Taxmann's Company Law & Practice | CRACKER

Chapter-wise Marks Distribution

I-6 CHAPTER-WISE MARKS DISTRIBUTION

Chapter-wise Comparison with Study Material

SHARE & SHARE CAPITAL CHAPTER 4

TYPES OF CAPITAL

1.Distinguish between: Nominal Capital & Subscribed Capital [June 2010 (4 Marks)]

Ans.: Nominal, Authorized or Registered Capital [Section 2(8)]: This is the sum stated in the memorandum of association of a company limited by shares as the capital of the company with which it is registered. It is the maximum amount which the company is authorized to raise by issuing shares.

This is the capital, on which the company had paid the prescribed fee at the time of registration; hence it is also called Registered Capital. As and when this capital is increased, fees for such increase will have to be paid to the ROC. Subscribed Capital [Section 2(86)]: It is that portion of the issued capital at face value which has been subscribed for or taken up by the subscribers of shares in the company.

2.Distinguish between: Share and Stock.[June 2010 (4 Marks)]

Ans.: Following are the main points of distinction between share & stock:

Points Share Stock

Nature Shares in physical form bear distinct numbers. Stocks are the consolidated value of share capital.

Paid-up value Shares may or may not be fully paid-up. Stock is always fully paid-up.

Nominal value Shares have a nominal value.Stock does not have any nominal value.

Denomination All shares are of equal denomination. Denomination of stocks varies.

Fractions It is not possible to transfer shares into fraction. Stock is divisible into any amount required. Thus, it is possible to transfer even into fractions.

4.2 PART I : COMPANY LAW - PRINCIPLES & CONCEPTS

Points Share Stock

Existence

A share comes into existence before the stock and it is issued initially.

Stock comes into existence after conversion of shares into stock and on conversion of shares into stock, the provisions of the Act governing the shares shall cease to apply to the share capital as it is converted into stock.

3. Distinguish between Reserve Capital & Capital Reserve. [June 2012 (4 Marks)], [Dec. 2012 (4 Marks)] Or

‘Reserve Capital’ & ‘Capital Reserve’ are one and the same. [Dec. 2014 (5 Marks)]

Ans.: Following are the main points of distinction between reserve capital & capital reserve:

Points Reserve CapitalCapital Reserve

Meaning Reserve capital is that part of the uncalled capital of a company which the limited company has decided by special resolution not to call except in the event and for the purpose of the company being wound-up.

Mandatory Creation of reserve capital is not mandatory.

Balance sheet disclosure

Writing off capital losses

There is no need to disclose reserve capital in balance sheet.

Reserve capital cannot be used to write-off capital losses.

Process Special resolution is required to be passed at general meeting by the shareholders.

Capital reserves are created out of capital profit. Capital reserve may be statutory capital reserve or nonstatutory capital reserve.

Creation of capital reserve is mandatory in certain cases.

Capital reserves are disclosed in balance sheet under the head “Reserve & Surplus”.

Capital reserve can be used to write-off capital losses.

Capital reserve is created out of accounting process.

ISSUE & REDEMPTION OF PREFERENCE SHARES

4. Preference share are cumulative unless expressly stated to be noncumulative. Comment. [June 2011 (5 Marks)]

Ans.: Dividends on preference shares, like equity shares, can be paid only out of profits.

With regard to the payment of dividends, preference shares may be cumulative or non-cumulative.

A cumulative preference share confers a right on its holder to claim fixed dividend of the past and the current year and out of future profits. The dividend keeps on accumulating until it is fully paid.

The non-cumulative preference share gives right to its holder to a fixed amount or a fixed percentage of dividends out of the profits of each year. If no profits are available in any year, the shareholders get nothing, nor can they claim, unpaid dividend in any subsequent year.

Preference shares are cumulative unless expressly stated to be non-cumulative.

5. What are the conditions which must be fulfilled for issue and redemption of preference shares? [June 2011 (6 Marks)], [June 2015 (5 Marks)]

Ans.: Issue & Redemption of Preference Shares [Section 55]:

(1) Irredeemable preference shares cannot be issued: No company limited by shares shall issue any preference shares which are irredeemable.

(2) Period for which preference shares can be issued: If authorized by its articles, a company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue subject to prescribed conditions. However, a company may issue preference shares for a period exceeding 20 years for infrastructure projects, subject to the redemption of prescribed percentage of shares on an annual basis at the option of such preferential shareholders.

