Share capital, Debentures and Issue of Securities

Share Capital [S.43]

• With voting rights
• With differential rights as to dividend, voting or otherwise in accordance with the prescribed rules

means that part of the issued share capital of the company which carried or would carry a preferential right with respect to –

• Payment of dividend; and
• Repayment, in case of winding up or repayment of capital

Voting rights 
[S. 47(1)]

• No voting rights in respect of payment of calls in advance
• On show of hands – 1 member = 1 vote; and
• on a poll – in proportion to his share in the paid-up equity share capital of the company

• Every member holding preference share capital shall have a right to vote only on
  • the resolutions placed before the company which directly affect the rights attached to his preference shares and,
  • any resolution for winding up of the company or for repayment orreduction of its equity or preference share capital

  and his voting rights on a poll shall be in proportion to his share in the paid-up preference share capital of the company

• Further voting rights of equity shareholders : voting rights of preference shareholders = paid up equity share capital : paid up preference share capital

  Example:

  Paid-up Equity share capital: ₹ 700

  Paid-up Preference share capital: ₹ 300

  Voting right of a Preference shareholder holding ₹ 100, on a poll to repay ₹ 200 to equity shareholders

  = 100 / 300 * (300/(700+300))

• If dividend in respect of any class of preference shares has not been paid for 2 years or more, such preference shareholders shall have a right to vote on all the resolutions placed before the company.

   

If any notice, advertisement or other official publication, or any business letter, bill head orletter paper of a company contains a statement of the amount of the authorised capital of the company

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it shall also contain a statement, in an equally prominent positionand in equally conspicuous characters, of the amount subscribed and paid-up capital of the company.

(i)

Rights Issue [S.62(1)(a)]: Board resolution

to equity shareholders of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares

✓

✓

(ii)

Employees’ Stock Option Scheme[S.62(1)(b)]: Special resolution to employees

✓

✓

(iii)

Any person [S.62(1)(c)]: Special resolution

(a) Private Placement [S.42, R.14 of PSR]: Refer (6) & (7) below

incl. Preferential allotment [R.13 of SCDR]to:

– To Shareholders only

– To Others

✓

✓

(b) Public Offer [Part I of Chapter III]:

☓

✓

(c) Sweat Equity shares [S.54]: Refer (8) below

✓

✓

(iv)

Bonus Issue [S.63(1), R.14of SCDR]: Special resolution

Issue of fully paid-up Bonus Shares to its members in any manner, out of:

Free reserves / Securities Premium Account / Capital Redemption Reserve

✓

✓

Private placement means

Preferential Offer means

any offer or invitation to subscribe or issue of securities

an issue of shares or other securities

[i.e. equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date]

to a select group of persons

to any select person or group of persons on a preferential basis

by a company

by a company

(other than by way of public offer)

[by its nature, it also does not include rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities]

does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities

through private placement offer-cum-application

which satisfies the conditions specified in S.42

Conditions precedent

• the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company .[S.42(3), R.14(2)(b)]#
• previously approved by the shareholders by a Special Resolution, for each of the Offers or Invitations[R.14(2)(a)]
  • special resolution only once in a year sufficient for all the offers or invitation for non-convertible debentures during FY
• the basis or justification for the price (including premium, if any) disclosed explanatory statement annexed to the notice for the general meeting
• offer of securities or invitation to subscribe securities to persons not > 200, (excluding QIBs, and employees of the company being offered securities under ESOS as per section 62(1)(b)), in a FY (reckoned individually for each kind of security that is equity share, preference share or debenture). [S.42(2), R.14(2)(b)]#
  #Not applicable to NBFCs / HFCs registered with RBI / NHB respectively if they are complying with regulations made by RBI / NHB in respect of offer or invitation to be issued on private placement basis

³Offer

• Made through issue of a private placement offer letter in Form PAS-4
• accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made –
  • sent to him, either in writing or in electronic mode, within 30 days of recording the names of such persons in accordance with S.42(7). [S.42(1), R.14(1)(a) & (b)]
• All offers covered under S.42 shall be made -
  • only to such persons whose names are recorded by the company prior to the invitation to subscribe, and
  • such persons shall receive the offer by name, and
  • a complete record of such offers shall be kept by the company in Form No. PAS-5 and
  • a copy of such record in PAS 5 along with PPOL in Form PAS-4 to be filed with the RoC within 30 daysof circulation of relevant PPOL.[S.42(7)]
• Not to release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.[S.42(8)]
• investment size not to be <  ₹ 20,000 of face value of the securities [R.14(2)(c)]# (see Note at Conditions Precedent above)

