WEEK TWO - DAY -1

1. Who is a member of a company?

According to Section 2(55) of the Companies Act, 2013, “member”, in relation to a

company, means—
(i) the subscriber to the memorandum of the company who shall be deemed to have
agreed to become member of the company, and on its registration, shall be entered as
member in its register of members;
(ii) every other person who agrees in writing to become a member of the company
and whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a
beneficial owner in the records of a depository;

The terms “members” and “shareholders” are usually used interchangeably. In

general, every shareholder is a member and every member is a shareholder. However,
there may be exceptions to this statement, e.g., a person may be a holder of share(s)
by transfer but will not become its member until the transfer is registered in the books
of the company in his favor and his name is entered in the register of members.
Similarly, a member who has transferred his shares, though he does not hold any
shares yet he continues to be member of the company until the transfer is registered
and his name is removed from the register of members maintained by the company.
In Herdilia Unimers Ltd. v. Renu Jain1 It was held that the moment the shares were
allotted and share certificate signed and the name entered in the register of members,
the allottee became the member and shareholder, irrespective of whether the allottee
received the shares or not.
Members In the case of a company limited by shares, the shareholders, in general, are
the members. In a company limited by guarantee, the persons who are liable under the
guarantee clause in its Memorandum of Association are members of the company. In
an unlimited company, those persons who are liable to contribute the sums necessary
to discharge in full, the debts and liabilities of the company, in the event of its being
wound-up, are members.

1
(1998) 92 Comp Cas 841 : (1995) 19 CLA 190
 The two important elements, which must be present before a person can become
member of a company, are as, (i) agreement to become a member; and (ii) entry of the
name of the person so agreeing, in the register of members of the company2.

2. How can one acquire membership in a company?

According to Section 2(55) of the Companies Act, 2013, a person may acquire the
membership of a company:
(a) by subscribing to the Memorandum of Association (deemed agreement); or
(b) by agreeing in writing to become a member:
(i) by making an application to the company for allotment of shares; or
(ii) by executing an instrument of transfer of shares as transferee; or
(iii) by consenting to the transfer of share of a deceased member in his name; or
(iv) by acquiescence or estoppel.
(c) by holding shares of a company and whose name is entered as beneficial owner in
the records of a depository (Under the Depositories Act, 1996).

(a) Subscribers to the Memorandum

 In the case of a subscriber, no application or allotment is necessary to
become a member. By virtue of his subscribing to the memorandum, he is
deemed to have agreed to become a member and he becomes ipso facto (as
a result, therefore, hence, thus, in consequence, consequently) member on
the incorporation of the company and is liable for the shares he has
subscribed.
 A subscriber to the memorandum cannot rescind the contract for the
purchase of shares even on the ground of fraud by the promoters3.
 According to Section 10(2) of the Companies Act, 2013, all monies
payable by any member to the company under the memorandum or articles
shall be debt due from him to the company.
 A subscriber to the memorandum must pay for his shares in cash even if
the promoters have promised him the shares for services rendered in
connection with the promotion of the company. Again, he must take the

2
Balkrishan Gupta v. Swadeshi Polytex Ltd.1985 58 Comp cas 563(9)
3
Re. Metal Constituents Co. [1902] 1 Ch. 707
 shares directly from the company, and not through transfer from other
member(s).
(b) Agreement in Writing:
(i) By an application and allotment: A person who applies for shares becomes
a member when shares are allotted to him, a notice of allotment is issued
to him and his name is entered on the register of members.
(ii) By transfer of shares A person can become a member by acquiring shares
from an existing member and by having the transfer of shares registered in
the books of the company, i.e. by getting his name entered in the register
of members of the company.
(iii) By transmission of shares A person may become a member of a company
by operation of law i.e. if he succeeds to the estate of a deceased member.
Membership by this method is a legal consequence. On the death of a
member, the person who is entitled under the law to succeed to his estate,
gets the right to have the shares transmitted and registered in his name in
the company’s register of members. No instrument of transfer is necessary
in this case. 157
(iv) By acquiescence or estoppels A person is deemed to be a member of a
company if he allows his name, without sufficient cause, to be on the
register of members of the company or otherwise holds himself out or
allows himself to be held out as a member. In such a case, he is estopped
from denying his membership.

(c) Holding Shares as Beneficial Owner in the Records of Depository:

Every person holding shares of the company and whose name is entered as a
beneficial owner in the records of the depository shall be deemed to be a member
of the concerned company.