As per Rule 10 of the Companies (Share Capital & Debentures) Rules, 2014, a company engaged in the setting-up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum 10% of such preference shares per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders. The term ‘‘infrastructure projects’’ means the infrastructure projects specified in Schedule VI.

(3) Source of funds for redemption: Preference shares shall be redeemed:

(

a) Out of the profits of the company which would otherwise be available for dividend.

(

b) Out of the proceeds of a fresh issue of shares.

(

c) Partly out the profits of the company and partly out of the proceeds of a fresh issue of shares.

(4) Paid-up value of redemption: Preference shares shall be redeemed only if they are fully paid-up.

(5) Capital Redemption Reserve Account: Where preference shares are proposed to be redeemed out of the profits a sum equal to the nominal

PART I : COMPANY LAW - PRINCIPLES & CONCEPTS

amount of the shares should be transferred to the Capital Redemption Reserve Account.

Capital Redemption Reserve Account may be applied for issue of fully paid-up bonus shares.

(6) Premium on redemption of preference shares:

(i) In case of prescribed class of companies whose financial statement required to comply with the prescribed accounting standards under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed.

(ii) In a other cases, the premium payable on redemption shall be provided for:

(

a) Out of the profits of the company.

(

b) Out of the company’s securities premium account, before such shares are redeemed.

(

c) Partly out the profits of the company and partly out of securities premium account.

(7) Redemption of preference shares by issue of further redeemable preference shares: Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares referred as unredeemed preference shares), it may, with the consent of the holders of 3/4th in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

While giving approval, the Tribunal shall order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

Explanation: The issue of further redeemable preference shares or redemption of preference shares shall not be deemed to be an increase or a reduction, in the share capital of the company.

6. Whether equity shares already issued can be converted into redeemable preference shares? [Dec. 2012 (4 Marks)]

Ans.: There is not specific provision in the Companies Act, 2013 regarding conversion of equity shares into redeemable preference shares. However, it was held that where the equity shares are to be converted into redeemable preference shares it was necessary to adopt the process of reduction of capital u/s 66 of the Companies Act, 2013. [Re. Chowgule & Co. (P.) Ltd., St. James Court Estates Ltd.]

7. In no circumstances a company can issue redeemable preference shares with a redemption period of 20 years. [June 2015 (5 Marks)]

Ans.: As per Section 55 of the Companies Act, 2013, a company limited by shares shall not issue preference shares which are irredeemable. A company limited by shares may issue preference shares which are liable to be redeemed within a period 20 years from the date of issue.

As per Rule 10 of the Companies (Share Capital & Debentures) Rules, 2014, a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum ten percent of such preference shares per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders. The term ‘‘infrastructure projects’’ means the infrastructure projects specified in Schedule VI. Thus, it is incorrect to say that in no circumstances a company can issue redeemable preference shares with a redemption period of 20 years.

8. Distinguish between: Preference Share Capital & Equity Share Capital [Dec. 2015 (4 Marks)]

Ans.: Following are the main points of distinction between preference share capital & equity share capital:

Points

Preference Share CapitalEquity Share Capital

Dividend Preference shares are entitled to a fixed rate of dividend.

Rate of dividend on equity shares is recommended by the board of directors in its report to the shareholders, which is approved by the shareholders at the AGM.

Preference in dividend

Preference in winding-up

Dividend on the preference shares is paid in preference to the equity shares.

In case of winding-up, preference shareholders get preference over equity share holders with regard to the payment of capital.

Cumulativeness Dividend on preference share may be cumulative.

Voting rights Voting rights of preference shareholders are restricted. As per Section 47(2), a preference shareholder can vote only in following cases:

(a) When his special rights as a preference shareholder are being varied.

Dividend on equity shares is paid only after preference dividend has been paid.

In case of winding-up, equity shareholders get payment of capital after the payment of capital to preference shareholders.

Dividend on equity shares is not cumulative.

An equity shareholder can vote on all matters affecting the company.

4.6 PART I : COMPANY LAW - PRINCIPLES & CONCEPTS

Points Preference Share CapitalEquity Share Capital

(b) Any resolution for the winding-up of the company or for the repayment or reduction of its equity or preference share capital.

