20

Companies Act, 2013: Share Capital and Transfer of Shares

20.1 SHARE CAPITAL

The term ‘share capital’ is used to mean the capital raised by the company through the issue of shares. The shares issued by a company can be either equity shares or preference shares.

The memorandum of the company provides for the ‘share capital’ clause. Companies limited by guarantee or unlimited companies need not have share capital. Various terms used with reference to capital can be understood as under:

20.1.1 Authorized Capital—Section 2(8)

Authorised capitalis the sum stated in the Memorandum of Association as the capital of the company with which it is to be registered. It is also known as nominal or registered capital. The sum so stated is the maximum amount which the company can raise by issuing shares. This amount is divided into shares of fixed denominations.

20.1.2 Issued Capital—Section 2(50)

A company may not issue the entire authorised capital at once, i.e., only a part of the authorised capital which the company needs for the time being may be issued. Thus, issued capital is that part of the authorised capital which is offered to the public for subscription in the form of shares,

20.1.3 Subscribed Capital—Section 2(86)

Subscribed capital is that part of ‘issued capital’ for which applications have been received from the public.

20.1.4 Called-up Capital—Section 2(15)

Called-up capital is that part of the subscribed capital which has been called up or demanded by the company. Usually the company does not demand the entire amount due on the share at a time, but calls the amount in two or three installments.

20.1.5 Paid up Capital—Section 2(64)

Sometimes, subscribers for shares may fail to pay the full amount called up from them. That portion of the called-up capital which is actually paid by shareholders is termed as the paid-up capital.

20.1.6 Uncalled Capital

Uncalled capital is the total amount not called up on shares issued. However, the subscribers continue to remain liable for this amount and have to pay it when they are called upon to do so.

Example

A company has an authorised capital of ₹ 5,00,000 divided into 50,000 shares of ₹ 10 each; it may decide to issue 20,000 shares of ₹ 10 each. In that case the issued capital shall be ₹ 2,00,000. If the company receives applications for 18,000 shares, the subscribed capital shall be ₹ 1,80,000. If the company has called up ₹ 5 per share, then its called-up capital shall be ₹ 90,000. Against the call money of ₹ 90,000, if company has received ₹ 80,000, then the paid-up capital shall be ₹ 80,000.

20.1.7 Reserve Capital

It is that part of the uncalled capital which cannot be called by the company except in the event of winding up. Reserve capital cannot be converted into ordinary capital without the permission of the court.

20.2 NATURE OF SHARES

According to Section 2 (84) of the Companies Act, 2013, “a share means a share in the share capital of a company, and includes stock.”

In Boreland Trustees vs Steel Bros. & Co., it is defined as the interest of the shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of dividend in the second but also consisting of a series of mutual covenants entered into by all the shareholder inter se in accordance with the Companies Act.

According to Section 44, the shares, debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the Articles of the company.

Shares are treated as ‘goods’ under the Sale of Goods Act and they can be transferred to other persons.

20.2.1 Types of Shares

The shares which can be issued by a company are of two types, namely,

1. Equity share capital with a voting right or with differential rights as to dividend, voting or otherwise.
2. Preference shares.

As per Section 43 of the Companies Act, 2013, a company limited by shares can issue only the above two types of shares.

A share signifies the following rights or interest in a company:

1. The interest of a shareholder in the company
2. The right to receive dividend
3. The right to attend and vote at meetings, and receive a share in surplus assets in the event of winding up.
4. The liability of the shareholder to pay calls on share until fully paid up.
5. The right of the shareholder to transfer the share subject to the Articles of Association.
6. Binding covenants on the part of the company as well as the shareholder, as given in the Articles of the company.

20.3 EQUITY SHARES

Equity shares are those which are not preference shares. After satisfying the rights of preference shares, the equity shares shall be entitled to a 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 profit available. The rate of dividend is decided by the board of the company and approved by shareholders in the annual general meeting.

Equity shareholders have a right to vote on every resolution placed in the meeting and the voting rights shall be in proportion to the paid-up equity capital. Equity shares are also known as ordinary shares.

20.4 PREFERENCE SHARES

Preference shares are those shares which have a preferential right in respect of the payment of dividend and with respect to the repayment of the capital. The dividend may consist of a fixed amount or an amount calculated at a fixed rate. They will have a first charge on the distributable amount of profits. A company can issue preference shares by passing a special resolution.

Preference shareholders can vote only on such resolutions which directly affect the rights attached to the preference shares. However, if the preference dividend is not paid fully for more than two years, the preference shareholders shall also get voting right on every resolution placed before the company(as per Section 47, Companies Act, 2013).

20.5 KINDS OF PREFERENCE SHARES

Preference shares may be of the following kinds:

20.5.1 Cumulative and Non-cumulative Preference Shares

Cumulative preference shares are those which are assured of dividends every year. In the case of cumulative preference share, if in a particular year there are no profits to pay the dividends, the preference dividends shall accumulate and must be paid out of the profits of succeeding years. In subsequent years if there are sufficient profits, the accumulated arrears of dividend will have to be paid along with the dividend for the current year before paying dividend to other shareholders.

All preference shares are assumed to be cumulative unless stated to the contrary in the Articles of the company.

On the other hand, in the case of non-cumulative preference shares, the unpaid preference dividends do not accumulate but lapse, i.e., the unpaid dividend is not carried forward.

20.5.2 Participating and Non-participating Preference Shares

A further preference share can be divided between participating and non-participating preference shares. Participating preference shares are those which, in addition to their preferential dividend, are also entitled to participate in the surplus profits which remain after paying dividend to equity shareholder. If the articles are silent, all preference shares are deemed to be non-participating.

Non-participating preference shares are those, which are not entitled to participate in the surplus profits or surplus assets.

20.5.3 Redeemable and Irredeemable Preference Shares

Redeemable preference shares are those, the amount of which can be paid back to the holders of such shares. A company limited by shares, if authorised by its Articles, may issue preference shares which are to be repaid after a certain fixed period not later than 20 years at the option of company.

Redeemable preference shares may be redeemed:

1. At the fixed time or on happening of particular event;
2. Any time at the company’s option; or
3. Any time at the shareholders option.

Irredeemable preference shares are not redeemable except on the winding up of the company.

However companies engaged in the setting up and dealing with infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 days, subject to the redemption of minimum 10% of such preference shares per year from the 21st year onward or earlier, on proportionate basis, at the option of the preference shareholders.

20.5.4 Convertible and Non-convertible Preference Shares

Convertible preference shares are those which can be converted into equity shares within a certain period. The holders of such shares have the right to convert these shares into equity shares. Non-convertible preference shares are those which cannot be converted into equity shares.

20.6 REDEMPTION OF REDEEMABLE PREFERENCE SHARES (SECTION 55)

Preference shares, the amount of which can be refunded to the holders of such shares are termed as redeemable preference shares. The paying back of capital is called redemption.

A company limited by shares may, if so authorised by its Articles, issue preference shares which are, at the option of the company, liable to be redeemed.

Such shares can be redeemed only out of the following amounts:

1. The profits of the company, which are available for dividend.
2. The proceeds of fresh issue of shares which are issued for the purpose of redemption.

If any premium is payable on redemption, it must be paid out of the profits or out of the company’s securities premium account. If such shares are redeemed out of profits, then the amount equal to the amount paid on redemption must be transferred to a reserve fund to be called ‘capital redemption reserve account’.

Redemption of preference shares under Section 55 shall not be taken as reducing the amount of its authorised capital. The redemption of preference shares must be notified to the registrar of companies within 30 days of the date of redemption.

If a company is not in a position to redeem preference shares or pay dividend as per terms of issue, then it may, with the consent of three-fourth of the preference shareholders and with approval of tribunal,issue further redeemable preference shares equal to the amounts due in respect of the unredeemed preference shares. On the issue of such further redeemable preference shares, the unredeemed shares shall be deemed to have been redeemed. The tribunal, at the time of approval, shall order the redemption of preference shares held by such preference shareholders who have not consented to further issue of preference shares.

20.7 EQUITY SHARES WITH DIFFERENTIAL RIGHTS OR NON-VOTINGSHARES—RULE 4 OF COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014

A company can issue equity shares with similar voting rights or differential voting rights. However, not all companies are eligible to issue equity shares with differential voting rights. Equity shares with differential rights are also known as differential equity or non-voting shares. The following conditions shall be fulfilled to issue differential equity shares:

1. The company must have distributable profits for the last three years.
2. The company must not have been defaulted in filing of financial statement and annual returns for the last three financial years.
3. The company must not have failed to pay dividend after its declaration or repay deposit or interest thereon.
4. The Article of the company must authorise issue of such shares.
5. The company must not have defaulted in investors’ grievances procedure.
6. The proportion of shares with differential voting rights must not exceed 26% of the post total issued share capital.
7. The company must not have defaulted in repayment of term loan obtained from a public financial institution,a state level financial institution or a scheduled bank.
8. The company must not have defaulted in any dues in respect of statutory dues relating to its employees or defaulted in crediting the amount in investor education and protection fund (IEPF) to the central government.
9. The company should not have been penalised by a court or tribunal during the last three years for any offence under RBI Act, 1934, SEBI Act, 1992, Securities Contract Regulations Act, 1956, Foreign Exchange Management Act, 1999, or any other special act, under which such companies are regulated by sectorial regulators.

20.7.1 Procedure

If the company fulfils all conditions as above, it is required to convenea general meeting and pass an ordinary resolution approving the issue of differential equity. In case of listed company, this resolution must be approved by a postal ballot.

20.8 VOTING RIGHTS TO SHAREHOLDERS—SECTION 47

Equity shareholders enjoy voting rights for every subject matter while preference shareholders do not have voting right under usual circumstances.

20.8.1 Voting Rights of Equity Shareholders

In the case of voting on show of hands, every equity shareholder has one vote irrespective of his holding. In the case of voting on poll, every equity shareholder has votes in proportion to paid-up capital.

20.8.2 Voting Rights of Preference Shareholders

Preference shareholders have voting rights on every resolution that directly affects their right. If dividend has been unpaid for any class of preference shares for two years or more, they shall have voting rights on every resolution.

The proportion of voting rights of equity shareholders to the voting rights of preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares.

Example

Total paid-up share capital of a company is ₹ 400. It is divided into equity share capital of ₹ 300 and preference share capital of 100. A person holding 20 shares shall have 20% voting right under preference share capital but 5% voting right for total capital.

20.8.3 Voting Rights of Equity Shareholders with Differential Voting Rights

Equity shareholders with differential voting rights have voting rights as per the terms of issue. Nonvoting equity shareholders do not have voting right.

20.9 ALLOTMENT OF SECURITIES

When a public limited company issues a prospectus inviting the public to subscribe to its securities and people apply for them, this application is an offer to buy the securities and when such applications are accepted by the company, it is termed as ‘allotment’.

