Exhaustive Study Notes on Share Capital and Debentures

Overview of Share Capital & Debentures

• Legal Scope and Framework

  • Covers Sections $43$ to $72$ of the Companies Act, $2013$
  • Governed by the Companies (Share Capital and Debentures) Rules, $2014$ (commonly designated as the "$\text{SH}$ Rules")
  • Governed by the Companies (Prospectus and Allotment of Securities) Rules, $2014$ (commonly designated as the "$\text{PAS}$ Rules")

• Capital Structure and Corporate Financing Sources

  • Owned Capital: Equity Share Capital and Preference Share Capital
  • Debt Capital / Borrowed Funds:
  • Deposits (governed by Sections $73$ to $76$)
  • Debentures (governed by Section $71$)
  • External Commercial Borrowings ($\text{ECB}$)
  • Foreign Currency Exchangeable Bonds ($\text{FCEB}$)
  • American Depositary Receipts ($\text{ADR}$) and Global Depositary Receipts ($\text{GDR}$)
  • Bank Loans and Financial Institution Borrowings (governed by Section $179$ and Section $180$)

• Legal Definition of Share (Section $2(84)$)

  • A share represents a share in the share capital of a company and explicitly includes stock.
  • It constitutes the smallest unit, part, or denomination into which the share capital of a company is divided.

• Distinction Between Share and Stock

  • Initial Issuance: Shares are issued directly upon allotment. Stock cannot be issued initially; shares are subsequently converted into stock once fully paid up.
  • Nature: Shares represent precise, indivisible unit holdings (e.g., $11$ shares of $\text{Rs. } 10$ each representing a total holding of $\text{Rs. } 110$). Stock represents a consolidated bundle or collection of fully paid shares merged into a single aggregate fund.
  • Document of Title: Share holdings are evidenced by a Share Certificate specifying discrete share numbers. Stock holdings represent an aggregate value credited to the member.

• Judicial Precedent on Nature of Shares

  • New London Brazilian Bank v. Brocklebank: A share is not merely a sum of money; it represents a complex bundle of rights and obligations created by the statute and the Articles of Association of the company.

Section $43$: Kinds of Share Capital

• Types of Share Capital

  • Equity Share Capital: All share capital that is not preference share capital.
  • Preference Share Capital: Capital that carries preferential rights regarding:
  • Dividend: Fixed rate or fixed amount payable prior to equity dividend payments.
  • Repayment: Priority over equity shareholders in the repayment of capital upon winding up or liquidation.

• Voting Rights Comparison under Section $43$

  • Equity Shareholders: Enjoy voting rights on all resolutions placed before the general meeting (subject to Section $47$ and Section $43$ rules).
  • Preference Shareholders: Hold no voting rights in general meetings except under specific circumstances prescribed in Section $47(2)$.

• Classification of Preference Shares

  • Cumulative vs. Non-Cumulative: Cumulative preference shares carry the right to accumulate unpaid dividend arrears, payable in future profitable years before equity dividends. Non-cumulative preference shares forfeit unpaid dividends if profits are insufficient in any given year.
  • Participating vs. Non-Participating: Participating preference shares carry a right to participate in surplus profits or assets remaining after standard preference and equity payments. Non-participating shares receive only their fixed dividend rate.
  • Convertible vs. Non-Convertible: Convertible preference shares can be converted into equity shares; non-convertible shares cannot.
  • Redeemable vs. Irredeemable: Redeemable preference shares are repaid within a specified period. Irredeemable preference shares are strictly prohibited under Section $55(1)$.

• Classification of Equity Shares

  • Equity Shares with Normal Voting Rights: Plain vanilla shares carrying standard uniform voting rights (e.g., $1 \text{ share} = 1 \text{ vote}$).
  • Equity Shares with Differential Rights (DVR): Shares carrying differential rights as to voting, dividend, or otherwise (e.g., $1 \text{ share} = 3 \text{ votes}$, $1 \text{ share} = 6 \text{ votes}$, or $4 \text{ shares} = 1 \text{ vote}$). Shares carrying DVR are of the same kind but constitute distinct classes.

Section $43$ & Rule $4$: Issue of Equity Shares with Differential Voting Rights (DVR)

• Conditions for Issuing Equity Shares with DVR (Rule $4(1)$ of $\text{SH}$ Rules, $2014$)

