original owner continues to be the member.
(c) Where a company has registered the transferee as a member on
the basis of a forged transfer, following consecutive shall following:
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(i) The original owner can compel the company to restore his
name on the register of members.
(ii) The company shall cancel the share certificate issued to the
transferee and Consequently the transferee’s name shall be
struck off the register of members.
(iii) Where the transferee has already transferred the shares to an
innocent purchaser, the position will be as follows:
 The company shall refuse to register the new purchaser of
shares, as a member.
 However, the new purchaser of shares shall have a right to
claim damages from the company.
 The company shall have a right to recover damages from
the person who had deposited the forged transfer deed.
Judicial Decision  A forged transfer does not pay any title. This is so even where a
person acting innocently has taken a transfer of shares, with the
treanseror’s signatures forged, and has got himself registered as a
member in the transferor’s place and has received a share
certificate in his own name [France Vs. Clark]
 When shares are transferred by means of a gorged transfer deed,
the transferee does not get any right in respect of the shares. The
fact that he is a bona fide purchaser for value does not make any
difference. The transferee does not get any rights. The company is
bund to restore to the register of members of the name of the
original shareholder (purported transferor) and cancel the name of
the transferee from the register of members and cancel the share
certificate issued to the transferee [Kaushalya Devi (Smt.) Vs.
National Insulated Cable Company of India Limited].
 Failure to replay to an intimation by the company to a shareholder
that transfer of his shares is about to be made unless objected to,
is not negligence on the part of the shareholder [Barton Vs. London
and North Western Rly. Co.]
 An estoppel arises against the company where on the basis of a
forged transfer the company has issued a share certificate to the
transferee and some innocent third party, acting on the faith of
such share certificate and for consideration, applies for transfer of
shares in his name. accordingly the company shall have to pay
damage to such innocent third party [Sheffield Corporation Vs.
Barclay].
May, 1997: Rights and liabilities of parties where signatures of transferred are forged.
P. 4.43A: 500 equity shares in ‘XYZ Limited’ were acquired by Mr. ‘B’. But the signature of Mr.
‘A’, the transferor, on the transfer deed was forged. Mr. ‘B’ after getting the shares registered
by the company in his name, sold 200 equity shares to Mr. ‘C’ on the strength of the share
certificate issued by ‘XYZ’ Limited. Mr. ‘B’ and Mr. ‘C’ were not aware of the forgery. What are
the rights of Mr. ‘A’, ‘B’ and ‘C’ against the company with reference of the aforesaid shares?
Answer:
Rights of Mr. A He can compel the company to restore his name on the register of
members (since a forged transfer is without any legal effect and the true

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owner continues to be the member of the company)

Liabilities of B ‘B’ is liable to compensable the loss caused to the company since he had
lodged the forged transfer deed, even though he was not aware of the
forgery.
Rights of C  The company can refuse to register ‘C’ as a member.
 The company is liable to ‘C’ since the company had issued the share
certificate to B, and therefore, the company shall be stopped from
denying the liability accruing to it from its own default.

Nov, 2002: Rights and liabilities of parties where signatures of transferor are forged.
P. 4.43B: ‘A’ commits forgery and thereby obtains a certificate of transfer of shares from a
company and transfers the shares to ‘B’ for value acting in good faith. Company refuses to
transfer the shares to ‘B’. Whether the company can refuse? Decide the liability of ‘A’ and of
the company towards ‘B’.
Answer:
Rights of the He can compel the company to restore his name on the register of
True Owner members (since a forged transfer is without any legal effect and the true
owner continues to be the member of the company).
Liabilities of A ‘A’ is liable to compensate the loss caused to the company since he had
lodged the forged transfer dead.
Rights of B  The company can refuse to register ‘B’ as a member.
 The company is liable to ‘B’ since the company had issue share
certificate to A, and therefore the company shall be stopped from
denying the liability accruing to it from its own default.

May, 2007: Rights and liabilities of parties where signature are forged.
P. 4.43C: ‘X’, a registered shareholder of Y Limited left his share certificates with his broker. A
forged the transfer deed in favour of Z, accompanied by these share certificates lodged the
transfer deed along with the share certificates with the company for registration. The
Company Secretary who had certain doubts, wrote to X informing him of the proposed
transfer and in the absence of a reply from him (X) within the stipulated time, registered the
transfer of shares in the name of Z. Subsequently, Z sold the shares to J and J’s name was
placed in the register of shareholders. Later on X discolvered that forgery has taken place.
Referring to the provisions of the Companies Act, state the remedy available to X and Z in the
given case. Explain.
Answer:
Rights of Mr. X He can compel the company to restore his name on the register of
members (since a forged transfer is without any legal effect and the true
owner continues to be the member of the company).
Liabilities of Z ‘Z’ is liable to compensable the lass caused to the company since he had
lodged the forged transfer deed, even though he was not aware of the

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forgery.
Rights of J  The company can refuse to register ‘J’ as a member.
 The company is liable to ‘J’ since the company had issued share
certificate to Z and therefore, the company shall be stopped from
denying the liability accruing to it from its own default.

Nov, 2019: Rights and liabilities of parties where signature of transferor are forged.
P. 4.43D: Mr. ‘Y’ transferee, acquired 250 equity shares of BRS Limited from Mr. ‘X’, the
transferor. But the signature of Mr. ‘X’, the transferor, on the transfer deed was forged. Mr.
‘Y’ after getting the shares registered by the company in his name, sold 150eqs t Mr. ‘L’ on
the basis of the share certificate issued by BRS Limited. ,r ‘Y’ and ‘Z’ were not aware of the
forgery. State the rights of Mr. ‘X’, ‘Y’ and ‘Z’ against the company with reference to the
aforesaid shares.
Answer:
Rights of Mr. X He can compel the company to restore his name on the register of
members (since a forged transfer is without any legal effect and the true
owner continues to be the member of the company).
Rights of Mr. ‘Z’  The company can refuse to register Mr. ‘Z’ as a member.
 The company is laible to Mr. ‘Z’ since the company had issued share
certificate to Mr. ‘Y’ and therefore, the company shall be stopped from
denying the liability accruing to it from its own default.
Liabilities of Mr. ‘Y’ is liable to compensate the loss caused to the company since he had
‘Y’ lodged the forged transfer deed, even though he was not aware of the
forgery.
Nov. 2016: Rights and liabilities of parties wher signatures of transferor are forged.
P. 4.43E: ‘V’ the transferee, acquired 300 Equity shares of ABC Limited from ‘S’, the
transferor. But signature of ‘S’, the transferor, on the transfer deed was forged. ‘Y’ after
getting the shares registered by the company in his name subsequently sold 250 shares to ‘X’
on the basis of the share certificate issued by ABC Limited. ‘V’ and ‘X’ were not aware of the
forgery. Explain the right of ‘S’, ‘V’ and against the company with reference to the aforesaid
equity shares under the provision of the Companies Act, 2013.
Answer:
Rights of Mr. ‘S’ He can compel the company to restore his name on the register of
members (since f forged transfer is without any legal effect and the true
owner continues to be the member of the company)
Rights of Mr. ‘X’  The company can refuse to register Mr. ‘X’ as a member.
 The company is liable to Mr. ‘X’ since the company had issued share
certificate to Mr. ‘V’, and therefore, the company shall be stopped from
denying the liability accruing to it from its own default.
Liabilities of Mr. ‘V’ is liable to compensate the loss caused to the company since he had
‘V’ lodged the forged transfer deed, even though he was not aware of the
forgery.