Allotment results in a binding contract between the company and the prospective security holder. The rules of offer and acceptance are applicable to the application and allotment of securities.

Allotment of shares means the appropriation, by the Board of Directors of a company out of the previously unappropriated capital of the company, of a certain number of shares to persons who have made application for shares.

It is in fact a division of share capital into definite shares of particular value and of different classes and assignment of such shares singly or numerously to different persons.

Allotment is done by resolution of the Board of Directors, as per the Articles of the company. Shares come into existence on allotment. Thus, allotment is the fresh issue of shares. The re-issue of forfeited share cannot be called as allotment; it is simply a sale of shares.

20.10 GENERAL PROVISIONS FOR THE ALLOTMENT OF SECURITIES

For an allotment to be valid, it must satisfy the requirement relating to offer and its acceptance. These may briefly summed up as under:

20.10.1 By Proper Authority

The allotment of securities must be made by proper authority and the proper authority is the Board of Directors. This authority may, however, be delegated by the Board as per the provisions of Articles of the company. Any allotment of securities made by an improper authority will be void.

20.10.2 Within a Reasonable Time

The allotment must be made within a reasonable period of time. What is the reasonable time is a question of fact in each case. As per contract law, the offer must be accepted within a reasonable time. If the application for securities is not accepted within a reasonable time, then the applicant may refuse to take the securities.

20.10.3 Must be Communicated

The allotment, to be legally effective and binding, must be communicated to the applicant. Posting a properly addressed and stamped letter of allotment is a sufficient communication even if the letter is delayed or lost in transit.

20.10.4 Absolute and Unconditional

The allotment of securities should be absolute and unconditional and must conform to the terms and conditions of the application; otherwise, the applicant shall not be bound to accept them.

Where a person applied for shares in the company on the condition that he would be appointed cashier of a new branch of the company, it was held that he was not bound by allotment unless he was so appointed [Ramanbhai vs Ghasiram].

20.11 MODE OF ISSUE OF SECURITIES—SECTION 23

The word ‘Securities’ is not defined under Companies Act, 2013. However, its meaning is derived from Securities Contract Regulation Act, 1956. It is an inclusive definition and covers shares, debentures, mutual funds and other marketable securities.

A public company may issue securities by the following methods:

1. to the public through prospectus (public offer)
2. through private placement
3. through a rights issue or a bonus issue.

A private company may issue securities by the following methods:

1. by way of rights issue or bonus issue
2. through private placement.

A ‘public offer’ includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.

As per Section 42(2), ‘private placement’ means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter in Form PAS 4

20.12 LEGAL RULES FOR ALLOTMENT—SECTION 39-40

In addition to the general rules as state above, a valid allotment must comply with legal rules contained in the Companies Act. It is also known as restrictions on allotment. Legal rules for allotment of securities are mentioned under Sections 39 and 40 of the Companies Act, 2013. These provisions may be discussed as under:

1. The prospectus should be filed with the registrar.
2. The application money received on application should be at least 5% of the nominal value of shares. However, as per SEBI guideline, the company should collect 25% of application money at the time of application. The company can collect more money than 25%.
3. The amount of minimum subscription must be received. If the minimum subscription amount is not received, the application money should be refunded within 15 days from closure of issue. If money is not repaid within this time limit, all directors are jointly liable to repay money with 15% interest per annum.
4. The company should apply to one or more stock exchanges for listing of securities and obtain listing permission. Failure will attract the following punishment:
   • Fine of ₹ 5 to 50 lakhs to the company and
   • Officer in default is liable for imprisonment upto 1 year or a fine of ₹ 50,000 to 1,00,000 or both.
5. The application money received should be kept in a separate bank account (known as escrow account) until allotment. The money should not be utilised except:
   • For adjustment of allotment of securities or
   • For repayment to unsuccessful applicants.
6. The Board of Directors then passes a resolution making the allotment of securities and authorizing the company secretary to issue the letter of allotment.

Section 40 of the Companies Act, 2013, requires that every company offering its securities to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchanges for permission for the shares or debentures to be dealt with in the stock exchange for each such stock exchange. The name of stock exchange where the application is made shall be disclosed in the prospectus.

Where a prospectus states that an application has been made for permission for the shares or debentures to be dealt in one or more stock exchanges, the allotment made under such prospectus shall be void if the permission has not been granted.

However, where an appeal has been preferred against the decision of the stock exchange, the allotment shall not be void until the appeal has been dismissed. An appeal can be preferred against the stock exchange to the SEBI Appellant Tribunal (SAT).

Similarly, where permission has been granted by recognised stock exchanges, all moneys in excess of the application money have to be returned forthwith.

In case the issue is over subscribed, the applications will have to be allotted for a lesser number of shares than applied for. In case shares have been listed on a stock exchange, then the allotment will be made in consultation with the stock exchange.

20.13 RETURN OF ALLOTMENT—SECTION 39

Under Section 39 of the Companies Act, 2013, a company, after allotment of its securities must file with the Registrar of Companies, a statement known as ‘return of allotment’ in the prescribed Form No PAS-3 within 30 days of the allotment. However, no return of allotment is required to be filed with regard to the re-issue of forfeited shares or debenture as it does not amount to allotment but it is the sale of existing securities of the company. In a similar way, no return of allotment is required in the case of re-issue of surrender shares or debenture.

The return of allotment must contain the following particulars:

1. The number and nominal amount of shares allotted.
2. The names, addresses and occupations of the allottees.
3. The amount paid or due and payable on each share.

These details should be certified as correct by signatories to return.

20.14 UNDERWRITING AGREEMENT—SECTION 40 (6) READ WITH RULE 13 OF COMPANIES (PROSPECTUS AND ALLOTMENT OF SECURITIES) RULES, 2014

An underwriting agreement is an agreement between the company and an individual, firm or orgnisation, known as underwriter, whereby the latter agrees to take up the whole or part of the securities which may not be subscribed by the public.

This is a sort of insurance covering the shortfall in public response to its securities offered for subscription.

As per Section 40 of the Companies Act, 2013, a company may pay a commission to any person in consideration of his subscribing, or agreeing to subscribe, for any securities of the company, or his procuring, or agreeing to procure subscription for any securities of a company subject to the following conditions:

1. The payment of underwriting commission should be authorised by the Articles of the company.
2. The commission may be paid out of proceeds of the issue or profit of the company or both.
3. The rate of commission must not exceed 5% of the price at which shares are issued, and in the case of debentures 2.5% of the price of debenture. Articles of the company may provide less percentage of underwriting commission.

The prospectus should disclose the names of underwriters, the rate of commission payable to the underwriter and the number of securities which is agreed to be underwritten. A copy of the underwriting contract should be delivered to the Registrar along with the prospectus. Underwriting commission will not be payable on securities which are not offered to the public.

20.15 BROKERAGE

A commission payable to brokers who induce their clients to subscribe for the shares or debentures is termed as ‘brokerage’. Brokerage is different from underwriting commission. A broker does not undertake to subscribe for shares if the shares are not taken up by the public. Brokerage is to be paid to a professional person known as broker and who is registered with any recognised stock exchange.

Brokerage payable must be stated in the prospectus. All sums paid on account of commission or brokerage must be disclosed in the balance sheet.

20.16 ALTERATION OF SHARE CAPITAL CLAUSE—SECTION 61

A company limited by shares may, if so authorised by its Articles, alter the capital clause of its Memorandum of Association by passing a resolution in the general meeting. To alter the capital clause, the company may:

1. increase its share capital by issuing new shares;
2. consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;
3. convert all or any of its fully paid-up shares of any denomination;
4. sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum; and
5. cancel the shares which have not been taken up by any person and thereby diminish the amount of its share capital.

The powers conferred by this Section can be exercised by a company by passing an ordinary resolution at a general meeting and shall not be required to be confirmed by a court.

A cancellation of shares in pursuance of this Section shall not be deemed to be a reduction of share capital within the meaning of this Act.

The company is required to give a notice to the Registrar of Companies within 30 days of the alteration. The registrar shall then record the notice, make the necessary alterations in the Memorandum or Articles or both.

20.17 REDUCTION OF SHARE CAPITAL—SECTION 66

According to Section 66 of Companies Act, 2013, a company limited by shares or a company limited by guarantee and having a share capital may, if so authorised by its Articles, reduce its share capital in any one of the following ways:

1. by extinguishing or reducing the liability on any of its shares in respect of share capital not paid up;
2. by canceling any part of the paid-up capital which is lost as un-represented by available assets;
3. by paying off any part of the paid-up capital which is in excess of the need of the company; and
4. by any other method approved by the tribunal.

20.18 PROCEDURE TO THE REDUCTION OF SHARE CAPITAL—SECTION 66

If a company wants to reduce its share capital by any of above method, the company is require to pass a special resolution in the general meeting of the shareholders. This resolution is required to be confirmed by the tribunal. No reduction is allowed if the company is in arrears in repayment of any deposits accepted by it or interest payable on it.

The tribunal shall, before making the order of confirmation, cause to be prepared a list of creditors who are entitled to object and shall cause to be published a notice inviting objections to the reduction. The tribunal should also give notice of application made to it to the central government and Registrar of Companies and consider its objection, if any. In case of listed company, the copy of application is forwarded to SEBI and objections received, if any, should be considered.

The tribunal must also look after the interest of the shareholders. After hearing their objections, if the tribunal is satisfied that every creditor entitled to object has given his consent to the reduction or his debt has been discharged or secured, it may confirm the reduction on such terms and conditions as it thinks fit. The tribunal will not confirm reduction of capital if it is not in conformity with application accounting standards. The company is required to obtain a certificate stating that it has complied with accounting standard from its auditor and submit it to the tribunal.

The tribunal may also order the company to add the words ‘and reduced’ to its name for a specified time. The tribunal may also order the company to publish the reasons for reduction of capital for public information.

The company is required to file a certified copy of the tribunal order confirming the reduction of capital with the registrar of companies. The resolution for reduction of share capital shall take effect from the date of registration of the tribunal order and minutes. Then the registrar shall issue a certificate to this effect and this certificate shall be the conclusive evidence of the fact that all the requirements of the Act regarding reduction of share capital have been complied with.

In Tamil Nadu Newsprint and Papers Ltd. vs Registrar of Companies,the court allowed the company to reduce its capital which was found to be in excess of its needs by permitting it to pay the same partly in cash and partly in the form of non-convertible debentures.

20.19 DIMINUTION OF SHARE CAPITAL

When a company reduces its share capital in a certain manner, it is not required to follow the procedure of reduction of capital. This is known as diminution of share capital. Diminution of share capital takes place in the following cases:

1. when the company cancels shares that have not been taken or agreed to be taken;
2. when redeemable preference shares are redeemed;
3. when there is a surrender of shares; and
4. when some shares are forfeited for non-payment of calls.

