UNIT III

SHARES

The capital of a company is divided into a number of units of fixed amount. These units
are known as shares. According to Section 2(84) of Companies Act 2013, “share is a share in
the share capital of a company and includes stock”.

Supreme Court define the share as a right to participate in the profits made by a company
while it is going concern an d declares a dividend, and in the assets of the company when it
is wound u.p

In short share does not merely represent an interest of a shareholder in a company, it carries
with it certain rights and liabilities while the company is a going concern or while the
company is being wound up. It thus represents a bundle of „rights and obligations‟.

Nature of a share

A share is not a sum of money but is the interest of a shareholder in the company
measured by a sum of money for the purpose of liability in the first place and of interest in
the second but also consisting of a series of mutual covenants entered by all shareholders
inter se.

A share is a chose-in action implies the existence of some person entitled to the rights
which are rights in action as distinct from rights in possession and until the shares issued no
such person exists.

In India Share is regarded as goods. Section 2(7) of Sales of Goods Act 1930 define
shares to mean any kind of movable property other than actionable claims and money and
includes stock and shares

A share is not a negotiable instrument ( negotiable instrument is a document guaranteeing

the payment of a specific amount of money either on demand or at a set time with the payer
usually named on the document)

A share is an expression of proprietary relationship between shareholder and the

company

Difference between Share and Share Certificate

Section 44 of Companies Act 2013 describe the shares as movable property Transferable in a
manner provided by articles of company.

Section 46 describe the share certificate to mean a certificate under the common seal of the
company specifying any share held by any member.

Section 46 further suggests that share certificate shall be prima facie evidence of title of
the member to such share. Thus, where share presents for property, share certificate is an
evidence of title of the member to such property .

A share certificate serve as an estoppel as to payment against the Bona Fide purchaser of
shares from alleging that the amount stated as being paid on share has not been paid
Each share bears a distinctive number and it is not the same as share certificate number.
Therefore a single share certificate maybe and evidence of many shares, say 1500 even 1
lakh.

Share vs stock

A share represents I unit into which the capital of the company is divided. Thus, the share
capital of the company is 5 lacs divided into 50,000 units of rupees 10 each. Each unit shall
be called a share of a company

The term stock on the other hand may be defined as the aggregate of fully paid up shares
of a member merged into one fund of equal value. It is set of shares put together in a
bundle. The stock is expressed in terms of money and not as so many shares. Stock can be
divided into fractions of any amount and may be transferred like shares.

Diff between n share and stock

SHARE STOCK
Shares have nominal value Stock has no nominal value
All shares are equal denomination Stock has no such equal denomination
Shares may be fully-paid or partly paid Stock must be fully paid-up.

Share can be transferable in round number Stock is transferable in small fractions.

Shares always have their distinctive Stock does not bear any such distinctive
numbers. Each share has its own number. numbers.

They can be issued directly to the public It cannot be issued to public directly. Only
the shares can be issued directly to the
public.

Kinds of Shares

As per Companies Act, 2013 only two kinds of shares can be issued by a company. Section
43 of Companies Act provides that the share capital of company limited by shares will be of
two kinds only:

a. Equity share capital-

I. With voting rights or
II. With differential rights as dividend, voting otherwise in accordance with
such rules and subject to such conditions as may be prescribed.
b. Preference share capital

Equity Shares
Shares which are not preference shares are called equity shares. In other words shares which
do not enjoy any preferential rights in the matter of payment of dividend or repayment of
capital are known as equity share. After satisfying the rights of preference shares, equity
shares shall be entitled to share in remaining amount of distributable net profit of the
company. The dividend on equity share is not fixed and may vary from year to year
depending upon the amount of profits available. The rate of dividend is recommended by the
board of directors of the company and declared by shareholders in Annual General Meeting.

Every member for company limited by shares and holding equity share capital there in shall
have-

a. Right to vote on every resolution placed before the company; and

b. his voting rights, on a Poll shall be in proportion to his share in the paid up equity
share capital of the company.

Non voting shares

Non-Voting shares are termed as share with you know voting rights visa contemplated as
share with my carrier additional dividend in view of the voting rights section 43 aloud issue
of equity shares without voting rights

Preference Shares

A preference share is one which carries the following two rights over holders of equity
shares: (i) a preferential right in respect of dividends at a fixed amount or at a fixed rate and
(ii) a preferential right in regard to repayment of capital on winding up.

As compared to equity share holders, the holders of preferential share can vote only on such
resolutions as directly affect the rights attached to preference shares and any resolution for
winding up of the company or for the repayment or reduction of equity or preference share
capital.

Voting rights of a preference share holder on a poll shall be in proportion to his share in the
paid up preference share capital of the company.