  1. Authorization: The Articles of Association ($\text{AOA}$) of the company must authorize the issue of shares with $\text{DVR}$.
  2. Shareholder Approval: An Ordinary Resolution ($\text{OR}$) must be passed at a General Meeting of shareholders.
  3. Cap on Voting Power: The voting power in respect of shares with $\text{DVR}$ shall not exceed $74\%$ of total voting power ($\text{TVP}$) of the company at any point in time.
  4. Filing Compliance: The company must have no default in filing Financial Statements under Section $137$ (Form $\text{AOC-4}$ within $30\text{ days}$) and Annual Return under Section $92$ (Form $\text{MGT-7}$ within $60\text{ days}$) for immediately preceding $3\text{ financial years}$ ($\text{FYs}$).
  5. No Subsisting Default in Core Financial Commitments: The company has no subsisting default in:
  • Payment of declared dividend
  • Repayment of matured deposits
  • Redemption of preference shares or debentures
  • Payment of interest on deposits or debentures
  1. No Subsisting Default in Statutory and Institutional Liabilities:
  • Payment of preference dividend
  • Repayment of loan from Public Financial Institutions ($\text{PFI}$) or State Financial Institutions ($\text{SFI}$), or interest thereon
  • Payment of employee statutory dues (Provident Fund - $\text{PF}$, Bonus, Gratuity)
  • Crediting required funds to the Investor Education and Protection Fund ($\text{IEPF}$) under Section $125$
  1. Five-Year Cure Period Provision: A company may issue $\text{DVR}$ shares after the expiry of $5\text{ years}$ from the end of the financial year in which any default specified in point $6$ above was fully made good.
  2. No Penalty by Statutory Regulators: The company must not have been penalized by any Court or Tribunal during the last $3\text{ years}$ under:
  • Reserve Bank of India Act, $1934$
  • Securities and Exchange Board of India Act, $1992$
  • Securities Contracts (Regulation) Act ($\text{SCRA}$), $1956$
  • Foreign Exchange Management Act ($\text{FEMA}$), $1999$

• Operational and Procedural Rules for DVR

  • Rule $4(2)$ - Explanatory Statement: Explanatory statement annexed to the notice of general meeting must specify particulars of issue, size of issue, and details of $\text{DVR}$.
  • Rule $4(3)$ - Conversion Prohibition: Existing normal equity shares cannot be converted into $\text{DVR}$ equity shares, nor can $\text{DVR}$ equity shares be converted into normal equity shares.
  • Rule $4(4)$ - Disclosure in Board Report: The Board of Directors must disclose complete particulars of the $\text{DVR}$ issue in the Board's Report for the relevant financial year.
  • Rule $4(5)$ - Rights of DVR Shareholders: Holders of $\text{DVR}$ shares enjoy all other rights (such as bonus shares, rights issue, etc.) that an ordinary equity shareholder receives.
  • Rule $4(6)$ - Register of Members: Register of Members maintained under Section $88$ must contain all particulars of $\text{DVR}$ shares issued.

• Exemption: Section $43$ does not apply to Specified $\text{IFSC}$ Public Companies and Private Companies, provided they have not defaulted in filing under Section $92$ or Section $137$

Section $55$: Issue and Redemption of Preference Shares

• Prohibition on Irredeemable Preference Shares (Section $55(1)$)

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

• Tenure for Redemption

  • Standard Maximum Tenure: Maximum $20\text{ years}$ from the date of issue.
  • Infrastructure Projects Exception (Rule $10$ of $\text{SH}$ Rules): Preference shares issued for infrastructure projects may exceed $20\text{ years}$ up to a maximum of $30\text{ years}$, provided that a minimum of $10\%$ of such preference shares are redeemed every year from the $21\text{st year}$ onwards on a proportionate basis or earlier.

• Conditions for Issuance (Rule $9$ of $\text{SH}$ Rules)

  • Authorized by Articles of Association ($\text{AOA}$).
  • Special Resolution ($\text{SR}$) passed in general meeting.
  • No subsisting default in the redemption of preference shares or in the payment of dividend on any preference shares.

• Sources and Rules for Redemption (Section $55(2)$)

  • Fully Paid Requirement: Preference shares must be fully paid-up prior to redemption.
  • Permissible Sources:
  • Out of profits of the company available for dividend; or
  • Out of proceeds of a fresh issue of shares made for the purposes of redemption.
  • Capital Redemption Reserve ($\text{CRR}$): When preference shares are redeemed out of profits, a sum equal to the nominal (face) value of the shares redeemed must be transferred to the Capital Redemption Reserve ($\text{CRR}$).
  • Premium on Redemption: Premium payable on redemption must be provided for out of profits of the company or out of the Securities Premium Account ($\text{SPA}$) under Section $52$.

• Inability to Redeem or Pay Dividend (Section $55(3)$)

  • If a company is unable to redeem any preference shares or pay dividend thereon, it may, with the consent of holders of $3/4\text{th}$ in value of such preference shares AND approval of the National Company Law Tribunal ($\text{NCLT}$), issue further redeemable preference shares equal to the amount due.
  • Upon granting approval, $\text{NCLT}$ shall order the immediate redemption of preference shares held by dissenting shareholders (those holding up to $10\%$ or not consenting in favor).

• Utilization of CRR (Section $55(4)$)

  • Capital Redemption Reserve ($\text{CRR}$) may be applied by the company in paying up unissued shares to be issued to members as fully paid bonus shares pursuant to Section $63$

• Filing Form: File Form $\text{SH-7}$ with the Registrar of Companies ($\text{ROC}$) within $30\text{ days}$ of redemption/alteration.

Section $53$: Prohibition on Issue of Shares at Discount

• General Rule (Section $53(1)$ & $53(2)$)

  • Any issue of shares at a discount is strictly prohibited.
  • Any share issued by a company at a discounted price shall be void ab initio.