(

c) If preference dividend has not been paid for a period of 2 years or more.

Bonus & right shares No bonus shares/right shares are issued to preference share holders

Redemption Preference shares are liable to be redeemed within a period 20 years from the date of issue.

ISSUE OF SHARES AT PREMIUM

A company may issue rights shares or bonus shares to the company’s existing equity shareholders.

Equity shares cannot be redeemed except under a scheme involving reduction of capital or buy-back of its own shares.

9. Securities premium shall be utilized only for certain specific purposes only. Comment. [Dec. 2013 (4 Marks)] Or

Amount lying in the securities premium account belongs to the shareholders and can be used freely for their benefit. [June 2021 (5 Marks)]

Ans.: A company may issue securities at a premium when it is able to sell them at a price above face value. The Companies Act, 2013, does not stipulate any conditions or restrictions regulating the issue of securities by a company at a premium. However, it imposes conditions regulating the utilization of the amount of premium collected on securities.

Securities Premium Account [Section 52(1)]: Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of the Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company. Conditions relating to utilization of securities premium [Section 52(2)]: Securities premium can be used by the company for the following purposes:

(

a) Issuing fully paid bonus shares.

(

b) Writing off the preliminary expenses.

(

c) Writing off commission or discount or the expenses on issue of shares or debentures.

(d) Writing off premium on redemption of redeemable preference shares or debentures.

(e) Buy-back of face value of shares and writing off premium on buy-back. Conditions relating to utilization of securities premium in case of prescribed class of companies [Section 52(3)]: In case of prescribed class of companies whose financial statement comply with the accounting standards prescribed under section 133, securities premium account can be used for the following purposes:

(

i) Issuing fully paid-up bonus shares.

(ii) Writing off expenses or commission or discount on any issue of equity shares.

(iii) Buy-back of face value of shares and writing off premium on buy-back.

10. In view of provisions of the Companies Act, 2013 relating to ‘securities premium’, state whether the amount lying in securities premium account of a company can be used:

(

(

i) For issuance of Bonus shares; and

ii) For payment of dividend declared by the company at its General Meeting. [Dec. 2015 (4 Marks)]

Ans.: Conditions relating to utilization of securities premium [Section 52(2)]: Please refer to Answer of Question No. In view of above provisions, answer to given case is as follows:

(i) Company can use the amount laying in securities premium for issuance of bonus shares.

(ii) Company cannot use the amount laying in securities premium for payment of dividend declared by the company at its general meeting.

11. Radhika Textile Limited has utilized the securities premium during the financial year 2016-2017 as follows:

(i) ` 15 lakh against expense of foreign travelling of directors.

(ii) ` 5 lakh for writing-off the balance of preliminary expenses of the company.

(iii) ` 10 lakh distributed as dividend for the financial year ending 31st March, 2017.

You, being the secretarial Auditor of the company, referring to the provision of the Companies Act, 2013 relating to securities premium account, examine the validity of the above. [June 2017 (8 Marks)]

Ans.: Conditions relating to utilization of securities premium [Section 52(2)]: Please refer to Answer of Question No.

4.8 PART I : COMPANY LAW - PRINCIPLES & CONCEPTS

In view of above provisions, answer to given case is as follows:

(

(

i) Balance in securities premium cannot be utilized for writing-off expenses of foreign travelling of directors.

ii) Balance in securities premium can be utilized writing-off preliminary expenses of the company.

(iii) Balance in securities premium cannot be utilized for payment of dividend.

ISSUE OF SHARES AT DISCOUNT

12. Write a short note on: Issue of shares at discount [June 2001 (6 Marks)], [Dec. 2001 (6 Marks)]

Ans.: Prohibition on issue of shares at discount [Section 53]: Except as provided in Section 54 [issue of sweat equity shares], a company shall not issue shares at a discount.

Any share issued by a company at a discount price shall be void

However, a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the RBI under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.

Penalty: Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or ` 5 lakh, whichever is less.

The company shall also be liable to refund all monies received with interest at the rate of 12% p.a. from the date of issue of such shares to the persons to whom such shares have been issued.

SWEAT EQUITY SHARES

13. Write a short note on: Sweat Equity Shares [Dec. 2014 (4 Marks)]

Ans.: Sweat Equity Shares [Section 2(88)]: Sweat equity shares means equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Issue of sweat equity shares [Section 54]: A company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied:

(

a) The issue has been authorized by a special resolution passed by the company in the general meeting.