The preference or priority of the preference shareholders is in relation to the rights of equity
shareholders [Section 85]

Types of Preference Shares

Participating and non-participating. If a preference share carries either one or both of the
following rights then it is known as participating share: (i) to Participate further in the profits
either along with, or after payment of a certain rate of dividends on equity shares, (ii) to
participate in the surplus assets at the time of winding up [s.85]. Thus, if a preference share
does not carry either of these rights, then it will be known as non-participating share. It
should be remembered that preference shares are always presumed to be non-
participating unless expressly described as participating.
Cumulative and non-cumulative- lf a preference share carries the right for payment of
arrears in dividend from future profits, then such a share is known as cumulative
preference share. Thus, dividends not paid in any year or years accumulate and are paid out
whenever profits are available. If a preference share does not carry the right to dividend in
arrears, then such a preference share is known as non- cumulative or simple. Thus, if no
profits are available in a year' the holders get nothing nor can they claim unpaid dividend in
subsequent years. Its hould be remembered that preference shares are always presumed to be
cumulative unless expressly described as non cumulative.

Redeemable and irredeemable- A preference share which can be redeemed upon the
resolution of the Board of Directors, if the articles so provide, is known as redeemable
preference share (s.80). A company can issue redeemable preference shares if it complies
with the following requirements:

(i) such shares are to be issued as redeemable preference shares; shares issued earlier
cannot be converted into redeemable preference;
(ii) there must be authority in the articles to issue redeemable preference shares;

(iii) the shares can be redeemed only when they are fully paid up;

(iv) the shares may only be redeemed: (a) out of profits of the company which would
otherwise be available for dividend, or (b) out of the proceeds of a new issue of shares - not
necessarily of redeemable preference shares made for the Purpose of redemption;

(v) if there is a premium payable on redemption, it must have been provided out of
profits or. out of the share premium account before the shares are redeemed;

(vi) where the shares are redeemed out of profits, a sum equal to the nominal amount
of the shares redeemed is to be transferred out of profits to the "Capital Redemption Reserve
Account.

The redeemable preference shares can be redeemed by the company either at a fixed
date, or after a certain period of time, or at the option of the company. But redemption
of such shares shall not be taken as reducing the nominal capital of the company [s.80 (3)].

The Companies (Amendment) Act, 1999 has amended s. 80 to the effect that for the words
"share premium account", the words "security premium account‟ shall be substituted.

Irredeemable preference shares- No company limited by shares can issue any preference
shares which are irredeemable or are redeemable after the expiry of ten years from the date
of issue. Also, once the company has redeemed the shares, or it is about to redeem them, it
may issue new shares upto the same nominal amount and it will be presumed that the
preference shares were never redeemed. In such a situation the company's capital is not
deemed to be increased and, therefore, no stamp duty is to be paid. This privilege is
available only if the redemption takes place within one month after the making of the fresh
issue [s.80 (4)].
Par value of shares

SEBI regulations permit the companies to use shares of any par value subject only to the
value being not less than Rupee 1 or being other than multiple of rupee one . Thus,different
companies may now issue shares of different par value .

Further, companies whose shares are dematerialised or who have applied for it would be
eligible to alter the par values of shares indicated in the memorandum and articles of
association.

However, at any given time there shall be only one denomination for the shares of a
company.

Raising of Capital/ Issue of Shares

Companies limited by shares raise the necessary capital for their operations through issue of
shares. This may be done in three ways:

I. By private placement of share

II. By allotting entire share to an issue house which in turn offers the share for sale
to public and
III. My inviting the public to subscribe for shares in the company through a
prospectus

I. By private placement of shares

Private company limited by shares is prohibited by the Act and the articles from inviting
public for subscriptions of share and debenture. As per section 42 (4 ) an offer for invitation
shall be deemed to be invitation to public if it cannot be considered as private placement
under subsection 2 of Section 42

A public company can also raise its capital by placing the share privately and without
inviting the public for subscription of its shares and debentures. In this kind of arrangement
underwriter or a broker finds persons, normally his clients who wish to buy the shares. As
per the regulations issued by SEBI, private placement of shares should not be made by
subscription of shares from unrelated investors to any kind of market intermediaries. This
means promoters shares should not be contributed by subscription of those shares by
unrelated investors through brokers, merchant bankers, etc. However, subscription of shares
by friends, relatives, and associates is allowed.

II. By an offer for sale

In this arrangement a company agrees to allot shares and debentures at a price to a financial
institution or an issue house for sale to public. This issue house publishes the document
called an „offer for sale‟ within application form attached, offering to the public shares and
debentures for sale at a price higher than what is paid by it at par. This document is deemed
to be a prospectus under Section 25.
By inviting public through prospectus

This is the most common method by which a company seeks to raise capital from the public
by inviting offers from members of the public to subscribe for shares and debentures
through prospectus. An investor is expected to study the prospectus and if convinced about
the prospectus of the company apply for shares.

III. Issue of shares to existing shareholders

Capital is also raised by issue of rights shares to existing shareholders. Acc to Section 62
shares are allotted to the existing equity shareholders in proportion to their original share
holding. Example one share against every two shares held by a member

Greenshoe Option

A greenshoe option is an over-allotment option. In the context of an initial public

offering (IPO), it is a provision in an underwriting agreement that grants the underwriter the
right to sell investors more shares than initially planned by the issuer if the demand for a
security issue proves higher than expected.

Greenshoe options typically allow underwriters to sell up to 15% more shares than the
original amount set by the issuer for up to 30 days after the IPO if demand conditions
warrant such action. For example, if a company instructs the underwriters to sell 200
million shares, the underwriters can issue if an additional 30 million shares by exercising a
greenshoe option.