• Statutory Exception (Section $53(2A)$)

  • A company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or Corporate Debt Restructuring ($\text{CDR}$) framework specified by the Reserve Bank of India ($\text{RBI}$).

• Penalty for Contravention (Section $53(3)$)

  • Fine on Company and Officers in Default: Amount equal to the amount raised through the issue of shares at a discount OR $\text{Rs. } 5,00,000$, whichever is less.
  • Restitution Liability: The company is additionally liable to refund all monies received with interest at the rate of $12\%\text{ p.a.}$ calculated from the date of issue of shares to the date of actual refund.

Section $54$: Sweat Equity Shares

• Definition: Sweat Equity shares means equity shares issued by a company to its directors or employees at a discount or for consideration other than cash, for providing their know-how or making available rights in the nature of intellectual property rights ($\text{IPR}$) or value additions.

• Definition of Eligible Employee (Rule $8$ of $\text{SH}$ Rules)

  • 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 otherwise.
  • An employee or director as defined above of a subsidiary company (in or outside India) or holding company of the company.

• Conditions for Issue (Section $54(1)$ & Rule $8$)

  1. Special Resolution: Requires a Special Resolution ($\text{SR}$) passed by the company in General Meeting specifying the number of shares, current market price, consideration, and class of directors/employees.
  2. Regulatory Framework:
  • Listed Company: Must comply with Section $54$ and $\text{SEBI}$ (Share Based Employee Benefits and Sweat Equity) Regulations, $2021$
  • Unlisted Company: Must comply with Section $54$ and Rule $8$ of Companies ($\text{SH}$) Rules, $2014$
  1. Validity of SR: The Special Resolution authorizing sweat equity issue remains valid for allotment for maximum $12\text{ months}$.
  2. Lock-in Period: Sweat equity shares are subject to a mandatory lock-in period of $3\text{ years}$ from the date of allotment.
  3. Valuation: Valuation of intellectual property rights, know-how, or value additions must be performed by a Registered Valuer.
  4. Register: The company must maintain a Register of Sweat Equity Shares in Form $\text{SH-3}$ at its Registered Office or such other place as the Board may decide.

• Pari Passu Ranking (Section $54(2)$)

  • Sweat equity shares rank pari passu with existing equity shares, carrying identical rights, limitations, and restrictions.

• Quantitative Limits on Sweat Equity

  • Annual Limit: In any single Financial Year ($\text{FY}$), maximum $15\%$ of existing Paid-Up Equity Share Capital ($\text{PUESC}$) OR value of $\text{Rs. } 5\text{ Crores}$, whichever is higher.
  • Overall Cap: Total sweat equity issued shall not exceed $25\%$ of paid-up equity share capital at any point in time.
  • Startup Exemption Cap: For a Start-up company (valid up to $10\text{ years}$ from its date of incorporation), sweat equity shares shall not exceed $50\%$ of its paid-up equity share capital.

• Comprehensive Computation Example

  • Given: A company named Rangeela Ltd. has a Paid-Up Equity Share Capital ($\text{PUESC}$) of $\text{Rs. } 19\text{ Crores}$.
  • Step 1: Compute FY Limit: $15\% \text{ of } 19\text{ Cr} = \text{Rs. } 2.85\text{ Cr}$. Compare with threshold $\text{Rs. } 5\text{ Cr}$. The higher value is $\text{Rs. } 5\text{ Crores}$.
  • Step 2: Compute Overall Cap: $25\% \text{ of } 19\text{ Cr} = \text{Rs. } 4.75\text{ Crores}$.
  • Conclusion: Although the single-year limit yields $\text{Rs. } 5\text{ Crores}$, the absolute cumulative ceiling is $25\%$ of $\text{PUESC}$. Thus, Rangeela Ltd. can issue sweat equity shares up to a maximum value of $\text{Rs. } 4.75\text{ Crores}$.

Section $52$: Issue of Shares at Premium & Securities Premium Account

• Accounting Mandate (Section $52(1)$)

  • When a company issues shares at a premium (for cash or non-cash consideration), a sum equal to the aggregate premium amount must be credited to a separate account called the "Securities Premium Account" ($\text{SPA}$).
  • Journal entry effect: Asset/Cash A/c Dr. to Share Capital A/c (Nominal Value) to Securities Premium A/c (Premium).

• Permissible Application of SPA (Section $52(2)$)   a) Paying up unissued shares of the company to be issued to members as fully paid bonus shares.   b) Writing off preliminary expenses of the company.   c) Writing off expenses of, or commission paid, or discount allowed on any issue of shares or debentures of the company.   d) Providing for premium payable on redemption of redeemable preference shares or debentures.   e) Buy-back of own shares or securities under Section $68$

• Restricted Application for Specified Companies (Section $52(3)$)

  • For prescribed classes of companies complying with Accounting Standards under Section $133$, utilization of $\text{SPA}$ is restricted primarily to bonus shares, writing off issue expenses of equity shares, and buy-back.