(

b) Such special resolution should clearly specify:

(

(

- Number of shares

- Current market price

- Consideration and

- Classes of directors or employees to whom such equity shares are to be issued.

c) At least 1 year should have elapsed from the date on which the company was entitled to commence business. [Deleted by the Companies (Amendment) Act, 2017]

d) A company whose shares are listed on a recognized stock exchange issuing sweat equity shares should comply with the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021.

(

e) A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures) Rules, 2014. Rights, limitations, restrictions applicable to sweat equity shares [Section 54(2)]: The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued and the holders of sweat equity shares shall rank pari passu (on an equal footing) with other equity shareholders.

14. The share capital of Raney Ltd. is ` 30 Crore. ‘Russel’ is appointed as the managing director of the company, the company wants to compensate him by issue of shares for supplying technical know-how without any cost. In this context, answer the following:

(

(

(

i) Whether the company is allowed to allot such shares?

ii) Is approval of shareholders required for issuing such shares?

iii) If found eligible to allot such shares, what will be the quantum (value) of shares that can be allotted?

(

iv) Can Russel sell such allotted shares in the market?

(

v) Will the amount that he receives on sale of his shares be considered a part of his remuneration? [Dec. 2019 (1 × 5 = 5 Marks)]

Ans.: Considering provisions of Section 2(88), Section 54 of the Companies Act, 2013 read with the Companies (Share Capital & Debentures) Rules, 2014 relating to Sweat Equity Shares, answer to given case is as follows:

(

i) Sweat equity shares can be issued by a company to its directors or employees for providing know-how or making available rights in the nature of intellectual property rights or value additions. Thus, the company can compensate its managing director by issuing to Sweat Equity Shares for providing technical know-how.

(

ii) The special resolution is required to be passed for issue of sweat equity shares. Such resolution is valid for making the allotment within a period

of not more than 12 months from the date of passing of the special resolution.

(iii) The company shall not issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of ` 5 Crore, whichever is higher.

As the paid-up share capital of the company is ` 30 Crore. The company can allot sweat equity shares of ` 4.5 Crore (30 Crore × 15%) or ` 5 Crore, whichever is higher

Thus, Raney Ltd. can allot maximum ` 5 Crore value of sweat equity shares to its directors and employees.

(iv) Sweat equity shares issued to directors or employees shall be locked-in/ 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 period of expiry of lock in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.

Hence, the sweat equity shares allotted to Russel can be sold in the market only after the expiry of the lock-in period of 3 years.

(v) The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of Sections 197 & 198 of the Companies Act, 2013, if the following conditions are fulfilled –

(

a) Sweat equity shares are issued to any director or manager; and

(

b) They are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards. In simple words, amount of sweat equity shares issued shall be treated as part of managerial remuneration only if it is expensed in the books of the company.

15. Sita Ltd. intends to issue sweat equity shares to its employees for a non-cash consideration. Managing Director believes that the sweat equity shares can only be issued for consideration received in cash. Do you agree? [June 2022 (3 Marks)]

Ans.: Sweat Equity Shares [Section 2(88)]: Sweat equity shares means equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

As per Section 54 of the Companies Act, 2013, a company may issue sweat equity shares of a class of shares already issued, if the issue is authorized by a special resolution passed by the company. Such resolution specifies the number of shares, the current market price, consideration and the class or classes of directors or employees to whom such equity shares are to be issued.

Further, as per Rule 8(9) of the Companies (Share Capital & Debentures) Rules, 2014, company can issue sweat equity shares for non-cash consideration on the basis of valuation report in respect thereof obtained from a registered valuer. Based on above provisions, we can conclude that the view of the Managing Director is not correct.