20.20 ISSUE OF SHARES AT PREMIUM

A company can issue shares either at par or premium or at a discount. The issue of shares at a premium means the issue of shares at a price higher than the nominal value of the share. A company can issue shares at premium at any time. The Companies Act, 2013, does not contain any provision for issue of shares at premium by a company. Any company may issue shares at any premium.

Any offer of shares made to the public at a premium by way of prospectus shall be made in accordance with SEBI guideline. It is not necessary that for issuing shares at premium, powers must be given by the Articles of Association.

20.21 UTILISATION OF SECURITIES PREMIUM AMOUNT—SECTION 52

The amount of securities premium account can be utilised for the following purposes specified under Section 52 of the Companies Act, 2013:

1. to issue fully paid bonus shares to the members of the company;
2. to write off the preliminary expenses of the company;
3. to write off the expenses of, or the commission paid or the discount allowed on, any issue of shares or debentures of the company; and
4. to provide for the premium payable on the redemption of preference shares or debentures of the company.
5. for buy-back of shares.

If the amount of securities premium account is used for any other purpose than above specified, it shall be deemed as reduction of capital. The securities premium amount should not be treated as free reserves of the company; they are in the nature of capital reserve. Securities premium account is not treated as issued capital nor reserve capital. Balance in securities premium account cannot be utilised for declaring dividend.

20.22 CONDITIONS FOR THE ISSUE OF SHARES AT DISCOUNT—SECTION 53

Company cannot issue any shares at discount. However,it can issue sweat equity shares at discount. If a company issue shares at discount, allotment shall be void and company is liable to pay fine.

20.23 STOCK OR STOCK CERTIFICATE

Section 2(84) states that ‘share’ means share in the share capital of a company, and includes stock, except where a distinction between stock and shares is expressed or implied. Thus, ‘stock’ is also ‘share’.

The term ‘stock’ may be defined as the aggregate of fully paid-up shares of a member merged into one fund of equal value.

A ‘stock’ is simply a set of shares put together in a mass, with the peculiarity that they can be dealt with fractionally. Stock is expressed in terms of money and is transferable in units of money. Stock has no nominal value. Stock can be in different denominations.

Only fully paid, shares can be converted into stock. Initially, a company can issue only shares, which can later be converted into stock. The stock can be reconverted into shares. A stockholder has the same rights as that of a shareholder. However, if a stock contains a fraction of share, such fraction is not entitled to voting right at a meeting, but is entitled to dividend and participation of assets in winding up. Stock can be transferred in parts also. Of late, ‘stocks’ are rarely issued.

20.24 DISTINGUISH BETWEEN ‘SHARE’ AND ‘STOCK’

Share	Stock
A share has a nominal value.	A stock has no nominal value.
A share has a distinctive number which distinguishes it from other shares.	A stock bears no such number.
Shares can be issued originally to the public.	A company cannot make an original issue of stock. Stock can be issued by an existing company by converting its fully paid-up shares.
A share cannot be transferred in fractions. It is transferred as a whole.	A stock may be transferred in any fractions.
All the shares are of equal denomination.	Stock may be different denominations.
Shares can be issued by any company, public or private.	Stock can be issued only by a public company limited by shares.

20.25 FORFEITURE OF SHARES

If any member of the company fails to pay a valid call within the stipulated time, the company has two options: it may either sue him for the amount or forfeit the shares for non-payment of the call. Suing the defaulting shareholder to recover the amount is a tedious process and therefore almost all companies prefers to forfeit the shares.

A company can forfeit the shares only if it is authorised by the Articles of Association. As per Regulation 28 of ‘Table F’, the shares can be forfeited only for non-payment of calls. The power to forfeit the shares must be exercised bonafide.

If the Articles of Association authorise forfeiture of shares, then this power must be exercised strictly in accordance with the rules and procedure laid down in the Articles. If there is any irregularity in the procedure, then the forfeiture may not be valid. Before forfeiture, the board of directors shall issue notice. Notice must state the amount of the call payable, last date for payment and method of payment. Notice must also state that if call money is not paid, shares will be forfeited. If money is not received even after expiry of time period, the board should pass resolution to forfeit shares. The company can reissue forfeited shares.

20.26 LEGAL REQUIREMENTS FOR FORFEITURE OF SHARES

The company is required to follow the procedure as per the provisions of the Companies Act and as per the Articles to forfeit the shares. The proper procedure to be followed for the valid forfeiture of shares is as under:

20.26.1 In Accordance with Articles

The Articles of Association must empower the company to forfeit the shares. As per Regulation 28 of ‘Table F’, shares can be forfeited only for non-payment of calls.

It was held that where shares are once registered in the name of a person, the company has no power to forfeit the shares on the ground of failure of consideration. Its remedy is only to obtain appropriate relief by suit.

Again, where two directors were allotted qualifications shares without any payment and these shares were forfeited by a Board resolution passed at the request of those two directors, the forfeiture was held to be invalid and the directors were held liable to pay the nominal value of the shares–Esparto Trading Co.

20.26.2 Proper Notice

Regulation 29 of Table F provides that a notice requiring payment of the amount due together with any interest accrued must be served mentioning a further day (not less than 14 days from the date of service of the notice) on or before which the payments is to be made. The notice must also mention that in the event of non-payment, the shares are liable to be forfeited.

The object of the notice is to give the shareholder an opportunity for payment of the call money, interest and expenses. A proper notice is a condition particular of the amounts due. A proper notice is a condition precedent to the forfeiture, and even the slightest defect in the notice will invalidate the forfeiture—Public Passenger Services Ltd. vs M.A. Khader.

Where a notice for the forfeiture was sent by registered AD post and was returned unserved, the forfeiture was held invalid. However, the accidental non-receipt of notice of forfeiture by the defaulter is not a ground for relief against forfeiture.

20.26.3 Resolution for Forfeiture

If the defaulting shareholder does not pay the amount within the specified time as required by the notice, the directors may pass a resolution forfeiting the shares (Articles 30 of Table F).

20.26.4 Bona Fide and in Good Faith

Power of forfeiture must be exercised bona fide and in good faith. The power cannot be used at the request of the shareholder to relieve him of liability. Such a forfeiture amounts fraud on other shareholders. If shares are forfeited for this reason, the forfeiture is void and the shareholder continues to be responsible for the unpaid part of the issue price.

Even a slight irregularity in forfeiture would be rendering the forfeiture null and void. The aggrieved shareholder may bring an action for setting aside the forfeiture as well as for damages. After shares have been forfeited, a further notice intimating forfeiture is not necessary to complete the forfeiture of shares.

20.27 EFFECT OF FORFEITURE OF SHARES

On the valid forfeiture of shares, the original shareholder ceases to be a member of the company and his name must be removed from the register of members.

The original shareholder is free from all liability for past calls. The Articles of the company may, however, make him liable for moneys which were actually due from him. The payment of such amount cannot be enforced as call but may be sued for as a debt. Further, the suit must be filed within three years from the date on which the shares were forfeited.

The name of the original shareholder shall be put on the ‘B’ list in the event of company going into liquidation within one year of the forfeiture.

In case, the defaulting shareholder approaches the board to cancel the forfeiture, the board is empowered to cancel such forfeiture and claim the due amount with interest.

20.28 SURRENDER OF SHARES

Surrender of shares means voluntary return of shares to company for cancellation. There is no provision for the surrender of shares either in the Companies Act, 2013, or in Table F, but the articles of some companies may allow it as a short-cut to the long procedure of forfeiture.

Surrender of shares shall be valid only when there is a provision to this effect in the Articles of Association of the company. Surrender of shares shall be valid only where the forfeiture is otherwise justified. In any other circumstances, surrender of shares cannot be accepted without the sanction of the court, as this would amount to reduction of capital.

Shares are surrendered when the shareholder is unable to make the payment of subsequent calls and wishes to avoid the disgrace of forfeiture. This can happen only in case of partly paid shares. The only exception where fully paid up shares may be accepted is where shares are surrendered in exchange for new shares of the same nominal value (but with different rights). In such a case, the capital is not reduced, but only replaced. Surrendered shares may be re-issued in the same way as forfeited shares.

20.29 LIEN ON SHARES—RULES 9 TO 12, TABLE ‘F’ OF COMPANIES ACT, 2013

Lien means a right to retain something belonging to another until the claims of the person in possession of the things are satisfied or discharged. It is essentially a right of retention. This right is not conferred by the statute, but is usually provided in the Articles of the company.

The lien on shares means the company’s right over the shares until the debts due to it by the shareholder are paid. Regulation 9 of Table F provides for lien on shares which are not fully paid up. Thus, a shareholder cannot transfer his shares unless he pays his debts to the company.

The Articles also authorise the company to sell such shares if the outstanding dues are not paid. Shares can thus be sold by giving 14 days notice to the member. The sale proceeds should be applied towards the payment of outstanding dues, and if there is any surplus, it must be paid to the member.

The company may also have the lien on the dividends payable on shares. The Articles may provide for a lien on fully paid shares for any debt due from the member. But stock exchange regulations generally prohibit the exercise of right of lien on fully paid listed shares.

Where a shareholder pledges his shares to a third party as security for a loan before he incurs any debt to the company and the company has notice of such pledge, then the pledge shall have priority over the lien of the company. Also, when the company registers the transfer of shares which were subject to lien, the company’s lien is lost.

In Bradford Banking Co. vs Briggs Sons & Co., some shares were handed over to the bank as security against overdraft. The bank notified the company about the same. The company subsequently was not entitled to any priority because it could not disregard the notice given by the bank.

The death of a shareholder does not terminate the right of lien and it can be exercised against executors also.

20.30 BONUS SHARES—SECTION 63

When large amount of reserves are accumulated with the company and the company decides to distribute these past undistributed profits among the shareholders, it may decide to issue shares free of cost to its existing shareholders. Such shares are known as ‘bonus shares’.

Bonus shares are issued to the members in proportion to their existing shareholding. On the issue of bonus shares, the issued capital increases while the assets of the company remain intact.

Bonus shares can be issued only where there is a provision to this effect in the Articles of the company. If the Articles do not contain such a provision, the company must pass a special resolution in the general meeting of the shareholders and make such a provision in the Articles.

For issuing bonus shares, a resolution should first be passed by the board of directors and it should then be approved by shareholders in their general meeting. The company should not have defaulted in payment of deposit on maturity or interest thereon. The company should also not have defaulted in payment of statutory dues of employees, such as bonus, gratuity and provident fund. A public listed company issuing bonus shares should ensure that the issue is in conformity with the SEBI guidelines in this respect.

A company may issue bonus shares by utilising the amount available in free reserves, Securities Premium Account and Capital Redemption Reserve Account. No issue of bonus shares shall be made by capitalising on reserves created by the revaluation of assets. It has to ensure that no public or rights issue has been made within 12 months prior to the bonus issue. It also has to ensure that bonus issue is not made in lieu of dividends.

In case the bonus issue appears to result in increase of capital beyond the company’s authorised capital, the company has to take steps to increase its authorised capital.

