HISTORY
KINDS OF COMPANIES
FORMATION AND INCORPORATION OF A COMPANY
4.1 Promotion
4.2 Registration/Incorporation of a company
4.3 Simplified Proforma for Incorporating Company Electronically (SPICe) + (Pronounced as SPICe Plus)
4.3A Certificate of incorporation
4.3AA Online Registration of a company
4.3B Effect of certificate of incorporation
4.3C Conclusiveness of certificate of incorporation
4.4 Commencement of
5.1
MEMORANDUM OF ASSOCIATION
5.2 Memorandum of Association - Whether an unalterable
5.3 Form and contents
6.1 Introduction
ARTICLES OF ASSOCIATION
6.2 Memorandum and Articles - Their Relationship
6.3 Distinction between memorandum of association and articles of association
6.4 Contents
6.5 Model form of articles
6.6 Signing of Articles
6.7 Alteration of articles
6.8 Binding effect of memorandum and articles
6.9 Doctrine of constructive notice
PROSPECTUS
7.1 Meaning and definition of a prospectus
7.2 Contents of a prospectus
7.3 Draft Prospectus to be made public 160
7.3A Abridged Prospectus 160
7.4 Is issue of prospectus compulsory/When prospectus is not required to be issued? 161
7.5 Statutory requirements in relation to a prospectus 161
7.6 Prospectus by implication/Deemed prospectus [Section 25] 163
7.7 Shelf Prospectus and Information Memorandum [Section 31] 164
7.8 Red herring prospectus [Section 32] 165
7.9 Misstatements in a prospectus and their consequences 165
7.10 Golden Rule for framing of Prospectus 169
7.11 Allotment of shares in fictitious names prohibited [Section 38] 170
7.12 Announcement regarding proposed issue of capital [Section 30] 171
ACCEPTANCE OF PUBLIC DEPOSITS
SHARE AND SHARE CAPITAL
9.1
9.4 Kinds
9.7
9.10
9.11
9.12
10.2
REGISTERS AND RETURNS
13.1/2
DIVISIBLE PROFITS AND DIVIDEND
COMPANY MANAGEMENT
14.8
14.15
15.4
16
COMPANY MEETINGS-I - GENERAL
16.1
16.2
16.3
16.4
16.5
16.6
17
COMPANY MEETINGS-IIGENERAL BODY MEETINGS
18.1
COMPANY MEETINGS-III - BOARD MEETINGS
18.3 Participation of directors through video conferencing or other audio visual means [Section 173(2)]
18.4 Board meeting
18.5 Contents and Agenda of Board Meeting
18.6 Time and place of Board meeting
18.7 Quorum
18.8 Adjournment for want of quorum
18.9 Passing of Resolutions by Circulation [Section 175]
18.10 Minutes of the Board meeting
ACCOUNTS AND AUDIT
ACCOUNTS
19.1 Books of account required to be kept
19.2 Inspection of books of account
19.3 Persons responsible for keeping proper books of account [vide sub-section (6) of section 128] 496
19.4 Financial Statements
19.5 Authentication of Accounts
19.6 Board’s Report
19.7 Circulation of Financial Statements
19.8 Adoption and filing of Financial Statements
19.9 Accounting Standards
19.10 Internal Audit
AUDIT
19.11 Who can be appointed as an Auditor (Qualifications)? 511
19.12 Who cannot be appointed as an Auditor (Disqualifications)? 512
19.13 Auditor not to render certain services 514
19.14 Appointment of First Auditors 514
19.15 Appointment of subsequent Auditors 515
19.16 Tenure of appointment 515
19.17 Compulsory rotation of auditors 515
19.18 Reappointment of retiring auditor 517
19.19 Rights of retiring auditor [Section 140(4)]
19.20 Casual vacancy
19.21 Removal and resignation of an auditor 518
19.22 Remuneration of auditors
19.23 Rights of the company auditor
19.24 Duties of Company Auditor 522
19.25 Special provisions relating to audit of Government Companies 524
19.26 Punishment for Contravention 526
19.27 Audit Committee 526
19.28 Cost audit [Section 148] 527
19.29
INSPECTION, INQUIRY AND INVESTIGATION
INSPECTION
20.1 Power to call for information, inspect books and conduct inquiries 533
20.2 What books and papers can be inspected? 535
20.3 Place and time of inspection 535
20.4 Duties of directors, officers, employees of the company to assist in inspection 536
20.5 Powers of the inspector 536
20.6 Supply of report 537
INVESTIGATION
20.7 Investigation 537
