SHARE CAPITAL AND DEBENTURES

Question 1

What is private placement?

Answer 1

“private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.

Question 2

How many persons can a company offer securities to through private placement?

Answer 2

Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.

Question 3

When does private placement become a deemed public offer?

Answer 3

If a company offers securities to more than the prescribed number of persons, it will be considered an offer to the public and governed by the provisions of Part I of the relevant chapter.

Question 4

What is a qualified institutional buyer?

Answer 4

A qualified institutional buyer is defined as per the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, and refers to specific institutions meeting certain criteria to participate in the securities market.

Question 5

What are the conditions for private placement?

Answer 5

Private placement must meet the conditions specified in the relevant section, including issuing a private placement offer letter and complying with the prescribed form, manner, and other conditions.

Question 6

What happens if an offer or invitation does not comply with the provisions of this section?

Answer 6

Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be required to be complied with.

Question 7

How should the payment for subscription of securities be made?

Answer 7

All payments for subscription of securities under this section must be made through cheque, demand draft, or other banking channels, excluding cash.

Question 8

How long does a company have to allot securities in private placement?

Answer 8

A company must allot securities within sixty days from the date of receiving the application money. If unable to do so, the company must repay the application money within fifteen days from the completion of sixty days.

Question 9

What penalties apply if a company contravenes this section?

Answer 9

If a company makes an offer or accepts monies in contravention of this section, it may be liable for a penalty extending up to the amount involved in the offer or two crore rupees, whichever is higher. The company must also refund all monies to subscribers within thirty days of the penalty order.

Question 10

What are the two kinds of share capital in a company limited by shares?

Answer 10

(a) equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting, or otherwise in accordance with such rules as may be prescribed; and
(b) preference share capital:

Question 11

What is equity share capital?

Answer 11

Equity share capital refers to all the share capital in a company limited by shares that is not classified as preference share capital.

Question 12

What is preference share capital?

Answer 12

Preference share capital is the part of the issued share capital that carries preferential rights concerning dividend payment (fixed amount or rate) and repayment of capital in case of winding up.

Question 13

What are the repayment rights of preference capital?

Answer 13

In the case of winding up or capital repayment, preference capital is entitled to have its paid-up capital or deemed paid-up capital returned, either with or without a fixed premium specified in the memorandum or articles.

Question 14

What sections should be considered for voting rights?

Answer 14

Voting rights are subject to the provisions of Section 43 and subsection (2) of Section 50.

Question 15

Do all members of a company have voting rights?

Answer 15

Yes, every member of a company limited by shares holding equity share capital has the right to vote on every resolution placed before the company.

Question 16

How is the voting right of an equity shareholder determined?

Answer 16

The voting right of an equity shareholder on a poll is in proportion to their share in the paid-up equity share capital of the company.

Question 17

Do preference shareholders have voting rights?

Answer 17

Preference shareholders in a company limited by shares have the right to vote on resolutions directly affecting the rights attached to their preference shares, as well as resolutions related to the winding up, repayment, or reduction of equity or preference share capital.

Question 18

How is the voting right of a preference shareholder determined?

Answer 18

The voting right of a preference shareholder on a poll is in proportion to their share in the paid-up preference share capital of the company. The proportion is determined based on the paid-up capital in respect of the equity shares compared to the paid-up capital in respect of the preference shares.

Question 19

Under what circumstances can preference shareholders vote on all resolutions?

Answer 19

If the dividend in respect of a class of preference shares has not been paid for a period of two years or more, the preference shareholders of that class have the right to vote on all resolutions placed before the company.

Question 20

What resolutions can equity shareholders vote on?

Answer 20

Equity shareholders can vote on every resolution placed before the company, regardless of whether it directly affects their rights.

Question 21

How are voting rights proportionally allocated?

Answer 21

Voting rights are allocated based on the proportion of the paid-up capital in respect of the equity shares and the paid-up capital in respect of the preference shares.

Question 22

How can the rights attached to a class of shares be varied?

Answer 22

The rights attached to shares of any class can be varied with the consent of holders of at least three-fourths of the issued shares of that class, or by a special resolution passed at a separate meeting of the holders of that class, subject to certain conditions.