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44. BLANK TRANSFER

Meaning of Where a shareholder, with an intention of transferring his shares, fills up
‘Blank Transfer his name in the transfer deed and sign it as a ‘transferor’ and delivers such
Deed’ transfer deed to a buyer of shares, but does not mention the name of the
buyer as a ‘transferee’ in such transfer deed, such a transfer deed is
termed as ‘blank transfer deed’ .
Procedure for The shareholder delivers to the buyer –
‘Blank Transfer’ (i) Share certificate; and
(ii) Blank transfer deed.
Purpose / (i) The ‘blank transfer’ enables a buyer to sell the shares contained in
benefit of ‘blank transfer deed’ to some other person by delivering the share
‘Blank Transfer’ certificate and ‘blank transfer deed’, without becoming an owner of
such shares.
(ii) This process of buying and selling of shares through a blank transfer
may continue any number of times.
(iii) Any buyer buying the shares by way of a ‘blank transfer’ may become
the owner of such shares, by filing his own name and other particulars
in the ‘blank transfer deed’ as a transferee, and depositing with the
company the transfer deed so filled up along with the share certificate.
Such a buyer becomes the ‘transferee’ of shares, and no intervening
buyer of shares shall be regarded as ‘transferee’.
(iv) Until some buyer is registered by the company as a shareholder, the
original shareholder (i.e. the transferor) shall continue to be the owner
of the shares.
(v) When the name of the buyer is registered as a shareholder by the
company, he shall acquire a good title to the shares notwithstanding
the fact that the shares were transferred to him under a ‘blank transfer’
Whether a  Although one buyer may sell the shares to another buyer by way of
negotiable ‘blank transfer’, yet a ‘blank transfer deed’ is not a negotiable
instrument? instrument.
 Accordingly, if the title of any intervening buyer is defective, then, the
title of the transferee (viz. The last buyer who fills his own name and
other particulars in the ‘blank transfer deed’ as a transferee and
deposits with the company the transfer deed so filled up along with the
share certificate) shall also be defective.
Evils connected (i) Avoidance of stamp duty.
with ‘Blank (ii) Identify of the person having a right over the shares is concealed.
Transfer’ (iii) Avoidance of capital gains tax by intervening buyers.

Unit IV: Membership in a Company

45. DEFINITION OF ‘MEMBER’ [sec 2(55)]
‘Member’, in relation to a company, means –

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(i) The subscriber to the memorandum of the company who shall be (Subscriber to
deemed to have agreed to become member of the company, and memorandum)
on its registration, shall be entered as member in its register of
members;
(ii) Every other person who agrees in writing to become a member of (Person named in
the company and whose name is entered in the register of the register of
members of the company; members)
(iii) Every person holding shares of the company and whose is entered (Beneficial owner
as a beneficial owner in the records of a depository of shares)

46. DISTINCTION BETWEEN A MEMBER AND A SHAREHOLDER

Nov. 2005: ‘Every shareholder of a company is also known as a member, while every member
may not be known as a shareholder”. Examine the validity of the statement and point out the
distinction between a ‘member’ and a ‘shareholder’.
May, 2012: In what way a ‘Member’ of a company is different from that of a ‘shareholder’ of
the company?
Nov, 2012: State whether the following statements are correct or incorrect:
Every shareholder is a member, but every member may not be a shareholder of the company.
Basis of
Member Shareholder
Distinction
1. Definition The term ‘member’ is defined The term ‘shareholder’ has not been
Under Section 2(55) defined under the Companies Act,
2013.
2. Meaning The term ‘member’ generally The term ‘shareholder’ means a
means a person whose name is person who holds shares in a company
entered in the register of
members
3. Nature of Every company shall have the Only a company having a share capital
company minimum number of members, can have shareholders. A company
whether it is limited by share limited by guarantee and having no
capital or guarantee. share capital does not have any
shareholders.
4. Signatory to A person who signs the A person who signs the memorandum
memorand memorandum is deemed to be a become a shareholder only when the
um member from the date of shares are actually allotted to him.
registration of the company
5. Transferor A transferor of shares continues Where a person transfers his shares,
of shares to be a member until his name is he immediately ceases to be a
until change removed from the register of shareholder, even though his name
in the members continues to appear in the register of
register members.

47. MODES OF ACQUIREING MEMBERSHIP (or) HOW TO BECOME A MEMBER

1. By subscribing  The fact that a person is a subscriber to memorandum is sufficient
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to to constitute such person a member of the company. The

Memorandum subscribers to memorandum of Association become members by
the fact of subscription (i.e. signing on the memorandum), and not
by reason of allotment of shares to him.
 All the subscribers to memorandum become the members of the
company immediately on incorporation of the company.
 No application in writing is required from a subscriber to
memorandum.
 It is immaterial as to whether the shares have actually been
allotted to him or not.
 No entry in the register of members is required to constitute him a
member.
 A subscriber memorandum by fraud or misrepresentation.
 Generally, the subscribers to memorandum are called as ‘Founder
Members’.
2. By allotment of Where shares are allotted to an applicant he becomes a holder of
shares shares. However, he becomes a member only when his name is
entered in the register of members.
3. By transfer The transferee of shares becomes a member only when the transfer of
shares is registered by the company, and the name of the transferee is
entered in the register of members.
4. By transmission A person entitled to the shares of a member, as a Consequence of
transmission, becomes a member when he gives a notice of fact of
transmission to the company, and his name if entered in the register of
members.
5. By becoming a Where the shares are held in dematerialized form, the beneficial
beneficial owner of shares whose name is entered in the records of the
owner of shares depository is called as a member.
6. By estoppel or A person who knowingly permits entering his name in the register of
Acquiescence members, becomes a member by estoppel or Acquiescence. In other
words, if the name of a person is entered in the register of members,
although he is not a member, but such person does not object to it (i.e.
he does not apply for rectification of register of members), he
becomes a member by estoppel.
Nov. 2006: X had applied for the allotment of 1,000 shares in a company. No allotment of
shares was made to him by the company. Later on, without any further application from X,
the company transferred 1,000 partly-paid shares to him and his name in the Register of
Members. X, knowing that his name was placed in the Register of Members, took no steps to
get his name removed from the Register of Members. The company later on made final call. X
refuses to pay for this call. Referring to the provisions of the Companies Act. Examine
whether his (X’s) refused to pay for the call is tenable and whether he can escape himself
from the liability as a member of the company.
Answer:
Register of members is a - Of any matters directed or authorised to be inserted therein
prima facie evidence by the Act (Section 95).
X is a members by - Since he knowingly permitted inclusion of his name in the
estoppels register of members.

