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COMPANIES ACT 2013 > CHAPTER IV - SHARE CAPITAL AND DEBENTURES > Flashcards

CHAPTER IV - SHARE CAPITAL AND DEBENTURES Flashcards

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1
Q

What section of the Companies Act 2013 outlines the types of share capital?

A

Section 43

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2
Q

According to Section 43, what are the two main kinds of share capital companies may issue?

A

Equity Share Capital
Preference Share Capital

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3
Q

What are the characteristics of equity share capital? (Section 43)

A

May have standard voting rights
May have differential rights regarding dividends, voting, etc. (if rules are followed)
Represents standard ownership in a company

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4
Q

What are the characteristics of preference share capital? (Section 43)

A

Entitled to preferential dividends (fixed amount or rate)
Entitled to preferential repayment of capital in case of winding up
May or may not have voting rights

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5
Q

How does Section 43 define “equity share capital”?

A

All share capital that is NOT preference share capital.

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6
Q

How does Section 43 define “preference share capital”?

A

Share capital with a preferential right to:
Dividend payment (fixed amount or rate, may be tax-free or subject to tax)
Repayment of capital upon winding up (may include premium terms)

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7
Q

Can preference share capital have additional participating rights? If so, what are they? (Section 43)

A

Yes. Even with preferential rights, preference shares may also be entitled to:
Participate in surplus dividends after equity shareholders receive their share
Participate in surplus assets after repayment of all capital during winding up

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8
Q

What are equity shares with differential rights?

A

Equity shares that have different rights than standard equity shares regarding dividends, voting, or other matters. Companies must follow specific rules to issue them.

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9
Q

Does Section 43 affect the rights of preference shareholders who were entitled to participate in winding-up proceeds before the Act came into effect?

A

No, their rights are protected.

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10
Q

What does Section 44 of the Companies Act, 2013 establish about shares, debentures, and member interests within companies?

A

It declares them as movable property, transferable according to the company’s articles of association

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11
Q

What is the main requirement outlined in Section 45 of the Companies Act, 2013 regarding shares?

A

Every share in a company with share capital must have a unique, distinguishing number.

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12
Q

Why is it important to number shares distinctively, according to Section 45?

A

Distinctive numbering ensures that each share can be easily tracked, identified, and differentiated during trading, ownership changes, and company actions.

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13
Q

Under what circumstance does the share numbering requirement in Section 45 NOT apply?

A

When a share is held by a person listed as the beneficial owner of that share in the records of a depository.

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14
Q

What is the focus of Section 46 of the Companies Act of 2013?

A

Certificate of shares

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15
Q

What does a share certificate represent according to Section 46(1)?

A

A share certificate, issued correctly, serves as prima facie evidence of a person’s title to the shares it specifies.

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16
Q

How can a company validly issue a share certificate under Section 46(1)?

A

It must be under the company’s common seal (if they have one), OR
Signed by two directors, OR
Signed by one director and the company secretary (if there is one)

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17
Q

Under what conditions can a company issue a duplicate share certificate according to Section 46(2)?

A

The original certificate is proven lost or destroyed.
The original certificate is defaced, mutilated, or torn and surrendered to the company.

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18
Q

What serves as primary evidence of ownership for shares held in a depository (electronic form)? (Section 46(4))

A

The depository’s records of the beneficial owner.

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19
Q

What are the penalties for a company that issues a fraudulent duplicate share certificate under Section 46(5)?

A

A fine between 5-10 times the face value of the shares involved or a minimum of 10 crore rupees (whichever is higher).
Officers in default can be liable under Section 447 of the Act.

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20
Q

Section 47

A

Voting rights

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21
Q

Under Section 47 of the Companies Act of 2013, when do equity shareholders in a company limited by shares have voting rights?

A

Equity shareholders have the right to vote on every resolution placed before the company. (Companies Act 2013, Section 47(1)(a))

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22
Q

In a company limited by shares, how are an equity shareholder’s voting rights determined on a poll?

A

An equity shareholder’s voting rights on a poll are in proportion to their share in the company’s paid-up equity share capital. (Companies Act 2013, Section 47(1)(b))

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23
Q

: Under Section 47 of the Companies Act of 2013, when do preference shareholders get voting rights?

A

Preference shareholders have voting rights on the following types of resolutions:
Resolutions directly affecting their preference share rights
Resolutions for winding up the company
Resolutions for repayment or reduction of equity or preference share capital (Companies Act 2013, Section 47(2))

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24
Q

How are preference shareholders’ voting rights determined on a poll?

A

Their voting rights are in proportion to their share of the company’s paid-up preference share capital. (Companies Act 2013, Section 47(2))

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25
Q

What is the key proviso regarding the proportion of voting rights between equity and preference shareholders?

A

The proportion of voting rights between equity shareholders and preference shareholders must be the same as the ratio of their respective paid-up capital in the company. (Companies Act 2013, Section 47(2) - First Proviso)

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26
Q

Under what specific condition do preference shareholders gain the right to vote on ALL resolutions placed before the company?

A

If dividends on a class of preference shares have not been paid for two or more years, those preference shareholders gain the right to vote on all resolutions. (Companies Act 2013, Section 47(2) - Second Proviso)

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27
Q

Section 48

A

Variations of shareholders‘ rights

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28
Q

Under what conditions can the rights attached to a specific class of shares be changed? (Section 48)

A

With Consent: If at least three-fourths of the issued shares within that class consent in writing.
Special Resolution: A special resolution is passed at a separate meeting of that class of shareholders.
Provision in Articles/Memorandum: The company’s memorandum or articles contain provisions allowing such variations or the terms of the share issue don’t prohibit it.

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29
Q

What happens if a variation in share rights of one class affects the rights of another class of shareholders? (Section 48)

A

Consent of at least three-fourths of the affected class of shareholders is also required

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30
Q

Can shareholders challenge a variation of share rights? If so, how? (Section 48)

A

Yes. Shareholders holding at least 10% of the issued shares of the affected class who didn’t consent or vote in favor can apply to the Tribunal to cancel the variation.