20.8 Who can apply and the scope of investigation? 537
20.9 Investigation into affairs of a company by Serious Fraud Investigation Office 538
20.10 Investigation into company’s affairs in other cases 540
20.11 Firm, body corporate or association not to be appointed as inspector 542
20.12 Investigation of ownership of a company [Section 216] 542
20.13 Powers of inspectors 542
20.14 Report of the Inspector 544
20.15 Follow up action by the Central Government on the investigation report of the inspector 545
20.16 Investigations etc. of foreign companies [Section 228] 545
20.17 Penalty for furnishing false statements, mutilation or destruction of documents 545
20.18 Difference between Inspection and Investigation 545 TEST YOUR KNOWLEDGE 547
21
MAJORITY RULE AND MINORITY PROTECTION
21.1 Rule of majority 548
21.2 Personal rights of members 550
21.3 Representative and Derivative Action 551
21.4 Exceptions to ‘the rule in Foss v. Harbottle’ 552 TEST YOUR KNOWLEDGE 555
22
PREVENTION OF OPPRESSION AND MISMANAGEMENT
22.1 Meaning of oppression 556
22.2 Application to Tribunal for relief in cases of oppression etc. 566
22.3 Power of Tribunal 571
22.4 Oppression of majority 571
22.5 Appeals against the orders of the Tribunal and variation of the order of Tribunal 573
22.6 Composite/simultaneous petition under sections 241 and 271Whether maintainable 573
22.7 Powers of the Tribunal [Section 242] 573
22.8 Class Action 577 TEST YOUR KNOWLEDGE 579
23
COMPROMISES, ARRANGEMENTS, RECONSTRUCTION AND AMALGAMATION
23.1 Meaning of compromise 581
23.2 Meaning of arrangement 581
23.3 Statutory provisions regarding compromise or arrangement 582
23.4 Exercise of the Tribunal’s discretion 584
23.5 Powers of the Tribunal 588
23.6 Information as to compromise or arrangement [Section 230] 589
23.7 Reconstruction and amalgamation 591
23.8 Meaning of reconstruction 591
23.9 Meaning of amalgamation and merger 592
23.10 Difference between amalgamation and reconstruction 592
23.11 Take-over v. Merger 592
23.12 Legal provisions regarding reconstruction and amalgamation 593
23.13 Reconstruction/Amalgamation by sale of undertaking [Section 232] 593
23.14 Merger and Amalgamation of certain companies [Section 233] 599
23.14A Application of section 233 to Start-up Companies 601
23.15 Merger or Amalgamation with foreign company [Section 234] 601
23.16 Power to acquire shares of shareholders dissenting from scheme or contract approved by majority [Section 235] 602
23.17 Amalgamation of companies in public interest [Section 237] 605
23.18 Preservation of Books and Papers of Amalgamated Company [Section 239] 607
23.19 Offences committed prior to merger, amalgamation [Section 240] 608
23.20 Valuation by registered valuers 608
YOUR KNOWLEDGE 608
24
WINDING UP
24.1 Meaning 611
24.2 Modes of winding up [Section 270] 611
24.3 Winding up by the Tribunal 612
24.4 Who can make petition [Section 272] 619
24.5 Commencement of winding up [Section 357] 622
24.6 Procedure for winding up order 622
24.7 Consequences of winding up order 625
24.8 Submission of report by Company Liquidator [Section 281] 627
24.9 Promoters, directors etc. to cooperate with the Company Liquidator [Section 284] 629
24.10 Advisory Committee [Section 287] 629
24.11 General Powers of Tribunal in case of winding up by Tribunal 631
24.12 Dissolution of company [Section 302] 631
24.13 Enforcement of and appeal from orders 632
24.14 Summary procedure for Liquidation [Section 361] 633
24.15 Liquidators 634
24.16 Liquidators in winding up by the Tribunal 634
24.17 Liquidator in Summary Procedure 637
24.18 Official Liquidators 637
24.19 Provisions applicable to every mode of winding up 637
24.20 Debts of all descriptions to be admitted to proof [Section 324] 637
24.21 Preferential Payments 638
24.22 Antecedent and other transactions 641
24.23 Avoidance of voluntary transfer [Section 329] 642
24.24 Transfer for benefit of all creditors [Section 330] 642
