Securities and Share Capital Regulations: Sections 52-55

Securities Premium Account (Section 52)

• General Rule for Securities Premium Account (SPA):

  • When a company issues shares at a premium (above the nominal/par value), the amount of such premium must be transferred to the Securities Premium Account (SPA).

• Universal Uses of the Securities Premium Account (Section 52(2)):

  • Issuing fully paid-up bonus shares to members.

  • Writing off preliminary expenses of the company.

  • Writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company.

  • Providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

  • For the purchase of its own shares or other securities under Section 68 (Buyback).

• Restrictions for Prescribed Companies under Section 133:

  • Specific classes of companies that are required to comply with Accounting Standards (AS) specified under Section 133 (IndAS) face restricted use of the SPA.

  • For these companies, the SPA can be utilized for:

    • Issuing fully paid-up bonus shares.

    • Writing off expenses or commission on the issue of shares.

    • Buyback of shares under Section 68.

  • For these prescribed companies, the premium on redemption must be charged to the Profit & Loss (P&L) account as a finance cost rather than the SPA, meaning SPA cannot be used for the premium on redemption of preference shares for these entities.

Prohibition on Issue of Shares at Discount (Section 53)

• General Prohibition:

  • Except as provided in Section 54 (Sweat Equity Shares), a company shall not issue shares at a discount.

  • Any share issued by a company at a discount shall be void.

• Consequences of Non-Compliance:

  • The company must refund the money received with interest at a rate of $12\%$ per annum from the date of issue.

  • Penalties/Fine: The company and every officer in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or $₹ 5,00,000$, whichever is less.

• Statutory Exception for Debt Restructuring:

  • A company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory debt restructuring scheme or a resolution plan in accordance with guidelines specified by the Reserve Bank of India (RBI) or the Insolvency and Bankruptcy Code (IBC).

  • Example: In cases like Vodafone or Jet Airways, where debt is converted to equity through a tribunal or resolution process, shares may be issued at a discount to creditors to resolve insolvency.

Sweat Equity Shares (Section 54)

• Definitions and Purpose:

  • Sweat equity shares are equity shares issued by a company to its directors or employees at a discount or for consideration other than cash.

  • These are rewards for providing "know-how," making available rights in the nature of Intellectual Property Rights (IPR), or for providing value additions.

• Conditions for Issue:

  • The issue must be authorized by a Special Resolution (SR) passed by the company in a general meeting.

  • The resolution must specify:

    • The number of shares to be issued.

    • The current market price.

    • The consideration (if any).

    • The class or classes of directors or employees to whom such shares are issued.

  • Listed companies must follow SEBI regulations, while unlisted companies follow Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014.

  • The holders of sweat equity shares rank pari passu (at an equal footing) with other equity shareholders.

• Definition of Employee for SES (Rule 8):

  • A permanent employee of the company who has been working in India or outside India.

  • A director of the company, whether a whole-time director or not.

  • An employee or a director of a subsidiary (in India or outside) or of a holding company or associate company.

• Timeline and Validity:

  • The allotment of sweat equity shares must be made within $12$ months from the date of passing the Special Resolution.

• Limits on Issue Size:

  • Per Financial Year (FY): A company shall not issue sweat equity shares for more than $15\%$ of the existing Paid-Up Equity Share Capital (PUESC) or shares of the issue value of $₹ 5$ Crore, whichever is higher.

  • Overall Ceiling (Cumulative): The issuance of sweat equity shares in the company shall not exceed $25\%$ of the paid-up equity capital of the company at any time.

  • Startup Exception: For startup companies, the limit is increased. They may issue sweat equity shares up to $50\%$ of their paid-up equity share capital for up to $10$ years from the date of incorporation.

• Lock-in Period:

  • Sweat equity shares are subject to a lock-in period of $3$ years from the date of allotment. They are non-transferable during this time.

• Valuation and Accounting:

  • The price of sweat equity shares must be determined by a Registered Valuer (RV), who must submit a report to the Board of Directors (BOD).

  • If the consideration for the shares is a non-cash asset (e.g., IPR), it must be treated as a depreciable or amortizable asset in the company's books. If not an asset, it is expensed out according to Accounting Standards (AS).

• Maintenance of Register:

  • A Register of Sweat Equity Shares must be maintained at the Registered Office (RO) or such other place as the BOD decides. It must be authenticated by the Company Secretary (CS) or an authorized person.

Issue and Redemption of Preference Shares (Section 55)

• Prohibition on Irredeemable Shares:

  • No company limited by shares shall issue any preference shares which are irredeemable. Only redeemable preference shares are permitted.

• Conditions for Issuance:

  • Authorization by the Articles of Association (AOA).

  • Passed by a Special Resolution (SR).

  • At the time of issue, there must be no subsisting default in the redemption of preference shares or in the payment of dividends due on any preference shares.

• Period of Redemption:

  • Standard Period: Preference shares must be redeemed within a period not exceeding $20$ years from the date of their issue.

  • Infrastructure Exception: Companies engaged in infrastructure projects as specified in Schedule VI may issue preference shares for a period exceeding $20$ years but not exceeding $30$ years.

  • Redemption Requirement for Infra Projects: For periods beyond $20$ years, at least $10\%$ of the nominal value of these preference shares must be redeemed annually from the $21^{st}$ year onwards, at the option of the preference shareholders.

• Redemption Framework:

  • Only fully paid-up preference shares can be redeemed.

  • Redemption must occur on the terms on which the shares were issued or later varied.

• Sources of Redemption:

  • Redemption must be funded out of:

    1. Profits of the company which would otherwise be available for dividend.

    2. Proceeds of a fresh issue of shares made specifically for the purpose of such redemption.

• Capital Redemption Reserve (CRR):

  • Where shares are redeemed out of profits, a sum equal to the nominal amount of the shares redeemed must be transferred to the Capital Redemption Reserve (CRR) account.

  • The CRR may be utilized by the company only for the purpose of issuing fully paid-up bonus shares.

• Premium on Redemption:

  • The premium, if any, payable on redemption must be provided out of the profits of the company or out of the Securities Premium Account.

  • Note for Section 133 Companies: For companies whose financial statements comply with the accounting standards under Section 133, the premium on redemption of preference shares must be provided only out of the profits of the company before the shares are redeemed. In these cases, the SPA cannot be used for the payment of premium on redemption.

Examples and Numerical Illustrations

• Entity Case Studies:

  • Tata BYD Motors Example: An example involving a CEO (Mr. Byd) receiving $10,000$ shares at a discount as a reward for value addition or know-how.

  • Debt to Equity Conversion: Examples of Vodafone and Jet Airways illustrate Section 53 exceptions where creditors take equity in lieu of debt under restructuring plans approved by tribunals.

• Sweat Equity Limit Calculations:

  • For a company with a PUESC of $₹ 100$ Crore:

    • Max issue per FY: $15\%$ of $100$ Crore = $₹ 15$ Crore, or $₹ 5$ Crore (whichever is higher). Thus, $₹ 15$ Crore is the limit for that year.

    • Total lifetime limit: $25\%$ of $100$ Crore = $₹ 25$ Crore total.

  • For a startup: If the PUESC is $₹ 10$ Crore, they can issue up to $50\%$ of that amount ($₹ 5$ Crore worth of sweat equity) within the first $10$ years.