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31
Q

What is the time limit for shareholders to apply to the Tribunal to challenge a share rights variation? (Section 48)

A

Shareholders must apply within 21 days of the date consent was given or the resolution was passed.

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32
Q

Is the Tribunal’s decision on a share rights variation challenge final? (Section 48)

A

Yes, the Tribunal’s decision is binding on all shareholders.

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33
Q

What must a company do after a Tribunal order regarding a share rights variation? (Section 48)

A

The company must file a copy of the Tribunal’s order with the Registrar within 30 days of the order’s date.

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34
Q

What are the penalties for non-compliance with Section 48 of the Companies Act of 2013?

A

Company: Fine between 25,000 and 5 lakh rupees.
Officers in Default: Imprisonment up to six months, or a fine between 25,000 and 5 lakh rupees, or both.

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35
Q

What is the key principle established by Section 49 of the Companies Act of 2013?

A

When a company makes calls for further share capital on a specific class of shares, those calls must be made on a uniform basis across all shares within that class.

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36
Q

Does Section 49 mean that all shares in a company must have the same level of paid-up capital?

A

No. The Explanation to Section 49 clarifies that shares with the same nominal value, but different amounts paid-up are not considered to be in the same class. This means calls can be different for shares where shareholders have paid different amounts towards their share value.

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37
Q

Give an example of how Section 49 ensures fairness in a company’s capital calls.

A

Consider a company with Class A shares. Some shareholders might have paid 50% of the share’s value, others 80%. If the company requires more capital, Section 49 prevents them from asking those who paid 50% to pay more than those who paid 80%. The call amount must be proportionally uniform.

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38
Q

Section 49

A

Calls on shares of same class to be made on uniform basis

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39
Q

Which section of the Companies Act of 2013 allows companies to accept unpaid share capital in advance of calls?

A

Section 50

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40
Q

Under what conditions can a company accept unpaid share capital from a member, even if no formal call for payment has been made? (Section 50)

A

The company’s articles of association must explicitly authorize the company to accept such payments.

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41
Q

Can a member contribute funds towards their unpaid share capital at their own initiative? (Section 50)

A

Yes, a member of a company can choose to pay all or part of the remaining unpaid amount on their shares, even when the company hasn’t made a formal call for that capital.

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42
Q

What restriction applies to voting rights for amounts paid towards shares before a formal call? (Section 50)

A

A member cannot exercise voting rights on the amount paid in advance until the company makes a formal call for that capital.

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43
Q

Why might a company’s articles allow for accepting unpaid share capital in advance?

A

Flexibility: It gives the company access to additional capital if needed without going through a formal call process.
Investor Interest: It allows members to demonstrate commitment and potentially gain more influence when calls are made.

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44
Q

What is the standard method for distributing dividends in a company?

A

The usual practice is to distribute dividends in proportion to the number of shares held by each member, regardless of how much they have paid up on those shares.

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45
Q

Can a company choose to pay dividends differently? If so, under what conditions? (Section 51)

A

Yes, a company can pay dividends in proportion to the amount paid-up on each share, but only if its articles of association specifically authorize this method.

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46
Q

Give an example of how dividend distribution would work under Section 51.

A

Consider two shareholders:

Shareholder A: Holds 100 shares, 50% paid-up
Shareholder B: Holds 100 shares, 80% paid-up
If the company uses Section 51, Shareholder B would receive a larger dividend than Shareholder A, as they have paid up a greater portion of their share value.

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47
Q

Why might a company choose to use the dividend distribution method outlined in Section 51?

A

Rewarding Early Investment: It incentivizes shareholders who have paid more upfront for their shares.
Financial Flexibility: It can help the company manage cash flow if significant portions of share capital remain unpaid.

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48
Q

Which section of the Companies Act of 2013 allows companies to pay dividends based on the amount paid-up on shares?

A

Section 51

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49
Q

Which section of the Companies Act of 2013 governs the application of share premiums?

A

Section 52

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50
Q

What happens when a company issues shares at a premium? (Section 52)

A

The premium amount (the excess above the share’s face value) must be transferred to a special reserve account called the “Securities Premium Account.”

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51
Q

How does the law treat the Securities Premium Account? (Section 52)

A

For most purposes, it’s treated similarly to paid-up share capital, including being subject to the rules governing the reduction of share capital.

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52
Q

List the permitted uses of the Securities Premium Account. (Section 52)

A

Issuing fully paid bonus shares to existing members
Writing off preliminary company expenses
Writing off expenses, commissions, or discounts related to share or debenture issues
Funding the redemption premium of redeemable preference shares or debentures
Buying back the company’s own shares (under Section 68)

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53
Q

Are there companies with additional flexibility in using the Securities Premium Account? (Section 52)

A

Yes, certain prescribed companies whose financial statements comply with specific accounting standards (under Section 133) can also use the premium to:
Issue fully paid bonus equity shares
Write off equity share issue expenses, commissions, or discounts

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54
Q

Why does the Companies Act have strict rules about the use of share premiums?

A

To protect the company’s creditors and maintain the integrity of its stated capital. The premium is viewed as contributed capital, not freely distributable profit. .

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55
Q

Which section of the Companies Act of 2013 prohibits the issue of shares at a discount?

A

Section 53

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56
Q

What is the main rule established by Section 53 of the Companies Act of 2013?

A

A company cannot issue shares at a discount to their face value (with an exception covered in Section 54).

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57
Q

What is the consequence of a company issuing shares at a discount in violation of Section 53?

A

Any shares issued at a discount are considered void (invalid).

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58
Q

What are the penalties for a company violating the provisions of Section 53?

A

Company: Fine between 1 lakh and 5 lakh rupees.
Officers in Default: Potential imprisonment up to six months, a fine between 1 lakh and 5 lakh rupees, or both.