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X is liable to pay the final - Since a member by estoppel is liable to pay the unpaid calls.
call

48. CAPACITY TO BECOME A MEMBER (WHO CAN BECOME A MEMBER)?

Nov. 2011: Examine the position of a minor in relation to obtain membership in a company
under the provisions of the Companies Act, 2013.
1. Minor Consequences If the company allots share to a minor in ignorance of
where a minority, following Consequences shall following:
company allots (i) The minor shall not be liable to pay any calls
shares to a minor remaining unpaid on the shares held by him.
(ii) The guardian cannot be compelled to pay the calls
due on the share held by a minor.
(iii) The minor can repudiate the allotment made to
him. The minor shall be entitled to receive back
the money paid by him.
(iv) The company can repudiate the allotment made to
the minor. The minor shall be entitled to receive
back the money paid by him.
Consequences (i) On attaining majority, the minor does not
where minor automatically become a member in a company.
attains majority (ii) If on attaining majority, the minor does anything
which shows that he has accepted the
membership, the minor shall be henceforth
deemed to be a member
A minor can hold  There is no legal bar on minor becoming a member
fully paid shares of a company, provided minor acquires the shares
by way of transfer and the shares are fully paid-up,
and no further obligation or liability is attached to
such shares [Devan Singh Vs. Minerva Films
Limited]. Similar judgment was delivered in S.L.
Bangree Vs. Britannia Industries Limited.
 In such case, the shares shall be registered in the
name of the minor, i.e. the share certificate shall
be made in the name of the minor and the name
of the minor shall be entered in the register of
members. There is no question of entering the
name of the guardian in the share certificate or
register of members.
2. Company  A company can become a member of any other company only if it is
specifically authorised by the memorandum to purchase shares of any
other company.
 A subsidiary company cannot become a member of its holding
company (Section 19).
3. Co-  A cooperative society is a legal person and so it has power to hold
operative property. Therefore, a cooperative society can become a member in a
Society and company.
Society  A society when registered under the Societies Registration Act, 1860 is

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a legal person, and so it can become a member in a company.

4. Trade Union A Trade Union registered under the Trade Unions Act, 1926 is legal person
(i.e. a body corporate) capable of holding property. Therefore, a trade
union can become a member in a company.
5. Partnership  A firm is not a legal person. It cannot hold property in its own name;
Firm the property is held in the names of the partners on behalf of the firm.
Therefore, a firm cannot become a member in a company.
 However, a partnership firm may become a member in a company
licensed Under Section 8.
6. HUF Hindu Undivided Family (HUF) is not a separate legal person. Therefore, an
HUF cannot become a member in a company in its own name.
7. Trust A trust is not a separable legal person. Therefore, the shares cannot be
allotted or transferred in the name of a trust.
8. Joint Holder Two or more persons may hold the shares in a company in their joint
names
9. Foreigner  A foreigner can become a member in a company by complying with the
requirements of Foreign Exchange Management Act, 1999.
 In case a war breaks out with such foreign country, the foreigner
cannot enforce any right available to the members.
10. Government CG or SG can become a member in a body corporate
11. Insolvent  The shares of the insolvent vest in the official assignee or the official
receiver, as the case may be. however, an insolvent continues as a
member until his shares are sold by the official assignee or the official
receiver, as the case may be.
 Until an insolvent is discharged, he cannot become a member.

49. RIGHTS OF A MEMBER UNDER THE COMPANIES ACT, 2013

1. Right to obtain the share certificate from the company (Section 56).
2. Right to have his name entered in the register of members (Section 88).
3. Right to transfer his securities (subject to the restrictions contained in the articles and the
Act) (Section 44 and 58).
4. Right to receive the notice of GMs, attend the GMs and vote threat (Section 123).
5. Right to receive the dividend, where a dividend is declared by the company (Section 123).
6. Right to apply to the Court seeking an injunction restraining the Directors from paying
dividend out of capital (Section 123).
7. Right to inspect and obtain extracts and copies of the registers and indices of members,
Debenture-holders and other security holders and annual returns (Section 94).
8. Right to obtain copies of Memorandum and Articles (Section 17).
9. Right to have the shares offered to him in case of further issue of shares (i.e. the right of
pre-emption)(Section 62).
10. Right to apply to the Court to set aside any variation in the rights attached to any class of
shares (Section 48).

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11. Right to give a special notice so as to move a resolution requiring special notice (provided
he is eligible as per the provisions of Section 115).
12. Right to receive a copy of special notice when special notice is served on the company
(Section 115).
13. Right to obtain a copy of the minutes of the general meeting (Section 119).
14. Right to requisition an Extra-ordinary General meeting (EGM) of the company (provided he
is eligible as per the provisions of Section 100) (Section 100).
15. Right to vote at GM in respect of any matter requiring ‘OR’ or ‘SR’ (Section 107 and 109).
16. Right to vote by means of electronic mode in respect of any matter requiring ‘OR’ or ‘SR’
(Section 108)
17. Right to vote by postal ballot when a resolution is put to vote by the company by way of
postal ballot (Section 110).
18. Right to obtain copies of Profit and Loss account, balance sheet, auditor’s report and other
documents (Section 136).
19. Right to make an application to the Tribunal seeking an order for calling the AGM (Section
97).
20. Right to make an application to the Tribunal seeking an order for calling an EGM (Section
98).
Nov. 2002: Whether a minor or his father is liable to pay calls where shares are allotted to a
minor in response to an application signed by the father of minor?
P. 4.49A: A company issued 20 partly paid equity shares and registered them in the name of
the minor describing him as minor. The father of the minor signed the application on the
minor’s behalf. After some time company went into liquidation. The company filled a suit
against father of the minor to recover the remaining amount on the shares. Whether the
company will succeed? Advise.
Answer:
The company cannot - From the minor, since an allotment of partly paid shares to a minor
recover unpaid calls does not bind him to pay the unpaid calls;
on shares - From the father of the minor, since signing an application for
shares on minor’s behalf does not create any contractual
relationship between the father of minor and the company.
Nov. 2004: M/s Honest Cycles Limited has received an application for transfer of 1,000 equity
shares of Rs. 10 each fully paid-up in favour of Mr. Balak. On scrutiny of the application form it
was found that the application is minor. Advise the company regarding the contractual liability
of a minor and whether shares can be allotted to Balak by way of transfer
Answer:
The company is - Since a minor can become a member, if the shares are fully paid-
advised to transfer up;
fully paid shares to - Since there is no question of liability of minor if the shares are fully
Mr. Balak paid-up.

June, 2009: Whether partly paid shares can be transferred to a minor?

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P. 4.49C: X, a minor purchased 500 equity shares of Rs. 10 each of a company, on which only
Rs. 5 per shares were paid, from the Mumbai Stock Exchange, and submitted an application to
the company for transfer of these shares in his name. Examining the provisions of the
Companies Act, decide whether these shares can be transferred to X.
Answer:
The company is - Since a minor is not bund to pay the unpaid calls;
advised not to - Since such transfer does not create any contractual relations
transfer partly paid between the minor and the company;
shares to X, the - Since, if the shares are transferred to the minor, the minor or the
minor company may afterwards, repudiate such transfer.

50. CESSATION OR TERMINATION OF MEMBERSHIP

1) Forfeitures of shares
2) Surrender of shares
3) Transfer of shares
4) Transmission of shares
5) Sale of shares of a member by the company, where the company has exercised lien on
shares.

Unit V: Debentures
51. MEANING OF ‘DEBENTURE’
 ‘Debenture’ includes Debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company or not.
 “Debenture is a name applied to certain types of documents evidencing an indebtedness
which is normally but not necessarily secured by a charge over property”. (Gower, L.C.B.).
 Debentures are bonds issued as an acknowledgement of the amount borrowed by a
company.
 Debentures are generally secured upon the company’s property or undertaking.
52. CHARACTERISTICS OF ‘DEBENTURES’
 Debenture holders are the creditors of the company.
 No den can carry any voting right.
 A deb is acknowledgment of indebtedness of the company. The Debenture specified the
payment of a specified sum payable at a certain specified rate of interest.
 Debentures are generally issued under the seal of the company. However, it is not a legal
requirement.
 Debentures are generally secured. The Debenture holders are given a charge on certain
assets of the company. However, it is possible to issue unsecured debentures.
 Debentures are generally issued in a series. However issue of debentures to one person is
also possible.