3. Kinds of Share Capital – Section 43.

The share capital of a company limited by shares shall be of two kinds, namely:—
(a) equity share capital—
(i) with voting right ; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such
rules as may be prescribed; and
(b) preference share capital:
Provided that nothing contained in this Act shall affect the rights of the preference
shareholders who are entitled to participate in the proceeds of winding up before the
commencement of this Act.
Explanation.—For the purposes of this section,—
(i) “equity share capital”, with reference to any company limited by shares , means all
share capital which is not preference share capital;
(ii) “preference share capital”, with reference to any company limited by shares,
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, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of
the share capital paid-up or deemed to have been paid-up, whether or not, there is a
preferential right to the payment of any fixed premium or premium on any fixed scale,
specified in the memorandum or articles of the company;
(iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled
to either or both of the following rights, namely:—
(a) that in respect of dividend , in addition to the preferential rights to the amounts
specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or
to a limited extent, with capital not entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a
winding up, of the amounts specified in sub-clause (b) of clause ( ii), it has a right to
participate, whether fully or to a limited extent, with capital not entitled to that
preferential right in any surplus which may remain after the entire capital has been
repaid.

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

equity share capital—with voting rights, orwith differential rights as to dividend,

voting or otherwise in accordance with such rules and subject to such conditions as
may be prescribed; and preference share.Besides, a company may also issue Global
Depository Receipts (GDRs) under section 41.
 Preference Shares or Preference Share Capital

Preference Share Capital means that part of the share capital of the company which
fulfils both the following requirements:
 During the life of the company it must be assured of a preferential. The preferential
dividend may consist of a fixed amount (say, one lakh rupees) payable to preference
shareholders before anything else is paid to the equity shareholders. Alternatively, the
amount payable as preferential dividend may be calculated at a fixed rate, e.g., 10% of
the nominal value of each share.
 On the winding-up of the company it must carry a preferential right to be paid, e.,
amount paid up on preference shares must be paid back before anything is paid to the
equity shareholders.

Types of Preference shares

 Participating or non-participating – Participating preference shares are those shares

which are entitled to a fixed preferential dividend and, in addition, carry a right to
participate in the surplus profits along with equity shareholders after dividend at a
certain rate has been paid to equity For example, after 20% dividend has been paid to
equity shareholders, the preference shareholders may share the surplus profits equally
with equity shareholders. Again, in the event of winding-up, if after paying back both
the preference and equity shareholders, there is still some surplus left, then the
participating preference shareholders get additional share in the surplus assets of the
company. Unless expressly provided, preference shareholders get only the fixed
preferential dividend and return of capital in the event of winding-up out of realised
values of assets after meeting all external liabilities and nothing more. The right to
participate may be given either in the memorandum or articles or by virtue of their
terms of issue.

 Cumulative and non-cumulative shares – With regard to the payment of dividends,

preference shares may be cumulative or non-cumulative. A cumulative preference
share confers a right on its holder to claim dividend fixed at a sum or a percentage for
the past and the current years out of future profits. The fixed dividend keeps on
accumulating until it is fully paid. The non-cumulative preference share gives right to
 its holder to a fixed amount or a fixed percentage of dividend out of the profits of
each If no profits are available in any year or no dividend is declared, the preference
shareholders get nothing, nor can they claim unpaid dividend in any subsequent year.
Preference shares are cumulative unless expressly stated to be non-
cumulative.7 Dividends on preference shares, like equity shares, can be paid only out
of profits and on declaration of dividend for preference shares.

 Redeemable and Irredeemable Preference shares – As per Section 55 of the

Companies Act, 2013:

1. No company limited by shares can issue any preference shares which are
irredeemable.

2. A company limited by shares may, if so authorized by its articles, issue

preference shares which are liable to be redeemed within a period not
exceeding twenty years from the date of their issue.

However, a company may issue preference shares for a period exceeding twenty years for
infrastructure projects, subject to the redemption of such percentage of shares as may be
prescribed on an annual basis at the option of such preferential shareholders. Rule 10 of
the Companies (Share Capital and Debentures) Rules, 2014, in this regard, provides that a
company engaged in the setting up of infrastructure projects may issue preference shares
for a period exceeding twenty years but not exceeding thirty years, subject to the
redemption of a minimum 10% of such preference shares per year from the twenty first
year onwards or earlier, on proportionate basis, at the option of the preference
shareholders.