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59
Q

Which section of the Companies Act of 2013 specifically allows the issuance of sweat equity shares?

A

Section 54

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60
Q

What are sweat equity shares? (Section 54)

A

Sweat equity shares are a form of compensation given to directors or employees. They are issued at a discount or for a consideration other than cash, in recognition of intellectual property, know-how, or value addition provided.

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61
Q

Under what conditions can a company issue sweat equity shares? (Section 54)

A

Special Resolution: The company passes a special resolution authorizing the issuance.
Resolution Details: Specifies the number of shares, market price, any consideration, and the eligible directors/employees.
One-Year Operation: The company has been in operation for at least one year.
Listing Status: If listed, the issuance follows SEBI regulations. If unlisted, it follows prescribed rules.

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62
Q

What rights do holders of sweat equity shares have? (Section 54)

A

They have the same rights, limitations, and restrictions as holders of regular equity shares. They rank pari passu (on equal footing) with other equity shareholders

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63
Q

Why is Section 54 important within the Companies Act?

A

It provides a key exception to Section 53’s prohibition on issuing shares at a discount. Sweat equity allows companies to:
Attract and retain talent
Reward employees/directors for non-monetary contributions
Conserve cash while still providing compensation

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64
Q

Which section of the Companies Act of 2013 deals with the issuing and redemption of preference shares?

A

Section 55

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65
Q

Can a company issue irredeemable preference shares under the Companies Act of 2013? (Section 55)

A

No. Section 55 explicitly prohibits the issuance of irredeemable preference shares after the commencement of the Act.

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66
Q

Under what conditions can a company issue redeemable preference shares? (Section 55)

A

Authorization: The company’s articles of association must allow it.
Time Limit: Redeemable within 20 years from issue (longer allowed for infrastructure projects).
Prescribed Conditions: As specified by regulations.

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67
Q

What are the special provisions for preference shares issued for infrastructure projects? (Section 55)

A

Extended Redemption Period: They can have a redemption period exceeding 20 years.
Mandatory Redemption: A prescribed percentage of shares must be redeemed annually, at the option of the preference shareholders.

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68
Q

What are the sources of funds a company can use to redeem preference shares? (Section 55)

A

Profits Available for Dividend:
Proceeds of a Fresh Share Issue: Specifically made for redemption purposes.

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69
Q

What additional requirements apply to the redemption of preference shares? (Section 55)

A

Fully Paid: Shares must be fully paid-up before redemption.
Capital Redemption Reserve Account: When redeeming from profits, an equal amount must be transferred to this reserve.
Accounting for Redemption Premium: Rules vary based on the company’s class and accounting standards.

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70
Q

Redeemable preference shares

A

a type of share that allow a company to repurchase the shares from shareholders at a specified date or on the company’s discretion. The company can redeem the shares for cash or convert them into ordinary shares, or both.

considered hybrid securities because they have characteristics of both debt and equity

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71
Q

What happens if a company cannot redeem preference shares or pay dividends as per the terms of issue? (Section 55)

A

With Consent: The company can issue further redeemable preference shares with the consent of holders representing 3/4th of the value of unredeemed shares.
Tribunal Approval: The company needs approval from the Tribunal.
Mandatory Redemption: The Tribunal will order the redemption of shares held by those who didn’t consent.

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72
Q

What is the Capital Redemption Reserve Account used for? (Section 55)

A

Redeeming Preference Shares: Its primary purpose.
Issuing Bonus Shares: Can be used to pay up unissued shares issued as fully paid bonus shares.

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73
Q

What is the general rule for registering a transfer of securities in a company? (Section 56)

A

The company must receive the following within 60 days of execution:
A properly executed and stamped instrument of transfer
Details of the transferee (name, address, occupation)
The relevant share certificate or letter of allotment

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74
Q

What happens if the transfer instrument is lost or not delivered in time? (Section 56)

A

The company may still register the transfer, but they can decide on indemnity terms to protect themselves from potential liability.

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75
Q

What is the process for registering transmission of securities by operation of law? (Section 56)

A

The company can register the transmission upon receiving notice of the transmission of rights to the securities. This doesn’t require a formal transfer instrument.

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76
Q

What happens if only the transferor applies for the registration of partly paid shares? (Section 56)

A

Notice: The company must notify the transferee as prescribed.
Objection: The transfer cannot be registered if the transferee objects within two weeks of the notice.

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77
Q

What are the timelines for a company to deliver security certificates after allotment, transfer, or transmission? (Section 56)

A

Subscribers: 2 months from incorporation
Allotment: 2 months from allotment date
Transfer/Transmission: 1 month from receipt of documents
Debenture Allotment: 6 months from allotment date

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78
Q

How are transfers of securities from a deceased person handled? (Section 56)

A

Transfers made by the deceased person’s legal representative are valid, even if the representative isn’t a security holder themselves.

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79
Q

What are the penalties for non-compliance with the provisions of Section 56?

A

Company: Fine between 25,000 and 5 lakh rupees.
Officers in Default: Fine between 10,000 and 1 lakh rupees.

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80
Q

Which section of the Companies Act of 2013 governs the transfer and transmission of securities?

A

Section 56

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81
Q

Which section of the Companies Act of 2013 specifically addresses punishment for shareholder personation?

A

Section 57

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82
Q

Describe the offense of shareholder personation under Section 57 of the Companies Act of 2013.

A

Deceitfully impersonating the owner of any of the following:
Company securities or interests
Share warrants or coupons issued under the Companies Act

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83
Q

What are the consequences of shareholder personation under Section 57?

A

The offender can receive any of the following:
Obtaining or attempting to obtain securities, share warrants, or coupons
Receiving or attempting to receive money that is rightfully due to the actual shareholder

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84
Q

What are the penalties for shareholder personation under Section 57 of the Companies Act of 2013?

A

Imprisonment: Minimum of one year, extendable up to three years.
Fine: Minimum of 1 lakh rupees, extendable up to 5 lakh rupees.