Section $42$: Private Placement

• Definition (Section $42(1)$ & Rule $14$ of $\text{PAS}$ Rules, $2014$)

  • Private Placement ($\text{PP}$) means any offer or invitation to subscribe securities to a selected group of persons (termed "Identified Persons" - $\text{IP}$) by a company (other than by way of public offer) through issuance of a Private Placement Offer-cum-Application Letter in Form $\text{PAS-4}$.

• Numerical Ceiling on Identified Persons (Section $42(2)$)

  • Offer shall be made to maximum $200\text{ persons}$ in a Financial Year ($\text{FY}$) for each kind of security (equity, debenture, preference, etc.).
  • Exclusions from the Limit of $200$:
  1. Qualified Institutional Buyers ($\text{QIBs}$)
  2. Employees offered securities under Employee Stock Option Plan ($\text{ESOP}$)
  • $\text{NBFC}$ / $\text{HFC}$ Exception: Non-Banking Financial Companies ($\text{NBFCs}$) registered with $\text{RBI}$ and Housing Finance Companies ($\text{HFCs}$) registered with $\text{NHB}$ are exempt from the $200$ numerical limit if they comply with regulations framed by $\text{RBI}$ / $\text{NHB}$.

• Key Statutory Conditions for Private Placement

  • No Right of Renunciation: $\text{PAS-4}$ offer letter is personal to the identified person and contains no right of renunciation.
  • Banking Channels Only: All application money must be paid via Cheque, Demand Draft ($\text{DD}$), or other banking channels. Cash payments are strictly prohibited.
  • Separate Bank Account: Application money received must be deposited in a separate bank account in a scheduled bank and cannot be utilized until allotment is completed AND return of allotment in Form $\text{PAS-3}$ is filed with $\text{ROC}$.
  • Previous Issue Completion: No fresh private placement offer shall be made unless previous offer of private placement has been completed, withdrawn, or cancelled.
  • Prohibition on Public Advertisements: No company issuing securities via private placement shall release public advertisements or utilize public media/agents.

• Allotment Timeline, Refund, and Interest Penalty (Section $42(6)$)

  • Allotment Period: Allotment must be completed within $60\text{ days}$ of receiving application money.
  • Refund Period: If securities are not allotted within $60\text{ days}$, application money must be refunded within $15\text{ days}$ from the $60\text{th day}$.
  • Interest Liability: If refund is delayed beyond $15\text{ days}$, interest accrues at $12\%\text{ p.a.}$ from the expiry of the $60\text{th day}$ until actual repayment.

• Filing and Registers

  • Record Maintenance: Company maintains record of private placement in Form $\text{PAS-5}$.
  • Return of Allotment: File Form $\text{PAS-3}$ with $\text{ROC}$ within $15\text{ days}$ of allotment.
  • Cross-Border Restrictions: Any private placement offer to a Body Corporate or individual incorporated/nationalized in a country sharing a land border with India requires prior Central Government approval under $\text{FEMA}$.

• Special Resolution Framework for Debt Securities (Rule $14(2)$)

  • Generally, private placement requires a Special Resolution ($\text{SR}$) for each offer.
  • For Non-Convertible Debentures ($\text{NCDs}$), if proposed borrowing falls within limits of Section $180(1)(c)$ ($\text{Existing Borrowings} + \text{Proposed Borrowings} \le [\text{PUESC} + \text{Free Reserves} + \text{SPA}]$), a Board Resolution ($\text{BR}$) under Section $179(3)$ is sufficient.
  • If Section $180(1)(c)$ limit is exceeded, a single $\text{SR}$ passed once a year for all $\text{NCD}$ issues in that $\text{FY}$ is sufficient.

• Penal Provisions (Section $42(9)$, $42(10)$, $42(11)$)