Conditions for issue of Redeemable Preference Shares

 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;

 no such shares shall be redeemed unless they are fully paid;

 where such shares are proposed to be redeemed out of the profits of the company,
there shall, out of such profits, be transferred, a sum equal to the nominal amount of
 the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve
Account;

 the capital redemption reserve account may be applied by the company, in paying up
unissued shares of the company to be issued to members of the company as fully paid
bonus shares.

 The premium, if any, payable on redemption shall be provided for out of the profits of
the company, before the shares are redeemed.

 the issue of further redeemable preference shares or the redemption of preference

shares shall not be deemed to be an increase or, as the case may be, a reduction, in the
share capital of the company.

Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014, inter alia, provide:

 A company having a share capital may issue preference shares only if so authorized
by its articles.

 A special resolution in the general meeting of the company must have been passed
authorizing the issue.

 The company, at the time of such issue of preference shares, must not have any
subsisting default in the redemption of preference shares issued earlier or in payment
of dividend due on any preference shares.

 The Register of Members maintained under section 88 must contain the particulars in
respect of such preference shareholder(s).

 A company intending to list its preference shares on a recognized stock exchange

shall issue such shares in accordance with the Securities and Exchange Board of India
(Issue and Listing of Non-convertible Redeemable Preference Shares) Regulations,
2013.

 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. The preference shares may be redeemed:

1. at a fixed time or on the happening of a particular event;

2. anytime at the company’s option; or

 3. anytime at the shareholder’s

Where a company is not in a position to redeem any preference shares or to pay dividend,
if any, on such shares in accordance with the terms of issue (such shares hereinafter
referred to as unredeemed preference shares), 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, issue further redeemable preference shares equal to
the amount due, including the dividend thereon, in respect of the unredeemed preference
shares. On the issue of such further redeemable preference shares, the unredeemed
preference shares shall be deemed to have been redeemed.

However, the Tribunal shall, while giving the approval, order the redemption forthwith of
preference shares held by such persons who have not consented to the issue of further
redeemable preference shares.

It may be further noted that notice of redemption of preference shares must be sent to the
Registrar under Section 64 of the Act.

 Equity shares [Sec. 43]

The equity shares are those shares which are not preference shares. In other words, shares
which do not enjoy any preferential right in the matter of payment of dividend or
repayment of capital, are known as equity shares. After satisfying the rights of preference
shares, the equity shares shall be entitled to share in the remaining amount of distributable
profits of the company. The dividend on equity shares 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
the annual general meeting.

Every member of a company limited by shares and holding equity share capital therein,
shall have:

 a right to vote on every resolution placed before the company; and

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

As compared to this, the holders of preference shares can vote only on such resolutions
which directly affect the rights attached to the 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. However, if the preference dividend is not paid for two years or
more, the preference shareholders shall also get voting right on every resolution placed
before the company (Section 47).

Voting rights of a preference shareholder, on a poll, shall be in proportion to his share in

the paid-up preference share capital of the company.

Where members of unincorporated association become members of company –

Where company was incorporated to take over as going concern unincorporated
association and enroll its members of all categories as members of company, as long as
names of members of the unincorporated association were entered in register of members
of company, they would have right to vote under section 87 [Now section 47] and
restrictions, if any, on their rights as members of the unincorporated association would
not haunt their rights as members of company4.

 Preference shares compared with equity shares

1. Preference shares are entitled to a fixed rate/amount of dividend. The rate of dividend
on equity shares depends upon the amount of net profit available after payment of
dividend to preference shareholders and the fund requirements of the company for
future expansion etc.

2. Dividend on the preference shares is paid in preference to the equity. In other words,
the dividend on equity shares is paid only after the preference dividend has been paid.

3. The preference shares have preference in relation to equity shares with regard to the
repayment of capital on winding-up.

4. If the preference shares are cumulative, the dividend not paid in any year is
accumulated and until such arrears of dividend are paid, equity shareholders are not
paid any dividend.

5. Redeemable preference shares are redeemed by the company on expiry of the

stipulated period, but equity shares cannot be redeemed.

6. The voting rights of preference shareholders are restricted. An equity shareholder can
vote on all matters affecting the company but a preference shareholder can vote only

4
C.P. Singhania v. Garware Club House [2003] 46 SCL 659 (Bom.)
 when his special rights as a preference shareholder are being varied or their dividend
is in arrears for at least two years.

7. A company may issue rights shares or bonus shares to the company’s existing equity
shareholders whereas it is not so allowed in case of preference shares (Section 62).

 Non-voting shares

‘Non-voting shares’ as the term suggests are shares which carry no voting rights. These
are contemplated as shares which may carry additional dividends in lieu of the voting
rights. Section 43 allows issue of equity shares without voting rights [See Para 9.4].