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 Debentures are redeemable at the expiry of their term as specified in the terms of issue
of debentures. However, it is possible to issue irredeemable debentures.
53. DISTINCTION BETWEEN ‘SHARES’ AND ‘DEBENTURES’
Nov. 2004: Explain briefly the distinction between and debentures.
Nov. 2018: State the differences between the debentures and shares.
Basics of
Shares Debentures
Distinction
1. Capital Vs Amount raised by issue of shares Amount raised by issue of debentures
Debt represents the capital of the represents the indebtedness of the
company company.
2. Form of The return paid to shareholders is The return paid to debentures holders
Return termed as dividend. is called as interest.
3. Quantum of Dividend on shares is an Interest on debentures is a charge on
return appropriation of profits. profits
4. Return vise- The amount of dividend varies The amount payable as interest is fixed
a-versa with the quantum of profit. irrespective of quantum of profits.
Profits
5. Issue at Issue of shares at a discount is There is no restriction or condition for
discount prohibited issue of debentures at discount.
6. Voting Shareholders have voting rights. Debentures holders cannot have any
rights voting rights.
7. Purchase of A company cannot purchase its A company can purchase own
own shares own shares, except by way of debentures. After such purchase, the
or buy-back as per the provisions of company may cancel such debentures
debentures Section 68. Even where a or continue to hold them as
company buy-backs its own investments.
shares, the company cannot hold
then as investments; these shares
must be cancelled.
8. Security for No security is created in favour of Generally, security is created in favour
payment shareholders. of debentures
9. Trust Deed No trust can executed in case of Trust deed must be converted into
issue of security shares, if the terms of issue of
debentures so provide, i.e. in case of
convertible debentures.
10. Conversion Shares cannot be converted into Debentures may be converted into
any other security shares, if the terms of issue of
debentures so provide, i.e. in case of
convertible debentures.
11. Redemption Equity shares are always Debentures may be irredeemable or
irredeemable. Preference shares redeemable. There is no restriction on
re redeemable, but the period of term of debentures.
redemption cannot be more than
20 years (however, in case of
infrastructure with Section 55).
12. Bearer Bearer shares cannot be issued. The debentures may be registered

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debentures or bearer debentures.

13. Repayment In the event of Winding Up of the Debentures get priority over shares in
in Winding company, shares are repaid after the matter of repayment in the event
Up all the liabilities, including of Winding Up of the company.
debentures, are repaid.

54. TERMS OF ISSUE OF DEBENTURES

Nov. 2017: What do you mean by ‘Part Passu’ clause in a Debenture?

 The term ‘pari-passu’ means ‘ranking equally amongst

themselves.
Debentures with
 Every holder of debentures issued with pari-passu clause shall be
pari-passu clause
entitled to share the proceeds of the security realized, even
though these debentures were issued at different points of time.
Debentures  The debentures shall rank according to the dates of issue of
without a pari- debentures, i.e. a Debenture issued first shall have priority over
passu clause the debentures issued afterwards.
 If some debentures are issued on the same date, then the
priority shall be determined according to the serial number of
the debentures issued.
Restriction on A company is not entitled to issue a new series of debentures –
powers of the  Having priority over an earlier series of debentures; or
company  Ranking pari-passu with an earlier series of debentures
 Unless such right is expressly reserved under the terms and
conditions of earlier series of debentures.

55. LEGAL PROVISIONS WITH RESPECT TO DEBENTURES (Section 71)

May, 2015: Board of Directors of PQR Limited wants to create a ‘Debenture Redemption
Reserve (DRR)’ for the redemption of debentures issued by the company under the provisions
of the Companies Act, 2013. Explain the provisions of the companies (Share Capital and
Debenture) Rules, 2014 in this regard.
Nov, 2016: What are the provisions of the Companies Act, 2013, relating to the appointment
of ‘Debenture Trustee’ by a company?
(A) Provisions of the Act.
1. Issue of A company may issue debentures with an option to convert them
convertible (either wholly or in part) into shares, provided such issue is
debentures approved by passing SR in the GM.
2. No voting No debentures shall carry any voting right
rights
3. Issue of A company may issue secured debentures by complying with such
secured terms and conditions as may be prescribed.
debentures Rule 18 of the Companies (Share capital and Debentures) Rules,
2014 prescribes the following conditions for issue of secured
debentures:

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(a) The date of redemption of secured shall not exceed 10 years

from the date of issue.
However, the following classes of companies may issue secured
debentures for a period exceeding 10 years but not exceeding 30
years):
(i) Companies engaged in setting up of infrastructure projects.
(ii) ‘Infrastructure Finance Companies’.
(iii) ‘Infrastructure Debt Fund Non-Banking Financial Companies’.
(iv) Companies permitted by a Ministry or Department of the
Central Government or by Reserve Bank of India or by the
National Housing Bank or by any other statutory authority to
issue Debenture for a period exceeding 10 years.
(b) The secured debentures shall be secured by the creation of a
charge on the assets of the company or its subsidiaries or its
holding company or its associates companies, having a value
which is sufficient for the due repayment of the amount of
debentures and interest thereon.
(c) The company shall appoint a Debenture trustee, and execute a
Debenture trust deed to protect the interest of the Debenture
holders.
4. Mandatory  Every company issuing the debentures shall create DRR.
creation of  DRR shall be created out of the profits available for Distribution
DRR of dividend.
 DRR shall be utilized only for the purpose of redemption of
debentures.
5. Appointment  Appointment of one or more Debenture trustee is mandatory, if
of Debenture –
trustee(s) (a) The company issues a prospectus; or
(b) The company makes an offer of invitation to the public; or
(c) The company makes an offer to its members exceeding 500
in number,
 The appointment of Debenture trustee(s) shall be made –
(a) Before issue of prospectus or before making such offer or
invitation; and
(b) By complying with such terms and conditions as may be
prescribed.
6. Duties and  To protect the interests of the Debenture holders.
functions of  To redress the grievances of Debenture holders in accordance
Debenture with such Rules as may be prescribed.
trustee(s)
7. Liability of If – The Debenture trustee is guilty of breach of trust; or
Debenture – The Debenture trustee fails to show the degree of care and
trustee(s) diligence expected out of him
Then – The Debenture trustee shall be liable for damages.
 Any provision which has the effect of exempting or indemnifying
the Debenture trustee(s) against any liability shall be void,
whether such provision is contained in the trust deed or in any
contract.

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 However, the Debenture trustee(s) may be provided with such

exemption(s) as may be agreed upon by a majority of Debenture
holders holding not less than 3/4th in value of total debentures.
8. Duty to make Every company shall pay the interest and redeem the debentures in
payments accordance with the terms and conditions of such debentures.
9. Restrictions If – at any time the Debenture trustee comes to a conclusion that
on incurring the assets of the company are insufficient or are likely to
further become insufficient to discharge the principal amount as and
liabilities by when it becomes due,
the company Then – The Debenture trustee may file a petition before the
Tribunal.
The Tribunal may, after hearing the company and any other person
interested in the matter, by order, impose such restrictions on the
incurring of any further liabilities by the company as the Tribunal
may consider necessary in the interests of the Debenture holders
10. Default in If – A company fails to redeem the debentures on the date of their
payment by maturity or fails to pay interest on the debentures when it
the company becomes due,
Then – Any Debenture holder, or Debenture trustee may make an
application to the Tribunal
The Tribunal may, after hearing the parties concerned, direct, by
order, the company to redeem the debentures forthwith by
payment of principal and interest due thereon.
11. Punishment Every officer of the company who is in default shall be punishable
for default in with –
complying  Imprisonment: Maximum 3 years; or
with order of  Fine: Minimum Rs. 2 Lakhs, and Maximum Rs. 5 Lakhs; or
Tribunal  Both.
12. Suit for A contract entered into by any person with the company to take and
specific pay for the debentures may be enforced by way of a decree for
matters specific performance.
13. Rules w.r.t. CG may, by Rules, prescribe –
certain (a) The procedure for securing the issue of debentures;
matters (b) The form of Debenture trust deed;
(c) The procedure for inspection of trust deed and obtaining copies
thereof;
(d) Quantum of DRR required to be created; and
(e) Such other matters.