  • Default in Filing $\text{PAS-3}$: Company, Promoters, and Directors liable to penalty of $\text{Rs. } 1,000/\text{day}$ up to maximum \text{Rs. } 25,000,000$.\n - **Contravention of Section 42$**: Penalty up to amount raised through the offer OR$ ext{Rs. } 2,000,000$(whichever is lower), and full refund of all money raised with$12\%\text{ p.a.}$interest within$30\text{ days} of order.\n - **Deemed Public Issue**: Any offer made in contravention of Section 42 shall be deemed to be a Public Issue governed by public offer regulations.\n\n# Section 62: Further Issue of Share Capital\n\n- **Section 62(1)(a) - Rights Issue**\n - Offered to existing equity shareholders in proportion to paid-up equity capital (e.g., 1:4$,$1:5) via Letter of Offer / Notice.\n - **Notice Period**: Offer open for minimum 15\text{ days}$and maximum$30\text{ days}.\n - *Private Company & Specified IFSC Public Company Exemption*: Shorter offer period allowed if consent is received from at least 90\% of members.\n - **Dispatch**: Notice dispatched at least 3\text{ days} before opening of issue via Registered Post, Speed Post, Courier, or Electronic mode (with proof of delivery).\n - **Deemed Decline**: Non-acceptance within time limit is deemed a decline of offer.\n - **Right of Renunciation**: Unless ext{AOA} otherwise provides, offer includes right of renunciation in favor of another person.\n - **Disposal of Declined Shares**: If declined, the Board of Directors ( ext{BOD}) may dispose of unaccepted shares in a manner not disadvantageous to the company and its members.\n\n- **Section 62(1)(b) & Rule 12 - Employee Stock Option Plan (ESOP)**\n - Issuance of options to employees subject to vesting conditions and exercise period.\n - **Approval**: Requires Special Resolution ( ext{SR}$). For unlisted Private Companies, Ordinary Resolution ($ ext{OR}$) is sufficient if no default under Section$92$/$137\n - **Eligible Employee**: Permanent employee in/outside India, Director of company/subsidiary/holding.\n - **Exclusions**: Employee who is a promoter/belongs to promoter group, or Director holding >10\% of equity shares directly or indirectly.\n - **Vesting Rules**:\n - Minimum vesting period: 1\text{ year}.\n - In case of Death or Permanent Incapacity: Options vest immediately in legal heirs or employee.\n - In case of Resignation/Termination: Unvested options lapse.\n - **Restrictions**: Options are non-transferable, cannot be pledged/hypothecated, carry no dividend or voting rights until converted into shares.\n - **Register**: Maintained in Form ext{SH-6} at Registered Office.\n - **Amalgamation**: Prior vesting period served in transferor company is adjusted/credited in transferee company.\n\n- **Section 62(1)(c) - Preferential Issue**\n - Shares offered to any person (including non-members) by passing Special Resolution ( ext{SR}).\n - Price determined by Registered Valuer report. Must comply with Section 42 private placement conditions.\n - *Note*: Every preferential allotment is a Private Placement, but every Private Placement is not a preferential allotment.\n\n- **Section 62(3) & 62(4) - Conversion of Debt/Loan into Shares**\n - **Voluntary Conversion (Section 62(3)$)**: Option attached to debentures/loans to convert into equity shares, provided terms were approved by Special Resolution ($ ext{SR}) at the time of sanctioning loan or issuing debentures.\n - **Government Forced Conversion (Section 62(4) & 62(5)$)**: Central Government ($ ext{CG}) may order conversion of loans/debentures provided by Government into equity shares in public interest, even if terms do not contain conversion option.\n - *Factors Considered by CG*: Financial position of company, interest rate, terms of issue.\n - **Deemed Capital Increase (Section 62(6)$)**: Upon Government conversion order, Authorized Share Capital of company automatically increases by equivalent amount, and Memorandum of Association ($ ext{MOA}) stands deemed altered.\n\n# Section 63: Bonus Issue\n\n- **Definition (Section 63(1))**\n - Capitalization of profits by issuing fully paid-up bonus shares to existing equity shareholders for free on a proportionate basis (e.g., 1:1$,$1:4).\n\n- **Permissible Sources**\n 1. Capital Redemption Reserve ( ext{CRR})\n 2. Securities Premium Account ( ext{SPA})\n 3. Free Reserves / Profit and Loss Account\n - **Strict Statutory Prohibition**: Bonus shares shall **NEVER** be issued out of Revaluation Reserve created by revaluing assets.\n\n- **Conditions for Issuing Bonus Shares (Section 63(2))**\n - Authorized by Articles of Association ( ext{AOA}).\n - Recommended by Board Resolution ( ext{BR}$) AND approved by Shareholders via Ordinary Resolution ($ ext{OR}) in General Meeting.\n - No default in payment of principal or interest on debentures or deposits.\n - No default in payment of statutory employee dues (Provident Fund, Bonus, Gratuity).\n - Existing partly paid-up shares must be converted to fully paid-up prior to bonus allotment.\n - Bonus shares cannot be issued in lieu of dividend payments.\n - **Irrevocability**: Once announced by the Board, the bonus offer cannot be subsequently withdrawn.\n\n# Allotment of Securities & Sections 39$,$40\n\n- **Mechanism of Allotment**: Public Invitation via Prospectus \rightarrow$Application by Public$\rightarrow Acceptance/Allotment by Board. Allotment is the appropriation of unappropriated share capital.\n\n- **Minimum Application Money (Section 39(2))**\n - Companies Act Mandate: Minimum 5\%$of Face Value ($ ext{FV}).\n - ext{SEBI (ICDR)}$Mandate: Minimum$25\% of Issue Price.\n\n- **Minimum Subscription & Refund Timelines (Section 39(3))**\n - Minimum subscription required for public offer: 90\% of total issue size.\n - Time limit to receive minimum subscription: Within 15\text{ days} from closure of issue.\n - If minimum subscription is not received within timeframe, full application money must be refunded within 15\text{ days} from issue closure.\n - If refund delayed beyond 15\text{ days}$, interest payable at$15\%\text{ p.a.}$from expiry of$15\text{th day}.\n - Money credited directly to bank account from which application money was remitted.\n\n- **Return of Allotment (Section 39(4) & Rule 3$of$ ext{PAS} Rules)**\n - File Form ext{PAS-3}$with$ ext{ROC}$within$30\text{ days} of allotment, along with list of allottees (Name, Address, Occupation, Securities allotted) and valuation reports or contracts (for non-cash consideration).\n - Penalty under Section 39(5)$: Company and Officer in Default liable to penalty of$ ext{Rs. } 1,000/\text{day}$up to maximum$ ext{Rs. } 1,00,000$.