Partly paid shares, if any, should be made fully paid. The stock exchange has to be informed, where the shares are listed, the date of the Board’s meeting.

20.30.1 Procedure for Bonus Shares

Hold the meeting of the Board of directors to consider the bonus issue proposal including the proportion in which they are to be issued. Intimate the stock exchange the outcome of the Board’s meeting. Ensure that the bonus issue is made within six months from the date of the Board meeting.

Hold the general body meeting and get the resolution for issue of bonus shares passed by the members. Forward a copy of the general body resolution to the concerned stock exchange.

If bonus shares are to be issued to non-resident members, obtain consent of the Reserve Bank of India. Fix the date of closure of register of members or record date in consultation with the regional stock exchange.

Issue a public notice, at least seven days before, in respect of closure of register or record date in at least two newspapers—one in English and the other in the vernacular language of the region in which the registered office of the company is situated. Also intimate the concerned stock exchange(s) at least 21 days before the closure of register or record date.

Send the letter of allotment to those members whose names appear in the register of members on a record date. Make necessary entries in the register of members. Prepare share certificates and issue them to the allottees. Within 30 days of the allotment, file a ‘Return of Allotment’ with the registrar.

Forward a certificate to SEBI duly signed by the issuer company and countersigned by the statutory auditors or by the company secretary in practice that the bonus issue has been made in terms of SEBI guidelines.

20.31 PRE-EMPTIVE RIGHT OR RIGHT SHARES—SECTION 62

Companies do not issue the whole of its authorised capital at once. When the directors need more funds for expansion or modernisation, they may issue further shares. However, the directors cannot issue the new shares at their discretion. They have to follow the provisions of Section 62 of the Companies Act, 2013. Certain conditions need to be satisfied for further issue of shares. The further shares shall be offered to existing shareholders. The right to get offer of further shares is known as preemption right.

If the company wants to issue further shares after the expiry of two years from its formation or one year from the first allotment, whichever is earlier, the new shares must be offered to the existing equity shareholders in proportion to the paid-up capital on the shares held by them. The intension behind this provision is that there should be equal distribution of shares.

The right offer should be given by means of a notice specifying the number of shares offered and the time within which this offer is to be accepted. The shareholders must be given time not less than 15 days and not more than 30 days to decide whether to accept the offer or not. Right offer is always made with the price. The notice must clearly state that if the offer is not accepted within the prescribed time, it shall be deemed to have been declined. The notice must also inform the shareholder that he has a right to renounce all or any of the shares offered to him. If the shareholders do not accept the offer or reject the offer, the board of directors may dispose of it in such manner as they think fit.

20.31.1 When Further Shares are not Required to be Offered to Existing Shareholders

A company may offer new shares to the outsiders without offering them to the existing shareholders in the following cases:

1. If a special resolution is passed in the general meeting of the company deciding to offer new shares to the outsiders; or
2. If a special resolution is not passed, but the votes cast in favour of the resolution are more than the votes cast against the resolution, and approval of the Central Government is obtained. The Central Government will give its approval, if it is satisfied that the proposal is most beneficial to the company.
3. If the existing shareholders to whom the shares are offered decline to accept the shares.
4. If it is a private company.
5. Where debentures or loans are converted into shares as per terms of issue of debenture or loan agreement.

20.32 CALL ON SHARES

Calls on shares means demand by a company on its shareholders to pay the whole or part of the balance remaining unpaid on each share.

When shares are issued to the public, a part of the amount is paid with the application and the remaining part on the allotment of shares. The amount paid on application and allotment is not considered as calls unless the Articles expressly recognize them as call.

The unpaid amount on each share is called by the company in one or two installments. These installments are known as calls.

20.33 REQUISITES FOR VALID CALLS

For a call to be valid, the following conditions must be satisfied:

1. It must be made in accordance with the provisions of the Companies Act and Articles of the company.
2. A resolution must be passed by the Board of Directors at a meeting of the directors—Section 179
3. The resolution must specify the amount of call as well as the date and place of payment. All calls should be completed within a period of 12 months from date of allotment.
4. The power to make calls must be exercised bonafide for the benefit of the company.
5. The call must be made on a uniform basis on all shares falling under the same class—Section 49
6. A proper notice must be given to the shareholders.

Regulations 13 to 18 of Schedule F contain following provisions for making call:

1. For each call, at least 14 days’ notice must be given to members.
2. An interval of one month is required between two successive calls and not more than one-fourth of the nominal value of shares can be called at one time. However, companies may have their own articles and raise the limit.
3. The board of directors has the power to revoke or postpone a call after it is made.
4. Joint shareholders are jointly and severally liable for payment of calls.
5. If a member fails to pay call money he is liable to pay interest not exceeding the rate specified in the articles or terms of issue or such lower rate, as the board may determine. The directors are free to waive the payment of interest wholly or in part.
6. If any member desires to pay the call money in advance, the directors may, at their discretion, accept and pay interest not exceeding the rate specified in the articles.
7. A defaulting member will not have any voting right till call money is paid by him.

If any of the above condition is not satisfied, the call is said to be invalid. On invalid call, shareholders are not required to pay call money.

20.34 CALLS IN ARREAR

When members fail to pay the call money in time, the amount unpaid on calls is known as ‘calls in arrear’. If calls are in arrear interest at 10% p.a. or such lower rate as decided by BOD is paid, the board has the right to waive interest in part or in whole as per Regulation 16 of Table F.

20.34.1 Effects of Non-payment of Calls

If a shareholder fails to pay calls within a specified time, the board may forfeit the shares. Article of company may provide that the member who has not paid call on shares shall not exercise voting rights. Non-payment of call by a person for six months will disqualify him from holding office of the directors of the company.

20.35 CALLS IN ADVANCE

Sometimes, members may pay the call amounts in advance, i.e., even before amount is called. This is known as calls in advance. Section 50 provides that a company can accept such advance amount, if articles so provide.

However, Section 50 makes it clear that such members who pay advance call amounts shall not be entitled to voting rights in respect of such calls in advance. He will get voting rights only when the amount is called and becomes due.

20.35.1 Effects of Calls in Advance

The amount paid in advance by a shareholder is appropriated towards share capital, when the call is actually issued and is due. If a company goes into winding up its operations, the calls in advance aid will be treated as amount payable to unsecured creditors and will be treated accordingly. The amount paid as calls in advance is non-refundable.

20.36 BUY-BACK OF SHARES—SECTION 68

The buy-back may be defined as the purchase by a company of its own shares. The legal provisions relating to buy-back may be discussed as under:

20.36.1 Sources of Buy-back

A company can purchase its own shares out of:

1. its free reserves; or
2. the securities premium account; or
3. the proceeds of any shares or other specified securities.

However, no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

In case shares are bought back out of free reserves, then a sum equal to the nominal value of shares bought back shall be transferred to a reserve account to be called the ‘Capital Redemption Reserve Account’,the details of which shall be disclosed in the balance sheet. SEBI guidelines stipulate that this account shall be allowed to be used for issue of fully paid bonus shares.

20.36.2 Authority of Articles

A company can purchase its shares if buy-back is authorised by its articles.

20.36.3 Passing of Resolution

Companies Act has authorised the buy-back by passing a resolution at a meeting of the Board of Directors provided the buy-back does not exceed10% of the total paid-up equity capital and free reserves of the company. However, there cannot be more than one such buy-back in any period of 365 days, although buy-back more than 10% but less than 25% of the total paid-up capital and free reserves is allowed with passing of special resolution.

Buy-back of shares in any financial year must not exceed 25% of its paid-up equity capital in that financial year.

20.36.4 Post-Debt Equity Ratio

The post-debt capital ratio of the company is not more than twice the capital and its free reserves after such buy-back. However, the Central Government may prescribe a higher ratio of the debt for a class or classes of companies.

All the shares or other specified securities are fully paid-up.

20.36.5 SEBI Guidelines

The buy-back of listed securities should be in accordance with the regulations made by the Securities and Exchange Board of India.

20.36.6 Notice

The notice of the meeting where special resolution is proposed to be passed shall be accompanied by an explanatory statement stating and containing the following details:

1. A full and complete disclosure of all material facts.
2. The necessity for the buy-back.
3. The class of security intended to be purchased under the buy-back.
4. The amount to be invested under the buy-back.
5. The time limit for completion of buy-back.
6. The price at which buy-back of shares shall be made.

20.36.7 Time Limit

Every buy-back shall be completed within one year of the date of passing the special resolution as above.

20.36.8 Buy-back shall be Permissible

The company can buyback shares from the existing shareholders on a proportionate basis through a tender offer or from open market through book-building process. The company may buyback shares from odd-lot holders or securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

20.36.9 Other Paper Work

Where a company has passed a special resolution to buyback its own shares or other securities under this section, it shall, before making such purchases, file with the Registrar and the Securities and Exchange Board of India, a declaration of solvency in the form prescribed, verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any.

Where a company buys back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days from completion of buy-back.

SEBI guidelines in this regard stipulate that the shares certifications bought back shall be destroyed in the presence of a Registrar or Merchant Banker and the Statutory Auditor. A certificate to his effect shall be furnished to SEBI duly signed by two directors including the managing director and verified by the registrar or merchant banker and statutory auditor.

Where a company completes a buy-back of its shares and other securities under this Section, it shall not make further issue of the same kind of shares including by way of rights or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock options schemes, sweat equity or conversion of preference shares or debentures into equity shares.

Where a company buys back its securities under this section, it shall maintain in a register of the securities so bought, the consideration paid for the securities bought back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other particulars as may be prescribed.

A company shall after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed. However, no such return shall be required to be filed with SEBI in case the company buying back is an unlisted company.

20.36.10 Buy-back of Securities Prohibited

No company shall, directly or indirectly, purchase its own shares or other specified securities:

1. Through any subsidiary company including its own subsidiary companies; or
2. Through any investment company or group of investment companies; or
3. If at default, in repayment of deposit or interest thereon, redemption of debentures or preference shares or payment of dividend or repayment of a term loan or interest thereon to any financial institution or bank;
4. In case it has not complied with provisions of Section 92 (i.e., annual return), Section 127 (i.e., failure to distribute dividends within specified time) and Section 129 (i.e., form and contents of financial statements and Compliance with the Accounting Standards).

However, the company is not taken to have purchased its shares in the following cases when it has:

1. Redeemed its redeemable preference shares,
2. Forfeited its shares for non-payment of calls, or
3. Accepted a valid surrender of shares.

20.37 MEMBER

Section 2(27) states that a ‘member’, in relation to a company, does not include the bearer of share warrant. The person whose name is entered into the register of members is known as a member of the company. In the case of company, the terms ‘member’ and ‘shareholder’ are used interchangeably.

A person can become a member in the following ways:

20.37.1 Subscribers to Memorandum

The subscribers to memorandum are deemed to have agreed to become members. Their names must be entered into the register of members. Practically, they also agree to subscribe to certain shares in the company, while subscribing to the memorandum and hence are also shareholders.