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85
Q

Which section of the Companies Act of 2013 deals with refusal of registration of securities transfers and the appeal process?

A

Section 58

86
Q

What obligation does a private company have if it refuses to register a transfer or transmission of securities? (Section 58)

A

Within 30 days of receiving the transfer instrument or transmission notice, it must send a notice of refusal to both the transferor and transferee (or the person who gave the transmission notice), stating reasons for the refusal.

87
Q

Are there restrictions on the transferability of securities in public companies? (Section 58)

A

No. In principle, securities in public companies are freely transferable. Even private contracts between individuals regarding transfers are enforceable.

88
Q

What recourse does a transferee have if their transfer is refused? (Section 58)

A

They can appeal to the Tribunal:
Within 30 days of receiving a refusal notice
Within 60 days of submitting the documents if no notice was received

89
Q

What if a public company refuses to register a transfer without sufficient cause? (Section 58)

A

The transferee can appeal to the Tribunal:
Within 60 days of the refusal
Within 90 days of submitting documents if no response is received.

90
Q

What powers does the Tribunal have when dealing with appeals under Section 58?

A

It can:
Dismiss the appeal
Order the company to register the transfer (compliance within 10 days)
Order rectification of the register of members
Order the company to pay damages to the aggrieved party

91
Q

What are the penalties for defying a Tribunal order under Section 58?

A

Imprisonment: Minimum 1 year, extendable to 3 years
Fine: Minimum 1 lakh rupees, extendable to 5 lakh rupees

92
Q

Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a

A

contract

93
Q

Under what conditions can the register of members be rectified? (Section 59)

A

A person’s name is wrongly included in the register.
A person’s name is wrongly removed from the register.
There’s a delay or default in updating the register to reflect changes in membership.

94
Q

Who can appeal for the rectification of the register of members? (Section 59)

A

The person who is wrongly added, removed, or whose update is delayed (the aggrieved party).
Any other member of the company.
The company itself.

95
Q

Which section of the Companies Act of 2013 deals with rectifying the register of members?

A

Section 59

96
Q

Where can an appeal for rectification of the register be filed? (Section 59)

A

Domestic Members: To the Tribunal (National Company Law Tribunal)
Foreign Members: To a competent court outside India, specifically designated by the Central Government.

97
Q

What powers does the Tribunal have in rectification cases? (Section 59)

A

Dismiss the Appeal: If the complaint is found to be without merit.
Order Registration: Direct the company to register a transfer or transmission within 10 days.
Order Rectification: Direct the company or depository to correct the records
Award Damages: Direct the company to pay compensation to the party harmed by the error.

98
Q

Does Section 59 restrict a securities holder’s right to transfer their securities? (Section 59)

A

No. Transfer rights are protected, and a person acquiring the securities gain associated voting rights (unless suspended by a separate Tribunal order).

99
Q

What if a securities transfer violates other laws? (Section 59)

A

Relevant bodies (company, depository, SEBI, etc.) can apply to the Tribunal to rectify the situation, even if the transfer itself wasn’t the direct error.

100
Q

What are the penalties for non-compliance with a Tribunal order under Section 59?

A

Company: Fine between 1 lakh and 50 lakh rupees.
Officers in Default: Imprisonment up to one year and/or a fine between 1 lakh and 3 lakh rupees.

101
Q

Which section of the Companies Act of 2013 covers the publication of authorized, subscribed, and paid-up capital?

A

Section 60

102
Q

What documents must disclose a company’s subscribed and paid-up capital, in addition to its authorized capital? (Section 60)

A

Company Notices
Advertisements
Official Publications
Business Letters
Billheads
Letter Papers

103
Q

What are the display requirements when stating a company’s authorized, subscribed, and paid-up capital? (Section 60)

A

The subscribed and paid-up capital information must be displayed:
Equally prominent: As prominent as the authorized capital statement.
Equally conspicuous: Presented in a visually clear and noticeable way.

104
Q

What are the penalties for non-compliance with the disclosure requirements of Section 60?

A

Company: A fine of 10,000 rupees for each instance of non-compliance.
Officers in Default: A fine of 5,000 rupees for each instance of non-compliance.

105
Q

Which section of the Companies Act of 2013 governs a limited company’s power to alter its share capital?

A

Section 61

106
Q

Under what conditions can a limited company alter its share capital? (Section 61)

A

Authorization: The company’s articles of association must allow for alterations.
General Meeting: Alterations must be approved by a resolution passed at the general meeting of shareholders.

107
Q

What types of alterations to share capital are permitted under Section 61?

A

Increase Authorized Capital: Raise the maximum share capital amount.
Consolidate and Divide: Combine shares into those of larger value or split shares into those of smaller value.
Convert to/from Stock: Convert fully paid-up shares to stock and vice versa.
Sub-divide Shares: Split shares into smaller denominations, maintaining the paid-up to unpaid ratio.
Cancel Shares: Cancel unsubscribed shares and reduce the share capital accordingly.

108
Q

Are there restrictions on consolidation and division of shares? (Section 61)

A

Yes. Changes that would alter the voting power distribution among shareholders require approval from the Tribunal (National Company Law Tribunal) upon a prescribed application.

109
Q

Is the cancellation of shares considered a reduction in share capital? (Section 61)

A

No. Section 61 specifically states that the cancellation of shares under this section does not constitute a reduction in share capital.

110
Q

Which section of the Companies Act of 2013 covers the further issue of share capital?

A

Section 62

111
Q

When a company wants to increase its subscribed capital, what is the primary rule regarding how new shares must be offered? (Section 62)

A

They must be offered to existing equity shareholders in proportion to their current holdings (commonly known as a “rights issue”).

112
Q

What are the key conditions for offering new shares to existing shareholders? (Section 62)

A

Letter of Offer: Includes the number of shares offered and a time limit (15-30 days) to accept.
Right to Renounce: Shareholders can renounce their right in favor of someone else.
Disposal After Time Limit: The Board can dispose of unaccepted shares in a manner beneficial to the company.