Payment of subscription money

• payment for subscription to securities shall be made from the bank a/c of the person subscribing to such securities [R.14(2)(d)]
• in case of joint holders, it shall be paid from the bank account of the person whose name appears first in the application
• The Co shall keep the record of the Bank a/c from where such payments for subscriptions have been received –
• ⁴All monies payable towards subscription of securities on private placement basis under S.42 shall be paid through cheque/ demand draft / other banking channels but not by cash [S. 42(5)]
• Monies received on application u/s 42 shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—
  • for adjustment against allotment of securities; or
  • for the repayment of monies where the company is unable to allot securities.

Post offer closure compliances

• allot the securities within 60 days from the date of receipt of the application money for such securities [S.42(6)]
• Return of allotment of securities be filed with the RoC within ⁵30 days of allotment in Form PAS-3 along with a complete list of all security holders, with their full names, addresses, number of securities allotted and such other relevant information [S.42(9), R.14(4)]
• Otherwise repay the application money to the subscribers within 15 days from the date of completion of 60 days
  • if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest @ 12% p.a. from the expiry of the 60 days:
• Issue, deliver the certificate/s of securities allotted:
  • within 2 months from the date of allotment, in case of shares [S.56(4)(b)]
  • within 6 months from the date of allotment, in case of debentures [S.56(4)(d)]

  Where the securities are dealt with in a depository, intimate the details of allotment of securities to depository immediately on allotment of such securities

• Make necessary entries in the relevant registers

Meaning [S.2(88)]

“sweat equity shares” means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called

What can be issued [S.54(1)]

Sweat equity shares of a class of shares already issued

To whom it can be issued [R.8(1), Expl (i)]

directors or employees

1. a permanent employee of the Co. who has been working in India or outside India, for at least last 1 year; or
2. a director of the Co., whether a WTD or not; or
3. an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the Co.;

Quantum [R.8(4)]

• Max (NOT > than 15% of the existing paid-up Equity Share Capital in a year, OR Shares of the Issue Value of ₹ 5 crores)
• not > 25% of the Paid-Up Equity Capital of the Company at any time.

Valuation [R.8(6)]

Price of equity shares shall be determined by a Registered Valuer as fair price giving justification for such valuation.

Lock-in [R.8(5)]

3 years from the date of allotment.

Conditions [S.54(1)]

• the issue authorized by a special resolution
  • allotment to be completed within 12 months of passing special resolution [R 8(3)];
• the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
• at the date of such issue, not < 1 year has elapsed since the date on which the Co had commenced business
  • A startup Co may issue sweat equity shares not exceeding 50% of its paid up capital up to 5 years from the date of its incorporation or registration.
• where the equity shares of the Co are listed on a recognised SE, the sweat equity shares are issued in accordance with the relevant SEBI regulations.

Pari passu with other equity shareholders [S.54(2)]

The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued u/s. 54 and the holders of such shares shall rank pari passu with other equity shareholders.

Accounting treatment and Managerial remuneration [R 8(6), (9), (10), (11), (12)]

Disclosures
[R 8(13)]

Prescribed details are required to be disclosed in the Directors’ Report for the year in which sweat equity shares are issued

Register of Sweat Equity Shares
[R 8(14)]

To be maintained in Form No. SH.3 at the registered office of the company or such other place as the Board may decide

Permitted to issue

• Redeemable preference shares only

Preconditions for issue [S.55(2), R.9(1)]

• Authorised by AoA
• authorized by passing a special resolution in the GM
• at the time of such issue of preference shares, the Co has no subsisting default in the redemption of preference shares issued either before or after the commencement of Co Act 2013 or in payment of dividend due on any preference shares

Tenure 
[S.55(2), R 10]

• 20 years
  • For infrastructure projects (specified in Schedule VI to the Co Act, 2013) : > 20 years, but NOT > 30 years
    • Redemption of minimum 10% on an annual basis from 21st year at the option of preference shareholders

Redemption out of - 
[S.55(2), 2nd proviso, R.8(4)]

• Profits available for dividend
  • sum equal to the nominal amount of the shares to be redeemed out of such profits, be transferred to Capital Redemption Reserve A/c
• Proceeds of fresh issue of shares made for the purpose of such redemption

Premium on redemption, if any, to be provided before redemption of preference shares [S.55(2), 2nd proviso, (d)]

Redemption of preference shares as per its terms [R.8(6)]

• at a fixed time or on the happening of a particular event;
• any time at the company’s option; or
• any time at the shareholder’s option

Sr. No.