Thus, if the subscribers later do not subscribe to the shares to which they have agreed, they will still be ‘members’ and will be responsible for payment in respect of shares which they have agreed to subscribe. They will not get voting rights if they do not actually pay for subscription, as voting rights are proportional to the paid-up value of share. A subscriber will cease to be member when he transfers his shares.

20.37.2 By Application in Writing

Every other person who has agreed in writing to become a member of the company, and whose name is entered into the register is a member of the company. Thus, a shareholder is not a ‘member’ unless his name is entered in the register of members of the company. Thus, a shareholder is not a ‘member’ unless his name is entered in the register of members.

20.37.3 By Agreeing to Take Qualification Shares of a Public Company—Director

When a director agrees to take qualification shares, such director is in the same position as if he has signed a memorandum of company for those shares of that number of value. Thus, he is deemed to have agreed to become a member of the company and will be liable in respect of those qualification shares.

20.37.4 By Entering His Name in Records of Depository as Beneficiary

In case of demat shares, all shares are in name of depository and the company has no record of persons who hold shares in demat form. Once shares are dematerialised, name of the person is removed from records of the company as a member. However, the person has all rights of a member including that of dividend, voting, bonus shares etc. Hence, it is provided that every person who holds equity share capital of company and whose name is entered as beneficial owner in the records of depository, shall be deemed to be a member of the company. In such case, he does not apply to company ‘in writing’ but is still a member.

20.37.5 By Transfer or Transmission

Shares of a company are freely transferable. It is transferred by executing a transfer deed. When shares are transferred, the purchaser who is also known as transfer or becomes a member of the company when such transfer is registered by the company and his name is recorded in the register of members.

Transmission of shares is transfer of shares by operation of law. Transmission of shares take place on death or insolvency of shareholder. On death of shareholder, his legal representative becomes entitled to shares. The legal representative may apply to the company for registration of shares in his name. On registration of shares, he becomes a member of the company.

20.37.6 Other Methods

On surrender of share warrant, the name of the person is entered again into the register of members and he is considered as member of the company. On conversion of debenture into shares, a person becomes member of company.

20.38 WHO CAN BECOME A MEMBER OF A COMPANY?

The following persons can be members of a company:

20.38.1 Individual

An individual or group of individuals in their joint names can be a member. As per government guidelines, only three persons can be joint members.

20.38.2 Body Corporate

Any incorporated body which has a separate legal personality can be a member. Thus, a company registered under Companies Act, Trade Union registered under Trade Union Act or a Cooperative Society registered under Co-operative Societies Act or society registered under Multi-State Co-operative Societies Act, are ‘persons’ and can become ‘members’.

20.38.3 Government

The Government of India can become a member and shares are held in name of the President of India. Similarly, as a State Government can hold shares in the name of the Governor.

20.38.4 Partnership Firm

A partnership firm cannot be a member of a company. Individual partners can hold shares in their joint names for the benefit of the partnership firm. A partnership firm can be member of ‘licensed company’ i.e., ‘Section 8 company’.

20.38.5 Other

A Hindu undivided family(HUF) cannot be member of a company. A trust is not a ‘legal person’ and therefore cannot be member of a company. A trade union can be member of a company. A society registered under Societies Act cannot be member of a company. However, a society registered under Cooperative Societies Act is a corporate body and can hold shares in its own name.

20.39 MINOR AS MEMBER OF COMPANY

A minor cannot apply for shares, as indeed, shares application is a contract between an applicant and the company. A minor cannot subscribe to memorandum of the company. In any case, he cannot incur any liability when he is a minor.

If allotment is made to a minor wrongly, the company can repudiate or cancel the allotment, but must repay all moneys received from such minor.

A minor can be a member through natural guardian. A natural guardian can enter into contract on behalf of the minor for the minor’s benefit. Such contract is valid, if it is for benefit of a minor. He can ‘apply in writing ‘on behalf of the minor. Hence, shares can be registered in the name of the minor indicating the name of guardian representing the minor. Such contract will not be personally binding on the minor, but the minor’s property may be held liable.

20.40 TERMINATION OF MEMBERSHIP

Membership of a person is terminated, i.e., a person can cease to be a member by one of the following modes:

1. Transfer of shares to another person.
2. Death of member and his heir/legal representative becomes a member or he sells shares to a third person (transmission of shares)
3. Member is adjudged insolvent and shares are transmitted in name of official receiver/official assignee. Until shares are registered in the name of official assignee/receiver or third party, the insolvent continues to be a member.
4. Surrender of shares, which is accepted by company as short-cut to forfeiture
5. Forfeiture of shares.
6. Company exercising lien on shares and selling them.
7. Buy back of shares by company.
8. Redemption of preference shares.
9. Rectification of Register, if ordered by tribunal.
10. Compulsory sale of shares, if ordered by tribunal.
11. Expulsion of member, if permitted by articles.
12. Irregular allotment is avoided by allottee.

20.41 RIGHTS OF A MEMBER OF THE COMPANY

The Companies Act, 2013, confers a number of rights on the member of a company. These rights may be summed up as under:

1. To receive the share certificates, on allotment or transfer as the case may be, in due time
2. To have his name entered in the register of members
3. To sell/transfer/gift shares if he desires, subject to articles
4. To receive copies of annual report, financial statement, and the auditor’s report
5. To obtain copies of memorandum and articles
6. To receive notice of general meetings with explanatory statement.
7. To vote in postal ballot
8. To participate and vote in general meetings of members either personally or through proxies
9. To inspect record of proxies, register of members, register of directors shareholding auditors’ report kept for inspection at AGM
10. To inspect register of charges, copy of instrument creating charges, register of investment in shares and securities not held in company’s name, copy of trust deed, register of members, debenture holders and indexes (These rights are also available to debenture holders)
11. To inspect the minute books of the general meetings, register of contracts in which directors are interested, register giving particulars of directors, key managerial personnel and their shareholding, register of loans and investments made by companies (these rights are only to members and not to debenture holders or outsiders)
12. To contest for the post of director of the company or to nominate another person for the post of director
13. To receive dividends in prescribed time once approved in general meetings
14. To receive corporate benefits like rights, bonus etc. once approved
15. To apply to the tribunal to call or direct the Annual General Meeting
16. To proceed against the company by way of civil or criminal proceedings
17. To apply for winding up of the company
18. To receive residual proceeds after completion of winding up
19. To apply to SEBI regarding any grievance.

20.42 RIGHTS OF MEMBERS AS A GROUP

Certain rights conferred by the Companies Act can be exercised by a group of members and not an individual member. Following are the rights which may be exercised by a group of members:

1. To requisition an extraordinary general meeting (EOGM)
2. To appoint and remove director or auditors
3. To restrict powers of directors by altering articles
4. To apply to the tribunal to cancel variation or abrogation of rights
5. To demand a poll on any resolution
6. To apply to the Central Government to investigate the affairs of the company.
7. To apply to the tribunal for relief in cases of oppression and/or mismanagement.

20.43 TRANSFER OF SHARES—SECTIONS 56 AND 58

Section 56 provides that a company shall not register a transfer of shares of the company unless a proper transfer deed in Form SH 4 as given in Rule 11 of Companies (Share Capital and Debentures) Rules, 2014, duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company, along with the certificate relating to the shares, or if no such certificate is in existence, along with the letter of allotment of the shares.

20.43.1 Time Period for Deposit of Instrument for Transfer

An instrument of transfer of shares, i.e.. Form SH. 4 with the date of its execution specified thereon shall be delivered to the company within sixty (60) days from the date of such execution by or on behalf of the transferor and by or on behalf of the transferee.

20.43.2 Value of Share Transfer Stamps to be Affixed on the Transfer Deed

Stamp duty for transfer of shares is 25 paise for every ₹ 100 or part thereof of the value of shares as per notification by the Ministry of Finance, Department of Revenue, New Delhi.

20.43.3 Time Limit for Issue of Certificate on Transfer—Section-56(4)

Every company, unless prohibited by any provision of law or of any order of any court, tribunal or other authority, shall, within one month, deliver the certificates of all shares transferred after the application for the registration of the transfer of any such shares, debentures or debenture stock received.

20.43.4 Private Company shall Restrict Right to Transfer its Shares

The entire shareholding of a private company may be owned by a family or other private groups. Section 2(58) of the Companies Act, 2013, provides that the articles of a private company shall restrict the right to transfer the company’s shares.

20.43.5 Restriction on Transfer in Private Company not Applicable in certain cases

Restriction upon transfer of shares in a private company is not applicable in the following cases:

1. The right of a member to transfer his/her shares cannot be applicable in a case where the shares are to be transferred to his representative(s).
2. In the event of death of a shareholder, the legal representatives may require the registration of share in the names of heirs, on whom the shares have been devolved.

20.43.6 Time Limit for Refusal of Registration of Transfer

Provisions related to refusal of registration and appeal against refusal is given in Section 58 of the Companies Act, 2013. Power of refusal to register transfer of shares is to be exercised by the company within thirty (30) days from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company.

20.43.7 Time Limit for Appeal Against Refusal to Register Transfer by Private Company

As per Section 58(3), a transferee of shares may appeal to the tribunal against the refusal within a period of thirty (30) days from the date of receipt of the notice from the company or in case no notice has been sent by the company, within a period of sixty (60) days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.

20.43.8 Time Limit for Appeal Against Refusal to Register Transfer by Public Company

As per Section 58(4), a transferee of shares may, within a period of sixty (60) days of such refusal or where no intimation has been received from the company, within ninety (90) days of the delivery of the instrument of transfer or intimation of transmission appeal to the tribunal.

20.44 PROCEDURE OF TRANSFER—SECTION 56

20.44.1 Procedure for Transfer of Share in a Private Company

Generally, articles contain the detailed provisions as regards the procedure for transfer of shares. The following steps shall be followed by a private company to give effect to the transfer of shares:

1. Transferor should give a notice in writing for his intention to transfer his share to the company.
2. The company, in turn, should notify other members as regards the availability of shares and the price at which such share would be available to them.
3. Such price is generally determined by the directors or the auditors of the company.
4. The company should also intimate to the members, the time limit within which they should communicate their option to purchase shares on transfer.
5. If none of the members comes forward to purchase shares, then the shares can be transferred to an outsider and the company will have no option, other than to accept the transfer.
6. Get the share transfer deed in form SH-4 duly executed both by the transferor and the transferee.
7. The transfer deed should bear stamps according to the Indian Stamp Act. The stamps affixed should be cancelled at the time or before signing of the transfer deed.
8. The signatures of the transferor and the transferee in the share transfer deed must be witnessed by a person giving his signature, name and address.
9. The relevant share certificate or allotment letter should be attached with the share transfer deed and delivered to the company. The share transfer deed should be deposited with the company within sixty (60) days from the date of such execution by or on behalf of the transferor and by or on behalf of the transferee.
10. The board shall consider the received share transfer deed and if the documentation for transfer of share is in order, the board shall register the transfer by passing a resolution.