Underwriters use greenshoe options in one of two ways. First, if the IPO is a success and the
share price surges, the underwriters exercise the option, buy the extra stock from the
company at the predetermined price, and issue those shares, at a profit, to their clients.
Conversely, if the price starts to fall, they buy back the shares from the market instead of the
company to cover their short position, supporting the stock to stabilize its price.

Employee Benefit Scheme

Employees’ Stock Option” means the option given to the directors, officers or
employees of a company or of its holding company or subsidiary company or companies, if
any, which gives such directors, officers or employees, the benefit or right to purchase, or
to subscribe for, the shares of the company at a future date at a pre-determined price .

“Employee” for the purpose of this scheme means—

(a) a permanent employee of the company who has been working in India or outside India;
or
(b) a director of the company, whether a whole time director or not but excluding an
independent director; or

(c) an employee as defined in clause (a) or (b) of a subsidiary, in India or outside India, or of
a holding company of the company
ALLOTMENT OF SHARES

A public limited company invites subscriptions from the public and for this purpose a
prospectus is issued. In response to this invitation, the prospective investors offer to buy
shares by submitting the prescribed application form. If the application is accepted by the
company, it proceeds to allot him the shares. With the issue of the letter of allotment, the
offer stands accepted thereby giving rise,to a legally binding contract between the company
and the shareholder. Thus, an allotment is the acceptance by the company of the offer to
purchase shares.

Notice of Allotment

An allotment is the acceptance of an offer to take shares by an applicant, and like any other
acceptance, it must be communicated. There can be no binding contract unless the
acceptance of the offer is properly communicated. Thus, notice of allotment must be given to
the allottee. If the letter of allotment is properly posted i.e., it is correctly addressed and
stamped, a contract will arise even if the letter of allotment is delayed or lost in the course of
transit. In this letter of allotment, besides other details of the number of shares applied for,
the number of shares allotted etc., the allottee is asked to pay the money due on allotment to
the company's bankers within a specified time unless there is partial allotment and the
allotment money is appropriated out of the excess application money.

Rules regarding Allotment of Shares

The rules regarding allotment of shares can be discussed under the two broad headings - (a)
general rules and (b) the legal rules.

General Rules

You know that the allotment is the acceptance of an offer to purchase certain number of
shares. Therefore, the general rules relating to valid acceptance of an offer must be followed.
The general rules regarding allotment of shares are as follows:

i) The allotment must be made by proper authority: It is the duty of the Board
of' directors to allot the shares. However, the Board may delegate this authority to
some other person or persons as per the provisions of the articles of association.
Allotment of Shares made by an improper authority will make it void.
ii) The allotment should be made within reasonable time: The offer to purchase
shares of the company must be accepted within a reasonable time otherwise the
applicants may refuse to take shares because after a reasonable time the offer
lapses. What is the 'reasonable time' is a question of fact in each case.
iii) It must be communicated: The allotment of shares should be communicated to
the applicants. Posting of a properly addressed and stamped letter of
allotment will be taken as a valid communication. Even if this letter of
allotment is delayed or lost in transit, the allottee will be liable
 iv) It must be absolute and unconditional: The allotment of shares must conform
to the terms and conditions of the application. If the allotment is not according to
the terms and conditions, the applicant may refuse to accept the shares even
though allotment has been made to him. If the conditions are not fulfilled, the
applicant must reject the shares promptly. His silence or acceptance will debar
him from this right.

Statutory Rules Regarding Allotment of Shares

So far as the private companies are concerned, the Act does not lay down any restrictions as
to the allotment of shares. But the Act has laid down certain restrictions regarding the
allotment of shares by public companies.

When no public offer is made: Where a public company does not offer its shares to the
public but arranges the capital privately, the company cannot proceed with the allotment
unless it files with the Registrar of Companies at least three days before the first allotment, a
statement in lieu of prospectus. If the allotment is made in contravention to this provision, it
will be termed as 'irregular allotment' and it shall be voidable at the option of the allottee. In
addition to this, every officer of the company, who is a party to such allotment shall be
punishable with fine which may extent to Rs. 1,000.

When an Offer is made to the Public: Where a company offers to shares to the public:

i) Issue of Prospectus: A prospectus must be issued and a copy of the same

should be filed with the Registrar. You should note that the company cannot allot
the shares immediately after issuing the prospectus. No allotment can be made until
the beginning of the fifth day from the date of issue of prospectus. The fifth day is to
be counted from the date of issue of prospectus was published or was otherwise
notified to the public.
The Companies Act, however, does not specifically provide for the time of
closing the subscription list. It means that the company may keep the subscription
list open for any length of time it wants. According to stock exchange regulations
where the shares are listed on any stock exchange, the subscription list must be kept
open for at least three days, In such cases, the prospectus usually mentions the time
of closing of the subscription lists.