113
Q

Can new shares be offered under other circumstances in addition to a rights issue? (Section 62)

A

Yes, under these conditions:
Employees’ Stock Option Scheme (ESOP): Subject to a special resolution by the company and prescribed conditions.
Others (Non-employees): If authorized by a special resolution and priced based on a registered valuer’s report.

114
Q

What are the notice requirements for a rights issue under Section 62?

A

Registered post, speed post, or electronic mode to all existing shareholders at least three days before the issue opens

115
Q

Does Section 62 apply when debentures or loans contain pre-approved conversion options?

A

No, if the terms were approved by a special resolution in general meeting before the debentures or loans were issued.

116
Q

Can the Government mandate the conversion of debentures or loans into shares? (Section 62)

A

Yes, if deemed in the public interest. The government sets the terms, but the company can appeal to the Tribunal within 60 days if terms are unacceptable.

117
Q

What happens to the company’s memorandum if the government orders debenture/loan conversion? (Section 62)

A

If it increases authorized share capital, the memorandum is automatically altered to reflect the increase.

118
Q

What factors must the government consider when setting the terms of a mandatory debenture/loan conversion? (Section 62, subsection 5)

A

Company’s financial position
The original terms on which the debentures or loans were issued
Interest rates payable on the debt
Any other relevant factors deemed necessary

119
Q

Which section of the Companies Act of 2013 deals with the issue of bonus shares?

A

Section 63

120
Q

What is the basic principle behind issuing bonus shares? (Section 63)

A

A company can distribute fully paid-up bonus shares to existing shareholders, essentially capitalizing reserves or retained earnings.

121
Q

From which sources can a company fund the issuance of bonus shares? (Section 63)

A

Free Reserves
Securities Premium Account
Capital Redemption Reserve Account

122
Q

Is there a restriction on the type of reserves that can be used for bonus shares? (Section 63)

A

Yes. Reserves created from the revaluation of assets cannot be used for issuing bonus shares.

123
Q

Under what conditions can a company issue bonus shares? (Section 63)

A

Articles Authorization: Company’s Articles of Association must allow it.
General Meeting Approval: Authorization via a resolution in a general meeting.
No Loan/Deposit Defaults: No defaults on fixed deposits or debt securities.
No Statutory Dues Defaults: Up-to-date on employee-related payments (PF, gratuity, etc.).
Fully Paid Shares: Any partially paid-up shares must be made fully paid-up.
Prescribed Conditions: The company must adhere to any other conditions set by regulations.

124
Q

Can bonus shares be issued instead of a cash dividend? (Section 63)

A

No. Section 63 explicitly prohibits this.

125
Q

Which section of the Companies Act of 2013 mandates notice to the Registrar for share capital alterations?

A

Section 64

126
Q

Under what circumstances must a company notify the Registrar about changes to its share capital? (Section 64)

A

Company-Initiated Alterations: Any changes made as per Section 61 (increase, consolidation, subdivision, etc.)
Government-Mandated Debt Conversion: If a government order under Section 62 results in an increased authorized share capital.
Redemption of Preference Shares: When the company redeems any redeemable preference shares.

127
Q

What information must be included in the notice to the Registrar? (Section 64)

A

Prescribed Form: A specific form mandated by regulations.
Altered Memorandum: A copy of the updated Memorandum of Association reflecting the share capital changes.

128
Q

What is the deadline for filing the notice with the Registrar? (Section 64)

A

Within 30 days of the share capital alteration, increase, or redemption event.

129
Q

What are the penalties for non-compliance with the notice requirements of Section 64? (Section 64)

A

Company: Fine up to 5 lakh rupees.
Officers in Default: Fine of up to 1,000 rupees per day of continued non-compliance, or up to 5 lakh rupees total (whichever is less).

130
Q

What is a limited company?

A

A company where shareholders’ liability is limited to the amount they have invested in shares. In case of the company facing losses or liquidation, shareholders’ personal assets are protected.

131
Q

What is an unlimited company?

A

A company where shareholders’ liability is not limited. If the company incurs debts it cannot repay, shareholders’ personal assets can be used to settle those debts. [SOLE PROPRIETOR]

132
Q

What does Section 65 of the Companies Act of 2013 address?

A

It outlines procedures for an unlimited company to convert to a limited company, specifically concerning reserve share capital.

133
Q

What is reserve share capital?

A

A portion of a limited company’s authorized share capital that can only be called up (asked for payment from shareholders) if the company is being wound up (liquidated).

134
Q

What options does Section 65 give an unlimited company converting to limited?

A

Option A: Increase nominal share value while designating this increase as reserve share capital.
Option B: Designate a portion of existing uncalled capital as reserve share capital.

135
Q

Why does Section 65 mandate reserve share capital in this conversion?

A

Protects Existing Creditors: Ensures some funds are set aside for potential debt repayment during winding up, as shareholders in the newly limited company won’t have unlimited liability anymore.

136
Q

Uncalled Capital

A

The portion of a company’s authorized share capital that has been issued to shareholders but not yet demanded as payment

137
Q

Which section of the Companies Act of 2013 governs the reduction of share capital?

A

Section 66

138
Q

Under what conditions can a company reduce its share capital? (Section 66)

A

Company Type: The company must be limited by shares or limited by guarantee and have a share capital structure.
Special Resolution: A special resolution must be passed by shareholders approving the reduction.
Tribunal Confirmation: The National Company Law Tribunal must confirm the reduction.

139
Q

What are the permissible methods for reducing share capital? (Section 66)

A

Reduce Liability on Unpaid Shares: Decrease or eliminate the remaining liability shareholders have on partially paid shares.
Cancel Lost/Unrepresented Capital: Cancel paid-up capital that’s no longer backed by assets (e.g., due to losses).
Pay Off Excess Capital: Return paid-up capital to shareholders if it’s more than the company needs.