24.25 Liabilities and rights of certain fraudulently preferred person [Section 331] 643
24.26 Effect of floating charge [Section 332] 643
24.27 Disclaimer of onerous property [Section 333] 643
24.28 Avoidance of transfers, etc. after commencement of winding-up [Section 334] 645
24.29 Avoidance of certain attachments [Section 335] 645
24.30 Offences by officers of companies in liquidation [Section 336] 646
24.31 Penalty for fraud by officers [Section 337] 647
24.32 Liability for not keeping proper books [Section 338] 648
24.33 Liability for fraudulent conduct of business [Section 339] 648
24.34 Damages for misfeasance etc. [Section 340] 649
24.35 Prosecution of Delinquent Officer and Members of the Company [Section 342] 652
24.36 Miscellaneous provisions 652
24.37 Distribution of property 655
24.38 Default by the Company Liquidator to make returns [Section 353] 656
24.39 Meetings to ascertain wishes of creditor and contributories [Section 354] 656
24.40 Contributory 656
24.41 Unregistered Companies 660
24.42 Winding-up of a Foreign Company 662
24.43 Removal of name of company from Register of Companies 662
24.44 Transfer of winding-up proceedings to Tribunal 669
TEST YOUR KNOWLEDGE 669
25
AUTHORITIES UNDER THE COMPANIES ACT, 2013
25.1 Registrar of Companies (ROC) 672
25.2 Regional Director 674
25.3 National Financial Reporting Authority [Section 132] 676
25.4 Serious Fraud Investigation Office [Section 211] 677
25.5 National Company Law Tribunal 678
25.6 National Company Law Appellate Tribunal 681
25.7 Special Courts 683
25.8 Adjudication of Penalties 684 TEST YOUR KNOWLEDGE 685
26
SERVICE OF DOCUMENTS
26.1 Service of documents on a company 686
26.2 Service of documents on ROC [Section 20] 686
26.3 Service of documents on members by company [Section 20] 686
26.4 Electronic communication 687
TEST YOUR KNOWLEDGE 687
27
CORPORATE GOVERNANCE
27.1 Meaning of Corporate Governance 688
27.2 Need for Corporate Governance 688
27.3 Corporate Governance in India 690
27.4 Kotak Committee on Corporate Governance 694
27.5 Certain Provisions of the Companies Act, 2013 vis-a-vis Corporate Governance 695
TEST YOUR KNOWLEDGE 697
THE DEPOSITORIES ACT, 1996 : AN ANALYSIS
28.1 Objectives 698
28.2 Salient features of Depositories Act, 1996 698
28.3 Meaning of Depository 699
28.4 Benefits of depository system 699
28.5 Services to be rendered by a Depository 699
28.6 Dematerialisation of securities 702
28.7 How does an investor avail services of a depository? 702
28.8 Free transferability of services 703
28.9 Rematerialisation 704
28.10 Powers of SEBI under the Depositories Act, 1996 704
28.11 Bye-laws of a depository 704
28.12 Stamp duty on security certificates 705
28.13 Distinctive number of shares 706
28.14 Exercise of membership rights in respect of securities held by a Depository 706
28.15 The evidential value of the records of the depository 706
28.16 Cognizance of offence by Courts 706
28.17 Penalty for offences under the Depositories Act 706 TEST YOUR KNOWLEDGE 707
COMPANY LAW IN A COMPUTERISED ENVIRONMENT - E-GOVERNANCE AND E-FILING
29.1 What is e-Governance 708
29.2 Filing of applications, documents, inspection etc. in electronic form 708
29.3 Advantages of e-Filing 710
29.4 MCA-21 Programme 710
29.5 MCA-21 Version 3 712
29.6 Five Step e-Filing Process 713 TEST YOUR KNOWLEDGE 716
Share and Share Capital
The capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as ‘shares’. According to section 2(84) of the Companies Act, 2013, “A share is a share in the share capital of a company, and includes stock”. The Supreme Court of India in the Commissioner of Income-tax v. Standard Vacuum Oil Co. [1966] Comp. LJ 187 (SC) observed “By a share in a company is meant not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred on its holders by the articles of the Company which constitute a contract between him and the Company”.