ii) Minimum subscription: No company can proceed to allot shares to the public until
the minimum subscription (which is 90%.thc issue amount) has been subscribed,
and the sum payable on applications for it has been received by the company in
cash. If the company does not receive the minimum subscription of 90% of the issue
amourit, the eqtire subscription will be refunded to the applicants within 90 days
from the date of closure of the issue. If there is a delay in refund of such amount by
more than ten days, the company is liable to pay interest at the rate of 15% per
annum for the delayed period.
iii) Application money: It is the amount which is payable on each share along-with the
application for purchase of shares. The amount payable on application of each -
share shall not be less than 5 per cent of the nominal amount of the share.
iv) Application money to be deposited in a scheduled bank: All the money received
from applicants must be deposited in a scheduled bank and it shall remain there until
the certificate to commence business is received.
v) Allotment of shares to dealt in on stock exchange. According to Section 73(1) of
the Companies Act, every company intending to offer shares 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
to be dealt with in the stock exchange. Thus, now it is made compulsory that the
shares must be listed on a recognised exchange.

Buyback of Shares/ Purchase of its own shares by a company

Section 67(1) of the Companies Act 2013 provides that a company limited by shares or
company limited by guarantee having share capital cannot buy its own shares. The
restriction is applicable to all companies whether private or public.

However Sec 68 allows a company to purchase its own shares or other securities subject to
certain conditions-

Sources to buy back:

A company can buy its own shares and other securities out of
a) its free reserves;
b) the securities premium account; or
c) the proceeds of the issue 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.
Preliminary Conditions for Buy back
Section 68(2) provides that no company shall purchase its own shares or other specified
securities unless:
a) The buyback is authorized by its articles;
b) A special resolution has been passed at a general meeting of the company authorizing
the buy-back, but the same is not required when:
i. the buy-back is 10% or less of the total paid-up equity capital and free
reserves of the company; and
ii. such buy-back has been authorized by the Board by means of a resolution
passed at its meeting;
c) The buy-back is twenty-five per cent or less of the aggregate of paid-up capital and
free reserves of the company. But in case of Equity Shares, the same shall be taken as 25%
of paid up equity capital only.
d) Debt equity ratio should be 2:1
Where: Debt is aggregate of secured and unsecured debts owed by the after buy-back
Equity: is aggregate of the paid-up capital and its free reserves:
e) All the shares or other specified securities for buy-back are fully paid-up;
f) If shares or securities are listed, buy back will be in accordance with the regulations
made by the Securities and Exchange Board in this behalf; and
g) The buy-back in respect of unlisted shares or other specified securities is in
accordance Share Capital and Debentures Rules, 2014.
h) No offer of buy-back shall be made within a period of one year from the date of the
closure of the preceding offer of buy-back, if any.

Share Certificate

A share certificate is a certificate issued by the company under its common seal specifying
the shares held by any member and the amount paid on each 'Share. A share certificate is an
evidence of title of the allottee or transferee to the shares. It is a declaration that the person in
whose name the certificate is made out and to whom it is, given, is a shareholder in the
company. However, it should be remembered that it is not a negotiable instrument,

The share certificate may be in any form, but a valid share certificate must have the
following contents:

i) Name of the company; ii) Name and address of the shareholder; iii) Number of shares held
by him; iv) Distinctive number of shares; v) Amount paid on each share; vi) Date of issue;
vii) Share certificate number; viii) Stamp; IX) Signatures of two directors and the Secretary.

Every person whose name is entered as a member in the Register of members is entitled to
receive one share certificate for all his shares without payment. A share certificate is
considered as the prima facie evidence of the title of the member to the shares mentioned in
the certificate.

Duplicate Share Certificate

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

a) is proved to have been destroyed or lost, or

b) having been defaced, mutilated or torn, is surrendered to the Company.

The fact of being a duplicate share certificate must be mentioned on the certificate. The
company may charge a fee not exceeding Rs, 2 per certificate while issuing a duplicate one.
If a company renews a share certificate or issues a duplicate one with intent to defraud, then
the company shall be punishable with fine which may extend to Rs. 10,000 and every officer
of the company who is in default shall be punishable with imprisonment a six months or
with fine upto Rs. 10,000 or with both.

Share Warrant

A share warrant is a bearer document of title to the specified shares. A share warrant is a
document issued under the common seal of the company stating that the bearer is
entitled to the specified number of shares. Since it is a bearer document, it can be
transferred by mere delivery. Thus, the holder of a share warrant is entitled to the shares
specified therein.

Rules regarding Share Warrants

A public company limited by shares may issue share warrants under its common seal in the
follbwing circumstances: a) if it is authorised by its articles; b) shares are fully paid-up; and
C) previous approval of the Central Government is obtained.

From the above it should be clear to you that share warrants can be issued only by public
companies in respect of fully paid shares. It is a substitute for the share certificate.

When a share warrant is issued, the company strikes out the name of the member from the
register of members of the company and makes a note about the issue of a share warrant.
The date of issue of share warrant is also recorded. The holder of the share warrant,
whenever he desires, can surrender it to the company for cancellation. Subject to the articles
of the company, the holder is entitled to have his name recorded as a member in the register
of members by paying such fee to the company as the Board of directors of the company
may from time to time determine.

