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SHARE CAPITAL
In relation to a company limited by shares, the word “capital” means the share capital i.e., the capital in terms of rupees divided into specified number of shares of a fixed amount each.
For e.g. share capital of a company is Rs. 10,00,000 which can be divided into 1,00,000 shares ofRs. 10 each.
Classification of Share Capital
(a) Nominal, Authorised or Registered Capital: As per section 2(8), “authorised capital” or “nominal capital” or ‘Registered capital’ means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.
(b) Issued Capital: As per section 2(50), “issued capital” means such capital as the company issues from time to time for subscription. It is that part of the authorised or nominal capital which the company issues for the time being for public subscription and allotment. This is computed at the face or nominal value.
(c) Subscribed Capital: According to Section 2(86), “subscribed capital” means such part of the issued capital which is subscribed. . (d) Called up Capital: As per section 2(15), “called-up capital” means such part of the subscribed capital, whichhas been called for payment.
(e) Paid-up Share Capital: As per section 2(64), “paid-up share capital” means such aggregate amount received as paid-up in respect of shares issued
KIND OF SHARE CAPITAL – Section 43
a. Equity share capital
b. Preference Share capital
Equity Share Capital (Explanation to Section 43)
Equity share capital means all share capital which is not preference share capital;
Equity share capital
i. with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed.
Preference Share Capital
Preference share capital means that part of the issued share capital of the company which carries or would carry a preferential right with respect to
a. payment of dividend, either
▲ as a fixed amount or
▲ an amount calculated at a fixed rate
(b) repayment, in the case of a winding up or repayment of capital
Voting rights of Preference share holders - Section 47(2)
Preference shareholders shall have a right to vote only on resolutions placed before the company which
▲ directly affect the rights attached to preference shares and,
▲ any resolution for the winding up of the company or for the repayment or reduction of its
equity or preference share capital
his voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company:
Provided further that where the dividend in respect of a class of preference shares has not been paid for aperiod of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
Equity share and Preference shares – difference
Preference Shares Equity Shares
Preference shares are entitled to a fixed rate Not so in case of equity shares. It depends on of dividend profits and what is recommended by Board &
approved by shareholders. D
Dividend on the preference shares is paid in The dividend on equity shares is paid only preference to the equity shares. after the preference dividend has been paid
In case of cumulative preference shares, the If dividend is not paid in any financial years, it Dividend gets cumulated does not get cumulated
In case of winding up, preference share holder No such preference. Paid only after preference gets preference over equity share holders with shareholders gets paid regard to the payment of capital.
Preference shareholders can Equity shareholders can vote on any matters vote only when affecting the company
• his special rights as a preference
shareholder are being varied , or
No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, unless
a. issue is authorised by company’s articles
b. Bonus issue has been recommended by the Board, and approved by the shareholders in the
general meeting of the company
c. The company has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities
d. The company has not defaulted in respect of the payment of statutory dues of the employees,
such as contribution to provident fund, gratuity and bonus;
e. the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;
No Bonus shares in lieu of dividend - Section 63(3)
The bonus shares shall not be issued in lieu of dividend.
No Withdrawal after Board recommendation – Rule 14
the company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.
Advantages of Issuing Bonus Shares
1. it enhances reputation of the company.
2. Increases the loyalty of the shareholders
3. Market value of the Company’s shares comes down to their nominal/reasonable value by issue
of bonus shares.
3. Market capitalisation of the company increases with the increase in number of shares.
4. Bonus shares is not an income. Hence it is not a taxable.
5. Paid-up share capital increases with the issue of bonus shares.
FURTHER ISSUE OF SHARES/RIGHT SHARES – SECTION 62
Whenever at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to the existing holders of equity shares in
proportion to the paid-up share capital on their shares at the time of further issue by sending a letter of offer.
The company must give notice of offer to each of the equity shareholders,
▲ giving him option to take the shares offered to him by the company.
▲ the number of shares he has been offered
▲ Shareholders should be given at least 15 days but not more than 30 days to decide to subscribe
▲ The said notice shall be despatched through registered post or speed post or through
electronic mode to all the existing shareholders at least 3 days before the opening of the issue.
Non-conveyance of acceptance : If the shareholder does not convey to the company his acceptance he shall be deemed to have declined the offer.
Right to renounce : the notice of offer of rights shares shall indicate that the shareholder has a right to renounce the offer in whole or in part , in favour of some other persons.