 Par Value of Shares

SEBI Regulations permit the companies to issue shares of any par value subject only to
the value being not less than Re. 1 or being other than multiple of Re. 1. Thus, different
companies may now issue shares of different par value. For instance, XYZ Ltd. can issue
shares to the public at say, Rs. 3, while ABC Ltd. can issue at Rs. 5.

Further, companies whose shares are dematerialised or who have applied for it would be
eligible to alter the par value 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.

 Global Depository Receipts [Section 41]

Meaning of Global Depository Receipt

A depository receipt is a foreign currency denominated instrument, listed on an

international exchange, issued by a foreign depository to a domestic custodian and
includes Global Depository Receipts (GDRs)

According to Section 2(44) of the Companies Act, 2013, Global Depository Receipt”
means any instrument in the form of a depository receipt, by whatever name called,
created by a foreign depository outside India and authorised by a company making an
issue of such depository receipts.

Section 41 read along with Companies (Issue of Global Depository Receipts) Rules, 2014
allows a company which is eligible to do so in terms of the Scheme and relevant
provisions of the Foreign Exchange Management Rules and Regulations to issue
depository receipts in any foreign country. The depository receipts can be issued by way
of public offering or private placement or in any other manner prevalent abroad and may
be listed or traded in an overseas listing or trading platform.

Conditions for issue of GDRs, inter alia, include passing of a resolution by the Board as
well as special resolution at a general meeting; the GDRs shall be issued by an overseas
bank appointed by the company and the underlying shares shall be kept in the custody of
a domestic custodian bank; the company shall appoint a merchant banker or a practising
chartered accountant/practising cost accountant/practising company secretary to oversee
all the compliances relating to issue of depository receipts and take the compliance report
from them.

The provisions of the Act and any rules issued thereunder insofar as they relate to public
issue of shares or debentures shall not apply to issue of depository receipts abroad.

Depository Receipts Scheme 2014

The Securities and Exchange Board of India (SEBI) has introduced a framework for
issuance of Depository Receipts (DRs) by companies listed or to be listed in India (DR
Framework), by its circular dated October 10, 2019. Highlights of the Scheme include:

 Only listed companies are permitted to issue DRs on the back of equity shares or debt
securities listed in India. SEBI said that listed firms are allowed to issue such
securities provided their promoters, directors and selling shareholders are not barred
from the capital markets. Besides, they should not be wilful defaulters or economic
offenders.

 Companies undertaking a domestic Initial Public Offering (IPO) are also permitted to
simultaneously set up a DR programme (subject to successful completion of the IPO).

 The DR Framework also permits existing shareholders to exit by way of a DR

 Where the initial listing of DRs includes such secondary sales, the issuer is required to
provide an opportunity to all its shareholders to tender their shares to participate in
such DR issuance.

 Listed firms will be allowed to issue permissible securities for the purpose of issue of
DRs only in permissible jurisdictions and such DRs will be listed on specified
 international bourses, including Nasdaq, NYSE, Hong Kong Stock Exchange and
London Stock Exchange.

 The DR offer document must now be filed by an intermediary with the SEBI and the
stock exchanges for their review at the time of initial listing of

 Whilst SEBI and the stock exchanges are to provide comments within prescribed
Issuers may need to factor in the time for such review into their issue timelines.

 Further, Indian residents and Non-Resident Indians (NRIs), are not permitted to be
permissible holders or their beneficial owners.

 Listed company shall ensure that the aggregate of permissible securities which may be
issued or transferred for the purpose of issue of DRs, along with permissible securities
already held by persons resident outside India, shall not exceed the limit on foreign
holding of such permissible securities under the applicable regulations of FEMA.

 In case of a simultaneous listing of such securities on Indian stock exchange pursuant

to a public offer and DRs on the overseas bourse, SEBI said the price of issue of DRs
by foreign depository should not be less than the price for the public offer to domestic
investors.

4. Section 2(81) Companies Act, 2013.

The term ‘Securities’ under Section 2(81) of the Companies Act, 2013 has been
defined to mean ‘securities’ as defined in Section 2(h) of the Securities Contracts
(Regulation) Act, 1956 (SCRA).
Under section 2(h) of SCRA, the term ‘securities’ include the following:
 Shares, scrips, stocks, bonds, debentures,debenture stocks etc. in or of any
incorporated company or another body corporate.
 Derivatives.
 Units issued by any Collective Investment Scheme to the investors in such scheme.
 Security receipt as defined in Section 2(zg) of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002.
 Units or any other such instruments issued to the investors under any Mutual fund
scheme.
 Government Securities
 Such other instruments, rights or interest therein shall be declared by the government
to be securities be declared by the government to be securities.