• Section $40$ - Stock Exchange Permission & Underwriting

  • Stock Exchange Permission (Section $40(1)$): Company must apply to at least one Recognized Stock Exchange ($\text{RSE}$) and obtain listing permission before public issue. Name of exchange stated in prospectus.
  • Separate Bank Account (Section $40(3)$): Application money held in separate account in scheduled bank.
  • Non-waivable (Section $40(4)$): Any condition purporting to waive compliance with Section $40$ is strictly void.
  • Underwriting Commission (Section $40(6)$ & Rule $13$ of $\text{PAS}$ Rules):
  • Authorized by $\text{AOA}$, paid out of profits or issue proceeds, disclosed in prospectus.
  • Maximum Rate for Shares: Lower of $5\%$ of Issue Price OR rate authorized in $\text{AOA}$.
  • Maximum Rate for Debentures: Lower of $2.5\%$ of Issue Price OR rate authorized in $\text{AOA}$.
  • Example Computation: $1\text{ crore shares}$ @ Face Value $\text{Rs. } 10$, Premium $\text{Rs. } 90$ ($\text{Issue Price} = \text{Rs. } 100$). Total issue value = $\text{Rs. } 100\text{ Crores}$. Max underwriting commission = $5\% \text{ of } 100\text{ Cr} = \text{Rs. } 5\text{ Crores}$.
  • No commission paid on shares not offered to public.

Section $46$: Share Certificate & Duplicate Certificates

• Evidentiary Value (Section $46(1)$)

  • Share Certificate issued under Common Seal (if any) or authorized signatories is prima facie evidence of title of shares held.

• Signatory Requirements

  • Signed by $2\text{ Directors}$ OR $1\text{ Director} + 1\text{ Company Secretary (CS)}$.
  • If company has a CS, CS signature is mandatory.
  • At least $1\text{ director}$ should be non-Executive/other than MD/WTD if composition permits.
  • Signatures may be printed, engraved, or e-signed. Directors personally responsible for safe custody of signature equipment.

• Duplicate Share Certificate Rules (Section $46(2)$ & Rules $5, 6, 7$)

  • Issued if original is lost, destroyed, stolen, torn, defaced, or mutilated and surrendered.
  • Format: Form $\text{SH-1}$. Duplicate Register in Form $\text{SH-2}$.
  • Preserved in good order for $30\text{ years}$ (permanently in case of dispute).
  • Issuance Timeline:
  • Unlisted Company: Within $3\text{ months}$ of submission of documents.
  • Listed Company: Within $45\text{ days}$ of submission of documents.

• Penalty for Fraudulent Issue (Section $46(5)$)

  • Fine on Company: Minimum $5\text{ times}$ face value up to maximum $10\text{ times}$ face value OR $\text{Rs. } 10\text{ Crores}$, whichever is higher.
  • Officer in default liable for fraud under Section $447$

Section $47$: Voting Rights

• Section $47(1)$ - Equity Voting Rights

  • Every equity shareholder has right to vote on every resolution.
  • Voting on poll is in proportion to paid-up equity share capital.
  • Nidhi Company Exemption: Maximum voting right capped at $5\%$ per member.

• Section $47(2)$ - Preference Voting Rights

  • Preference shareholders vote ONLY on resolutions affecting their rights, or resolutions for:
  1. Winding up of company
  2. Capital reduction
  • Arrears Provision: If preference dividend is not paid for consecutive $2\text{ years}$ or more, preference shareholders obtain voting rights on ALL resolutions until dividend arrears are cleared.

Section $49$ & Section $50$: Calls on Shares

• Section $49$ - Uniform Basis: Calls on shares of same class must be made on a uniform basis.
• Section $50$ - Calls in Advance:
  • $50(1)$: Accept calls in advance if authorized by $\text{AOA}$.
  • $50(2)$: NO voting rights on advance call money until called up.
  • $50(3)$: Dividend paid on advance money if authorized by $\text{AOA}$.

Section $56$: Transfer and Transmission of Shares

• Transfer vs. Transmission

  • Transfer: Voluntary act between Transferor ($\text{TFR}$) and Transferee ($\text{TFE}$) using Share Transfer Form $\text{SH-4}$.
  • Transmission: By operation of law (Death, Insolvency, Lunacy). Intimation sent to company; no $\text{SH-4}$ required.

• Section $56(1)$ - Execution of Transfer

  • Instrument $\text{SH-4}$ duly executed, stamped, dated, specifying details of $\text{TFR}$ and $\text{TFE}$, along with Share Certificate delivered to company within $60\text{ days}$ of execution.
  • Not applicable to Demat mode holdings.

• Section $56(3)$ - Partly Paid Shares

  • Notice sent to transferee in Form $\text{SH-5}$ if application made by transferor alone. Transferee has $2\text{ weeks}$ to object; deemed accepted if no objection.