In another case Supreme Court defined a share as “a right to participate in the profits made by a company, while it is a going concern and declares a dividend, and in the assets of the company when it is wound-up [Bucha F. Guzdar v. Commissioner of Income-tax, Bombay LR 617 (SC)].
In short, a ‘share’ does not merely represent an interest of a shareholder in a company, it carries with it certain rights and liabilities while the company is a going concern or while the company is being wound-up. It thus represents a ‘bundle of rights and obligations’.1
A ‘share’ is not a sum of money but is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual ‘covenants’ entered by all the shareholders inter se [Borland’s Trustees v. Steel Bros. & Co. Ltd. [1901] 1 Ch. 279 (Ch.D.)]
A share is a chose-in-action. A chose-in-action implies the existence of some person entitled to the rights, which are rights in action as distinct from rights in possession, and until the share is issued no such person exists. 2
1.Vishwanath v. East India Distilleries [1957] 27 Comp. Cas. 175
2. See Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp. Cas. 862 (SC)
In India, a share is regarded as ‘goods’. Section 2(7) of the Sale of Goods Act, 1930 defines ‘goods’ to mean any kind of movable property other than actionable claims and money and includes stock and shares. However, section 44 of the Companies Act, while recognising shares as movable property, suggests that they shall be transferable only in the manner provided by the articles of the company.
In Vishwanathan v. East India Distilleries [1957] 27 Comp. Cas. 175, it was observed:
“A share is undoubtedly movable property but it is not movable property in the same way in which a bale of cloth or a bag of wheat is movable property. Such commodities are not brought into existence by legislation, but a share in a company belongs to a totally different category of property. It is incorporeal in nature, and it consists merely of a bundle of rights and obligations.”
A share is not a negotiable instrument
A share is an expression of proprietary relationship between a shareholder and the company [CIT v. Associated Industrial Development Co. [1969] 2 Comp. LJ 19].
Certain interesting and comprehensive observations were made regarding nature of a share in Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.). The learned Judge observed :
The statutory meaning of share covers the three phases of the share, share when it is a part of the share capital still remaining unexploited by the company; share when it is exploited by the company finding a shareholder and lastly, when the share is converted into stock. The first phase arises because under the company law every company limited by shares has nominal or authorised or registered share capital. This capital is one of the essential features in the company’s constitution. It is to be mentioned in the memorandum of association and the capital so mentioned is to be divided into shares of a fixed amount. The capital is usually fixed at some round figures according to the requirements of the company assessed by the promoters of the company. Therefore, it seems that the first part of the definition of the word ‘share’ refers to the share in this limited sense when the share is still in the womb of the company or in the shell of the company and has no shareholder. The second phase arises when it attracts section 44. Therefore, the share when it becomes associated with a member becomes a movable property. It is, however, not a movable property whose transfer is solely regulated by the Sale of Goods Act. Its transfer is also governed by the Companies Act and/or Articles of the Company. Each share again bears a distinguishing number. It may be noticed that certificate of shares is not the shares or a share. Under section 46 a certificate, under the common seal of the company, specifying any share or stock held by any member, shall be a prima facie evidence of the title of the member to the shares or stock therein specified. Hence, a share certificate is not the share; it is only a prima facie evidence of the title to the share. Therefore, it is necessary to consider what is the character of a share. Section 44 says it is a movable property. It is, however, not a tangible property for it is not the share certificate; it only consists of a bundle of rights and obligations. A share can be either in the first phase or stage or in the second phase or stage. It remains either in its shell as a part of the capital or resides in a shareholder. It cannot be suspended in any intermediate phase or stage.
Para 9.1
A common man uses ‘share’ and ‘share certificate’ to mean one and the same thing. It is, therefore, important to note the exact difference between the two. Section 44 of the Companies Act, 2013 in this regard describes a share as a movable property transferable in the manner provided by the articles of the company. Section 46, on the other hand, describes a ‘certificate of shares’, to mean a certificate, under the common seal3 of the company, specifying any shares held by any member. Section 46 further suggests that a share certificate shall be prima facie evidence of title of the member to such shares. Thus, whereas ‘share’ represents property (movable), ‘share certificate’ is an evidence (prima facie) of the title of the member to such property.