16. Draft a specimen resolution for allotment of sweat equity shares to the Chairman & Managing Director (CMD) of a listed company. Also state the type of meeting and kind of resolution to be passed referring to the provisions of the Companies Act, 2013. [Dec. 2022 (5 Marks)]

Ans.: Type of meeting: General Meeting

Kind of resolution: Special Resolution

Specimen resolution:

RESOLVED THAT subject to the provisions of Section 54 of the Companies Act, 2013 read with Rule 8 of the Companies (Share Capital & Debentures) Rules, 2014, in accordance with the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021, the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 consent of the members be and is hereby accorded to allot ________ Equity Shares as Sweat Equity Shares of ` ________ each to Mr. ________ Chairman & Managing Director of the Company holding DIN ________, for the value addition he continues to create in 4 years while in employment of the Company, in such tranches as may be decided from time to time within the time permissible under relevant regulation, at ` ________ per share on the basis of the valuation reports dated ________ from (SEBI Category-I Merchant Banker) & from ________ Registered Valuer.

RESOLVED FURTHER THAT the Equity Shares to be allotted shall rank pari passu with the existing Equity Shares of the Company.

RESOLVED FURTHER THAT the price of the same shall be determined as prescribed under Regulation 33 of the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021.

RESOLVED FURTHER THAT Mr. ________ (Company Secretary) and Mr. ________ (Director) be and are hereby authorized to do all such acts and deeds as may be deemed necessary for giving effect to the aforementioned resolution.

SHARES WITH DIFFERENTIAL VOTING RIGHTS

17. Board of directors of Progressive Limited decides to issue equity shares of a company with differential voting rights. Examining the provision of Companies Act, 2013, State the conditions to be complied with the company in this regard. [Dec. 2016 (8 Marks)]

Ans.: Shares with differential rights: Shares with differential rights means shares issued with differential rights as to dividend, voting or otherwise in accordance with Section 43(a)(ii) of the Companies Act, 2013.

Conditions for issuing shares with differential rights: Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 provides that no company

4.12 PART I : COMPANY LAW - PRINCIPLES & CONCEPTS

limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions:

(1) Authorization from AOA: The article of association authorizes the issue of shares with differential rights.

(2) Resolution: The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders. However, in case of listed company the issue of such shares shall be approved by the shareholders through postal ballot.

(3) Limit on voting power: Voting power in respect of shares with differential rights of the 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.

(4) Track record of profits: The company having consistent track record of distributable profits for the last 3 years.

(5) No default in financial statements & annual returns: The company has not defaulted in filing financial statements and annual returns for 3 financial years immediately preceding the financial year in which it is decided to issue such shares.

(6) No subsisting default in certain matters: The company has no subsisting default in following:

(

a) Payment of a declared dividend to its equity shareholders.

(b) Repayment of its matured deposits.

(

c) Redemption of its preference shares or debentures that have become due for redemption.

(d) Payment of interest on deposits or debentures.

(

e) Payment of preference dividend.

(7) No defaults in respect of dividend, term loans etc.: The company has not defaulted in following:

(

a) Dividend on preference shares.

(

b) Repayment of any term loan from a public financial institution or State level financial institution or scheduled bank that has become repayable or interest payable thereon.

(c) Dues with respect to statutory payments relating to its employees to any authority.

(d) In crediting the amount in Investor Education & Protection Fund to the Central Government.

However, a company may issue equity shares with differential rights upon expiry of 5 years from the end of the financial Year in which such default was made good.

(8) No penalty under certain laws: The company has not been penalized by Court or Tribunal during the last 3 years of any offence under the following laws:

(

a) RBI Act, 1934

(

b) SEBI Act, 1992

(

c) Securities Contracts Regulation Act, 1956

(

d) Foreign Exchange Management Act, 1999

(

e) Any other special Act, under which such companies being regulated by sectoral regulators.

18. As a Practicing Company Secretary, advise your client company regarding the matter relating to issue of shares with differential rights, to be included in the Board of Directors Report. [June 2017 (4 Marks)]

Ans.: Disclosures in Board’s Report: As per Rule 4(4) of the Companies (Share Capital & Debentures) Rules, 2014, in case of issue of shares with differential rights, the board of directors shall disclose in the Board’s Report, the following details:

(

a) Number of shares allotted with differential rights.

(

b) Details of the differential rights relating to voting rights and dividends.

(

c) Percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time and percentage of voting rights which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital.

(d) Price at which such shares have been issued.

(e) Particulars of promoters, directors or key managerial personnel to whom such shares are issued.

(f) Change in control, in the company consequent to the issue of equity shares with differential voting rights.

(g) Diluted EPS calculated in accordance with the applicable accounting standards.

(h) Pre and post issue shareholding pattern along with voting rights.