20.44.2 Basic Procedure for Transfer of Share in a Public Company

Section 58(2) provides that the shares or debentures and any interest therein of a public company shall be freely transferable. Usually, the following steps shall be followed by a public company to give effect to the transfer of shares:

1. Get the share transfer deed in form SH-4 duly executed both by the transferor and the transferee.
2. The transfer deed should bear stamps according to the Indian Stamp Act. The stamps affixed should be cancelled at the time or before signing of the transfer deed.
3. The signatures of the transferor and the transferee in the share transfer deed must be witnessed by a person giving his signature, name and address.
4. The relevant share certificate or allotment letter should be attached with the share transfer deed and delivered to the company. The share transfer deed should be deposited with the company within sixty (60) days from the date of such execution by or on behalf of the transferor and by or on behalf of the transferee.
5. The board shall consider the received share transfer deed and if the documentation for transfer of share is in order, the board shall register the transfer by passing a resolution.

20.45 NOMINATION—SECTION 72

Section72 of Companies Act, 2013, provides for nomination by the security holders. The effect of nomination is that on the death of a security holder, the nominee becomes entitled to the security belonging to the security holder.

Nomination is optional. Every natural holder of security can nominate a nominee at any time. Nomination should be made in the prescribed form, i.e., From No. SH 13. On receipt of signed and valid nomination form, the company should record it in the register of security holder within a period of 2 months.

Only individual persons can be appointed as nominees. A company or body corporate cannot be appointed as nominee. Two or more individuals can be appointed as joint nominees. A minor can also be appointed as nominee but in such case, one major is appointed as guardian of the nominee.

The nominee has following rights on the death of the security holder:

1. Right to dividend, right shares, bonus shares etc.
2. No right to vote.
3. Right to become member.
4. Right to transfer security.

Nomination is overriding to the claim of legal representatives of deceased security holders.

20.46 TRANSMISSION OF SECURITIES

The term ‘transmission of securities’ means the process whereby the ownership of securities is transferred to another person by operation of law and not on account of the will of the security holder.

Transmission of security takes place on the death, lunacy or insolvency of a shareholder. It also takes place where the holder is a company, if it goes into liquidation.

In case of death of the security holder, his security vests in his legal representatives. If they desire, they may ask the company to register them as holders on those security and for this purpose no instrument of transfer is needed. The company can register the security on the basis of will or succession certificate.

The rules regarding transmission of security are given in the Articles of Association of the company. A company may refuse to register a transmission. But this power must be exercised in good faith and in the interest of the company. However, in case of refusal, the aggrieved party can appeal to the tribunal in the same manner as in the case of refusal to register transfer of securities.

In case of transmission of security, there is no instrument of transfer, no stamp duty is required to be paid.

20.47 CERTIFICATE OF SECURITY—SECTION 56

A security certificate is a document which specifies the number of the security held by a person. It is issued by the company under its common seal. This document is prima facie evidence of the title of the person to the security mentioned therein.

Every person whose name appears in the register of members is entitled to receive the security certificate from the company. Certificate of security can be issued for partly paid shares also. For issue of security certificate, permission of central government is not required to be obtained. A nominal amount of stamp duty is paid at the time of issue of security certificate.

Share certificate is issued in Form No. SH-1. It has the following contents:

1. name of the company.
2. serial number of the certificate.
3. name and address of the shareholder.
4. number of security held by him.
5. distinctive number of security.
6. type or class of security.
7. revenue stamp.
8. common seal of the company.
9. signatures of two directors and the secretary.

Every company must deliver the certificates of all securities allotted, transferred or transmitted within a period of:

1. two months from the date of incorporation, in the case of subscribers to the memorandum;
2. two months from the date of allotment, in the case of any allotment of any of its shares;
3. one month from the date of receipt by the company of the instrument of transfer or, as the case may be, of the intimation of transmission, in the case of a transfer or transmission of securities;
4. six months from the date of allotment in the case of any allotment of debenture.

20.48 DISTINCTION BETWEEN SHARE AND SHARE CERTIFICATE

A share certificate is a prima facie evidence of the shares held by a person. Thus, a ‘share certificate’ is neither ‘goods’ nor ‘chose in action’. Loss of share certificate does not mean loss of ‘share’ as a duplicate can always be obtained. The ‘share’ is considered as ‘goods’ and ‘chose in action’, but ‘share certificate’ is neither goods nor chose in action.

20.49 DUPLICATE SHARE CERTIFICATE

A certificate may be renewed or duplicate of a certificate may be issued if such certificate

1. is proved to have been lost or destroyed, or
2. having been defaced, mutilated or torn is surrendered to the company.

Following is the procedure for the issue of duplicate share certificates:

1. In case of loss or destruction of certificate, the board of directors has to give its prior consent. Usually, it is done by passing a resolution after the board obtainsa request to this effect from the shareholder.
2. If mutilated or torn, the share certificate in lieu of which the duplicate is being issued should be surrendered to the company for cancellation.
3. The company can charge a fee for the issue of the duplicate share certificate but it should not be more than ₹ 50 per certificate.
4. In case of lost or stolen certificates, there should be proper evidence of loss as well as indemnity. The expenses of giving a public notice and investigating the case are to be borne by the member.
5. Fact about duplicate certificate must be clearly shown on its stub by way of rubber stamp. Necessary particulars must be recorded in the member register in Form No. SH-2.
6. Duplicate share certificate should be issued within period of 15 days in case of listed company and 3 months in case of unlisted company, from the date of application.
7. Mutilated, defaced or torn certificates surrendered to the company must immediately be defaced by a ‘cancellation mark’ and may be destroyed after three years on the authority of a board resolution.

If a certificate is renewed or a duplicate certificate is issued with a fraudulent motive, the company shall be punishable with a fine from 5 times to 10 times of face value of shares and every officer who is in default may be liable under Section 447 for fraud.

The issue of duplicate certificates is governed by the rules prescribed by the Government under the Companies (Issue of Share Certificates) Rules, 1960.

20.50 DEBENTURE

A ‘debenture’ is a movable property transferable in the manner provided by the articles of the company.

According to Section 2(13), a ‘debenture’ includes debenture stock, bonds and any other instrument of the company, whether constituting a charge on the assets of the company or not.

Debenture does not become a share capital. Debenture is not ‘stock’. Debenture is not ‘goods’. A debenture holder is not a member of company but creditor. Debenture and shares convey distinct and separate meaning although they belong to the same genesis. R. D. Goyal vs Reliance Industries.

A debenture is a document which either creates debt or acknowledges it [CIT vs Cochin Refineries Ltd.] Adebenture may be secured or unsecured. A debenture is, in effect, a debt and acknowledgement of debt. It is one of the ways of raising loans.

The difference between debentures and loans is that while debentures can be issued to the public, loan is taken by a company from an institution or bank. The debenture certificate is an acknowledgement of loan. Debenture carrying voting rights cannot be issued. A ‘bond’ is also a debenture. Since debentures are freely transferable, a company cannot issue non-transferable bonds. A private company cannot issue debentures to the public. It can make only a private issues of debentures.

Debentures can be issued only by the Board of Directors at a meeting. These powers cannot be delegated to a committee or the resolution for issue of debentures cannot be passed by circulation.

20.51 TYPES OF DEBENTURE

Debentures may be of the following kinds:

20.51.1 Redeemable or Irredeemable Debenture

Debentures can be redeemable or irredeemable. Normally, irredeemable debentures are never issued although there is no legal ban. As such, SEBI guidelines are on the assumption that only redeemable debenture will be issued.

Perpetual debenture means irredeemable debenture. If perpetual secured debenture is issued, the borrower can never repay the loan and get, the security released. Normally, the mortgagor has the legal right to repay the loan and free the property from the charge.

However, Section 120 specifically allows issue of irredeemable debentures or issue of debentures for a very long period,even up to 100 years. Debentures can also be issued which are redeemable only on happening of a contingency which is very remote. Normally, irredeemable debentures are almost never issued, though legally permitted.

20.51.2 Convertible or Non-convertible Debenture

‘Convertible debenture’ means part or whole of the debenture can be converted into equity shares at a later date at a pre-determined rate per share.

The debentures continue to remain debentures and earn interest until they are converted into equity shares of the company. The debentures may be fully convertible or party convertible. For example,out of a debenture of ₹ 100, ₹ 60 may be converted into one share of ₹ 10 and the balance ₹ 40 canl be treated as non-convertible portion. It means that a share of company of face value of ₹ 10 is issued at a premium of ₹ 50 per share.

20.51.3 Secured or Unsecured Debenture

Debentures can be secured or unsecured. The security may be charge on assets. Debentures can be secured against property of the company.

Even if trust deed is not executed, the debenture holder can take action on behalf of himself and other debenture holders of the same class.

20.52 RIGHTS OF DEBENTURE HOLDER

Debenture holders have certain rights available to them. They are as follows:

1. To receive interest and/or redemption when due.
2. To receive a copy of trust deed on request.
3. To apply for winding up, if the company fails to pay its debt on maturity.
4. To approach a debenture trustee with grievance, if any.

These rights are, however, not absolute. Theyare subject to provisions of Companies Act and memorandum and articles of the company.

20.53 DEBENTURE TRUSTEE—SECTION 71

A debenture trustee is appointed to protect the interest of debenture holders as the latter may hold a nominal number of debentures and they do not have the time to look after their interest in properties charged to them.

Under the trust deed, a charge on the company’s property is created in favour of the trustee who acts as supervisory of property charged for the benefit of debenture holders.

The following category of person cannot be appointed a trustee if:

1. he beneficially holds shares in the company.
2. he is beneficially entitled to moneys which are to be paid by the company to the debenture trustees.
3. he has entered into any guarantee in respect of principal debts secured by the debentures or interest thereon.

If the company issues secured debentures, it is not possible to create charge in favour of each individual debenture holder. Hence, the charge is created in favour of debenture trustees. The trustees look after the interests of debenture holders. They supervise creation of charge; ensure that debenture holders are getting interest on due dates and the principal amount after redemption. Normally, a bank or financial institution is appointed as trustee of debenture holders.

Debenture trustees can be appointed for more than five years at a time, even if the trustee is a firm or body corporate. Appointment of one or more debenture trustees is mandatory if a company wants to issue prospectus or letter of offer to public. Such appointment must be made before issue of prospectus or letter of offer. The prospectus or letter of offer must state that the trustees have given their consent to act as trustee.

As per SEBI guidelines, appointment of trustees is mandatory if debenture maturity is 18 months or more. However, now such appointment is mandatory in all the cases.