Thus, the share certificate being prima facie evidence of title, it gives the shareholder the facility of dealing more easily with his shares in the market. It enables him to sell his shares by showing at once marketable title. 4
Also, a share certificate serves as an estoppel as to payment against a bona fide purchaser of the shares from alleging that the amount stated as being paid on the shares has not been paid. However, a person who knows that the statements in a certificate are not true cannot claim an estoppel against the company [Crickmer case [1875] L.J. Ch. 870].
An elaborate distinction between ‘share’ and ‘certificate of shares’ was made out in the case of Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.).
The learned Judge observed:
“It may be noticed that ‘Certificate of shares’ is not the shares or a share. Under section 46, a certificate under the common seal of the Company specifying any share or stock held by any member shall be prima facie evidence of the title of the member to the shares or stock therein specified. Hence, a share certificate is not the share, it is only a prima facie evidence of the title to the share. Therefore, it is necessary to consider what the character of a share is ? Section 44 says it is a movable property. It is, however, not a tangible property for it is not the share certificate; it only consists of a bundle of rights and obligations.
Each share bears a distinctive number and it is not the same as share certificate number; the two are different. In fact, a single certificate may be an evidence of many shares, say 50, 100 or even 1 lakh. Thus, whereas there will be only one number as the share certificate number for one certificate, there will be as many distinctive numbers 4 in respect of shares as are evidenced by the share certificate.
Once again, these two expressions need to be distinguished for clarity. As already noted, a share represents a unit into which the capital of a company is divided. Thus,
3.As per the Companies (Amendment) Act, 2015, share certificate may be issued under the signatures of two directors or a director and the company secretary, if the company has appointed a company secretary.
4.Cockburn, C.J. in Bhia & Sons Francis Co. Ry. In re [1868] L. R. 3 Q. B. 584 (Ch.D)
if the share capital of the company is Rs. 5 lacs divided into 50,000 units of Rs. 10, each unit of Rs. 10 shall be called a share of the company.
The term ‘stock’ on the other hand may be defined as the aggregate of fully paidup shares of a member merged into one fund of equal value. It is a set of shares put together in a bundle. The ‘stock’ is expressed in terms of money and not as so many shares. Stock can be divided into fractions of any amount and such fractions may be transferred like shares.
A company cannot make an original issue of the stock. A company limited by shares may, if authorised by its Articles, by a resolution passed in the general meeting, convert all or any of its fully paid-up shares into stock [Section 61]. On conversion into stock, the register of members must show the amount of stock held by each member instead of the number of shares. The conversion does not affect the rights of the members in any way.
Following are the main points of difference :
Share
1.A share has a nominal value
2.A share has a distinctive number5
Stock
1.A stock has no nominal value.
2.A stock bears no such number. which distinguishes it from other shares.
3.Originally Shares can only be issued.3.A company cannot make an original issue of stock. Stock can be issued by an existing company by converting its fully paid-up shares.
4.A share may either be fully paid-up4.A stock can never be partly paid-up, it or partly paid up. is always fully paid-up.
5.A share cannot be transferred in fr-5.A stock may be transferred in any actions. It is transferred as a whole.fractions
6.All the shares of a class are of equal6.Stock may be of different denominadenomination. tions.
As per the Companies Act, 2013, only two kinds of shares can be issued by a company. Section 43 of the Act provides that the share capital of a company limited by shares shall be of two kinds only*, namely : (a)equity share capital— (i)with voting rights, or
5.Section 45 which requires each share to bear a distinctive number will have no application to shares held with a depository.
*MOA or AOA of a private company may provide for any other kind of shares to be issued—Vide MCA Notification dated 5-6-2015.
(ii)with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed6;
(b)preference share capital.
Preference share capital means that part of the share capital of the company which fulfils both the following requirements:
(1)During the life of the company it must be assured of a preferential dividend. The preferential dividend may consist of a fixed amount (say, one lac rupees) payable to preference shareholders before anything else is paid to the equity shareholders. Alternatively, the amount payable as preferential dividend may be calculated at a fixed rate, e.g., 10% of the nominal value of each share.
6. With respect to issue of shares with differential voting rights, the Ministry of Company Affairs has notified the Companies (Share Capital and Debentures) Rules, 2014. As per Rule 4 of these rules, no company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with, inter alia, the following conditions:
(
(
a)the articles of association of the company authorizes the issue of shares with differential rights;
b)the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders:
Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot ;
(
(
c)As per Notification dated 16 August, 2019, the voting power in respect of shares with differential rights shall not exceed seventy-four per cent of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.