This definition is used for all purposes of the SEBI Act as well as various Rules,
Regulations and Guidelines issued under the SEBI Act. The Companies Act defines
the term securities to mean securities as defined in the SCRA and includes hybrids.
Thus, even the Companies Act relies on the SCRA definition. Hybrids are defined to
mean any security which has the character of more than one type of security,
including their derivative. An example of a hybrid would be a partly convertible
debenture, which has the characteristics of shares as well as debentures.

The SCRA contains an inclusive definition of the term:

(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate.
(ii) Derivative
(iii) Units of a collective investment scheme or CIS
(iv) Security receipts issued under the Securitisation and Reconstruction of
Financial assets and Enforcement of Security Act, 2002
(v) Units of a Mutual Fund scheme – till sometime ago, there was a
controversy over whether or not the units of a Mutual Fund could be
treated as securities.
The matter was settled by the Securities Appellate Tribunal in the case of
PCS Industries wherein it held that units are also securities. The Ministry
of Finance also issued a clarification to a similar effect. The matter is now
beyond doubt, since the SCRA was expressly amended in 2004 to provide
that securities include units of a mutual fund.

Government Securities – it is defined to mean a security created and issued, by the

Central or State Government for the purposes of raising a public loan and which is in
one of the forms specified in the Public Debt Act, 1944 (vii) Such other instruments as
may be declared by the Central Government to be securities (viii) Rights or interests
in securities.
 The SCRA recognises securities issued by a body corporate as well as the
government. A company may also issue its securities at a higher price than their
normal value if the market already exists. Stock exchanges are authorised under
Section 9(m) of SCRA to make provisions in their bye-laws to list securities on the
stock exchange.
Listing means including any security for the purpose of trading in a recognised stock
exchange, i.e. admission of securities of any incorporated company, Central and State
Governments, Quasi Governmental and other financial institutions/corporations,
municipalities, electricity, housing boards, etc.

In Sahara India Real Estate v. Securities & Exchange Board of India5, one of the
issues of the case was whether the hybrid Optionally Fully Convertible Debentures of
the company fall within the definition of "securities" within the meaning of
Companies Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to
investigate and adjudicate. It was held that although the OFCDs issued by the two
companies are in the nature of ‘hybrid’ instruments, it does not cease to be a
"Security" within the meaning of Companies Act, SEBI Act and SCRA. It says
although the definition of "Securities" under section 2(h) of SCRA does not contain
the term "hybrid instruments", the definition provided in the Act is an inclusive one
and covers all "Marketable securities".

5. Section 2(h) of Securities Contracts (Regulation) Act, 1956.

Under section 2(h) of SCRA, the term ‘securities’ include the following:
 Shares, scrips, stocks, bonds, debentures,debenture stocks etc. in or of any
incorporated company or another body corporate.
 Derivatives.
 Units issued by any Collective Investment Scheme to the investors in such scheme.
 Security receipt as defined in Section 2(zg) of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002.
 Units or any other such instruments issued to the investors under any Mutual fund
scheme.
 Government Securities
5
(2013) 1 SCC 173
 Such other instruments, rights or interest therein shall be declared by the government
to be securities be declared by the government to be securities.

This definition is used for all purposes of the SEBI Act as well as various Rules,
Regulations and Guidelines issued under the SEBI Act. The Companies Act defines
the term securities to mean securities as defined in the SCRA and includes hybrids.
Thus, even the Companies Act relies on the SCRA definition. Hybrids are defined to
mean any security which has the character of more than one type of security,
including their derivative. An example of a hybrid would be a partly convertible
debenture, which has the characteristics of shares as well as debentures.

The SCRA contains an inclusive definition of the term:

(vi) Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate.
(vii) Derivative
(viii) Units of a collective investment scheme or CIS
(ix) Security receipts issued under the Securitisation and Reconstruction of
Financial assets and Enforcement of Security Act, 2002
(x) Units of a Mutual Fund scheme – till sometime ago, there was a
controversy over whether or not the units of a Mutual Fund could be
treated as securities.
The matter was settled by the Securities Appellate Tribunal in the case of
PCS Industries wherein it held that units are also securities. The Ministry
of Finance also issued a clarification to a similar effect. The matter is now
beyond doubt, since the SCRA was expressly amended in 2004 to provide
that securities include units of a mutual fund.