Board power to dispose off shares :
If a shareholder has neither renounced in favour of another person nor accepted the shares, the Board of directors may dispose of the shares so declined in such manner which is not dis-advantageous to the shareholders and the company.
Issues of further shares to employees : Section 62 (1) (b)
a company may issue further shares to its employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.
ISSUES OF FURTHER SHARES TO PERSONS OTHER THAN SHAREHOLDERS
Section 62(1)(c) provides that a company can issue further shares to persons other than existing shareholders either for cash or for a consideration other than cash, if
1. the company in General Meeting passes a special resolution to this effect; and
2. the price of such shares is determined by the valuation report of a registered valuer
The restrictions contained in Section 62 of the Act regarding issue of further shares do not apply to:-
ii. the total number of shares or other securities to be issued;
iii. the price or price band at which the allotment is proposed;
iv. basis on which the price has been arrived at along with report of the registered valuer;
v. relevant date with reference to which the price has been arrived at;
vi. the class or classes of persons to whom the allotment is proposed to be made;
vii. intention of promoters, directors or key managerial personnel to subscribe to the offer;
viii. the proposed time within which the allotment shall be completed;
ix. the names of the proposed allottees and the percentage of post preferential offer
capital that may be held by them;
x. the change in control, if any, in the company that would occur consequent to the
preferential offer;
xi. the number of persons to whom allotment on preferential basis have already been made
during the year - number of securities as well as price;
xii. the justification for the allotment proposed to be made for consideration other than
cash together with valuation report of the registered valuer.
xiii. The pre issue and post issue shareholding pattern of the company in the prescribed format
e. the allotment of securities on a preferential basis shall be completed within a period of twelve
months from the date of passing of the special resolution.
f. if the allotment of securities is not completed within twelve months from the date of passing of
special resolution, another special resolution shall be passed .
g. the price of the shares or other securities to be issued on a preferential basis shall be
determined on the basis of valuation report of a registered valuer ;
h. When convertible securities are offered on a preferential basis with an option to apply for and get
equity shares allotted, the price of the resultant shares shall be determined beforehand on the basis of a valuation report of a registered valuer;
i. When shares or other securities are to be allotted for consideration other than cash, the valuation
of such consideration shall be done by a registered valuer
ISSUE AND REDUMPTION OF PREFERENCE SHARES :
Section 55. (1) : no company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable.
Section 55( 2 ) : a company limited by shares may issue preference shares liable to be redeemed within a period not exceeding twenty years from the date of issue
Exceptions
company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years ,
subject to the redemption of a minimum ten percent of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
a. Proviso to Section 55(2) provides that no such shares shall be redeemed
▲ except out of the profits of the company which would otherwise be available for
dividend
▲ or out of the proceeds of a fresh issue of shares made for the purposes of such
redemption;
unless they are fully paid
b. where such shares are proposed to be redeemed out of the profits of the company a sum equal to
the nominal amount of the shares to be redeemed shall be transferred from profits to reserves , to be called the Capital Redemption Reserve Account
c. Premium, if any, payable on redemption of any preference shares issued shall be provided for
out of the profits of the company or out of the company’s securities premium account
When company is unable to redeem the preference shares – Section 55 (3)
when a company is not in a position to redeem any preference shares or to pay dividend in accordance with the terms of issue it may
▲ with the consent of the holders of three-fourths in value of such preference shares and with the
approval of the Tribunal on a petition made by it in this behalf
b. the nature of such shares i.e. cumulative or non - cumulative, participating or non - participating ,
convertible or non – convertible
c. the objectives of the issue;
d. the manner of issue of shares ;
e. the price at which such shares are proposed to be issued;
f. the basis on which the price has been arrived at;
g. rate of dividend on each share
h. the terms of redemption , including the tenure of redemption, redemption of shares at premium
i. if the preference shares are convertible, the terms of conversion ;
j. the current shareholding pattern of the company;
k. the expected dilution in equity share capital upon conversion of preference shares.
Redemption of preference shares – Rule 9(6)
a company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act and the
preference shares may be redeemed:-
a. at a fixed time or on the happening of a particular event;
b. any time at the company’s option ; or
c. any time at the shareholder’s option
BUY BACK OF SHARES - Section 68(1)
a company may purchase its own shares or other specified securities (hereinafter referred to as “buy- back”) out of
i. its free reserves; or
(ii) the securities premium account
iii) the proceeds of any shares or other specified securities.
However, no buy-back of any kind of shares or other specified securities can be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
Authorisation (Section 68(2)
▲ articles of association of the company should authorise buyback.