19. Which of the following companies is eligible to issue shares with Differential Voting Rights (DVRs) during the financial year 2022-23?

Type of companyNature of default

Whether Articles of Association of the company authorized to issue shares with DVR?

A Ltd. – Unlisted company Company has made default in filing annual return for the financial years 2018-19 & 2019-20. Default was made good during the financial year 2020-2021.

B Pvt. Ltd.…………..No [June 2022 (3 Marks)]

Ans.: Section 43(a)(ii) of the Companies Act, 2013 read with Rule 4 of Companies (Share Capital & Debentures) Rules, 2014 provides that company limited by shares shall issue equity shares with differential rights if article of association authorizes the issue of shares with differential rights.

Company cannot issue shares with differential rights if company has defaulted in filing financial statements and annual returns for 3 financial years immediately preceding the financial year in which it is decided to issue such shares.

In light of the above provisions:

(1) A Ltd. can issue shares with differential rights as the company has made default during financial years 2018-19 & 2019-20 only in respect of filing annual return, which was made good during the financial year 2020-21. Articles of Association of A Ltd. also authorize to issue shares with differential rights.

(2) B Pvt. Ltd. cannot issue shares with differential rights unless it alter its Articles of Association in such a manner so as to authorize it to issue shares with differential rights.

RIGHT ISSUE

20. Section 62 of the Companies Act, 2013 ensures pre-emptive rights of shareholder. Discuss. [Dec. 2012 (4 Marks)]

Ans.: To preserve the shareholders proportionate dividend, liquidation and voting rights, pre-emptive rights are often recognized, but their existence and scope can be effected by provisions in the articles. However, Section 62 of the Companies Act, 2013 secures shareholders pre-emptive rights with regard to the further issue of share capital by the company. Further issue of share capital [Section 62(1)]: Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to:

(1) Existing shareholder in proportion to the paid-up share capital on those shares by sending a letter of offer. Such right issue is subject to the following conditions:

(a) The offer shall be made by notice specifying the number of shares offered and limiting a time not being less than 15 days or such less-

er number of days as may be prescribed and not exceeding 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined.

(b) Unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice shall contain a statement of this right.

(c) After the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not disadvantageous to the share holders and the company.

(2) To employees under a scheme of employees stock option by passing special resolution and complying with prescribed conditions.

(3) To other persons, if it is authorized by a special resolution, either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions and any other prescribed conditions.

Notice of right entailment [Section 62(2)]: The notice of right entailment shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least 3 days before the opening of the issue.

21. Distinguish between: Letter of Allotment & Letter of Renunciation. [Dec. 2012 (4 Marks)]

Ans.: Following are the main points of difference between letter of allotment & letter of renunciation:

PointsLetter of allotmentLetter of renunciation

Meaning Letter of allotment is a letter by which company communicates the subscriber to the shares that the company has allotted some shares to him.

Applicability Letter of allotment is applicable in all cases where shares are allotted to persons.

Option Letter of allotment do not contain any option.

When a company issue right shares it has to issue a letter stating that if shareholder do not want to subscribe the shares, he can renounce the shares in favour of any other person. Such letter is known as letter of renunciation.

Letter of renunciation is applicable in case of right issue under Section 62 of the Companies Act, 2013.

Letter of renunciation contains an option to renounce the shares in favour of any other person.

PointsLetter of allotmentLetter of renunciation

Surrender Letter of allotment is required to be surrendered to company for issue of share certificate.

Transfer of shares Shares can be transferred with the help of letter of allotment if share certificate do not exists.

Letter of renunciation is not required to be surrendered to company. In fact it is right to transfer to subscribe the right shares of the company.

Shares cannot be transferred with the help of letter of renunciation. But right shares can be subscribed by the persons in whose favour the right has been renounced.

22. A company has taken a term loan from a financial institution and is regularly paying the loan installments and interest. The financial institution proposes to convert 20% of the loan into equity shares of the company as per terms of the agreement. Advise the company, whether the financial institution can enforce such a convertibility clause? Also examine the validity of such a clause. [Dec. 2017 (4 Marks)]

Ans.: If a financial institution provides a loan, the terms of issue may contain a clause to convert later such loan into shares. It amounts to issue of further share capital and hence provisions of right issue contained in Section 62 will have to be complied. To remove this difficulty Section 62(3) provides that – nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company.