20.54 FUNCTIONS OF DEBENTURE TRUSTEES—SECTION 71 READ WITH RULE 18 OF COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014

The function of trustees is to protect the interest of debenture holders and to redress the grievances of debenture holders effectively. In particular,a debenture trustee may take steps as he may deem fit. The following are the functions of a debenture trustee:

1. To ensure that the assets of the company are sufficient to discharge the principal amount at all times.
2. To ascertain that the prospectus or letter of offer does not contain any matter which is inconsistent with terms of debentures or the trust deed.
3. To ensure that the company does not commit any breach of covenants and provisions of the trust deed.
4. To take steps to call a meeting of debenture holders as and when required.
5. In case of listed companies, to check whether SEBI guidelines are being followed by the company, in respect of debenture redemption reserve and other matters.
6. If company defaults in payment of interest or repayment of debentures, to take action for enforcing the security.
7. To sell or lease the property and to renew the lease.
8. Take a mortgage so that title deeds are transferred to the trustees.
9. To appoint a receiver if the security has to be enforced. If a receiver is appointed, the provisions in respect of receiver as during winding up apply.
10. To obtain periodic report/ information from company.
11. To inspect mortgaged property and related register and books of accounts.
12. To place restrictions on creation of further charge on same property without permission of trustees.
13. To appoint a nominee director on the board of the company in the event of:
    1. Two consecutive defaults in payment of interest to the debenture holders or
    2. Default in creation of security for debenture or
    3. Default in redemption of debenture.

20.55 PROVISIONS FOR CREATION OF DEBENTURE REDEPTION RESERVE—SECTION 71 READ WITH RULE 18 OF COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014.

A company issuing debentures must create a debenture redemption reserve [DRR] for redemption of such debentures. Adequate amounts should be transferred to DRR out of profits of the company every year until such debentures are redeemed.

DRR should be adequate to pay the value of debentures plus accrued interest, if not already paid. Since DRR is to be created out of profits, there is no obligation to create DRR, if there is no profit.

The company shall create a debenture redemption reserve for the purpose of redemption of debentures, in accordance with the conditions given below:

1. It shall be created out of the profits of the company available for payment of dividend.
2. The company shall create debenture redemption reserve equivalent to at least 50% of the amount raised through the debenture issue before debenture redemption commences.
3. Every company required to create debenture redemption reserve 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 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 of the following methods:
   1. in deposits with any scheduled bank, free from any charge or lien;
   2. in unencumbered securities of the Central Government or of any State Government;
   3. in securities or bonds mentioned in Section 20 of the Indian Trusts Act, 1882.
4. 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 to above. Provided that the amount remaining invested or deposited, as the case may be, shall not at any time fall below 15% of the amount of the debentures maturing during the year ending on the 31st day of March of that year.
5. In case of partly convertible debentures, debenture redemption reserve shall be created in respect of non-convertible portion of debenture.
6. The amount credited to the debenture redemption reserve shall not be utilised by the company except for the purpose of redemption of debentures.

LIST OF LANDMARK JUDGEMENTS

1. LIC vs Escorts Ltd (1986)

   Interest of shareholders is represented by his shareholding.

2. Morgan Stanely Mutual Fund vs Kartik Das (1994)

   Shares before allotment are not goods, as shares do not exist before allotment is made.

3. Killick Nixon Ltd vs Bank of India (1983)

   A transferee of shares is not a member unless his name is registered in the register of members.

4. R. Baliram vs Buckingham & Carnatic Co. Ltd (1969)

   Minor can be member through natural guardian.

5. Diwan Singh vs Minerva Films Ltd (1959)

   Fully paid shares can be transferred to minor

6. Radhey Shayam Gupta vs Kamal Oil (1999)

   If the name of person appears in the register of member, there is presumption that he is a member.

7. Ram Govind Mishra vs Allahabad Theaters (P) Ltd (1997)

   If one of the joint holders dies, shares are automatically transferred to the name of surviving joint holders. In such case, any question of nomination, will, succession etc. does not arise.

8. Smt. Kamalabai vs Vithal Prasad Co. P. Ltd (1993)

   No stamp duty is payable on transmission of shares.

9. Xavier Joseph vs Indo-Scottish Brand (2002)

   Private company can refuse transmission.

10. Bajaj Auto Ltd vs CLB (1998)

    Power of Board to refuse registration of transfer of shares must be in the interest of company and the general body of shareholders. The board should act bonafide and for the benefit of the company as a whole.

11. All Indian bank officers confederation vs Dhanlakshmi Bank Ltd (1977)

    A trade union registered under trade union act is considered as a person and can become member of a company.

12. Claude-lila Paralekar vs Sakal Papers (P) Ltd (2005)

    If the shares are in joint names, the transfer form must be jointly signed.

13. Kaushalya Devi vs National ins. Cable Co. of India Ltd (1977)

    When shares are transferred by a forged transfer, the transferee does not get any title to shares.

14. Barton vs North Staffordshires Railway (1888)

    If a company transfers securities on the basis of forged transfer deed, the company will still be liable to the original holder of security.

15. Worldwide agencies vs Margaret T. Desor (1990)

    Transmission is instantaneous transfer of ownership to the heirs of the last holder from the moment of death of the last holder and what the company does is only secretarial work of entering the name of the legal heir in records.

16. Rishyashringa Jewellery Ltd vs Stock exchange (1996)

    If a company makes application to more than one stock exchange and even if one of the stock exchanges refuses to list the shares, the entire issue becomes a void and the entire application money must be repaid.

17. Bhagwati Developers vs Peerless general finance & investment Co. (2005)

    Reserve arising from revaluation of assets can be used for issue of bonus shares.

18. Head (Henry) & Co. Ltd vs Roper Holding Ltd (1951)

    If a company issues shares at a premium for consideration other than cash, a sum equal to the amount or value of premium must be transferred to the share (not securities) premium account.

19. CIT vs Standard VacuumsOil Co. (1966)

    There can be no objection to charging of varying rates of premium in respect of block of shares carrying same rights.

20. Greaves Cotton & Co. Ltd vs State of Maharasthtra (2005)

    Issue of debenture certificate in case of fully convertible debenture not required.

21. Levy vs Abercorris Slate & Slab Co. (1888)

    Debenture is a document given by a company as evidence of debt to holder usually arising out of a loan and most commonly secured by charge.

22. Herdilia Unimers Ltd vs Renu Jain (1998)

    The moment the shares are allotted and a shareholder’s name is placed on the register of member, the person would become ashare holder of the company irrespective of whether the person had received the share certificate or not.

TEST YOUR KNOWLEDGE

1. Explain the various terms used in reference of capital under Companies Act, 2013.

   (Ref. Para-20.1)

2. Explain reserve capital.

   (Ref. Para-20.1)

3. Write the difference between called up capital and uncalled capital.

   (Ref. Para-20.1)

4. Define shares.

   (Ref. Para-20.2)

5. What does shares signify in a company?

   (Ref. Para-20.2)

6. Define the term ‘share’ and explain its characteristics.

   (Ref. Para-20.2)

7. Write a short note on equity shares.

   (Ref. Para-20.3)

8. Explain the term ‘equity shares’ and ‘preference shares’

   (Ref. Para-20.3,20.4)

9. What are the different kinds of share which a company can issue under Companies Act, 2013?

   (Ref. Para-20.5)

10. Preference shares are always presumed to be cumulative. Comment.

    (Ref. Para-20.5)

11. A company can issue irredeemable preference shares. Comment.

    (Ref. Para-20.5)

12. When can a company issue redeemable preference shares?

    (Ref. Para-20.6)

13. Out of which sources can a company redeem preference shares?

    (Ref. Para-20.5)

14. When and which company can issue equity with differential voting right?

    (Ref. Para-20.7)

15. Preference share holders can never have voting right. Comment.

    (Ref. Para-20.8)

16. How are voting rights available to various types of shareholders?

    (Ref. Para-20.8)

17. What is meant by allotment of shares?

    (Ref. Para-20.9)

18. What are the conditions required to be complied with by a public company before allotment of shares?

    (Ref. Para-20.10,20.11)

19. What is return of allotment? When is a company required to file return of allotment?

    (Ref. Para-20.13)

20. Define underwriting. As per Companies Act, what is maximum percentage of underwriting paid by a company?

    (Ref. Para-20.14)

21. Write a short note on brokerage.

    (Ref. Para-20.15)

22. State the legal provisions relating to alteration of share capital of a company.

    (Ref. Para-20.16)

23. Can a company reduce its capital? If so, what are the methods of reduction of capital?

    (Ref. Para-20.17)

24. Explain the procedure for reduction of capital.

    (Ref. Para-20.18)

25. What do you understand by diminution of capital?

    (Ref. Para-20.19)

26. Can a company issue shares at premium?

    (Ref. Para-20.20)

27. The amount of securities premium account can be utilised for any purpose. Comment.

    (Ref. Para-20.21)

28. What are the requirements for issue of shares at discount?

    (Ref. Para-20.22)

29. Write short notes on stock certificate.

    (Ref. Para-20.23)

30. Distinguish between shares and stock.

    (Ref. Para-20.24)

31. When and how shares may be forfeited?

    (Ref. Para-20.25,20.26)

32. What is the effect of forfeiture?

    (Ref. Para-20.27)

33. What do you understand by surrender of shares?

    (Ref. Para-20.28)

34. A company can exercise lien any time. Comment.

    (Ref. Para-20.29)

35. Write down the steps to issue bonus shares.

    (Ref. Para-20.30)

36. What are the provisions regarding further issue of share capital?

    (Ref. Para-20.31)

37. Issue of further share capital should first be made to existing shareholders. Comment.

    (Ref. Para-20.31)

38. What is calls on shares? What are the requirements of valid calls?

    (Ref. Para-20.32,20.33)

39. What will bethe effect of non-payment of calls?

    (Ref. Para-20.34)

40. What are calls in advance? What will be the effect of calls in advance?

    (Ref. Para-20.35)

41. What do you mean by the term ‘buy-back’? Explain the legal provisions relating to buy-back.

    (Ref. Para-20.36)

42. A company is not allowed to purchase its own shares. Is it a correct statement?

    (Ref. Para-20.36)

43. Discuss the modes of acquiring membership of a company.

    (Ref. Para-20.37)

44. Who can become member of a company?

    (Ref. Para-20.38)

45. Can a minor become member of a company?

    (Ref. Para-20.39)

46. How does the membership of a person terminate?

    (Ref. Para-20.40)

47. On redemption of preference shares, a person ceases to be a member of a company. Comment.

    (Ref. Para-20.40)

48. Discuss the rights of members.

    (Ref. Para-20.41)

49. Write down any five rights available to a group of members.

    (Ref. Para-20.42)

50. Explain the procedure for transfer of shares.

    (Ref. Para-20.44)

51. What remedies are available to the aggrieved party when the transfer of shares is wrongly refused by a company?

    (Ref. Para-20.43)

52. What is meant by nomination of shares?

    (Ref. Para-20.45)

53. What rights are available to the nominee on death of a shareholder?

    (Ref. Para-20.45)

54. Write short notes on transmission of shares.

    (Ref. Para-20.46)