(
d)[Omitted]
(
e)the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
(
f)the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;
(
g)the company has not defaulted in payment of the dividend on preference shares or 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 or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;
A company may, however, issue equity shares with differential voting rights upon expiry of five years from the end of the financial year in which such default was made good# # MCA Notification No. G.S.R. 704(E), dated 19.7.2016
h)the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies are being regulated by sectoral regulators;
(i)the company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.
(
(2)On the winding-up of the company it must carry a preferential right to be paid, i.e., amount paid up on preference shares must be paid back before anything is paid to the equity shareholders.
9.4-1a
TYPES OF PREFERENCE SHARES
(
(
a) Participating or non-participating - Participating preference shares are those shares which are entitled to a fixed preferential dividend and, in addition, carry a right to participate in the surplus profits along with equity shareholders after dividend at a certain rate has been paid to equity shareholders. For example, after 20% dividend has been paid to equity shareholders, the preference shareholders may share the surplus profits equally with equity shareholders. Again, in the event of winding-up, if after paying back both the preference and equity shareholders, there is still any surplus left, then the participating preference shareholders get additional share in the surplus assets of the company
b) Cumulative and non-cumulative shares - 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(s) out of future profits. The fixed 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.* Dividends on preference shares, like equity shares, can be paid only out of profits.
c) Redeemable and Irredeemable Preference shares - As per Section 55 of the Companies Act, 2013:
1.No company limited by shares can issue any preference shares which are irredeemable.
2.A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue.
However, a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders. Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014, in this regard, provides that a company engaged in the setting up of infrastructure projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum 10% of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders. Para
* Henry v. Great Northern Rly. Co. [1857] 1 De G&J 606.
9.4-1b CONDITIONS FOR ISSUE AND REDEMPTION OF REDEEMABLE PREFERENCE SHARES
(
a)No such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption;
(b)no such shares shall be redeemed unless they are fully paid;
(
c)where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account;
(
d)the Capital Redemption Reserve Account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
(e)the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed.
(
f)the issue of further redeemable preference shares or the redemption of preference shares shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company.
Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014, inter alia, provide:
1.A company having a share capital may issue preference shares only if so authorized by its articles.
2.A special resolution in the general meeting of the company must have been passed authorizing the issue.
3.The company, at the time of such issue of preference shares, must not have any subsisting default in the redemption of preference shares issued earlier or in payment of dividend due on any preference shares.
4.The Register of Members maintained under section 88 must contain the particulars in respect of such preference shareholder(s).
5.A company intending to list its preference shares on a recognized stock exchange shall issue such shares in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.
6.A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act. The preference shares may be redeemed:
(a)at a fixed time or on the happening of a particular event;
(b)any time at the company’s option; or
(c)any time at the shareholder’s option.
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 hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths 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. On the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.
However, the Tribunal shall, while giving the approval, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.
It may be further noted that notice of redemption of preference shares must be sent to the Registrar under Section 64 of the Act.
The equity shares are those shares which are not preference shares. In other words, shares which do not enjoy any preferential right in the matter of payment of dividend or repayment of capital are known as equity shares. After satisfying the rights of preference shares, the equity shares shall be entitled to share in the remaining amount of distributable net profits of the company. The dividend on equity shares is not fixed and may vary from year to year depending upon the amount of profits available. The rate of dividend is recommended by the Board of directors of the company and declared by shareholders in the annual general meeting.
Every member of a company limited by shares and holding equity share capital therein, shall have:
(a)a right to vote on every resolution placed before the company; and
(b)his voting rights, on a poll, shall be in proportion to his share in the paid-up equity share capital of the company.
As compared to this, the holders of preference shares can vote only on such resolutions which directly affect the rights attached to the preference shares and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital. However, if the preference dividend is not paid for two years or more, the preference shareholders shall also get voting right on every resolution placed before the company (Section 47).
Voting rights of a preference shareholder, on a poll, shall be in proportion to his share in the paid-up preference share capital of the company.
(1)Preference shares are entitled to a fixed rate/amount of dividend. The rate of dividend on equity shares depends upon the amount of net profit available after payment of dividend to preference shareholders and the fund requirements of the company for future expansion, etc.