However, the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting. Thus, as per facts given in case, the company can convert its loan into equity shares as per the terms of agreement provided that the terms of loan containing an option to convert loan into shares have been approved before raising of loan by a special resolution.

PREFERENTIAL ISSUE

23. Explain the provisions relating to ‘Private Placement’ as under the Companies Act, 2013.

Ans.: As per Section 23(1)(b) of the Companies Act, 2013, a public company may issue through private placement by complying with the provisions of Section 42. As per Section 23(2)(b), a private company may issue through private placement by complying with the provisions of Section 42.

Preferential Issue [Section 62(1)(c)]: A company can issue further shares to persons other than existing shareholders either for cash or for a consideration other than cash.

Conditions:

(a) The company in General Meeting passes a special resolution to this effect.

(

b) The price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with provisions of Section 42 [issue of shares on private placement basis] and any other conditions as may be prescribed.

Issue of shares on private placement basis [Section 42]: A company may make a private placement of securities subject to following conditions:

(1) Private Placement – Meaning: A private placement means any offer or invitation to subscribe or issue of securities to a select group of persons who have been identified by the Board [referred as “identified persons”], whose number shall not exceed 50 or such higher number as may be prescribed [excluding QIBs and employees who are being offered securities under the ESOS], in a financial year subject to prescribed conditions.

(2) Private Placement Offer: A company making private placement shall issue Private Placement Offer and application in prescribed form and manner to identified persons, whose names and addresses are recorded by the company in prescribed manner.

(3) No right of renunciation: The private placement offer and application shall not carry any right of renunciation.

(4) Mode of payment of application money: Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash.

(5) No use of money until return of allotment is filed with ROC: A company shall not utilize monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar.

(6) Restriction on further offer: No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company. However, subject to the maximum number of identified persons, a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

(7) Time limit for allotment: A company making an offer or invitation shall allot its securities within 60 days from the date of receipt of the application money.

(8) Refund of application money: If the company is not able to allot the securities within above stated period, it shall repay the application money to the subscribers within 15 days from the expiry of 60 days.

If the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% p.a. from the expiry of the 60th day. Monies received on application shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than:

(

a) For adjustment against allotment of securities.

(

b) For the repayment of monies where the company is unable to allot securities.

(9) No advertisements: A company issuing securities under private placement basis shall not release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue.

(10) Return of allotment: A company making any allotment of securities under private placement basis, shall file with the Registrar a return of allotment within 15 days from the date of the allotment in prescribed manner, including a complete list of all allottees, with their full names, addresses, number of securities allotted and other relevant information.

(11) Penalty for failure to file return of allotment: If a company defaults in filing the return of allotment, the company, its promoters and directors shall be liable to a penalty for each default of ` 1,000 for each day during which such default continues but not exceeding ` 25 lakh.

(12) Penalty: If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or ` 2 Crore, whichever is lower, and the company shall also refund all monies with interest within a period of 30 days of the order imposing the penalty.

(13) Deemed public offer: Any private placement issue not made in compliance of the provisions of this section shall be deemed to be a public offer and all the provisions of the Act and the Securities Contracts (Regulation) Act, 1956 and the SEBI, 1992 shall be applicable.

24. Distinguish between: Sweat equity & Issue of capital on preferential basis [Dec. 2009 (4 Marks)]

Ans.: Following are the main points of distinction between sweat equity & issue of capital on preferential basis:

PointsSweat Equity SharesIssue of capital on preferential basis

Meaning Sweat equity shares mean equity shares issued by a company to its employees or directors at a discount or for consideration, other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called.

A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons which is neither a rights issue nor a public issue.

To whom issued Sweat equity shares are issued to employees or directors.

A preferential issue is at par or at premium.

A preferential issue is an issue to a select group of persons. How issued Sweat equity shares are issued at a discount or for consideration, other than cash.

Application Sections & Rules

Section 2(88), Section 54 of the Companies Act, 2013 and Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 deals with the provisions relating to sweat equity shares.

Section 23(1)(b), Section 23(2) (b), Section 62(1)(c), Section 42 of the Companies Act, 2013 and Rule 13 of the Companies (Share Capital & Debentures) Rules 2014 deals with the provisions relating to preferential issue.