Question 23

What are the conditions for obtaining consent for variation of shareholders’ rights?

Answer 23

Consent for variation can be obtained if there is a provision in the company’s memorandum or articles allowing for such variation, or if the variation is not prohibited by the terms of issue of the shares of that class.

Question 24

What happens if a variation affects the rights of another class of shareholders?

Answer 24

If a variation affects the rights of another class of shareholders, the consent of three-fourths of the affected class of shareholders must also be obtained. The provisions of this section apply to such variations.

Question 25

What can shareholders do if they did not consent to a variation or vote in favor of the special resolution?

Answer 25

Shareholders holding at least ten percent of the issued shares of a class can apply to the Tribunal to have the variation cancelled. The variation will not have effect unless and until it is confirmed by the Tribunal.

Question 26

When should an application to the Tribunal be made regarding a variation?

Answer 26

An application should be made within twenty-one days after the date of giving consent or passing the resolution. It should be made on behalf of the shareholders entitled to make the application, appointed in writing by one or more of their number.

Question 27

Is the decision of the Tribunal on a variation application binding?

Answer 27

Yes, the decision of the Tribunal on an application regarding variation of shareholders’ rights is binding on the shareholders.

Question 28

What is the company required to do after receiving the order from the Tribunal regarding a variation?

Answer 28

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

Question 29

What penalties apply for non-compliance with the provisions of this section?

Answer 29

If a company fails to comply with the provisions of this section, it may be punishable with a fine ranging from twenty-five thousand rupees to five lakh rupees. Additionally, the officers of the company in default may be punishable with imprisonment for up to six months or a fine ranging from twenty-five thousand rupees to five lakh rupees, or both.

Question 30

What should a company do with the premium received on issued shares?

Answer 30

The company must transfer an amount equal to the premium received to a “securities premium account.” The provisions of the Act relating to reduction of share capital will apply to the securities premium account as if it were the paid-up share capital of the company.

Question 31

How can the securities premium account be utilized?

Answer 31

The securities premium account can be utilized for the following purposes:
(a) Issuing fully paid bonus shares to members of the company.
(b) Writing off preliminary expenses of the company.
(c) Writing off expenses, commission, or discount related to any share or debenture issue.
(d) Providing for the premium payable on the redemption of redeemable preference shares or debentures.
(e) Purchasing the company’s own shares or other securities under Section 68.

Question 32

Can the securities premium account be applied differently for certain prescribed classes of companies?

Answer 32

The securities premium account can be applied differently for prescribed classes of companies whose financial statements comply with the accounting standards prescribed for that class under Section 133:
(a) Paying up unissued equity shares to be issued as fully paid bonus shares to members.
(b) Writing off expenses, commission, or discount related to any issue of equity shares.
(c) Purchasing the company’s own shares or other securities under Section 68.

Question 33

Can a company issue shares at a discount?

Answer 33

No, except as provided in section 54, a company is prohibited from issuing shares at a discount.

Question 34

What are the penalties for contravening the prohibition on issuing shares at a discount?

Answer 34

If a company contravenes this section, it may be punishable with a fine ranging from one lakh rupees to five lakh rupees. Additionally, every officer who is in default may be punishable with imprisonment for up to six months or a fine ranging from one lakh rupees to five lakh rupees, or both.

Question 35

Can a company issue sweat equity shares?

Answer 35

Yes, a company can issue sweat equity shares of a class of shares already issued, subject to certain conditions.

Question 36

Are sweat equity shares subject to the same rights and provisions as equity shares?

Answer 36

the rights, limitations, restrictions, and provisions applicable to equity shares are also applicable to sweat equity shares issued under this section. The holders of sweat equity shares rank pari passu (equally) with other equity shareholders.

Question 37

How is the issuance of sweat equity shares authorized?

Answer 37

The issuance of sweat equity shares is authorized through a special resolution passed by the company, specifying the details of the shares, including the number, current market price, consideration (if any), and the class or classes of directors or employees eligible for these shares.