(B) Provisions contained in Rule 18 of the Companies (Share capital and Debentures) Rules,
2014.
1. Creation of The company shall comply with the requirements with regard to DRR
Debenture and investment or deposit of sum in respect of debentures during
Redemption the year ending on the 31st day of March of next year, in accordance
Reserve with the conditions given below:
(a) DRR shall be created out of profits of the company available for
payment of dividend;

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(b) The limits with respect to adequacy of DRR and investment or

deposits, as the case may be, shall be as under;
(i) DRR is not required for debentures issued by All India
Financial Institutions regulated by Reserve Bank of India and
Banking Companies for both public as well as privately placed
debentures;
(ii) For other Financial Institutions within the meaning of clause
(72) of Section 2 of the Companies Act, 2013, DRR shall be as
applicable to Non-Banking Finance Companies registered
with Reserve Bank of India.
(iii) For listed companies (other than All India Financial
Institutions and Banking Companies as specified in sub-clause
(i), DRR is not required in the following cases:
(A) In case of public issue of debentures –
A. For NBFCs registered with Reserve Bank of India
Under Section 45-1A of the R.B.I. Act, 1934 and for
Housing Finance companies registered with National
Housing Bank.
B. For other listed companies;
(B) In case of privately placed debentures, for companies
specified in sub-terms A and B.
(iv) For unlisted companies, (other than All India Financial
Institutions and Banking Companies as specified in sub-
clause(i)) –
(A) For NBFCs registered with Reserve Bank of India Under
Section 45-IA of the R.B.I. Act, 1934 and for Housing
Finance Companies registered with National Housing
Bank, DRR is not required in case of privately placed
debentures.
(B) For other unlisted companies, the adequacy of DRR shall
be ten percent or the value of the outside debentures;
(v) In case a company is covered in item (A) or item(B) of sub-
clause (iii) of clause (b) or item (B) of sub-clause (iv) of clause
(b), it shall on or before the 30th day of April in each year, in
respect of debentures issued by a company covered in item
(A) or item (B) of sub-clause (iii) of clause (b) or item (B) of
sub-clause (iv) of clause (b), invest or deposit, as the case
maybe, a sum which shall not be less than 15% of the
amount of its debentures maturing during the year, ending
on the 31st day of March of the next year in any one or more
methods of investments or deposits as provided in sub-
clause (vii).
(vi) For the purpose of sub-clause (v), the methods of deposits or
interests, as the case may be are as follows:
(A) In deposits with any scheduled bank, free from any
charge or lien
(B) In unencumbered securities of the Central Government
or any State Government.

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(C) In unencumbered securities mentioned in sub-clause (a)

to (d) and (ee) of Section 20 of the Indian Trustee Act,
1882.
(D) In unencumbered bonds issued by any other company
which is notified under sub-clause (f) of section 20 of the
Indian Trusts Act, 1882;
Provided that the amount invested or deposited as above
shall not be used for any purpose other than for
redemption of debentures maturing during the year
referred above.
(c) In case of partly convertible debentures, DRR shall be created in
respect of non-convertible portion of debentures issue in
accordance with this sub-rule.
(d) The amount credited to DRR shall not be utilized by the company
except for the purpose
2. Consent of the Before the appointment of Debenture trustee or trustees, a written
Debenture consent shall be obtained from such Debenture trustee or trustees
Trustee proposed to be appointed and a statement to that effect shall
appear in the letter of offer issued for inviting the subscription of the
debentures.
3. Disqualifications A person shall not be appointed as a Debenture trustee; if be –
for appointment (i) Beneficially holds shares in the company;
as Debenture (ii) Is a promoter, Director or key managerial personnel or any other
trustee officer or an employee of the company or its holding, subsidiary
or associate company;
(iii) Is beneficially entitled to moneys which are to be paid by the
company otherwise then as remuneration payable to the
Debenture trustee;
(iv) Is indebted to the company, or its subsidiary or its holding or
associate company or a subsidiary of such holding company;
(v) Has furnished any guarantee in respect of the principal debts
secured by the debentures or interest thereon;
(vi) Has any pecuniary relationship with the company amounting to
2% or more of its gross turnover or total income or Rs. 50 Lakhs
or such higher amount as may be prescribed, whichever is lower,
during the 2 immediately preceding financial years or during the
current financial year;
(vii) Is relative of any promoter or any person who is in the
employment of the company as a Director or key managerial
personnel.
4. Calling of A meeting of all the Debenture-holders shall be convened by the
meeting of Debenture trustee on –
Debenture (a) Requisition in writing signed by Debenture-holders holding at
holder least 1/10th in value of the debentures for the time being
outside.
(b) The happening of any event, which constitutes a breach, default
or which in the opinion of the Debenture trustees affects the
interest of the Debenture holders.

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5. Removal of A Debenture trustee may be removed from office before the expiry
Debenture of his term only if it is approved by the holders of not less than 3/4th
trustee in value of the debentures outstanding, at their meeting.
6. Non- Nothing contained in Rule 18 shall apply to Rupee denominated
applicability bonds issued exclusively to overseas investors in terms of A.P.(DIR
Series) Circular No. 17 dated September 29, 2015 of the Reserve
Bank of India.

56. TRUE OF FALSE’

State whether the following statements are True or False and give reasons (1 Mark each)
1 May, 2010, Issue of debentures with voting rights is not permissible.
May, 2013 Answer: The given statement is true.
Reason:
2 May, 2014 Debenture with voting right can be issued only if permitted by the
Nov, 2016 Articles of Association
Nov. 2017 Answer: The given statement is false.
Reason: As per Section 71, no company shall issue only Debenture
carrying voting rights.
3 May, 2007 A minor also can be become a member of a company
Answer: The given statement is false.
Reason: A minor has not capacity to contract or to incur any
obligation,. So, he cannot become a member. However, transfer of
fully paid-up shares to a minor is permissible
4 Nov. 2009 A transferee becomes a member of the company when the instrument
of transfer is submitted with the company.
Answer: The given statement is false.
Reason: As per Section 2(5), every person who agrees in writing to
become a member and company and whose is entered in its register of
members, shall be a member of the company, thus the transferee
becomes a member only when the company gives effect to the
transfer deed and enters the name of the person in the master of
members.
5 May 2017 Right shares are those shares which are issued by newly formed
company.
Answer: The given statement is false.
Reason: As per Section 62, rights shares means those shares which are
offered by a company to its existing members.
6 May, 2007 New shares cannot be issued to outsiders without prior offer to the
existing shareholders.
Answer: The given statement is true.
Reason: As per Section 62, further shares shall be offered to the
existing equity shareholders in proportion to the paid-up capital held
by them.
7 Nov. 2017 A public company cannot issue equity shares with differential rights as
to dividend.
Answer: The given statement is false.
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Reason: Section 43 outsiders issue of equity shares capital with