140
Q

Is there a restriction on reducing capital if a company has outstanding deposits? (Section 66)

A

Yes. Reduction is prohibited if the company is behind on repaying any accepted deposits or the associated interest.

141
Q

What is the role of the Tribunal, regulators, and creditors in a share capital reduction process? (Section 66)

A

Tribunal Notice: The Tribunal must notify the Central Government, Registrar, SEBI (for listed companies), and creditors about the reduction application.
Representations: These bodies have three months to submit any objections or representations to the Tribunal.
No Response = No Objection: If no responses are received within the time limit, it’s assumed they don’t object to the reduction.

142
Q

Under what conditions can the Tribunal confirm a share capital reduction?

A

Creditor Satisfaction: The company has addressed all debts/claims. This can mean debts are paid, arrangements are made with creditors, or creditors consent.
Accounting Standards Compliance: The company’s proposed accounting treatment for the reduction aligns with Section 133 or other relevant parts of the Act, and the auditor has certified this.

143
Q

What must a company do after the Tribunal confirms the share capital reduction?

A

Publish the Tribunal’s order of confirmation in a manner directed by the Tribunal. The goal is to ensure transparency and inform interested parties of the change.

144
Q

What documents must the company file with the Registrar after Tribunal approval, and what’s the deadline?

A

Certified Copy of Tribunal Order: Official proof of the authorization.
Minute of Changes: A document outlining:
New share capital amount
How shares are divided
Price per share
Amount (if any) considered paid-up per share as of registration.
Deadline: Within 30 days of receiving the Tribunal order.

145
Q

Does Section 66 apply to companies buying back their own shares?

A

No. Buybacks of shares are governed by a separate provision, Section 68 of the Companies Act.

146
Q

How does a share capital reduction impact a shareholder’s liability?

A

A shareholder’s maximum liability is limited to the difference between:
The amount originally paid for the share (or the reduced amount considered paid)
The new share value as per the reduction order

147
Q

What happens if a creditor is unaware of the reduction process and their debt remains unpaid?

A

Liability of Past/Present Members: Past and present company members on the registration date of the reduction order may be liable to contribute to the unpaid debt, up to the amount they would’ve owed in a winding-up on that date.
Tribunal Action: Upon creditor application and proof of ignorance, the Tribunal can establish a list of liable contributories and enforce payment like in a winding-up.

148
Q

Do contributories who are forced to pay for an unaware creditor’s debt have any recourse?

A

Yes. Subsection (9) clarifies that these contributories’ rights amongst themselves remain unaffected. They can potentially seek contribution from other liable members.

149
Q

What are the penalties for company officers who intentionally withhold creditor information or misrepresent debt during a share capital reduction?

A

Officers found guilty of:
Hiding creditor names
Misrepresenting creditor debt details
Being involved in such concealment/misrepresentation Can be penalized under Section 447 of the Act (covers punishment for fraud by or against the company).

150
Q

What is the penalty for a company that fails to publish the Tribunal’s share capital reduction order as mandated?

A

The company can be fined between ₹5 lakh and ₹25 lakh.

151
Q

What is the title and number of the Companies Act 2013 provision restricting share buybacks and financial assistance?

A

Section 67: Restriction on purchase by company or giving of loans by it for the purchase of its shares.

152
Q

Can a company limited by shares purchase its own shares? If so, under what circumstance? (Section 67(1))

A

Yes, but only if the resulting share capital reduction complies with the Companies Act 2013.

153
Q

Under what conditions can a public company provide financial assistance for purchasing shares in itself or its holding company? (Section 67(2))

A

A public company is strictly prohibited from providing financial assistance, directly or indirectly, for the purchase of its own shares or shares in its holding company.

154
Q

Name three situations where providing financial assistance for share purchases is exempt from the restrictions of Section 67(2).

A

A banking company lending money as part of its normal business operations.
A company providing money for employees to purchase fully paid-up shares, under a scheme passed by special resolution and meeting prescribed requirements.
A company giving loans (not exceeding six months’ salary) to regular employees (not directors/key personnel) to buy fully paid-up shares.

155
Q

Does Section 67 affect a company’s right to redeem preference shares? (Section 67(4))

A

No, Section 67 doesn’t impact a company’s ability to redeem preference shares issued within the Companies Act 2013 or previous company law.

156
Q

Describe the penalties faced by a company violating Section 67. (Section 67(5))

A

A minimum fine of 1 lakh rupees, extendable up to 25 lakh rupees.
Officers in default could face imprisonment of up to three years and fines between 1 lakh and 25 lakh rupees.

157
Q

Under Section 67(3)(b), what conditions must be met for company-funded employee share purchases to be exempt from restrictions?

A

The scheme must be approved by a special resolution of the company.
The scheme must comply with any prescribed requirements (likely set by regulations).
The shares purchased must be fully paid-up.
The shares must be held by trustees for the benefit of employees or directly by the employees.

158
Q

Section 67(3)(c) requires specific disclosures in the Board’s report regarding an employee share ownership scheme. What information must be disclosed?

A

The Board’s report must disclose voting rights that are not exercised directly by the employees on shares connected to the scheme. The exact format of this disclosure is likely detailed in regulations.

159
Q

What is the title and number of the Companies Act, 2013 provision dealing with share buybacks?

A

Section 68: Power of company to purchase its own securities

160
Q

List the sources of funds a company can use for a share buyback under Section 68(1).

A

Free reserves
Securities premium account
Proceeds from the issue of shares or other specified securities (with the restriction that these proceeds cannot be from an earlier issue of the same type of securities).

161
Q

What are the key requirements for a company to initiate a share buyback under Section 68(2)?

A

Authorization in the company’s articles
A special resolution passed at a general meeting (unless it’s within the Board-authorized limit)
The buyback must not exceed 25% of the aggregate of paid-up capital and free reserves (reference to 25% applies to the paid-up equity capital in that financial year).
Post-buyback debt-to-equity ratio must not exceed 2:1 (or a higher ratio if notified by the government)
Shares/securities must be fully paid-up

162
Q

Under what conditions can a Board of Directors authorize a share buyback without a special resolution of shareholders? (Section 68(2)(b))

A

The buyback represents 10% or less of total paid-up equity capital and free reserves.
The Board passes a resolution at its meeting authorizing the buyback.