Since the name of the shareholder is struck off from the register of members, it shall
not be possible for the company to know as to whom the dividends are to be paid.
Therefore, coupons are attached to a share warrant to provide for the payment of
dividend

Distinction between a Share Certificate and a Share Warrant

You have learnt about the nature of a share certificate and share warrant. Now you should be
able to distinguish between the two. The distinction between the two may be noted as
follows:

i) A share certificate can be issued by private as well as public companies, whereas

share warrants can be issued only by public companies.
ii) A share certificate is issued in respect of partly or fully paid shares, whereas a
share warrant can be issued only in respect of fully paid shares.
iii) The issuing of a share certificate is a statutory obligation and it requires no
approval of the Central Government, but for the issue of share warrants the
sanction of the Central Government must be obtained.
 iv) The holder of a share certificate is a member of the company. But the bearer of
the share warrant is ordinarily not considered as a member of the company
because on the issue of share warrant, the name of the shareholder is struck off
from the register of members. However, if the articles so provide, the bearer of
the warrant may be treated as member for the purposes defined in the articles.
v) The share certificate can be transferred by executing a transfer deed and
delivering the share certificate along with it, while share warrants can be
transferred by more delivery.
vi) Stamp duty is payable on transfer of shares, while no stamp duty is payable on
transfer of share warrants.
vii) A share certificate is not a negotiable instrument, while a share warrant is
considered to be a negotiable instrument.

Increase and Reduction of Share Capital

Every form of business needs funds to run the business. It can be a short term or long term
requirement. A short term need will have options like taking loans & advances. But a long
term need will require bringing in more capital. In a private limited company, such need can
make way to increase the authorized share capital of a company. Since the Company Act
governs a private entity, making changes in the structure will them to follow a procedure in
the Act and Rules.

The authorised share capital is the maximum amount of capital for which the Company
can issue shares to the shareholders.

How to increase the authorized capital of a company?

Step 1: Vetting of MOA and AOA

A company must check its MOA and AOA about the limit of authorized capital. If the issue
of shares is going to be beyond the specified limit in MOA then it has to increase its
authorized capital. Before increasing, the company must check whether it is can do so
legally as per the norms of association of the company. Altering AoA is one option to amend
such provisions.

Alteration of AOA:

To alter the AOA, the company must take approval from the shareholders in an annual
general meeting or extra-ordinary general meeting. Such altered AOA must be filed with
MCA within 30 days from the date of the resolution.

Once the AOA is altered, it can proceed with further procedure to increase authorized
capital.

Step 2: Holding Board Meeting

A board meeting must be arranged to take the approval of the board to increase authorized
share capital. Further, to decide the date and time to call an AGM or EGM to take the
shareholders‟ approval. A notice for holding an AGM or EGM must be sent to all the
shareholders as per the rules. A director must be authorized to file all the necessary forms
with the MCA.
Step 3: Hold Shareholders Meeting
The company shall hold the AGM/EGM on the specified date and time to take the approval
for an increase in authorized capital. An ordinary resolution must be passed in the meeting.

Step 4: Intimation to the ROC

After taking approval in shareholders meeting a company shall draft the altered MOA to
increase authorized share capital. A company has to intimate about the same by filing form
SH-7 with the MCA. The form must be filed in 30 days from the date of resolution. The
documents required to file the said form are as under.

 A certified true copy of Board resolution for alteration in AOA

 A certified true copy of Board resolution for alteration in MOA
 Notice of AGM/EGM
 A certified true copy of Shareholders resolution
 Altered copy of AOA
 Altered copy of MOA

After receiving approval from the MCA, a company shall alter its every copy of the MOA
and AOA. It is necessary to incorporate changes in AOA and MOA and put it up on website
if any.

Section 66 contains provisions with respect to reduction of share capital. The section
provides that subject to confirmation by the Tribunal on an application by the company, a
company limited by shares or limited by guarantee and having a share capital may by a
special resolution reduce the share capital in any manner and in particular may:

a. Extinguish or reduce the liability on any of its shares in respect of the share capital
not paid up, e.g.,where a share of rupees 10 on which rupees 5 has been paid is
treated as a share of rupees 5 fully paid up. In this way shareholder is relieved from
liability on the uncalled capital or
b. Either with or without extinguishing or reducing liability or an on any of its shares-
I. Cancel any paid up share capital which is not lost or is an presented by
available assets; or
II. Pay off any paid up share capital which is in excess of the wants of the
company

Rights Share
A rights offering (rights issue) is a group of rights offered to existing shareholders to
purchase additional stock shares, known as subscription warrants, in proportion to their
existing holdings. These are considered to be a type of option since it gives a company's
stockholders the right, but not the obligation, to purchase additional shares in the company.
In a rights offering, the subscription price at which each share may be purchased is generally
discounted relative to the current market price. Rights are often transferable, allowing the
holder to sell them in the open market.
Advantages of Rights Shares

Companies generally offer rights when they need to raise money. Examples include when
there is a need to pay off debt, purchase equipment, or acquire another company. In some
cases, a company may use a rights offering to raise money when there are no other viable
financing alternatives. Other significant benefits of a rights offering are that the issuing
company can bypass underwriting fees, there is no shareholder approval needed, and market
interest in the issuer's common stock generally peaks. For existing shareholders, rights
offerings present the opportunity to purchase additional shares at a discount.

