Study Notes on Share Capital and Debentures

Overview of Share Capital and Debentures

• Securities Definitions: Under the Companies Act, 2013, shares and debentures are collectively referred to as securities. Shares represent ownership with entrepreneurial risks, while debentures represent lender interest with limited risks.
• Share vs. Stock: A share is the smallest unit of share capital. Stock is a bundle or collection of fully paid-up shares. Only fully paid-up shares can be converted into stock under Section 61(1)(c).
• Kinds of Share Capital:
  • Equity Share Capital: Includes plain vanilla shares with standard voting rights and shares with differential rights regarding dividends or voting.
  • Preference Share Capital: Carries a preferential right to dividend payments (fixed amount or rate) and repayment of capital during winding up.

Equity Shares with Differential Rights

• Conditions for Issue (Rule 4):
  • Authorized by the Articles of Association.
  • Requires an ordinary resolution (postal ballot for listed companies).
  • Differential voting power must not exceed $74\%$ of total voting power.
  • No default in filing annual accounts for $3$ preceding financial years.
  • No subsisting default in dividend payments, matured deposits, or redemption of preference shares/debentures.
• Other Restrictions: Existing equity shares with voting rights cannot be converted into equity shares with differential rights and vice versa.

Share Certificates and Transfer

• Issuance (Section 46): Certificates are prima facie evidence of title. They must be signed by two directors or one director and the Company Secretary (if appointed).
• Duplicate Certificates: Issued if the original is defaced, lost, or destroyed. Unlisted companies must issue duplicates within $3$ months; listed companies within $45$ days.
• Delivery Timelines:
  • Subscribers to Memorandum: Within $2$ months from incorporation.
  • Allotment of Shares: Within $2$ months from allotment.
  • Transfer/Transmission: Within $1$ month from receipt of instrument/intimation.
  • Allotment of Debentures: Within $6$ months from allotment.
• Transfer vs. Transmission: Transfer involves a voluntary instrument (Form SH-4). Transmission is by operation of law (death, insolvency, or lunacy) and does not require a transfer deed.

Securities Premium and Discount

• Securities Premium Account (Section 52): Permitted uses include:
  • Issuing fully paid bonus shares.
  • Writing off preliminary or issue expenses.
  • Providing for premium on redemption of preference shares or debentures.
  • Buy-back of shares under Section 68.
• Prohibition of Discount (Section 53): Companies cannot issue shares at a discount except for Sweat Equity Shares issued under Section 54 or shares issued to creditors during statutory debt restructuring in accordance with Reserve Bank of India guidelines.

Sweat Equity and Preference Shares

• Sweat Equity (Section 54): Issued to directors or employees for providing know-how or intellectual property rights. Requires a special resolution specifying market price and consideration. These shares have a lock-in period of $3$ years.
• Preference Shares (Section 55): Irredeemable preference shares are prohibited. Maximum tenor is $20$ years, except for infrastructure projects which may extend to $30$ years with a mandatory $10\%$ redemption per year from the $21\text{st}$ year.
• Redemption: Must be made out of profits available for dividend or proceeds of a fresh issue. If profits are used, a Capital Redemption Reserve (CRR) must be created.

Alteration and Reduction of Share Capital

• Alteration (Section 61): Includes increasing authorized capital, consolidating/dividing shares, converting shares to stock, and sub-dividing shares. Requires an ordinary resolution and notice to the Registrar in Form SH-7 within $30$ days.
• Rights Issue (Section 62): Pre-emptive offer to existing shareholders in proportion to their holding. Notice period is generally $7$ to $30$ days. Rights can be renounced unless prohibited by the articles.
• Bonus Issue (Section 63): Issued from free reserves, securities premium, or CRR. Cannot be issued from revaluation reserves. Once recommended by the Board, the offer cannot be withdrawn.
• Reduction of Capital (Section 66): Requires a special resolution and confirmation by the National Company Law Tribunal (NCLT). It is not applicable to buy-backs.

Buy-Back of Securities

• Sources: Free reserves, securities premium account, or proceeds of a fresh issue (excluding same-kind securities).
• Limits (Section 68):
  • Maximum $25\%$ of aggregate paid-up capital and free reserves.
  • Post-buy-back debt-equity ratio must not exceed $2:1$.
  • A declaration of solvency (Form SH-9) must be filed with the Registrar.
• Process: Securities must be physically destroyed within $7$ days of completion. A cooling period of $6$ months applies before issuing the same kind of securities.

Debentures

• Voting Rights: Section 71(2) prohibits issuing debentures with voting rights.
• Secured Debentures: Tenor must not exceed $10$ years ($30$ years for infrastructure). A charge must be created on movable or immovable properties.
• Debenture Redemption Reserve (DRR): Required for unlisted companies (excluding NBFCs/HFCs) at $10\%$ of the outstanding value. For listed companies and unlisted NBFCs/HFCs, DRR is exempted.
• Liquidity Requirement: Companies must invest at least $15\%$ of the amount of debentures maturing during the year in authorized deposits/securities by 30th April.
• Debenture Trustee: Essential for public offers exceeding $500$ persons. Trustees protect the interests of holders and can petition the NCLT if company assets are insufficient to discharge principal.

Questions & Discussion

Q: Can a company offer further shares to only specific sections of existing shareholders?A: No. Under Section 62(1)(a), further shares must be offered to all existing equity shareholders in proportion to their paid-up capital. Excluding a specific shareholder (e.g., a holding company) is invalid even if the Articles of Association require a first offer to existing members.

Q: What is the deadline for raising an objection to a transfer of partly paid shares?A: When a transferor applies for the transfer of partly paid shares, the company must notify the transferee in Form SH-5. The transferee has $2$ weeks from the receipt of the notice to raise an objection.

Q: Can bonus shares be issued to partly paid-up shares?A: No. Section 63(2)(e) requires that any outstanding partly paid-up shares must be made fully paid-up before a bonus issue can proceed.

Q: Who is eligible for a loan from the company to purchase its own shares?A: Under Section 67(3), a company can provide a loan to employees (excluding directors or KMPs) for an amount not exceeding $6$ months' salary to purchase fully paid-up shares.

Q: Is a certificate of share a negotiable instrument?A: No, a share certificate is not a negotiable instrument. It acts as prima facie evidence of title to the shares specified therein.