differential rights as to dividend, voting or otherwise in accordance
with such Rules as may be prescribed.
8 May 2008 A Public Company can issue either redeemable or irredeemable
preference shares.
Answer: The given statement is false.
Reason: As per Section 55 no company shall issue irredeemable
preference shares.
9 Nov. 2014 As per Section 51 of the Companies Act, 2013, a company may, if so
authorised by its Articles, pay dividends in proportion to the amount
paid-up on each share.
Answer: The given statement is true.
Reason: As per Section 51 the articles of a company may provide that
the dividend shall be paid in proportion to the amount paid-up on each
shares
10 May 2015 Deferred shares also called founder’s shares.
Answer: The given statement is true.
Reason: Deferred shares are generally held by the promoters, viz.
founders of the company, and therefore, these shares are called as
founders’ shares.
11 Nov. 2017 A bearer of a share warrant of a Company is not a member of the
Company unless the Articles of Association so provide.
Answer: The given statement is true.
Reason: The Companies Act, 2013 does not contain any provision with
respect to share warrants. However, any person to whom the share
warrants were issued under the Companies Act, 1956 shall be termed
as a member of the company only if the articles of the company so
provide (Section 115 of the Companies Act, 1956).
12 Nov. 2017 An insolvent may be a member of the company.
Answer: The given statement is true.
Reason: The shares of the insolvent vest in the official assignee or the
official receiver, as the case may be. However on insolvent continues
as a member until his shares are sold by the official assignee or the
official receiver, as the case may be.
13 Nov. 2017 A partnership firm may hold shares in a Company by holding shares in
the individual names of the partners as joint holders.
Answer: The given statement is true.
Reason: A firm is not a legal person, and so it cannot hold shares of a
company in its own name. However, the shares of a company may be
held in the joint names of the partners of the firm.
14 Nov, 2017 Debentures with voting rights can be issued only if permitted by the
Articles of Association.
Answer: The given statement is false.
Reason: As per Section 71, no company shall issue any debentures
carrying voting rights.
15 Nov. 2018 ‘Transfer of shares’ and ‘transmission of shares’ are synonymous.
Answer: The given statement is false.
Reason: Transfer of shares is a voluntary act of parties, but

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transmission takes place because of operation of law.

57. ‘CHOOSE THE CORRECT ANSWER’

Pick-out the correct Answer from the following and give reasons (1 Mark each)
1 Nov. 2010 Sources and funds for buy-back as shares are:
(a) Free reserves or securities premium account
(b) The proceeds of any shares or other specified securities.
(c) Both (a) and (b)
(d) None of the above
Answer: (c)
Reason: As per Section 68, a company may buy-back is shares out of its
free reservation the securities premium accounting the proceeds of
any shares or other specified securities.
2 Nov. 2007 Share certificates are to be issued by a company within
(a) 2 months after allotment
(b) 1 month after allotment
(c) 6 months after allotment
(d) 3 months after allotment
Answer: (a)
Reason: As per Section 56, every company shall, within 2 months after
allotment, deliver the share certificate.
3 May 2008 A Public Company need not offer further shares to existing
shareholders if –
(a) Ordinary resolution passed to that effect by the company in
general meeting
(b) Special resolution is passed to that effect by the company in
general meeting
(c) Resolution is passed by Board of Directors and approved by
Company Law Board.
(d) Special resolution is passed by the Company in general meeting
and approved by Registrar of Companies.
Answer: (b).
Reason: As per Section 62, shares need not be offered to the existing
shareholders if a special resolution to that effect is passed by the
company in general meeting.
MCQs
1. __________ means such capital as is authorised by the memorandum of a company to be the
maximum amount of share capital of the company.
a) Authorised capital b) Issues capital c) Subscribed capital d) Called up capital
2. _____ means such part of the capital, which has been called for payment.
a) Authorised capital b) Issues capital c) Subscribed capital d) Called up capital
3. __________ means such capital as the company issues from time to time for subscription.
a) Authorised capital b) Issues capital c) Subscribed capital d) Called up capital

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4. __________ means such part of the capital which is for the time being subscribed by the
members of a company.
a) Authorised capital b) Issues capital c) Subscribed capital d) Called up capital
5. Sweat equity shares can be issued by a company only to _________
a) Directors of the company b) Employees of the company
c) Either a) or b) d) None of these
6. A company may issue equity shares with differential rights as to dividend, voting or
otherwise, only if it is authorised by __________
a) The Central Government b) The Court c) The Tribunal d) Its Articles
7. A company can issue the equity shares with differential rights only if it has no defaulted in
filing financial statements and annual reports for immediately preceding ______.
a) **financial year b) ** financial years c) 3 financial years d) 5 financial years
8. A company can issue the equity shares with differential rights only if it has consistent track
record of distributable profits for the last __________.
a) 2 years b) 3 years c) 5 years d) 7 years
9. The shares with differential rights shall not exceed _______ of the total post-issue paid-up
equity shares capital including equity shares with differential rights issued at any point of
time.
a) **35% b) 25% c) 50% d) 51%
10. A company can issue the equity shares with differential rights only if it not been penalized by
Court of Tribunal during the last 3 years, of any offence under _________
a) The Companies Act, 2013 b) The Prevention of Money Laundering Act, 2002
c) The Indian Penal Code ***1860 c) None of these
11. __________ is required for issue of shares with differential rights as to dividend, voting or
otherwise.
a) An Ordinary Resolution b) A Special Resolution
c) A Unanimous Resolution d) A Board Resolution

12. Every share shall be distinguished by _____________

a) The date of the issue b) The amount paid-up
c) Both (a) and (b) d) The Distinctive number
13. A share certificate is a _________ of the fact that the person named therein is the owner of
such number of shares as are specified therein.
a) Conclusive b) Prima facie evidence
c) Persuasive evidence d) Circumstantial evidence

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14. In case of unlisted companies the duplicate share certificate shall be issued within _____ of
submission of complete documents with the company.
a) 1 month b) 2 months c) 3 months d) 6 months
15. Every preference shareholder shall have a right to vote _________
a) On such resolutions which directly affect his rights
b) On any resolution for the Winding Up of the company
c) On any resolution for the repayment or reduction of share capital
d) All of these
16. If the dividend on any class of preference shares is not paid for _________ or more, then,
every preference shareholder of such class shall have a right to vote on every resolution
placed before the company.
a) 1 year b) 2 years c) 3 years d) 5 years
17. Every equity shareholder shall have a right to vote _______
a) Only on such Resolutions which affect his rights
b) Only on the resolution for the up of the company
c) Only on the resolution for the repayment or reduction of share capital
d) On every resolution placed before the company
18. On a poll, the voting right of every equity shareholder shall be __________
a) Based on the principle of 1 vote for every member
b) Based on the principle of 1 vote for every member, if so provided by the articles.
c) In proportion to his share in the paid-up equity shares capital of the company
d) In proportion to his share in the paid-up preference share capital of the company
19. The rights attached to the shares of any class may be varied with the consent in writing of the
holders of not less than _____ of the issued shares of that class.
a) One-half b) One-third c) Two-third d) Three Fourth
20. The rights attached to the shares of any class may be varied if _________ is passed at a
separate meeting of the holders of the issued shares of that class.
a) An ordinary resolution b) A special resolution
c) A unanimous resolution d) None of these
21. Where a company passes the necessary resolution for variation of rights attached to the
shares of any class, the holder(s) of such class of shares who hold not less than _____ shares
of such class and who had not consented to such variation or had not voted in favour, may
make an application to the Tribunal to cancel such variation.
a) 5% b) 10% c) 20% d) 25%
22. Where a company passes the necessary resolution for variation of rights attached to the
shares of any class, the dissenting shareholders, if they are eligible, may, within ______, make
an application to the Tribunal to cancel such variation.