Sweat Equity Shares

Sweat equity shares refers to equity shares given to the company‟s employees on favourable
terms, in recognition of their work. Sweat equity shares is one of the modes of making share
based payments to employees of the company. The issue of sweat equity shares allows the
company to retain the employees by rewarding them for their services. Sweat equity shares
rewards the beneficiaries by giving them incentives in lieu of their contribution towards the
development of the company. Further, Sweat equity shares enables greater employee stake
and interest in the growth of an organization as it encourages the employees to contribute
more towards the company in which they feel they have a stake.

Sweat equity shares can be issued to:

 Permanent employee of the company who has been working in India or outside India,
for atleast the last one year;
 Director of the company, whether a whole time Director or not;
 Employee or Director above of a subsidiary of the company, in India or outside
India, or of a holding company of the company.

Conditions to be Fulfilled

1) Not less than one year has, at the date of such issue, elapsed since the date on which the
company had commenced business;

2) The issue is authorised by a special resolution passed by the company;

3) The resolution specifies the number of shares, the current market price, consideration, if
any, and the class or classes of directors or employees to whom such equity shares are to be
issued;

4) The special resolution authorising the issue of sweat equity shares shall be valid for
making the allotment within a period of not more than twelve months from the date of
passing of the special resolution.
5) The sweat equity shares issued to directors or employees shall be locked in/non
transferable for a period of three years from the date of allotment and the fact that the share
certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or
mentioned in any other prominent manner on the share certificate.

6) Where the equity shares of the company are listed on a recognised stock exchange, the
sweat equity shares are issued in accordance with the regulations made by the Securities and
Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued
in accordance with the Companies Rules 2014.

Bonus Shares (Section 63)

The provisions with respect to issue of Bonus shares are contained in section 63 of
Companies Act 2013 besides in case of listed companies SEBI regulations 2009 shall also be
required to be complied with section 63 provides that

1. A company may issue fully paid up shares to its members in any manner whatsoever
out off
I. Its free Reserves
II. The securities premium account, or
III. The capital redemption reserve account
2. No company shall capitalise its profits or reserves for the purpose of issuing fully
paid up bonus shares under subsection 1 unless
a. It is authorised by its articles
b. It has on the Recommendation of the board been authorised in the
General Meeting of the company
c. It has not defaulted in payment of interest or principal in respect of
fixed deposits or debt securities issued by it
d. The partly paid up shares if any outstanding on the date of allotment
are made fully paid up
3. The bonus shares shall not be issued in lieu of dividend
---------------------------------Assignmnet 3-----------------------------------------

Call on Shares

When shares or debentures are issued, the terms of issue may specify the instalments by
which the issue price shall be payable. Instalment other than those payable by way of
application and allotment money are generally referred to as call. A call in strict sense
is a demand by the company for payment of part of the issue price of shares and
debentures which has not been paid and the date on which the payment was to be made
was not specified in terms of the issue. The amount payable on application on each share
must not be less than 5% of the nominal amount of the share (section 39). The balance must
be payable as and when called for by the board of directors in one or more instalments. Call
may also be made by liquidator in the course of winding up of the company.

The power to make calls is exercised by board in its meeting by means of a resolution
[Section 179(3)(a)]. The board, in making a call, must observe the provisions of Articles,
otherwise the call will be invalid and the shareholders are not bound to pay.

Essentials for a valid call

The Board of Directors of a Company has the right and authority to make calls on shares.

For making a valid call on shares the Board of Directors shall ensure that:
Board Resolution

Call on shares shall be made by the Board of Directors by passing a board resolution in this

regard as only the Board of directors of the Company has the authority to make calls on

shares. This power cannot be delegated by the Board of directors to any single director or to

any committee and must be exercised by the Board itself.

Uniform basis

Companies Act, 2013 provides that whenever any call on shares is made for a single class of

shares then such calls should be on a uniform basis for all shares in that class. However, as

regards to the shares which have the same nominal value but different paid up amount then

such shares cannot be considered to be belonging to a single class of shares.

Articles of Association

Board of directors of a Company should ensure that the calls on shares is made as per the

procedure outlined in the Article of Association of the Company. In case the articles of a

Company do not contain any provision in this regard then the Board shall follow the

Regulations 13-18 as laid down in Table F of Schedule I of Companies Act, 2013.

Call for Company benefit

Although the board of directors of a Company is authorized to make a call on shares, it is

their duty to make calls on shares when the Company genuinely requires fund and/or for any

bonafide purpose. The Board should not make calls to meet their private ends or for any

other whimsical reason.

Forfeiture of Share

You have learnt that the company does not require the shareholders to pay the full amount of
shares in one instalment. It makes calls on them as and when the money is needed. If a
shareholder fails to pay a valid call within the stipulated time, the company has two options:
(1) the company may file a suit for recovery of the amount, or (2) the company may forfeit
the shares. The first option is a lengthy process. Therefore, the company generally decides to
forfeit such shares.