(2)Dividend on the preference shares is paid in preference to the equity shares. In other words, the dividend on equity shares is paid only after the preference dividend has been paid.
(3)The preference shares have preference in relation to equity shares with regard to the repayment of capital on winding-up.
(4)If the preference shares are cumulative, the dividend not paid in any year is accumulated and until such arrears of dividend are paid, equity shareholders are not paid any dividend.
(5)Redeemable preference shares are redeemed by the company on expiry of the stipulated period, but equity shares cannot be redeemed.
(6)The voting rights of preference shareholders are restricted. An equity shareholder can vote on all matters affecting the company but a preference shareholder can vote only when his special rights as a preference shareholder are being varied or on any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital or where preference shares dividend is in arrears for at least two years.
(7)A company may issue rights shares to the company’s existing equity shareholders whereas it is not so allowed in case of preference shares (Section 62).
‘Non-voting shares’ as the term suggests are shares which carry no voting rights. These are contemplated as shares which may carry additional dividends in lieu of the voting rights. Section 43 allows issue of equity shares without voting rights [ See Para 9.4].
SEBI Regulations permit the companies to issue shares of any par value subject only to the value being not less than Re. 1 or being other than multiple of Re. 1. Thus, different companies may now issue shares of different par value. For instance, XYZ Ltd. can issue shares to the public at say, Rs. 3, while ABC Ltd. can issue at Rs. 5. Further, companies whose shares are dematerialised or who have applied for it would be eligible to alter the par value of shares indicated in the Memorandum and Articles of Association.
However, at any given time there shall be only one denomination for the shares of a company.
According to section 23—
(1) A public company may issue securities—
(a)to public through prospectus (herein referred to as “public offer”); or
(b)through private placement; or
(c)through a rights issue or a bonus issue in accordance with the provisions of this Act and the provisions of the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder. 193
(2) A private company may issue securities—
(a)by way of rights issue or bonus issue in accordance with the provisions of this Act; or
(b)through private placement
Further, as per the Companies (Amendment) Act, 2020, the Central Government may allow certain class of public companies to issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign or other prescribed jurisdictions.
Explanation I to section 42(3) defines “private placement” to mean any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cumapplication.
If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall be governed accordingly.
A private placement may be made subject only the following conditions:
(1)A company may, subject to the provisions contained in section 42, make a private placement of securities.
(1A)A company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations.7
However, in case of offer or invitation of any securities to qualified institutional buyers, it shall be sufficient if the company passes a previous special resolution only once in a year for all the allotments to such buyers during the year.8
(2)A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed, 200, as per the Rules, [excluding the qualified institutional buyers9 and employees of the company being offered securities under a
*As amended by the Companies (Amendment) Act, 2017.
7.Inserted vide the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 w.e.f. 7-8-2018.
8. Vide MCA Notification dated 16.10.2021.
9.“Qualified institutional buyer” means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
scheme of employees stock option in terms of provisions of clause (b) of subsection (1) of section 62], in a financial year subject to such conditions as may be prescribed:
Provided that no offer or invitation of any securities shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer-cum-application letter. Where offer of unsecured Fully Convertible Debentures (FCDs) was made only to shareholders of company and none else, it was not a private placement.
In Canning Industries Cochin Ltd. v. Securities and Exchange Board of India, Mumbai [2020] 115 taxmann.com 379 (SAT - Mumbai) an unlisted company sought to raise Rs. 4.82 crores. Company had passed a special resolution under section 62(3) read with section 71 in respect of issuance of Fully Convertible Debentures (FCDs). Prospectus and explanatory statement clearly stated that only members holding equity shares of company were eligible for allotment. It was clear that offer of FCDs was made to existing shareholders of company. Held company was required to ensure compliance with respect to limit of allottees, i.e., 200 persons, as applicable in case of private placement of securities.
(3)A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed:
However, the private placement offer and application shall not carry any right of renunciation
In Mrs. Proddaturi Malathi v. SRP Logistics (P.) Ltd. [2018] 96 taxmann.com 565 (NCL-AT), respondent directors increased share capital of company and further allotted shares of company to R2-director and to outsider at par by preferential allotment/private placement without following necessary procedure, said increase in share capital and subsequent allotment of shares was held to be invalid and thus same was to be set aside.
(4)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:
Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8).
(5)No fresh offer or invitation under this section 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:
Provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.