25. Preferential issue is not for retail investors. Comment. [Dec. 2012 (4 Marks)]

Ans.: Preferential issue means issuance of equity shares to promoter group or selected investors. It covers allotment of convertible debentures or any other financial instruments that could be converted into equity shares at a later date. The investors could be institutional investors, private equity investors, high net-worth individuals, or companies.

Preferential issue is one of the key sources of funding for companies. One of the biggest advantages of a preferential issue is that the company can raise money quickly and cheaply compared with other means of raising money, say IPO or issue of shares on a rights basis.

Preferential issues and private placement is only for selected class of investors and not for the retail investors. It is like a wholesale market, where institutions with financial clout are allowed to participate.

26. Green Commercial Ltd., an unlisted company, has made a preferential offer of shares for consideration other than cash. A question has been raised by the accounts department as to the valuation of consideration at allotment and the manner of treatment of non-cash consideration in books of account. As a practicing company secretary advise the company with reference to the provisions of the Companies Act, 2013. [Dec. 2019 (3 Marks)]

4.20 PART I : COMPANY LAW - PRINCIPLES & CONCEPTS

Ans.: Section 23(1)(b), Section 23(2)(b), Section 62(1)(c), Section 42 of the Companies Act, 2013 and Rule 13 of the Companies (Share Capital & Debentures) Rules 2014 deals with the provisions relating to preferential issue.

Preferential Issue [Section 62(1)(c)]: A company can issue further shares to persons other than existing shareholders either for cash or for a consideration other than cash.

Conditions:

(

a) The company in General Meeting passes a special resolution to this effect.

(

b) The price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with provisions of Section 42 [issue of shares on private placement basis] and any other conditions as may be prescribed.

Valuation of preferential offer of shares for a consideration other than cash [Rule 13(2)(g)]: Where shares or other securities are to be allotted for consideration other than cash, the valuation of such consideration shall be done by a registered valuer who shall submit a valuation report to the company giving justification for the valuation.

Accounting treatment of preferential offer of shares for a consideration other than cash [Rule 13(2)(i)]: Where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company:

(1) Non-cash consideration takes form of depreciable/amortizable asset: It shall be carried to the balance sheet of the company in accordance with the accounting standards.

(2) Other cases: It shall be expensed as provided in the accounting standards.

27. The Board of Customerlast Limited, an unlisted public company is exploring ways to increase its paid-up share capital from ` 125 Crore to ` 150 Crore. The CFO of the company suggested that instead of offering shares to all existing shareholders as a rights issue the company can issue further shares by private placement to four identified Qualified Institutional Buyers and the top 250 existing shareholders by receiving cash without offering shares to other shareholders.

The company secretary of the company objects to the manner of raising further capital, i.e. the offerings to the select shareholders as well as receiving cash.

Referring to the provisions of Companies Act, 2013 decide. [June 2023 (3 Marks)]

Ans.: As per section 23(1)(b) of the Companies Act, 2013, a public company may issue through private placement by complying with the provisions of section 42.

Company Law & Practice | CRACKER

AUTHOR : N.S. ZAD, DIVYA BAJPAI

PUBLISHER : TAXMANN

DATE OF PUBLICATION : JULY 2023

EDITION : 2023 EDITION

ISBN NO : 9789357782890

NO. OF PAGES : 626

BINDING TYPE : PAPERBACK

Description

This book is prepared exclusively for the Executive Level of Company Secretary Examination requirement as per the New Syllabus. It covers the (topic-wise) questions & detailed (pointwise) answers strictly as per the latest examination pattern.

The Present Publication is the latest 2023 Edition for CS-Executive | New Syllabus | Dec. 2023/June 2024 Exam. This book is authored by CS N.S. Zad & CS Divya Bajpai, with the following noteworthy features:

u Strictly as per the New Syllabus of the ICSI

u Coverage of this book includes

 Fully-Solved Questions of the Previous Exams (including the June 2023 Exam) as per the latest examination pattern

 [Topic-wise Arrangement of Questions] for Past Exams

 Case-Based Objective Questions

u [Chapter-wise Marks Distribution] from June 2018 onwards

u [Chapter-wise Comparison with Study Material] of the ICSI

u [Most Amended & Updated] Covers the latest applicable provisions and amendments under the respective laws ORDER

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