The term 'forfeiture' means taking them away from the member. It deprives the
shareholder of his property. The shares can be forfeited only if there is a provision to this
effect in the articles of the company. You must note that shares can be forfeited only for
non-payment of any call or instalment of a call and not for any other debt due from a
member.

The following rules are applicable relating to the forfeiture of shares:

i) The power to forfeit shares must be given in the articles of the company. '
ii) Shares can be forfeited only for non-payment of calls. A forfeiture on any other
ground is invalid.
iii) The company must serve a proper notice on the defaulting member asking him to
pay the amount within a fixed period, failing which the shares shall be forfeited.
The shareholder must be given at least fourteen days notice to pay the amount.
The notice must indicate the exact amount to be paid. If there is a slight defect in
the notice, the forfeiture will become invalid allotment of shares.
iv) The Board of directors must pass a resolution for the forfeiture of shares.
v) The power for forfeiture must be exercised in good faith and for the benefit of the
company. Forfeiture for the purpose of relieving a friend from liability shall be
invalid.

Effects of Forfeiture

a) The shareholder ceases to be a member of the company in respect of such shares. He

loses all his rights. The money paid on such shares is forfeited. On forfeiture, his name is
removed from the register of members.

b) The shareholder cannot be sued by the company for unpaid calls. The articles of the
company may, however, make him liable for the unpaid calls. Any action must be taken
within three years from the date of forfeiture.

c) The former shareholder can be placed on the 'B' list of contributories, if the company
is wound up within twelve months of the date of forfeiture.

d) After forfeiture, the shares become the property of the company and the company can
dispose them of in any manner it likes. Generally, the forfeited shares are reissued.

If the shares have, been forfeited wrongfully,, the concerned shareholder can sue the
company for cancelling the forfeiture. But if it is not possible on account of the reissue
of forfeited shares, he can sue the company for damages.
RE-ISSUE OF FORFEITED SHARES

When the shares are forfeited, they become the property of the company and, to that
extent, the paid-up capital of the company stands reduced. Therefore, the forfeited shares
are generally reissued by the company. The forfeited shares can be reissued at .any price
i.e., even at discount. But the amount of discount must not exceed the amount forfeited
on such shares. The reissue is done by a resolution of the Board of directors. After the
reissue, the buyer of such shares shall become liable to pay all the future calls due on
shares, including the calls for which the shares were forfeited. The name of the buyer
shall be recorded in the register of members and if the original shareholder has
surrendered the share certificate, the same shall be transferred in the name of the buyer,
otherwise a new share certificate shall be issued. The title of the buyer shall not be
affected by any irregularity or invalidity in proceedings with reference to forfeiture. It
should however be noted that reissue of forfeited shares is a sale of shares and it does not
amount to an allotment. Therefore, return of allotment need not be filed with the
Registrar.

SURRENDER OF SHARES

Surrender is a voluntary act of the shareholder under which the shares are
returned to the company for purposes of cancellation. Neither the Companies Act nor
Table 'A' provides for the surrender of shares. But, the articles may provide for the
surrender of the partly paid-up shares under circumstances where forfeiture seems to be
justified.

You must note that when shares are surrendered to the company, no amount is
refunded to the shareholder. It is so, because if some money is refunded it will
amount to a purchase by the company of its own shares which is prohibited by
Section 77 of the Companies Act.

Srrender of shares may be allowed in the following cases if its acceptance is authorised
by the articles of the company:

i) When shares are surrendered in exchange for new shares of the same nominal
value, as it does not amount to any reduction of capital.
ii) ii) When the circumstances are such where forfeiture is justified, because
surrender is a short-cut to forfeiture.

If the surrender of shares is accepted by the company for any other reason, other than the
reasons given above, it will be invalid.

Forfeiture and surrender of shares, both lead to the termination of membership.

But in case of forfeiture it is compulsory or a forced action, while in case of
surrender it is a voluntary act on the part of the member to avoid the disgrace of
forfeiture.
 TRANSFER AND TRANSMISSION OF SHARES

A. Transfer of Shares

The shares in a company are movable property and they can be

transferred in the manner provided by the articles of the company [Section 44]. A
private company with a share capital, by its very nature as provided by Section
3(1)(iii) of the Act restricts the right of transfer in shares by its articles. Transfer of
shares is less strict in a public company.
In a public company, every shareholder has right to transfer his shares
to any person without the consent of other shareholders subject to such express
restrictions as are found in the articles of the company. A restriction on transfer of
shares which is not specified in the articles is not binding on the company or the
shareholders. A transfer of share is valid if it is not forbidden under the articles of the
company, even if it has been made with the object of escaping liability on the shares.