Question 38

What regulations apply to the issuance of sweat equity shares for listed companies?

Answer 38

If the company’s equity shares are listed on a recognized stock exchange, the issuance of sweat equity shares must comply with the regulations set by the Securities and Exchange Board (SEBI) on this matter.

Question 39

What conditions must be fulfilled for the issuance of sweat equity shares?

Answer 39

The issuance of sweat equity shares must meet the following conditions:
(a) Authorization by a special resolution passed by the company.
(b) Specification of the number of shares, current market price, consideration (if any), and the class or classes of directors or employees to whom the equity shares will be issued.
(c) At least one year must have passed since the company commenced business.
(d) Compliance with regulations of the Securities and Exchange Board (SEBI) if the company’s equity shares are listed on a recognized stock exchange. If not listed, compliance with prescribed rules.

Question 40

Can a company issue irredeemable preference shares?

Answer 40

No, after the commencement of this Act, a company limited by shares cannot issue any irredeemable preference shares.

Question 41

Within what period can a company redeem preference shares?

Answer 41

A company can redeem preference shares within a period not exceeding twenty years from the date of their issue, subject to prescribed conditions.

Question 42

What conditions must be met for the redemption of preference shares?

Answer 42

The redemption of preference shares must satisfy the following conditions:
(a) Redemption should be from the profits of the company or from the proceeds of a fresh issue of shares made for the purpose of redemption.
(b) The shares to be redeemed must be fully paid.
(c) A sum equal to the nominal amount of the shares to be redeemed must be transferred to a Capital Redemption Reserve Account.
(d) Premium payable on redemption should be provided for from the profits of the company or the company’s securities premium account.

Question 43

How is the Capital Redemption Reserve Account treated?

Answer 43

The Capital Redemption Reserve Account is treated as paid-up share capital of the company, except as otherwise provided in this section.

Question 44

What can a company do if it cannot redeem preference shares or pay dividends according to the terms of issue?

Answer 44

With the consent of holders of three-fourths in value of such preference shares and the approval of the Tribunal, the company can issue further redeemable preference shares equal to the amount due. This issuance deems the unredeemed preference shares to have been redeemed.

Question 45

What is the definition of “infrastructure projects”?

Answer 45

“Infrastructure projects” refers to the projects specified in Schedule VI of the Act.

Question 46

Can a limited company alter its share capital?

Answer 46

Yes, a limited company with a share capital can alter its share capital if authorized by its articles of association.

Question 47

What types of alterations can a company make to its share capital?

Answer 47

A company can make the following alterations to its share capital:
(a) Increase its authorized share capital.
(b) Consolidate and divide its share capital into shares of a larger amount.
(c) Convert fully paid-up shares into stock and reconvert stock into fully paid-up shares.
(d) Subdivide shares into smaller amounts.
(e) Cancel shares that have not been taken or agreed to be taken and reduce the share capital accordingly.

Question 48

Can a company convert and reconvert its fully paid-up shares?

Answer 48

a company can convert fully paid-up shares into stock and reconvert that stock into fully paid-up shares of any denomination.

Question 49

How can a company subdivide its shares?

Answer 49

A company can subdivide its shares into shares of smaller amounts, ensuring that the proportion between the paid and unpaid amounts of the reduced shares remains the same as the original shares.

Question 50

When can a company cancel shares?

Answer 50

A company can cancel shares that have not been taken or agreed to be taken by any person. The amount of canceled shares is deducted from the share capital of the company.

Question 51

How can a company increase its subscribed capital by issuing further shares?

Answer 51

The company can offer the shares:
(a) to existing equity shareholders in proportion to their paid-up share capital,
(b) to employees under an employee stock option scheme, or
(c) to any person authorized by a special resolution, either for cash or a consideration other than cash.

Question 52

What conditions apply to the offer of further shares to existing equity shareholders?

Answer 52

The offer must be made by notice specifying the number of shares offered, allowing a certain time period for acceptance or rejection. The notice must also mention the right of the shareholder to renounce the shares in favor of another person.

Question 53

How much notice must be given to existing shareholders for the offer of further shares?