▲ If not alter the articles of association to authorise buyback.
▲ Buy-back can be made with the approval of the Board of directors at a board meeting. Board of
directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and
▲ the approval of the Board should be accorded by means of a resolution passed at the meeting.
▲ by a special resolution passed by shareholders in a general meeting. Shareholders can approve
buy-back up to 25% of the total paid-up capital and free reserves of the company in respect of any financial year
▲ In case of a listed company, approval of shareholders shall be obtained only by postal ballot.
Special Resolution to be accompanied by Explanatory Statement (Section
The notice shall be accompanied by an explanatory statement stating
a. a full and complete disclosure of all material facts;
b. the necessity for the buy-back;
c. the class of shares or securities intended to be purchased under the buy-back;
d. the amount to be invested under the buy-back; and
e. the time-limit for completion of buy-back.
Rule 17(1) Companies (Share Capital and Debentures) Rules, 2014
states that explanatory statement shall contain the following details
j. that immediately following the date on which the general meeting is convened there will be no
grounds on which the company could be found unable to pay its debts;
ii. the company will be able to meet its liabilities as and when they fall due and will not be
rendered insolvent within a period of one year from that date; and
iii. in forming their opinion for the above purposes, the directors have taken into account the
liabilities (including prospective and contingent liabilities); as if the company were being wound up under the provisions of the Companies Act, 2013.
(n) a report addressed to the Board of directors by the company’s auditors stating that:
i. they have inquired into the company’s state of affairs;
ii. the amount of the permissible capital payment for the securities in question is in their view
properly determined;
iii. that the audited accounts on the basis of which calculation with reference to buy back is done
is not more than six months old from the date of offer document, and
(iv) the Board of directors have formed the opinion as specified in clause (m) on reasonable grounds and that the company, having regard to its state of affairs, will not be rendered insolvent within a period of one year from that date;
Letter of Offer to be Filed with Registrar of Companies before Buy
Filing of letter of offer with RoC – Section 17(2)
▲ The company shall file with the Registrar of Companies a letter of offer in Form No SH 8 ,
along with the fee as prescribed before the buy back.
▲ letter of offer shall be dated and signed on behalf of the Board of directors of the company by not
less than two directors of the company, one of whom shall be the managing director, where there is one.
Dispatch of letter of offer to shareholders – Section 17 (4)
The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than 21 days from its filing with the Registrar of Companies.
Duration of Offer for buy back (Rule 17(5)
The offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer.
Post buy-back debt-equity ratio (Section 68(2)(d)
The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves.
Time gap between two buybacks (proviso to Section 68(2)
No offer of buy-back under Section 68(2) shall be made within a period of one year from the date Tof the closure of the preceding offer of buy-back, if any.
Time Limit for completion – Section 68 (4)
Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board.
Methods of buy-back - Section 68(5)
The buy-back of share can be made
a. from the existing shareholders on proportionate basis;
b. from the open market;
c. from employees of the company.
Filing Declaration of Solvency with SEBI/ROC as the case may be
(Section 68(6) read with Rule 17(3) of Companies Share Capital &
Debentures) Rules, 2014.
a company shall, before making such buyback, file with the Registrar and the Securities and Exchange Board (in case of listed companies), a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, in Form No. SH.9 and
an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year from the date of declaration adopted by the Board.
Extinguishment of securities bought back - Section 68(7)
The company shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
Prohibition of further issue of shares or securities (Section 68(8)
When a a company completes a buy-back of its shares or other specified securities it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub-section (1) of section 62 or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
Return of buyback (Section 68(10)
A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board (in case of listed companies) a return containing such particulars relating to the buy-back within thirty days of such completion , as may be prescribed:
c. an employee or a director of a subsidiary, in India or outside India, or of a holding company of the
company;
What is Value additions’
means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment.
Conditions for Issue of Sweat Equity Shares – section 54 (1)
a company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied:
(i) the issue has been authorised by a special resolution passed by the company in the general meeting.