Procedure for Transfer of Shares [Section 56]

Ordinarily, shares can be transferred by a person whose name

appears in the register of members and who is the holder thereof.
Shares may be transferred by executing an instrument of transfer
(called the 'transfer deed'). The instrument of transfer must be in the prescribed form.
Before it is signed by or on behalf of the transferor and before any entry is made
therein, it shall be presented to the prescribed authority which shall stamp or
otherwise endorse on it the date of presentation. The instrument of transfer shall then
be executed by the transferor and the transferee and completed in all respects.
Thereafter, it shall be presented to the company for registration within the following
time limits :
(i) Where the shares of the company are listed/dealt in/quoted on a
recognised stock exchange, the instrument of transfer must be
presented for registration at any time before the register of members is
closed for the first time a fter the date of presentation of the instrument
to the prescribed authority or within 12 months thereof, whichever is
later.
(ii) In any other case, the instrument of transfer shall be presented to the
company within 2 months of the date of presentation to the prescribed
authority. [Section 108 (1A)]

Certification of transfer

Where a person purchases a number of shares, only one

certificate of shares is issued in respect of the whole lot of shares so that
when he desires to transfer a part of his shares, he is required to produce
 before the company his certificate of shares along with the instrument of
transfer for the purpose of certification. The company then endorses on the
instrument of the transfer the fact of the certificate having been lodged with the
company. The company will cancel the old certificate and prepare two new
share certificates to be delivered to the transferor and the transferee.
This is known as the certification of transfer and is provided for in Section 112
of the Companies Act.

Forged Transfer

A forged document never has any legal effect. If a forged transfer is lodged with
the company for registration, the position of the parties affected is as follows :

(i) If the true owner has been removed from the register, he can compel the
company to replace him.
(ii) If the company has issued a new certificate to the so called transferee, it
cannot deny his title to the shares, the certificate stops it (the company)
from doing so.
(iii) The person lodging the transfer must indemnify the company against loss
by forgery.
Companies normally notify the transferor of the transfer so that he can object if he
wishes. The transferor is, however, under no legal obligation to reply and therefore no
estoppel can be raised against the owner on his failure to reply.

Transmission of shares and Debentures

When a registered shareholder dies or becomes bankrupt his share

are transmitted to his legal representative or the Official Assignee or Receiver,
This is called transmission of shares. It takes place when a registered shareholder (a)
dies or (b) becomes bankrupt.
Transmission of death : When a registered shareholder dies, his shares vest in
his legal representative. If they wish, they may ask the company to register them as
the holder of these shares and for this purpose no instrument of transfer is required
and the company is bound to accept the probate of will or letters of administration as
sufficient evidence of the title to those shares. When they are registered as the holder
of these shares and their names are put on the company's register of members, they
become personally liable on the shares. Thus if the shares are not fully paid, they
will be liable to pay the unpaid value of the shares.
However, if the legal representatives do not wish to be registered as
the holder of the shares, they may transfer them without being so registered. Section
109 enables the legal representative to transfer the shares even if he is not himself
a member of the company. Thus the transfer of shares of a deceased member made
by his legal representative, although the legal representative does not get himself
 registered as the holder of these shares, (i.e., the member of the company) is
perfectly valid and the transferee acquires a good title to the shares.

Distinction between Transfer and Transmission of Shares

The following are the points of difference between transfer and

transmission of shares:

(a) A transfer is a deliberate act of the holder, while transmission results by

operation of law.
(b) A transfer requires an execution of an instrument of transfer, while
transmission requires evidence showing the entitlement of the
transferee.
(c) For the execution of transfer, stamp duty is payable, while no stamp duty
is payable in case of transmission.
(d) The company charges for registering a transfer, while no charges are
levied for registering a transmission.
(e) In case of transfer, the liability of the transferor ceases as soon as the
transfer is complete, while in transmission, the shares continue to be
subject to original liabilities.

Nomination of Shares and Debentures

a. Section 72 of the Act provides that every holder of securities of a company may
nominate any person to whom his securities shall vest in the event of his death.
b. If the shares are held by joint holders, such joint holders will have to nominate a
single person as nominee.
c. The Act does not restrict the choice of persons who may be designated as a
nominee.
d. Even a minor can be nominated by the shareholder. If the nominee is minor, the
shareholder shall appoint any person to become entitled to the shares in the event of
the death of the nominee during his minority.
e. A nomination can be filed anytime during the lifetime of the shareholder. It has to
be filed in writing to the company in the prescribed form SH-13.
f. A nomination once filed can be cancelled or altered by filing form SH-14. The
cancellation or variation shall take effect from the date on which the notice of such
variation or cancellation is received by the company.
Lien of shares :
A lien is the right to retain possession of a thing until a claim is satisfied. In the case of

a company lien on a share means that the member would not be permitted to transfer
his shares unless he pays his debt to the company. The articles generally provide that the

company shall have a first lien on the shares of each member for his debts and liabilities to

the company. The right of lien is not inherent but must be clearly provided for in the articles.

The articles may give the right of lien over share either for unpaid calls or for any other debt

due by the member of the company. The company may have lien on fully paid-up shares.

The lien also extends to the dividends payable on the shares.

The death of a shareholder does not destroy the lien. The right of lien can be exercised even
through the claim has become barred by law of limitation. Where the liability of the

shareholder towards the company is disputed by him, it does not deprive the company of its

right of lien on the shares. But a company will not be able to exercise its right of lien where

the shareholder has mortgaged his shares before he has incurred any liability to the company

and the company has notice of it. Similarly, a company will loose its lien if registers a
transfer of shares subject to the lien.