55. What is a share certificate?

    (Ref. Para-20.47)

56. What should be the content of a share certificate?

    (Ref. Para-20.47)

57. Explain the difference between share and share certificate.

    (Ref. Para-20.48)

58. When can a company issue duplicate share certificate? State the procedure for this purpose.

    (Ref. Para-20.49)

59. What is debenture?

    (Ref. Para-20.50)

60. What are the various kinds of debentures?

    (Ref. Para-20.51)

61. Write down the rights available to debenture holders.

    (Ref. Para-20.52)

MULTIPLE-CHOICE QUESTIONS

1. The minimum application money should ______ be of nominal value.
   1. 5%
   2. 3%
   3. 2%
   4. none of these
2. The minimum application money should be ______ of nominal value as per SEBI guidelines.
   1. 25%
   2. 30%
   3. 40%
   4. none of these
3. A company cannot pay underwriting commission unless it is authorised by its _______.
   1. Articles
   2. Memorandum
   3. Both (i) & (ii)
   4. None of the above
4. In case of shares,maximum underwriting commission will be
   1. 2%
   2. 3%
   3. 5%
   4. none of these
5. In case of debentures,maximum underwriting commission will be
   1. 3%
   2. 4%
   3. 2.5%
   4. none of these
6. If a company wants to place shares to brokers, they should be given a maximum of ______ as brokerage commission.
   1. 3%
   2. 2%
   3. 1.5%
   4. none of these
7. Which of the following is a right of the members of a company?
   1. Right to have a share
   2. Right to appoint auditor
   3. Right to appoint director
   4. All the above
8. Which of the following cannot become a member of a company?
   1. Partnership firm.
   2. Foreigner.
   3. State Government.
   4. Central Government.
9. For calculating the number of members in a private company, joint holders will be treated as ______.
   1. 1
   2. 2
   3. 3
   4. 4
10. A company must inform the registrar about redemption of preference shares within
    1. 21 days.
    2. 15 days.
    3. 30 days.
    4. None of the above.
11. Share premium amount is treated as the ______ capital of a company.
    1. issued
    2. reserve
    3. subscribe
    4. none of the above
12. Capital redemption reserve must be used for the issue of
    1. fully paid bonus shares.
    2. fully paid equity shares.
    3. preference shares.
    4. none of the above.
13. Part of the issued capital taken by public is called ______.
    1. Subscribed capital
    2. Called-up capital
    3. Un-called capital
    4. Paid-up capital
14. Part of authorised capital which is offered by the company for subscription is ______.
    1. subscribed
    2. issued
    3. un-called
    4. called-up
15. Stamp duty on registration of the company is payable based on ______ capital.
    1. nominal
    2. authorised
    3. either (i) or (ii)
    4. none of these
16. ______ preference shares carry the right to cumulate the dividends.
    1. Convertible
    2. Cumulative
    3. Non-converted
    4. None of these
17. Paying back of capital is called
    1. Redemption.
    2. Conversion.
    3. Participation.
    4. None of these.
18. Premium amount on the securities are transferred to ______ account.
    1. securities premium
    2. reserve fund
    3. capital reserve
    4. none of these
19. ______ are the shares issued by the company to its employees or directors for consideration other than cash.
    1. Bonus
    2. Sweat
    3. Right
    4. None of the above
20. Cumulative preference shareholders have voting right if dividends are in arrears for ______ years.
    1. 1
    2. 2
    3. 3
    4. 4
21. ______ is an aggregate of fully paid share that have been legally consolidated.
    1. Share
    2. Stock
    3. Both (i) and (ii)
    4. None of the above
22. ______ have fixed denomination.
    1. Share
    2. Stock
    3. Both (i) and (ii)
    4. None of the above
23. ______should be passed by the company to offer shares to outsiders.
    1. Special resolution
    2. Ordinary resolution
    3. C.G
    4. None of the above
24. A company must pass ______ for reducing its share capital.
    1. ordinary resolution
    2. special resolution
    3. Central Government permission
    4. none of the above
25. Which of the following can be used for buy-back of shares?
    1. Free reserves
    2. Securities premium
    3. Proceeds of fresh issue of shares
    4. All of the above
26. Buy-back by board resolution can only be upto ______% of total paid up capital and free reserve.
    1. 15
    2. 10
    3. 25
    4. 20
27. Buy-back should be less than or equal to ______% of total paid-up capital and free reserve.
    1. 25
    2. 30
    3. 35
    4. 40
28. In case of buy-back, post debt equity ratio should not be more than ______.
    1. 1:2
    2. 2:1
    3. 3:1
    4. 1:3
29. Every buy-back shall be completed within ______ month from the date of passing the Special Resolution.
    1. 6
    2. 8
    3. 10
    4. 12
30. ______ companies are permitted to buy back its shares.
    1. Insolvent
    2. Solvent
    3. Both (i) and (ii)
    4. None of the above
31. Buy-back securities should be physically destroyed within ______ days.
    1. 7
    2. 17
    3. 21
    4. 28
32. After buy-back, a company cannot issue the same kind of shares for ______ months.
    1. 6
    2. 12
    3. 18
    4. 24
33. Within 30 days of completion of buy-back, the company shall file the details with whom ______.
    1. Registrar
    2. SEBI
    3. Both (i) and (ii)
    4. None of the above
34. The maximum premium amount that can be charged as per Companies Act is ______.
    1. 10%
    2. 15%
    3. 20%
    4. None of these
35. A company, to issue sweat equity shares, must pass a ______
    1. special resolution
    2. ordinary resolution
    3. unanimous resolution
    4. none of these
36. Stamp duty to be paid at the time of issue of share certificate is
    1. nominal
    2. high
    3. very high
    4. none of these
37. In case of ______, a duplicate can be obtained if it is lost.
    1. share warrant
    2. share certificate
    3. dividend coupon
    4. none of the above
38. For a company to accept calls in advance from shareholders, itshould have permission in
    1. MOA
    2. AOA
    3. BOD
    4. None of these
39. Forfeiture can be made only if it is authorised by ______.
    1. AOA
    2. MOA
    3. ROC
    4. CG
40. Name of the members is struck off from the register in case of ______.
    1. issue of share certificate
    2. forfeiture
    3. Both (i) and (ii)
    4. None of the above
41. ______ days have to be given for payment of call money from the date of service of notice.
    1. 14
    2. 13
    3. 12
    4. 11
42. ______ arises in respect of debt due on shares as well as on other transactions.
    1. Forfeiture
    2. Lien
    3. Both (i) and (ii)
    4. None of the above
43. Return of partly paid shares by the shareholders to the company is ______.
    1. surrender
    2. forfeiture
    3. lien
    4. none of the above
44. ______ is a short-cut to forfeiture
    1. Lien
    2. Surrender
    3. Right issue
    4. None of the above
45. No consideration shall be paid by the company in exchange of ______ shares.
    1. lien
    2. forfeited
    3. surrendered
    4. none of the above
46. The person who transfers his shares is called ______.
    1. transferee
    2. transferor
    3. promisor
    4. promisee
47. The person to whom the shares are transferred is called ______.
    1. transferee
    2. transferor
    3. endorser
    4. endorsee
48. ______ is an instrument of transfer signed by the transferor in which the name and date are not filled.
    1. Forged transfer
    2. Blank transfer
    3. Both (i) and (ii)
    4. None of the above
49. ______ transfer is null and void.
    1. Forged
    2. Blank
    3. Both (i) and (ii)
    4. None of the above
50. If the ownership of shares goes to another by operation of law, it is called as ______.
    1. transfer
    2. transmission
    3. Both (i) and (ii)
    4. None of the above
51. Transfer is effected by ______.
    1. sales
    2. death
    3. insolvency
    4. none of the above
52. Transmission is effected by ______.
    1. sale
    2. death
    3. insolvency
    4. Both (ii) and (iii)
53. In which of the following, stamp duty and consideration are not necessary? ______
    1. Transfer
    2. Transmission
    3. Both (i) and (ii)
    4. None of the above
54. Own funds are called ______.
    1. debenture capital
    2. share capital
    3. loan capital
    4. None of the above
55. Debenture forms part of ______.
    1. capital
    2. loan
    3. fund
    4. None of the above
56. Shareholders are ______.
    1. owners
    2. creditors
    3. debtors
    4. none of the above
57. Debenture holders are ______.
    1. owners
    2. creditors
    3. debtors
    4. none of the above
58. Return paid on shares is ______.
    1. interest
    2. dividend
    3. commission
    4. none of the above
59. Return paid on debentures is ______.
    1. interest
    2. dividend
    3. commission
    4. tax
60. Which of the following have voting rights?
    1. Shareholders
    2. Debenture holder
    3. Both (i) and (ii)
    4. None of the above
61. ______ on debenture is payable even if there are no profits.
    1. Interest
    2. Dividend
    3. Commission
    4. None of the above
62. Debentures payable to a holder of certificate is called ______.
    1. bearer
    2. unregistered
    3. secured
    4. Both (i) and (ii)
63. Debentures payable to person whose name appears both on debenture certificate and company’s register is called ______.
    1. bearer
    2. unregistered
    3. registered
    4. none of the above
64. Debentures which have the charge on the property of the company is ______.
    1. secured
    2. unsecured
    3. registered
    4. none of the above
65. Debenture which are repayable only on the event of winding up is called
    1. redeemable
    2. irredeemable
    3. perpetual
    4. Both (ii) and (iii)
66. Which reserve is required to be created for redemption of debentures?
    1. DRR
    2. Free reserve
    3. CRR
    4. None of these
67. ______ preference shares do not carry the right to accumulate dividends.
    1. Convertible
    2. Cumulative
    3. Non-cumulative
    4. None of these
68. ______ are the shares issued by the company to its existing shareholders free of cost.
    1. Bonus
    2. Sweat
    3. Right
    4. None of the above
69. ______ are the shares issued by the company to its existing shareholder as a matter of right with price.
    1. Bonus
    2. Sweat
    3. Right
    4. None of the above
70. When the shares are transferred to X from Y, Y will be a ______ of the company.
    1. member
    2. shareholder
    3. partner
    4. None of these

ANSWER KEYS

1. i
2. i
3. i
4. iii
5. iii
6. iv
7. iv
8. i
9. i
10. iii
11. iv
12. i
13. i
14. ii
15. iii
16. ii
17. i
18. i
19. ii
20. ii
21. ii
22. i
23. i
24. ii
25. iv
26. ii
27. i
28. ii
29. iv
30. ii
31. i
32. i
33. i
34. iv
35. i
36. i
37. ii
38. ii
39. ii
40. ii
41. i
42. ii
43. i
44. ii
45. iii
46. ii
47. i
48. ii
49. i
50. ii
51. i
52. iv
53. ii
54. ii
55. ii
56. iv
57. ii
58. ii
59. i
60. i
61. i
62. i
63. iii
64. i
65. i
66. i
67. iii
68. i
69. iii
70. i