Answer 53

The notice must be sent through registered post, speed post, or electronic mode at least three days before the opening of the issue.

Question 54

From where can a company issue bonus shares?

Answer 54

A company can issue bonus shares from its free reserves, securities premium account, or capital redemption reserve account.

Question 55

Can reserves created by revaluation of assets be used for issuing bonus shares?

Answer 55

No, reserves created by revaluation of assets cannot be capitalized for issuing bonus shares.

Question 56

Does a company need authorization to issue bonus shares?

Answer 56

A company must be authorized by its articles of association or by a resolution passed in the general meeting to issue bonus shares.

Question 57

What conditions must be met to issue bonus shares?

Answer 57

(a) it is authorised by its articles; (b) it has, on the recommendation of the Board, been authorised in the general meeting of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;

Question 58

Can bonus shares be issued in lieu of dividends?

Answer 58

No, bonus shares cannot be issued in lieu of dividend payments. They are separate from dividend distributions.

Question 59

Can a company reduce its share capital?

Answer 59

a company can reduce its share capital by a special resolution.

Question 60

How can a company reduce its share capital?

Answer 60

A company can reduce its share capital by extinguishing or reducing liability on shares, cancelling lost or excess paid-up share capital, or by altering its memorandum to reduce the amount of share capital.

Question 61

What accounting standards should be followed for share capital reduction?

Answer 61

The proposed accounting treatment for reduction must be in conformity with the accounting standards specified in Section 133 of the Companies Act. A certificate from the company’s auditor supporting this conformity must be filed with the Tribunal.

Question 62

What happens if a creditor’s name is not entered in the list of creditors during share capital reduction?

Answer 62

If a creditor’s name is omitted and the company is unable to pay the debt, the members of the company on the registration date of the reduction may be liable to contribute towards the unpaid amount, subject to the Tribunal’s settlement and enforcement.

Question 63

What are the consequences for concealing creditor names or misrepresenting debts during share capital reduction?

Answer 63

Any officer involved in concealing creditor names, misrepresenting debts, or aiding such actions may be liable under Section 447 of the Companies Act.

Question 64

Can a company purchase its own shares or specified securities?

Answer 64

A company can buy-back its own shares or specified securities using its free reserves, securities premium account, or proceeds from the issue of shares or specified securities.

Question 65

What are the conditions for a company to buy-back its securities?

Answer 65

The buy-back must be authorized by the company’s articles, approved by a special resolution in a general meeting, and meet certain limitations on the percentage of paid-up capital, debt ratio, and fully paid-up status.

Question 66

What information should be included in the explanatory statement for a buy-back?

Answer 66

The explanatory statement should disclose material facts, explain the necessity for the buy-back, specify the class and amount of securities to be purchased, and provide a time-limit for completion.

Question 67

How long does a company have to complete the buy-back?

Answer 67

The buy-back must be completed within one year from the date of the special resolution or resolution passed by the Board.

Question 68

How can a company buy back its securities?

Answer 68

The buy-back can be done proportionately from existing shareholders, from the open market, or by purchasing securities issued to employees under a stock option or sweat equity scheme.

Question 69

What requirement is there before a buy-back can be made?

Answer 69

The company must file a declaration of solvency signed by at least two directors stating that the company is capable of meeting its liabilities and will not be insolvent within one year.

Question 70

What obligations does a company have after completing a buy-back?

Answer 70

The company must physically destroy the bought-back shares or securities within seven days and cannot issue the same kind of securities within six months, except for bonus issues or in specific cases.

Question 71

What records should the company maintain after a buy-back?

Answer 71

The company should maintain a register of the bought-back securities and file a return with the Registrar and the Securities and Exchange Board within thirty days of completion.

Question 72

In which circumstances is a company prohibited from purchasing its own shares or other specified securities?

Answer 72

The company is prohibited from buy-back if it does so indirectly or directly through its subsidiary companies, investment companies, or group of investment companies. Additionally, if the company has defaulted in repayments, interest payments, redemption of debentures or preference shares, dividend payments, term loan repayments, or not complied with certain sections, buy-back is also prohibited.