(ii) as on the date of issue, at least one year should have elapsed from the date on which the company had commenced business.
iii. a company whose shares are listed on a recognized stock exchange should comply with the
regulations made in this behalf by SEBI.
iv. a company whose shares are not so listed should comply with the rules made in this behalf
by the Central Government (i.e., Companies (Share Capital and Debentures) Rules, 2014)
Compliances under Companies (Share Capital and Debentures) Rules,
As per Rule 8(2) the explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall contain the following particulars, namely:-
a. the date of the Board meeting at which the proposal for issue of sweat equity shares was
approved;
b. the reasons or justification for the issue;
c. the class of shares under which sweat equity shares are to be issued;
d. the total number of shares to be issued;
e. the class or classes of directors or employees to whom such shares are to be issued;
f. the principal terms and conditions on which sweat equity shares are to be issued, including basis
of valuation ;
g. the time period of association of such person with the company;
h. the names of the directors or employees to whom the sweat equity shares will be issued and
their relationship with the promoter or/and Key Managerial Personnel;
i. the price at which the sweat equity shares are proposed to be issued;
j. the consideration including consideration other than cash, if any to be received for the sweat
equity;
k. the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity
and how it is proposed to be dealt with;
l. a statement to the effect that the company shall conform to the applicable accounting standards;
m. diluted Earning Per Share pursuant to the issue of sweat equity shares , calculated in
accordance with the applicable accounting standards.
Validity of Special Resolution authorizing sweat equity shares – Rule 8(3)
the special resolution authorising the issue of sweat equity shares shall be valid for a period of not more than twelve months from the date of passing of the special resolution.
Limits on issue of sweat equity shares - Rule 8(4)
▲ Company shall not issue sweat equity shares for more than fifteen percent of the existing paid
up equity share capital in a year or shares of the issue value of rupees five crores, whichever is higher.
▲ The issuance of sweat equity shares in the Company shall not exceed twenty five percent , of the
paid up equity capital of the Company at any time.
Lock-in period
The sweat equity shares shall be locked in/non transferable for a period of three years from the date of allotment and
(h) the consideration (including consideration other than cash) received or benefit accrued to the company from the issue of sweat equity shares.
h. the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.
ISSUE OF SHARES WITH DIFFERENTIAL RIGHTS – Section 43
Companies can issue shares with differential rights etc.
Rule 4 of Companies (Share Capital and Debentures) Rules, 2014 states the following conditions regarding shares with differential voting rights.
Conditions for issuing shares with differential rights - Rule 4 of Companies (Share Capital and Debentures) Rules, 2014
a. the articles of association of the company authorizes the issue of shares with differential rights;
b. the issue of shares is authorized
▲ by an ordinary resolution passed at a general meeting of the
▲ in case of listed company approved by the shareholders through postal ballot ;
c. the shares with differential rights shall not exceed twenty-six percent of the total post-issue paid
up equity share capital including equity shares with differential rights issued at any point of time;
d. the company shall have consistent track record of distributable profits for the last three years;
e. the company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue such shares;
f. the company has no subsisting default in
• the payment of a declared dividend to its shareholders or
• repayment of its matured deposits or redemption of its preference shares or
• debentures that have become due for redemption or payment of interest on such deposits
or debentures or payment of dividend;
g. the company has not defaulted in
• payment of the dividend on preference shares or
• repayment of any term loan from a public financial institution or State level financial
institution or scheduled Bank or
• dues with respect to statutory payments relating to its employees to any authority or
default in crediting the amount in Investor Education and Protection Fund to the Central Government;
h. the company has not been penalized by Court or Tribunal during the last three years of any
offence under the Reserve Bank of India Act, 1934 , the Securities and Exchange Board of India Act, 1992 the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.
Contents in explanatory statement to the notice of the meeting - Rule
4(2) of Companies (Share Capital and Debentures) Rules, 2014
the explanatory statement shall contain the following particulars, namely:-
a. the total number of shares to be issued with differential rights;
b. the details of the differential rights ;
(c) the percentage of the shares with differential rights to the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time;
c. the reasons or justification for the issue;
d. the price at which such shares are proposed to be issued either at par or at premium;
e. the basis on which the price has been arrived at;
f. (i) in case of private placement or preferential issue
(a) details of total number of shares proposed to be allotted to promoters, directors and key managerial personnel;
(b) details of total number of shares proposed to be allotted to persons other than promoters, directors and key managerial personnel and their relationship if any with any promoter, director or key managerial personnel;
(ii) in case of public issue - reservation, if any, for different classes of applicants including promoters, directors or key managerial personnel;
(h) the percentage of voting right which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;
i. the scale or proportion in which the voting rights of such class or type of shares shall vary;
(j) the change in control in the company that may occur consequent to the issue of equity shares with differential voting rights;
(k) the diluted Earning Per Share pursuant to the issue of such shares, calculated in accordance with the applicable accounting standards;
(l) the pre and post issue shareholding pattern along with voting rights