163
Q

What additional requirements apply to buybacks of listed shares under Section 68?

A

The buyback must comply with regulations made by the Securities and Exchange Board of India (SEBI

164
Q

What is the minimum time interval required between two share buyback offers? (Section 68(2), Proviso)

A

There must be a gap of at least one year from the closure of the previous buyback offer.

165
Q

What information must be included in the notice for a meeting considering a special resolution for a share buyback (Section 68(3))?

A

The notice must be accompanied by an explanatory statement containing:
A full disclosure of all relevant facts regarding the buyback.
The justification or reason for the buyback.
The specific class of shares or securities targeted for repurchase.
The total amount planned for the buyback.
The timeframe for completing the buyback.

166
Q

What is the maximum timeframe for completing a share buyback under Section 68?

A

Every buyback must be finalized within one year from either:
The date the special resolution for the buyback was passed at a general meeting.
The date the Board resolution authorizing the buyback was passed (applicable for buybacks under 10% of capital and reserves).

167
Q

Under Section 68(5), what are the different methods a company can use to buy back its shares?

A

Companies have three options for conducting a share buyback:
Repurchasing shares proportionally from existing shareholders.
Buying shares from the open market.
Acquiring shares issued to employees through stock option or sweat equity plans.

168
Q

When does a company need to file a declaration of solvency for a share buyback under Section 68? (Section 68(6))

A

A declaration of solvency is required before the buyback if it’s authorized by:
A special resolution passed at a general meeting (clause (b) of sub-section (2)).
A Board resolution under the proviso to clause (b) (for buybacks under 10% of capital and reserves).

169
Q

What information does the declaration of solvency contain, and what’s its purpose? (Section 68(6))

A

The declaration, signed by at least two directors (including the managing director, if any), must be in a prescribed format and verified by affidavit. It confirms that the Board:
Has thoroughly investigated the company’s financial health.
Believes the company can meet its obligations and remain solvent for at least one year after the declaration date.

170
Q

Where must a company file the declaration of solvency for a share buyback? (Section 68(6))

A

The declaration needs to be filed with both:
The Registrar of Companies
The Securities and Exchange Board of India (SEBI)

171
Q

Does a company whose shares are not listed on a stock exchange need to file a declaration of solvency with SEBI? (Section 68(6), Proviso)

A

No, companies with unlisted shares are exempt from filing the declaration with SEBI.

172
Q

What must a company do with repurchased shares after a buyback under Section 68(7)?

A

The company must extinguish and physically destroy the bought-back shares within seven days of completing the buyback.

173
Q

What limitations apply to a company issuing new shares after a buyback under Section 68(8)?

A

Following a buyback, a company cannot issue new shares (including those under Section 62(1)(a)) or other specified securities of the same kind for six months. Exceptions include:
Bonus issues
Fulfilling existing obligations like conversions of warrants, stock options, sweat equity, or preference shares/debentures into equity shares.

174
Q

What information must be maintained in a register after a share buyback under Section 68(9)?

A

The company must keep a register detailing:
The repurchased shares or securities
The consideration paid for them
The date of share/security cancellation
The date of extinguishing and physically destroying them
Any other prescribed particulars

175
Q

What needs to be filed with the Registrar and SEBI after completing a share buyback under Section 68(10)?

A

Within 30 days of completing the buyback, a return containing prescribed details about the buyback must be filed with:
The Registrar of Companies
The Securities and Exchange Board of India (SEBI)

176
Q

Does a company with unlisted shares need to file a post-buyback return with SEBI? (Section 68(10), Proviso)

A

No, companies with unlisted shares are exempt from filing the post-buyback return with SEBI.

177
Q

What are the penalties for a company or its officers who fail to comply with Section 68 or SEBI regulations for buybacks? (Section 68(11))

A

The company faces a fine of ₹1 lakh to ₹3 lakh, and responsible officers could face imprisonment for up to 3 years, a fine of ₹1 lakh to ₹3 lakh, or both.

178
Q

What does “specified securities” encompass under Section 68? (Explanation I)

A

In addition to shares, “specified securities” include:
Employee stock options
Other securities notified by the Central Government

179
Q

How does Section 68 define “free reserves” for buyback purposes? (Explanation II)

A

Free reserves” include the company’s:
Accumulated profits
Securities premium account

180
Q

What is the title and number of the provision in the Companies Act, 2013, dealing with the Capital Redemption Reserve Account?

A

Section 69: Transfer of certain sums to capital redemption reserve account

181
Q

When is a company required to transfer funds to the Capital Redemption Reserve Account? (Section 69(1))

A

A company must transfer funds to the Capital Redemption Reserve Account when it uses the following to buy back its own shares:
Free reserves
Securities premium account

182
Q

What amount must be transferred to the Capital Redemption Reserve Account during a share buyback? (Section 69(1))

A

The transferred amount must equal the nominal (face) value of the repurchased shares.

This means the transfer amount is based on the par value, not the market value. For example, if a company buys back 1,000 shares with a face value of ₹10 per share even though the market price is ₹50 per share, the transfer to the Capital Redemption Reserve Account would still be ₹10,000 (1,000 shares * ₹10 per share).

183
Q

How must the Capital Redemption Reserve Account transfer be disclosed? (Section 69(1))

A

Details of the transfer to the Capital Redemption Reserve Account must be included in the company’s balance sheet.

184
Q

What is the primary use of the Capital Redemption Reserve Account? (Section 69(2))

A

The company can utilize the balance in the Capital Redemption Reserve Account to issue fully paid bonus shares to its existing members.

185
Q

What is the title and number of the provision in the Companies Act 2013 that outlines restrictions on share buybacks?