• Timelines for Issue of Certificates (Section $56(4)$)

  1. Subscribers to MOA: Within $2\text{ months}$ from incorporation.
  2. Allotment of Shares: Within $2\text{ months}$ from allotment.
  3. Transfer / Transmission: Within $1\text{ month}$ from receipt of instrument/intimation.
  4. Allotment of Debentures: Within $6\text{ months}$ from allotment.

• Penal Provisions (Section $56(6)$)

  • Company and OID liable to fine of $\text{Rs. } 50,000$. Depository/DP acting with intent to defraud liable under Section $447$

Section $57$, $58$, $59$: Personation, Refusal, and Rectification

• Section $57$ - Personation: Deceitful personation as owner of shares $\rightarrow$ Imprisonment $1\text{ to } 3\text{ years}$ AND fine \text{Rs. } 1,00,000\text{ to } \text{Rs. } 5,00,000$.\n- **Section 58 - Refusal & Appeals**:\n - **Private Company**: Refusal notice within 30\text{ days}$. Appeal to$ ext{NCLT}$within$30\text{ days}$of notice (or$60\text{ days} if no notice sent).\n - **Public Company**: Refusal notice within 30\text{ days}$. Appeal to$ ext{NCLT}$within$60\text{ days}$of notice (or$90\text{ days} if no notice sent).\n - Contravention of ext{NCLT}$Order: Imprisonment$1\text{ to } 3\text{ years}$AND fine$ ext{Rs. } 1,00,000\text{ to } \text{Rs. } 5,00,000$.
• Section $59$ - Rectification: Aggrieved party applies to $\text{NCLT}$ for rectification of Register of Members. $\text{NCLT}$ issues order within $10\text{ days}$.

Section $48$: Variation of Shareholders' Rights

• Section $48(1)$ - Procedure: Variation requires consent in writing of holders of at least $3/4\text{th}$ of issued shares of that class OR Special Resolution passed at separate meeting of that class.
• Section $48(2)$ - Dissenting Shareholders: Holders of at least $10\%$ of issued shares of that class who did not vote for variation may apply to $\text{NCLT}$ within $21\text{ days}$ for cancellation. Variation stayed until $\text{NCLT}$ decides. Copy of order filed with $\text{ROC}$ within $30\text{ days}$.

Section $61$ & Section $64$: Alteration of Share Capital

• Section $61(1)$ - Alteration Methods (Ordinary Resolution)
  • 61(1)(a): Increase Authorized Share Capital.
  • 61(1)(b): Consolidate shares (e.g., $10\text{ shares of Rs. } 10 \rightarrow 1\text{ share of Rs. } 100$). Requires $\text{NCLT}$ approval if voting rights change.
  • 61(1)(c): Sub-divide shares (e.g., $1\text{ share of Rs. } 100 \rightarrow 10\text{ shares of Rs. } 10$). Ratio of paid/unpaid remains unchanged.
  • 61(1)(d): Convert fully paid shares into stock and vice versa.
  • 61(1)(e): Cancel unsubscribed shares (diminution of capital).
• Section $61(2)$: Cancellation under 61(1)(e) is NOT deemed reduction of share capital.
• Section $64$ - Notice to ROC: File Form $\text{SH-7}$ with $\text{ROC}$ within $30\text{ days}$ of alteration/redemption. Penalty for delay: $\text{Rs. } 500/\text{day}$ up to max $\text{Rs. } 5,00,000$ for company and $\text{Rs. } 1,00,000$ for OID.

Section $66$: Reduction of Share Capital

• Pre-requisites: Authorized by $\text{AOA}$, Special Resolution passed, $\text{NCLT}$ approval. No default in deposits/interest.
• Methods (Section $66(1)$):
  • 66(1)(a): Extinguish/reduce liability on partly paid shares.
  • 66(1)(b)(i): Cancel lost paid-up capital unrepresented by assets.
  • 66(1)(b)(ii): Pay off excess paid-up share capital.
• Procedure: Notice to $\text{CG}$, $\text{ROC}$, $\text{SEBI}$, and Creditors. Representation within $3\text{ months}$. Auditor certificate required confirming accounting treatment complies with Accounting Standards under Section $133$.
• Filing: $\text{NCLT}$ order filed with $\text{ROC}$ within $30\text{ days}$ in Form $\text{INC-28}$. $\text{ROC}$ issues certificate of reduction.

Section $67$: Restrictions on Purchase / Financial Assistance

• Section $67(1)$ & $67(2)$: Company cannot buy its own shares unless formal reduction is made. Public company cannot give loans/financial assistance to purchase its own shares.
• Exceptions (Section $67(3)$):
  1. Banking company lending money in ordinary course.
  2. Trust scheme for employee benefit approved by $\text{SR}$ (Rule $16$).
  3. Loans to employees (other than Directors/KMPs) up to $6\text{ months' salary}$ to purchase fully paid shares.
• Private Company Exemption: Exempt if no body corporate invested, borrowings < 2 \times \text{PUESC} or $\text{Rs. } 50\text{ Crores}$ (whichever lower), and no borrowing default.