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a) 7 days b) 14 days c) 21 days d) 30 days

23. Statement (1): A call shall be made uniformly on all the shares falling under the same class.
Statement (2): The shares on which different amounts have been paid-up shall be deemed to
be the shares falling under the same class.
a) Only Statement (1) is true b) Only Statement (2) is true
c) Both the statements are true d) None of the statements is true
24. A company may accept calls in advance only if it is authorised by ______
a) The Central Government b) The Court c) The Tribunal d) Its Articles
25. The ‘Securities Premium Account’ cannot be used for _________
a) Writing off the preliminary expenses of the company
b) Issuing fully paid bonus shares to the members
c) Declaring dividend
d) Writing off the discount allowed on issue of shares or Debenture
26. A special resolution passed for by a company authorizing it to issue sweat equity shares shall
be valid for making the allotment within a period of not more than ______ from the dae of
passing SR.
a) 6 months b) 12 months c) 2 years d) 3 years
27. At any time, the sweat equity shares shall not exceed ______ of the paid-up equity capital of
the company.
a) 10% b) 20% c) 25% d) 50%
28. A company may issue the preference shares only if it is authorised by _______
a) The Central Government b) The Court c) The Tribunal d) Its Articles
29. Unless a company is engaged in infrastructure projects, it cannot issue preference shares
which are redeemable after ___________.
a) 10 years b) 15 years c) 20 years d) 30 years
30. In case of allotment of shares to the subscribers to memorandum, the share certificate shall
be delivered by the company within _________.
a) 1 month of incorporation b) 1 month of allotment of securities
c) 2 months of incorporation d) 2 moths of allotment of securities

31. In case of transfer of shares, the share certificate shall be delivered by the company within __
a) 1 month of receipt of transfer deed b) 1 month of effecting transfer of shares
c) 2 months of receipt of transfer deed d) 2 months of effecting transfer of shares
32. In case of any allotment of shares, the share certificate shall be delivered by the company
within ____
a) 1 month of receipt of application b) 1 month of allotment

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c) 2 months of receipt of application d) 2 months of allotment

33. In case of any allotment of debentures, the share certificate shall be delivered by the
company within _______
a) 3 months of receipt of application b) 3 months of allotment
c) 6 months of receipt of application d) 6 months of allotment
34. A transfer deed is submitted to the company by the transferor and the shares are partly paid-
up. The company gives a notice of the same to the transferee. The transferee has the right to
object to the proposed transfer within _______
a) 30 days b) 2 weeks c) 6 weeks d) 2 months
35. The application for transfer of securities must be made in Form No. _______
a) SH – 3 b) SH – 4 c) SH – 5 d) SH – 6
36. The transfer deed (after stamping, dating and signing) shall be submitted to the company
within ____ of execution.
a) The transfer deed (after stamping, dating and signing) shall be submitted to the company
within ____ of execution.
a) 30 days b) 45 days c) 60 days d) 90 days
37. Where a transfer deed is submitted to the company by the transferor and the shares are
partly paid-up, the company shall give a notice to the transferee in Form No. __________
a) SH – 3 b) SH – 4 c) SH – 5 d) SH – 6
38. Where a Private company refuses to register the transfer of any securities, it shall give a
notice of such refusal to the transferor and the transferee, within ______ from the date on
which the transfer deed was delivered to the company.
a) 7 Days b) 14 Days c) 15 Days d) 30 Days
39. Where a Private company gives a notice of refusal to transfer the securities, the transferee
may, within _____ of receipt of the notice of refusal, file an appeal with the Tribunal.
a) 15 Days b) 30 Days c) 60 Days d) 90 Days
40. Where a Private company refuses to register the transfer of any securities, but does not send
any notice of refusal, the transferee may, within ____ of delivery of the transfer deed, file an
appeal with the Tribunal.
a) 15 Days b) 30 Days c) 60 Days d) 90 Days
41. Where a public company refuses to transfer the securities, the transferee may, within _____
of such refusal, file an appeal with the Tribunal.
a) 15 Days b) 30 Days c) 60 Days d) 90 Days
42. Where a public company refuses to register the transfer of any securities, but does not sen
any notice of refusal, the transferee may, within _____ of delivery of the transfer deed, file an
appeal with the Tribunal.
a) 15 Days b) 30 Days c) 60 Days d) 90 Days
43. A company may alter the capital clause of memorandum by ________.
a) Passing an ordinary resolution b) Passing a special resolution

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c) Passing an ordinary resolution and obtaining approval of the Central Government

d) Passing a special resolution and obtaining approval of the Central Government
44. A notice of every alteration of capital clause of memorandum shall be given to the
registration within ____________
a) 7 Days b) 15 Days c) 30 Days d) 60 Days
45. One of the modes of alteration of capital clause of memorandum is to consolidate and divide
the share capital into shares of _____ amount than its existing shares.
a) Smaller b) Larger c) Either a) or b) d) None of these
46. One of the modes of alteration of capital clause of memorandum is to sub-divided the shares
into shares of _______ amount than its existing shares.
a) Smaller b) Larger c) Either a) or b) d) None of these
47. Offer of further shares by a company to all its existing shareholders in proportion to the paid-
up share capital held by them is called as __________
a) Bonus issue b) Right issue c) Public issue d) None of these
48. The letter of offer of a right issue shall be dispatched to all the existing shareholders at least
_____ before the opening of the issue.
a) 3 Days b) 7 Days c) 15 Days d) 21 Days
49. Bonus shares may be issued out of __
a) The free reserves b) The Securities Premium Account
c) The Capital Redemption Reserve Account d) Any of these
50. A company can effect reduction of capital by _______
a) Passing an ordinary resolution b) Passing a special resolution
c) Obtaining the confirmation of the Tribunal d) Both (b) and (c)
51. Where the buy-back is authorised by a special resolution, it shall not exceed ____of _____.
a) 25%, Aggregate of paid-up capital and free reserves
b) 25%, total paid-up equity capital
c) 25%, aggregate of paid-up equity capital and free reserves
d) 10%, aggregate of paid-up equity capital and free reserves

52. Where the buy-back is authorised by a resolution passed in Board Meeting, it shall not exceed
______ of _____.
a) 25%, Aggregate of paid-up capital and free reserves
b) 25%, total paid-up equity capital
c) 25%, aggregate of paid-up equity capital and free reserves
d) 10%, aggregate of paid-up equity capital and free reserves

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53. The buy-back shall be completed within ____ of passing the resolution for buy-back.
a) 3 months b) 6 months c) 9 months d) 1 year
54. Further offer of buy-back shall be given within ________ of closure of preceding offer of buy-
back.
a) 3 months b) 6 months c) 9 months d) 1 year
55. A company intending to buy-back is securities, shall file with the Registrar a Declaration of
solvency stating that it will not be rendered insolvent within next ________.
a) 3 months b) 6 months c) 9 months d) 1 year
56. After completion of buy-back, the company shall, within ____, file a return containing such
particulars relating to buy-back as may be prescribed.
a) 7 days b) 15 days c) 30 days d) 60 days
57. The company shall extinguish and physically destroy the shares bought-back within _____ of
completion of buy-back.
a) 7 days b) 15 days c) 30 days d) 60 days
58. The ratio of debt (secured as well as unsecured debt) owed by the company must not be
more than _____the aggregate of paid-up capital and free reserves ______ the buy-back.
a) Twice; before b) Twice; after c) Thrice; before d) Thrice; after
59. A company may issue debentures with an option to convert them into shares, provided such
issue is approved by passing ______.
a) As ordinary resolution b) A special resolution
c) A unanimous resolution d) A Board resolution
60. Statement (1): A Debenture can carry voting right only if it is secured.
Statement (2): A Debenture can carry writing right only if it is convertible into equity shares.
a) Only Statement (1) is true b) Only Statement (2) is true
c) Both the statements are true d) None of the statements is true
61. In no case the tenure of secured debentures shall exceed ______
a) 10 years b) 20 years c) 30 years d) 50 years
62. The Debenture trustee(s) may be provided with such exemption(s) as may be agreed upon by
a majority of Debenture holders holding not less than ______ of total debentures.
a) 2/3rd in value b) 3/4th in value c) 1/3rd in value d) None of these