A

Section 70: Prohibition for buy-back in certain circumstances

186
Q

Can a company buy back shares through subsidiaries or investment companies? (Section 70(1)(a) and (b))

A

No, a company cannot directly or indirectly buy back its shares through:
Subsidiaries (including its own subsidiaries)
Any investment company or group of investment companies

187
Q

What financial defaults prevent a company from buying back its shares? (Section 70(1)

A

A company cannot buy back shares if it has defaulted on:
Repayment of deposits (accepted before or after the Act’s commencement)
Interest on deposits
Redemption of debentures or preference shares
Dividend payments to shareholders
Repayment of term loans or interest to financial institutions or banks

188
Q

Under what conditions can a company resume share buybacks after a financial default? (Section 70(1) Proviso)

A

A company can resume buybacks if:
It has fixed the financial default.
A period of three years has passed since the default was remedied.

189
Q

Besides financial defaults, what other non-compliances would prohibit a company from buying back its shares? (Section 70(2))

A

A company is barred from buybacks if it hasn’t complied with the provisions of:
Section 92 (Annual Returns)
Section 123 (Declaration of Dividends)
Section 127 (Transfer of unpaid/unclaimed dividends to a specific account)
Section 129 (Financial Statements)

190
Q

What is the title and number of the Companies Act, 2013 provision dealing with debentures?

A

Section 71: Debentures

191
Q

Under Section 71(1), can a company issue debentures that convert into shares?

A

Yes, a company can issue debentures with the option to convert them (partially or fully) into shares at redemption. However, this requires approval through a special resolution passed at a general meeting.

192
Q

As per Section 71(2), can debentures carry voting rights?

A

No, companies cannot issue debentures with voting rights.

193
Q

Does Section 71(3) allow companies to issue secured debentures?

A

Yes, companies can issue secured debentures, but the terms and conditions for such issuance are subject to government regulations.

194
Q

When must a company create a debenture redemption reserve, as mandated by Section 71(4)?

A

Whenever a company issues debentures under this section, it must establish a debenture redemption reserve account using its available profits for dividend payments. Funds in this account can only be used for debenture redemption.

195
Q

Under Section 71(5), when does a company need to appoint a debenture trustee?

A

A company must appoint one or more debenture trustees before issuing a prospectus, making an offer, or inviting (public or members exceeding 500) to subscribe to its debentures. The conditions for appointing these trustees are also subject to government regulations.

196
Q

What are the duties of a debenture trustee as outlined in Section 71(6)?

A

A debenture trustee is responsible for:
Protecting the interests of debenture holders.
Addressing their grievances following prescribed regulations.

197
Q

Can a trust deed exempt or indemnify a debenture trustee from liability for breaches of trust? (Section 71(7))

A

No, any provision in a trust deed or contract aiming to exempt or indemnify a debenture trustee from liability for breaches of trust where they fail to exercise proper care and diligence is void. However, a majority of debenture holders (holding at least 75% of the total debenture value) can agree to specific exemptions through a meeting.

198
Q

How does a company handle debenture redemption and interest payments according to Section 71(8)?

A

The company must pay interest and redeem debentures based on the terms and conditions established when they were issued.

199
Q

Under what conditions can a debenture trustee petition the Tribunal, as per Section 71(9)?

A

When the debenture trustee believes a company’s assets are or will become insufficient to repay debentures when due, they can petition the Tribunal.

200
Q

What actions can the Tribunal take after hearing a debenture trustee’s petition (Section 71(9))?

A

The Tribunal, to protect debenture holders’ interests, may order restrictions on the company incurring further liabilities.

201
Q

When can debenture holders or their trustee approach the Tribunal as per Section 71(10)?

A

They can approach the Tribunal if the company:
Fails to redeem debentures on their maturity date.
Defaults on interest payments on the debentures.

202
Q

What order may the Tribunal issue when a company defaults on debentures? (Section 71(10))

A

After hearing all parties, the Tribunal may order the company to immediately redeem the debentures along with the principal and any interest owed.

203
Q

What penalties do company officers face if they fail to comply with a Tribunal order regarding debentures? (Section 71(11))

A

Officers in default can face:
Imprisonment for up to three years.
Fines between ₹2 lakhs and ₹5 lakhs.
Potentially both imprisonment and a fine.

204
Q

How can a contract to purchase debentures be upheld? (Section 71(12))

A

A contract to take up and pay for company debentures can be enforced through a court decree ordering specific performance.

205
Q

What aspects of debentures can the Central Government prescribe regulations for, as per Section 71(13)?

A

The government can prescribe regulations on:
Procedures for issuing debentures.
The format of debenture trust deeds.
Debenture holder rights to inspect and obtain copies of trust deeds.
The required amount for the Debenture Redemption Reserve.
Other related debenture matters.

206
Q

What is the title and number of the Companies Act, 2013 provision dealing with the power to nominate for securities in the case of a holder’s death?

A

Section 72: Power to nominate

207
Q

Can a security holder in a company nominate someone to receive their securities in the event of their death? (Section 72(1))

A

Yes, every security holder can nominate a person, using the prescribed process, to inherit their securities upon their death.

208
Q

Can joint holders of securities in a company make a nomination? (Section 72(2))

A

Yes, joint holders can nominate a person to receive all rights to the securities in the event of the death of all joint holders. This must be done in the prescribed manner.

209
Q

Does a nominee have priority over other potential claims on a deceased person’s securities? (Section 72(3))

A

Yes, unless the nomination is changed or canceled in the prescribed way, the nominee is entitled to all rights of the single or joint holder(s) related to the securities. This takes priority over other laws or testamentary claims.

210
Q

Can a securities holder appoint someone to manage the securities if the nominee is a minor? (Section 72(4))

A

Yes, if the nominee is a minor, the holder can appoint someone in the prescribed manner to become entitled to the securities if the nominee dies before reaching adulthood.

211
Q
A

COMPANIES ACT 2013 (3 decks)

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