Section $68$, $69$, $70$: Buy-Back of Securities

• Legal Framework: Sections $68$, $69$, $70$ + Rule $17$ of $\text{SH}$ Rules + $\text{SEBI (BB)}$ Regulations $2018$

• Sources (Section $68(1)$): Free Reserves ($\text{FR}$), Securities Premium Account ($\text{SPA}$), Proceeds of earlier issue of different security.

• Quantum and Approvals (Section $68(2)$):

  • Board Resolution ($\text{BR}$) passed at Board meeting: Up to $10\%$ of [$\text{PUESC} + \text{FR} + \text{SPA}$].
  • Special Resolution ($\text{SR}$) in GM: Up to $25\%$ of [$\text{PUESC} + \text{FR} + \text{SPA}$].
  • Equity Buy-back limit in any $\text{FY}$: Max $25\%$ of total Paid-Up Equity Share Capital ($\text{PUESC}$).
  • Post Buy-back Debt-Equity Ratio: Shall not exceed $2:1$ ($\text{Debt} : \text{Equity} \le 2:1$).
  • Cooling-off Period: $1\text{ year}$ gap between two buy-backs.

• Comprehensive Practical Math Problem on Buy-Back Ceiling

  • Data Provided:
  • Paid-Up Equity Share Capital ($\text{PUESC}$): $\text{Rs. } 30\text{ Lakhs}$ ($3,00,000\text{ shares}$ of $\text{Rs. } 10$ each)
  • Securities Premium Account ($\text{SPA}$): $\text{Rs. } 32.5\text{ Lakhs}$
  • General Reserve ($\text{GR}$): $\text{Rs. } 6\text{ Lakhs}$
  • P&L Cr. Balance: $\text{Rs. } 4.3\text{ Lakhs}$
  • Revaluation Reserve: $\text{Rs. } 6.2\text{ Lakhs}$ (Strictly excluded)
  • Total Debt: $\text{Rs. } 42\text{ Lakhs}$
  • Offer Price for Buy-Back: $\text{Rs. } 30\text{ per share}$
  • Step-by-Step Calculation:
  • Pre-Buy-back Equity = $\text{PUESC} + \text{SPA} + \text{GR} + \text{P\&L} = 30 + 32.5 + 6 + 4.3 = \text{Rs. } 72.8\text{ Lakhs}$.
  • Minimum Post-Buy-back Equity Required = $\frac{\text{Debt}}{2} = \frac{42}{2} = \text{Rs. } 21\text{ Lakhs}$.
  • Maximum Permissible Equity Outflow / Reduction = $72.8 - 21 = \text{Rs. } 51.8\text{ Lakhs}$ ($\text{Rs. } 51,80,000$).
  • Let $y$ be the number of shares bought back:
    • Outflow per share = Buy-Back Price = $\text{Rs. } 30$
    • Transfer to Capital Redemption Reserve ($\text{CRR}$) per share = Face Value = $\text{Rs. } 10$
    • Total reduction in reserves/equity per share = $30 + 10 = \text{Rs. } 40$
  • Equation: $40 y = 51,80,000 \implies y = 1,29,500\text{ shares}$.
  • Permitted Outflow: $1,29,500 \times 30 = \text{Rs. } 38,85,000$.
  • Transfer to CRR: 1,29,500 \times 10 = \text{Rs. } 12,95,000$.\n - *Verification*: \text{Post-BB Equity} = 72,80,000 - 38,85,000 - 12,95,000 = \text{Rs. } 21,00,000$. Debt-Equity ratio maintained exactly at$2:1.\n\n- **Procedural Mandates and Timelines**\n - **Completion**: Buy-back must be completed within 1\text{ year}$from date of passing$ ext{BR}$or$ ext{SR}.\n - **Declaration of Solvency (Form ext{SH-9}$)**: Filed with$ ext{ROC}$and$ ext{SEBI}$prior to buy-back, signed by$2\text{ Directors}$(including MD if any), verified by affidavit confirming solvency for$1\text{ year}.\n - **Physical Destruction**: Shares bought back must be extinguished and physically destroyed within 7\text{ days} of completion.\n - **Cooling-off Period on Fresh Issue (Section 68(8)$)**: No fresh issue of same kind of shares within$6\text{ months} (except bonus issue, conversion of debentures/preference shares, ESOP, sweat equity).\n - **Forms**: Offer Letter in Form ext{SH-8}$, Register of Buy-back in Form$ ext{SH-10}$, Return of Buy-back in Form$ ext{SH-11}$filed within$30\text{ days} of completion.\n\n- **Prohibitions on Buy-Back (Section 70)**\n - No buy-back through any subsidiary company (including own subsidiary) or investment companies/group of investment companies.\n - No buy-back if default exists in repayment of deposits/interest, dividend, redemption of preference shares/debentures, or bank/FI loans.\n - *Cure Period*: Buy-back allowed if default is rectified AND 3\text{ years} have elapsed since rectification.\n - No buy-back if default exists in compliance with Section 92$(Annual Return), Section$129$(Financial Statements), Section$123$(Declaration of Dividend), or Section$127$$ (Failure to Distribute Dividend).