63. The company shall create DRR equivalent to ______ of the value of outside debentures.
a) 15% b) 25% c) 35% d) 50%
64. The company shall, on or before the 30th day of April in each year, invest or deposit, as the
case may be, a sum which shall not be less than _________ of the amount of debentures
maturing up to 31st Mach of the next year, in deposits with any scheduled bank,
unencumbered securities of the Central Government or any State Government, etc.

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a) 15% b) 20% c) 25% d) 35%

65. Statement (1): A person who is a registered holder of shares but does not beneficially holds
any shares in a company, shall not be appointed as a Debenture trustee
Statement (2): A person who is indebted to the company shall not be appointed as a
Debenture trustee.
a) Only Statement (1) is true b) Only Statement (2) is true
c) Both the statements are true d) None of the statements is true
66. A person shall not be appointed as a Debenture trustee if he has any pecuniary relationship
with the company amounting to _____ or more of its gross turnover or total income or
_____or such higher amount as may be prescribed, whichever is lower, during the 2
immediately preceding financial years or during the current financial year.
a) 1%; Rs. 50 Lakhs b) 2%; Rs. 50 Lakhs c) 1%; Rs. 20 Lakhs d) 2%; Rs. 20 Lakhs
67. A person shall not be appointed as a Debenture trustee if he is relative of ______ or any
person who is in the employment of the company, as _________
a) Any promoter; a Director b) Any member; a Director
c) Any promoter a Director or key managerial personnel
d) Any member; a Director or key managerial personnel
68. A meeting of all the Debenture-holders shall be convened by the Debenture trustee on
requisition in writing signed by Debenture-holder holding at least ____ in value of the
debentures for the being outstanding.
a) 1/5th b) 1/10th c) 1/20th d) 1/3rd
69. ______ may issue secured debentures for a period exceeding 10 years but not exceeding 30
years.
a) Any company b) Infrastructure Finance Companies
c) Asset Reconstruction Companies d) Both b) and c)
70. ______ may issue secured debentures for a period exceeding 10 years but not exceeding 30
years.
a) Companies engaged in setting up of infrastructure projects
b) Infrastructure Debt Fund Non-Banking Financial Companies
c) Companies permitted by a Ministry or Department of the Central Government or by R.B.I.
or by the National Housing Bank or by any other statutory authority
d) Any of these
71. The secured debentures shall be secured by the creation of a charge on the assets of ______,
having a value which is sufficient for the due repayment of the amount of debentures and
interest thereon.
a) The company b) Its subsidiaries or its holding company
c) Its associates companies d) Any of these
72. Where a company makes an offer to its members exceeding ________ in number, the
appointment of one or more Debenture trustee is mandatory.

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a) 100 b) 200 c) 250 d) 500

73. Statement (1): Where a company issues a prospectus, the appointment of one or more
Debenture trustee is mandatory.
Statement (2): Where a company makes an offer or invitation to the public, the appointment
of one or more Debenture trustee is mandatory.
a) Only Statement (1) is true b) Only Statement (2) is true
c) Both the statements are true d) None of the statements is true
74. Any holder of securities may make a nomination by filing Form No. ________.
a) SH – 12 b) SH – 13 c) SH – 14 d) SH – 15
75. Nomination may cancelled or varied by filing Form No. _______
a) SH – 12 b) SH – 13 c) SH – 14 d) SH – 15
76. The issue of Employees Stock Option Scheme shall be approved by the shareholders of the
company by passing __________
a) An ordinary resolution b) A special resolution
c) A unanimous resolution d) None of these
77. _________ cannot become a member of a company
a) Hindu Undivided Family b) Company c) Government d) A body corporate
78. _______ can become a member of a company
a) A partnership firm b) Limited Liability Partnership c) Trust d) Insolvent
79. ___________ can become a member of a company
a) A cooperative society b) Foreigner c) Joint holders d) All of these

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KEY – Share Capital and Debentures

Q. No. 1 2 3 4 5 6
Ans: (a) (d) (b) (c) (c) (d)
Reason Sec. 2(8) Sec. 2(15) Sec. 2(50) Sec. 2(86) Sec. 2(88) Sec. 2(43)

Q. No. 7 8 9 10 11 12
Ans: (c) (b) (b) (d) (a) (d)
Reason Sec. 43 Sec. 43 Sec. 43 Sec. 43 Sec. 43 Sec. 45

Q. No. 13 14 15 16 17 18
Ans: (b) (c) (d) (b) (d) (c)
Reason Sec. 46 Sec. 46 Sec. 47 Sec. 47 Sec. 47 Sec. 47

Q. No. 19 20 21 22 23 27
Ans: (d) (b) (b) (c) (a) (d)
Reason Sec. 48 Sec. 48 Sec. 48 Sec. 48 Sec. 49 Sec. 50

Q. No. 25 26 27 28 29 30
Ans: (c) (b) (c) (d) (c) (c)
Reason Sec. 52 Sec. 54 Sec. 54 Sec. 55 Sec. 55 Sec. 56

Q. No. 31 32 33 34 35 36
Ans: (a) (d) (d) (b) (b) (c)
Reason Sec. 56 Sec. 56 Sec. 56 Sec. 5 Sec. 56 Sec. 56
Q. No. 37 38 39 40 41 42
Ans: (c) (d) (b) (c) (c) (d)
Reason Sec. 56 Sec. 58 Sec. 58 Sec. 58 Sec. 58 Sec. 58
Q. No. 43 44 45 46 47 48
Ans: (a) (c) (b) (a) (b) (b)
Reason Sec. 61 Sec. 61 Sec. 61 Sec. 61 Sec. 62 Sec. 62
Q. No. 49 50 51 52 53 54
Ans: (d) (d) (a) (d) (d) (d)
Reason Sec. 63 Sec. 66 Sec. 68 Sec. 68 Sec. 68 Sec. 68
Q. No. 55 56 57 58 59 60
Ans: (d) (d) (a) (b) (b) (d)
Reason Sec. 68 Sec. 68 Sec. 68 Sec. 68 Sec. 71 Sec. 71
Q. No. 61 62 63 64 65 66
Ans: (c) (b) (b) (a) (b) (b)
Reason Sec. 71 Sec. 71 Sec. 71 Sec. 71 Sec. 71 Sec. 71
Q. No. 67 68 69 70 71 72
Ans: (c) (b) (b) (d) (d) (d)
Reason Sec. 71 Sec. 71 Sec. 71 Sec. 71 Sec. 71 Sec. 71
Q. No. 73 74 75 76 77 78
Ans: (c) (b) (c) (b) (a) (b)
Reason Sec. 71 Sec. 72 Sec. 72
Q. No. 79
Ans: (d)
Reason

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