Government Securities – it is defined to mean a security created and issued, by the

Central or State Government for the purposes of raising a public loan and which is in
one of the forms specified in the Public Debt Act, 1944 (vii) Such other instruments as
may be declared by the Central Government to be securities (viii) Rights or interests
in securities.
 The SCRA recognises securities issued by a body corporate as well as the
government. A company may also issue its securities at a higher price than their
normal value if the market already exists. Stock exchanges are authorised under
Section 9(m) of SCRA to make provisions in their bye-laws to list securities on the
stock exchange.
Listing means including any security for the purpose of trading in a recognised stock
exchange, i.e. admission of securities of any incorporated company, Central and State
Governments, Quasi Governmental and other financial institutions/corporations,
municipalities, electricity, housing boards, etc.

In Sahara India Real Estate v. Securities & Exchange Board of India6, one of the
issues of the case was whether the hybrid Optionally Fully Convertible Debentures of
the company fall within the definition of "securities" within the meaning of
Companies Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to
investigate and adjudicate. It was held that although the OFCDs issued by the two
companies are in the nature of ‘hybrid’ instruments, it does not cease to be a
"Security" within the meaning of Companies Act, SEBI Act and SCRA. It says
although the definition of "Securities" under section 2(h) of SCRA does not contain
the term "hybrid instruments", the definition provided in the Act is an inclusive one
and covers all "Marketable securities".

6. Section 2 (50) of Companies Act, 2013.

Section 2(50) of the Companies Act, 2013 defines issued Capital as, “issued capital”
means such capital as the company issues from time to time for subscription;
Issued capital is a part of the Authorized capital, offered by the company for the
subscription. This includes the allotment of shares. Section 2(50) of the Companies
Act, 2013, offers this definition. Further, it is mandatory for companies to disclose its
issued capital in the balance sheet (Schedule III of the Act).

Explain and analyse the following terminologies:

1. Equity Shares.
6
id
 Equity shares are a key source of long-term financing for companies, issued to the
general public and non-redeemable. Shareholders of equity shares have voting rights,
share in profits, and can claim assets, providing them with a stake in the company's
success.

2. Preference Shares.
Preference shares, more commonly referred to as preferred stock, are shares of a
company's stock with dividends that are paid out to shareholders before common
stock dividends are issued. If the company enters bankruptcy, preferred stockholders
are entitled to be paid from company assets before common stockholders.

3. Convertible Instruments.
Convertible securities—also called convertible instruments or convertibles—are a
type of financial instrument that represents a transaction in which money invested can
be converted into equity or ownership in a company at a future date.

Convertible securities have a key advantage: They allow founders to raise capital
without a set valuation. This matters because very early stage startups typically have
not yet raised a “priced round” from investors, and the market has not yet set a value
on how much their company is worth. Many founders and investors turn to
convertibles because they’re typically faster, cheaper, and more flexible than raising
money via a priced round.

4. Authorised Share Capital.

Section 2(8) of the Companies Act, 2013, defines Nominal Capital as the amount of
capital that the Memorandum of the company authorizes as the share capital of the
company. Hence, it is the registered amount authorized that can be raised by issuing
shares.

The company also pays stamp duty in this amount. Typically, you can calculate
nominal capital by taking into consideration the working and reserve capital needs of
the company.

5. Paid up Share Capital.

 Paid up capital is the part of called up capital actually paid or credited by shareholders
on the issued shares. Mathematically, Paid up capital = Called up capital – Calls in
Arrears.

Paid up capital represents the money that the company has not borrowed. Also, it is
the total amount of money that the company receives from shareholders in exchange
for shares of stock.

6. Issued Capital
Issued capital is a part of the Authorized capital, offered by the company for the
subscription. This includes the allotment of shares. Section 2(50) of the Companies
Act, 2013, offers this definition. Further, it is mandatory for companies to disclose its
issued capital in the balance sheet (Schedule III of the Act).

7. Subscribed Capital.

Section 2(86) of the Companies Act, 2013, defines Subscribed capital as the part of
the capital being subscribed by the members of the company. It is the number of
shares that the public takes.
Further, if the company states Authorized Capital in any communication like notice,
advertisement, official/business letter, etc., then it has to also specify subscribed and
paid up capital in equally conspicuous characters.
Also, Section 60 of the Act specifies that defaulters in this regard, the company and
all officers who default, will be fined around Rs. 10,000 and Rs. 5,000 respectively.