Modes of reduction

Section

(A)

extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up

Example:

Face value: ₹ 10

Paid-up value: ₹ 7

Extinguish / reduce the liability to pay balance ₹ 3

66(1)(a)

(B)

either with or without extinguishing or reducing liability on any of its shares,—

(i) CANCEL any paid-up share capital which is lost or is unrepresented by available assets;

Example:

Paid up capital: ₹ 10

Accumulated losses: ₹ 7

Paid up capital to the extent of ₹ 7 be cancelled to write off Accumulated losses of ₹ 7

or

(ii) PAY OFF any paid-up share capital which is in excess of the wants of the Co, alter its memorandum by reducing the amount of its share capital and of its shares accordingly:

Example:

Paid up capital: ₹ 10

Excess capital not required by the Company: ₹ 4

Paid up capital to the extent of ₹ 4 be returned (paid in cash) to the shareholders.

Provided that no such reduction shall be made if the Co is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of Co Act 2013, or the interest payable thereon.

66(1)(b)

(C)

Application of PREMIUMS RECEIVED ON ISSUE OF SHARES, otherwise than in the following manner:

52(1)

Clause (d) of 2nd proviso to S. 55(2)

(D)

Application of CAPITAL REDEMPTION RESERVE ACCOUNT, otherwise than in paying up unissued shares of the Company to be issued to members of the Co as fully paid bonus shares

Clause (c) of 2nd proviso to S. 55(2) & S. 55(4)

Broad procedure for Reduction

Board approval → Special resolution → Application to NCLT → * Certificate from the Auditor to be filed with NCLT → NCLT order of confirmation of the reduction of share capital→ Filing of NCLT order with RoC
 

Out of: (1)

• its free reserves;
• the securities premium account; or
• the proceeds of the issue of any shares or other specified securities, not being proceeds of an earlier issue of the same kind of shares or same kind of other specified securities

Conditions:

(2)

• authorised by its articles;

• buy-back is < 25% of (paid-up capital + free reserves of the Co)

• buy-back of equity shares (in number) in any FY < 25% of its total paid-up equity capital in that FY;

• the ratio of (secured + unsecured debts owed by the Co after buy-back) is NOT > 2 * (the paid-up capital + free reserves) i.e. Debt-Equity ratio is NOT > 2:1:
• all shares / other specified securities for buy-back are fully paid-up;
• buy-back of listed shares or other specified securities is in accordance with the relevant SEBI regulations ; and
• buy-back offer shall NOT be made within 1 year from the date of the closure of the preceding offer of buy-back, if any.

Disclosures on GM notice (3)

Notice of GM at which the special resolution is proposed to be passed for buy-back shall be accompanied by an explanatory statement giving specified disclosures.

Completion of buy-back (4)

Buy-back shall be completed within 1 year from the date of passing the relevant resolution

Modes of buy-back (5)

• from the existing shareholders /security holders on a proportionate basis;
• from the open market;
• by purchasing the securities issued to employees of the Co pursuant to a scheme of stock option or sweat equity

Declaration of solvency (6)

Before making such buy-back, file a declaration of solvency signed by at least 2 directors of the Co, one of whom shall be MD, if any, verified by an affidavit (formed an opinion that the Co will not be rendered insolvent within a period of 1 year)

extinguish the shares / securities bought-back (7)

extinguish and physically destroy the shares or securities so bought back within 7 days of the last date of completion of buy-back

Restriction of further issue of same kind of shares or other securities bought-back (8)

Co shall not make a further issue of the same kind of shares or other securities including rights issue (u/s 62(1)(a)) within 6 months of completion of buy-back except

• a bonus issue, or
• in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares

Register of 
buy-back (9)

maintain a register of the shares or securities so bought in Form No. SH.10

Return of buy-back (10)

File with RoC within 30 days of completion of buy-back in Form No. SH.11